Explain inheritance taper relief to me
Discussion
I might be an idiot here but a solicitor is telling me something I think is wrong from my admittedly basic opinion, they are more than likely correct.
A working example to show what I think
Deceased parent dies today, leaving an estate of £1.5m. Two dead parents and family home in the estate means £1m is inheritance tax free, £325k*2 + £650k. That leaves £500k at 40% so £200k inheritance tax to pay which seems fairly simple. My query is say the parent gave a gift of £100k 5.5 years ago. From HMRC tax relief table 5-6 years after gift the tax is 16% so an extra £16k inheritance tax to pay on top of the £200k.
The solicitor says this is wrong and is a common misconception, the £100k comes off the £325k and isn't at 16%. Can anyone explain this to me in simplistic terms?
I am due to give my kids some inheritance early and want to make sure I understand the rules properly so I don't muck it up.
A working example to show what I think
Deceased parent dies today, leaving an estate of £1.5m. Two dead parents and family home in the estate means £1m is inheritance tax free, £325k*2 + £650k. That leaves £500k at 40% so £200k inheritance tax to pay which seems fairly simple. My query is say the parent gave a gift of £100k 5.5 years ago. From HMRC tax relief table 5-6 years after gift the tax is 16% so an extra £16k inheritance tax to pay on top of the £200k.
The solicitor says this is wrong and is a common misconception, the £100k comes off the £325k and isn't at 16%. Can anyone explain this to me in simplistic terms?
I am due to give my kids some inheritance early and want to make sure I understand the rules properly so I don't muck it up.
Solicitor is correct. Have a read of Can someone explain gifting money thread in this forum as this has been discussed at length.
Basically you will only get taper relief if the value of gifts exceeds the NRB. In your example the combined NRB is 650k. Unless the gift exceeds that amount then it just uses up some of that NRB.
Basically you will only get taper relief if the value of gifts exceeds the NRB. In your example the combined NRB is 650k. Unless the gift exceeds that amount then it just uses up some of that NRB.
Solicitor is right, most of the public misunderstand.
Gifts of amounts within £325,000 per person do not qualify for Taper Relief. You either live 7 years after making the gift and it becomes exempt/no longer part of the estate, or you don't and the amount gifted is included in the estate value on death.
The failed Potentially Exempt Transfer then uses up some of the standard Nil Rate Band, hence the relevance of £325,000. The knock on effect is that whilst the gift itself isn't taxed, there's less/no NRB to apply to the rest of the estate. In short, it's the same as if the gift was never made and the total estate value includes the amount.
If you give away more than £325,000 then only the excess above this is subject to an IHT charge if death occurs within 7 years. The rate of IHT tapers down from years 3-7 and the charge is payable by the recipient, not the donor. However, the exexcutors are responsible for collecting and paying the IHT.
Gifts of amounts within £325,000 per person do not qualify for Taper Relief. You either live 7 years after making the gift and it becomes exempt/no longer part of the estate, or you don't and the amount gifted is included in the estate value on death.
The failed Potentially Exempt Transfer then uses up some of the standard Nil Rate Band, hence the relevance of £325,000. The knock on effect is that whilst the gift itself isn't taxed, there's less/no NRB to apply to the rest of the estate. In short, it's the same as if the gift was never made and the total estate value includes the amount.
If you give away more than £325,000 then only the excess above this is subject to an IHT charge if death occurs within 7 years. The rate of IHT tapers down from years 3-7 and the charge is payable by the recipient, not the donor. However, the exexcutors are responsible for collecting and paying the IHT.
Edited by PistonHead007 on Tuesday 3rd March 15:08
cb31 said:
... From HMRC tax relief table 5-6 years after gift the tax is 16%
It might even be on the page you looked at, but it's clearly stated at: https://www.gov.uk/inheritance-tax/gifts"Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold."
cb31 said:
Thanks everyone, not the answers I wanted to hear. I better get gifting to the kids soon so I don t end up giving this useless government even more money to waste.
Regular and documented gifting excess income from say your taxed pension income is IHT exempt and is not subject to the 7 year rule either. There’s a few hoops and hurdles to it you must follow but certainly worth getting advice and or reading up on it.
Two significant points,
1. The £325,000 isn't just on death, it's lifetime and death.
2. Tax tapers, the gift doesn't. (So the full amount of the gift lasts the full 7 years.)
Leaving that aside, lifetime gifts will always deliver a tax saving so long as the donor survives for 3 years.
1. The £325,000 isn't just on death, it's lifetime and death.
2. Tax tapers, the gift doesn't. (So the full amount of the gift lasts the full 7 years.)
Leaving that aside, lifetime gifts will always deliver a tax saving so long as the donor survives for 3 years.
Edited by Panamax on Tuesday 3rd March 20:16
Panamax said:
Leaving that aside, lifetime gifts will always deliver a tax saving so long as the donor survives for 3 years.
You were making this point on the other thread but I still don't really understand what you're saying. From what you write in this forum you Obviously do know your stuff compared to a layman like me.Edited by Panamax on Tuesday 3rd March 20:16
In the example the OP gave of a 100k gift given 5.5 years ago where would the tax saving be? I'm not seeing it.
The nil rate band applies to oldest gifts first, so a lifetime gift made in the £325k band will never become taxable.
For larger estates the taxable amount of the estate, including gifts made within the 7 years before death, is on the face of things subject to IHT at 40%.
However, where a gift was made 5.5 years before death the amount of that gift will effectively be taxed at the tapered rate of 16% (see the online taper table).
The effect of this particular lifetime gift is reduction of IHT on the amount of the gift from 40% to 16%.
For larger estates the taxable amount of the estate, including gifts made within the 7 years before death, is on the face of things subject to IHT at 40%.
However, where a gift was made 5.5 years before death the amount of that gift will effectively be taxed at the tapered rate of 16% (see the online taper table).
The effect of this particular lifetime gift is reduction of IHT on the amount of the gift from 40% to 16%.
ChrisH72 said:
You were making this point on the other thread but I still don't really understand what you're saying. From what you write in this forum you Obviously do know your stuff compared to a layman like me.
In the example the OP gave of a 100k gift given 5.5 years ago where would the tax saving be? I'm not seeing it.
You need to ignore Panamax, he doesn't understand yet insists on trying to give out wrong advice.In the example the OP gave of a 100k gift given 5.5 years ago where would the tax saving be? I'm not seeing it.
There is NO IHT saved in the OP's example.
Panamax said:
Leaving that aside, lifetime gifts will always deliver a tax saving so long as the donor survives for 3 years.
For anyone else reading this, ignore it.The majority of gifts made are below the person's Nil Rate Band so you only save any IHT on the estate after the full seven years. There is no IHT directly on the gift, as it uses up NRB should someone die in less than 7 years after the gift is made.
PistonHead007 said:
Panamax said:
Leaving that aside, lifetime gifts will always deliver a tax saving so long as the donor survives for 3 years.
For anyone else reading this, ignore it.The majority of gifts made are below the person's Nil Rate Band so you only save any IHT on the estate after the full seven years. There is no IHT directly on the gift, as it uses up NRB should someone die in less than 7 years after the gift is made.
PistonHead007 said:
You need to ignore Panamax, he doesn't understand yet insists on trying to give out wrong advice.
There is NO IHT saved in the OP's example.
This guy is a fool, shouting that what I set out is wrong without bothering to read what was written. It's sad to see in a forum where most people are helpful.There is NO IHT saved in the OP's example.
Lifetime gifts will NEVER increase anyone's IHT. After three years they will ALWAYS deliver a tax saving, if fhere is any tax to be saved.
Panamax said:
PistonHead007 said:
You need to ignore Panamax, he doesn't understand yet insists on trying to give out wrong advice.
There is NO IHT saved in the OP's example.
This guy is a fool, shouting that what I set out is wrong without bothering to read what was written. It's sad to see in a forum where most people are helpful.There is NO IHT saved in the OP's example.
Lifetime gifts will NEVER increase anyone's IHT. After three years they will ALWAYS deliver a tax saving, if fhere is any tax to be saved.
I always appreciate your input on these matters.
Caddyshack said:
Panamax is correct though when the gifts are above the nil rate band, you cant just say to ignore the advice with a caveat of the majority of . If you need to add clarity then do but no need to trash the correct info when someone freely helps on a thread.
I have already given a full explanation above, answering the OP's post.He doesn't get it and seemingly never will...
There's only Taper Relief applicable on the excess gifted over the available NRB. It's not like you give £400,000 and then the whole amount benefits from Taper Relief, only £75,000 would.
PistonHead007 said:
Caddyshack said:
Panamax is correct though when the gifts are above the nil rate band, you cant just say to ignore the advice with a caveat of the majority of . If you need to add clarity then do but no need to trash the correct info when someone freely helps on a thread.
I have already given a full explanation above, answering the OP's post.He doesn't get it and seemingly never will...
There's only Taper Relief applicable on the excess gifted over the available NRB. It's not like you give £400,000 and then the whole amount benefits from Taper Relief, only £75,000 would.
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