Wills/Estate/IHT/gifts

[contractor]

Hi,

Can someone confirm my thinking please?

Person A has created a Will and nothing is explicitly called out, it's all divided up into percentages of the residuary estate. Eg after all costs person 1 gets 60%, person 1 gets 40%

Shortly (weeks) before death person A gifts cash/savings to person 1.

My understanding is that the gift of cash savings will be included for IHT calculation purposes, but it will no longer form part of any Residual Estate at the time of death, so the 60/40 split will not include these savings.

There may be some complications due to IHT payments but the general point is that 60/40 applies to assets at the time of death. Correct?

Thanks.

[NatAsp]

In theory you are correct but in reality the person who has lost out as a result of the transaction may well look to challenge this.

Be prepared for a legal battle.

[contractor]

NatAsp said:

In theory you are correct but in reality the person who has lost out as a result of the transaction may well look to challenge this.

Be prepared for a legal battle.

Thanks for the reply. The gift was accompanied by a signed and witnessed letter of gift so that angle should be covered.

[pacoryan]

Evidence of sound mind etc etc?

[jfbrin]

IHT will be payable on th gift. The question is " who pays it?"
From hmrc
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.
This could get complicated unless the written record relating to the PET is very clear and detailed.

[Ozzie Osmond]

I agree. The "gift" is what's called a Potentially Exempt Transfer for IHT. However, death of the donor within 7 years triggers a tax liability. Usually this tax liability falls on the remaining estate and not on the person who received the gift.

Obviously if the donor gave away "everything" and died with "nothing" this would not mean there was no tax! HMRC would be round knocking on the doors of the recipients.

This is from HMRC website and I've added the link,

"If the estate can’t pay the Inheritance Tax, the beneficiaries or 'donees' (recipients of gifts made during a person's lifetime) may have to pay it. A beneficiary or donee only has to pay Inheritance Tax in this case if:
• they receive a share of an estate after a death
• they receive a gift from someone who dies within seven years of making the gift

Here are some examples....."

http://www.hmrc.gov.uk/inheritancetax/paying-iht/w...

[jfbrin]

jfbrin said:

IHT will be payable on th gift. The question is " who pays it?"
From hmrc
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.
This could get complicated unless the written record relating to the PET is very clear and detailed.

Assuming the estate is valued > £325k of course.

[NatAsp]

The latter comments on here appear to be missing the point - read the post.

OP acknowledges the IHT liability on the gift - the question is on how the estate is treated, not the tax position.

[Ozzie Osmond]

I thought we'd covered that. But for clarity,

• The first step is to find the gross value of the deceased's assets. Let's say the person had a total value of £1m throughout the last year of his life and the beneficiaries are in for a 60/40 split from his will.

• But 6 months before death the deceased gave someone (it doesn't matter who) £400,000 without saying anything about the will or tax.

• After death IHT is payable on the full £1m because the gift, made within 7 years of death, is added back in. But there’s £325k tax free so tax is actually calculated at 40% on £1m - £325k = £675k, which means there is £270k of tax to pay. (675 x 40% = 270)

• So the “net estate” for distribution is £675k - £270k = £405k

• From the will one beneficiary receives 60% of £405k and the other receives 40% of £405k. Previous gifts are unaffected.

CONTRAST

• Same person actually gave away the whole £1m shortly before death so died with no assets at all.

• In the same way, tax of £270k is calculated and payable.

• The deceased's estate has no assets at all so the beneficiaries receive nothing and the estate can't pay the tax.

• HMRC will collect the tax from the recipient of the £1m gift.