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Will we have to pay inheritance tax on cash gifts from my grandfather?

Heather Rogers: Find out how to ask her a tax question in the box below

Heather Rogers: Find out how to ask her a tax question in the box below

My grandfather is 86 and has started donating his money to the family.

He owns his own house which is worth around £600,000 with around £200,000 in his bank accounts.

He has recently made bank transfers under the reference ‘gift’ of between £10,000 and £60,000 to his children and grandchildren.

Do we have to pay inheritance tax if he dies?

Our resident tax expert Heather Rogers answers: This is a topic I regularly get questions about.

Most of us want to pass on as much of our estate to our children and grandchildren as possible, rather than end up paying 40 percent inheritance tax.

But it’s important to note that many people worry unnecessarily about inheritance taxes.

Your beneficiaries are only liable if your estate is worth more than £325,000, or £500,000 if a property is passed on to direct descendants and the value of the estate is less than £2 million.

You don’t state whether your grandfather is married or widowed, but if his husband (probably your grandmother) has already passed away, he may have “inherited” her unused allowances. In that case, you may be able to double those thresholds.

Once these thresholds are crossed, the 40 percent inheritance tax rate is levied on all assets in the estate that exceed these levels.

Given all of the above, if you think your grandfather’s estate will be subject to inheritance tax, his gifts could make a difference to what the taxman owes, depending on how long he lives.

I’ll explain the rules for gifts in detail and then come back to the implications for your grandfather’s business.

Inheritance Tax Thresholds

Inheritance tax of 40 per cent is typically levied on a deceased person’s assets worth more than £325,000, which is the zero rate bandexplains Heather Rogers in an earlier tax column here.

Many people are allowed to leave an additional £175,000 worth of property without being liable to inheritance tax, if their house is part of their estate and they leave it to direct descendants.

That means children, including adopted, step- or foster children, and the linear descendants of those children.

This extra amount is called the residence zero rate bandand it is available to claim upon death on or after April 6, 2017.

Both protected amounts or ‘ties’, which together add up to £500,000 per person, can be transferred to a surviving spouse or civil partner if not used on the death of the first spouse.

The important rule to remember is that if you make gifts during your lifetime, inheritance taxes will be payable on them when you die, if they are made less than seven years before the date of your death.

Gifts made within seven years of your death will first consume the £325,000 benefit, and any remaining benefit not used will be set off against the value of the estate when you die.

What is an inheritance tax gift?

A gift can be:

– Money

– Property and land (unless it qualifies for an agricultural property exemption)

– Antiques and Jewelry

– Shares not eligible for corporate deduction

– Anything you sell to someone for less than market value; the difference between the market value and the sale amount counts as a gift to that person if you die within seven years from the date of the gift, and inheritance tax may be payable on all or part of the gift you made.

On which gifts is NO inheritance tax due?

– Gifts between spouses, provided they are married or in a civil partnership, as long as they live in the UK.

– Donations to registered charities.

– Gifts to political parties, provided they have at least two sitting MPs or a certain number of votes.

– Donations to heritage organizations, such as the National Trust.

– Gifts worth less than an annual gift allowance of £3,000, which any person can give free of inheritance tax each tax year.

The £3,000 can be given to one person or split among several. If you do not use the supplement, or the full supplement from the previous assessment year, you can add it to the current assessment year.

Inheritance Tax: My 86-Year-Old Grandfather Gives Large Cash Gifts to Relatives - What Are the Rules?

Inheritance Tax: My 86-Year-Old Grandfather Gives Large Cash Gifts to Relatives - What Are the Rules?

Inheritance Tax: My 86-Year-Old Grandfather Gives Large Cash Gifts to Relatives – What Are the Rules?

That means you can give up to £6,000 in that tax year, but if you don’t use the full amount from the previous year, you lose it. All donations are first settled with the previous surcharge.

– Gifts made on special occasions. You can also give on marriage or civil partnership each tax year: up to £5,000 to a child (including adopted or stepchildren); up to £2,500 to a grandchild (or further descendant); up to £1,000 to another person.

You can also combine allowances so that you can, for example, donate £5,000 for the wedding and use your £3,000 to the same person at the same time.

– Gifts worth the small gift deduction, which allows you to make as many gifts up to £250 per person each tax year as long as you have not used another gift deduction for the same person in the same tax year.

– Gifts made on birthdays and Christmas, which you give from your regular income (see below what that means).

– Gifts made as regular payments to another person to support themselves.

There is no limit to how much you can give tax-free, as long as you can make the payments after you meet your usual living expenses and you pay from your normal monthly income.

These gifts are known as “normal expenses from income.” Examples include paying rent for your child, depositing into a savings account for a child under the age of 18, and financially assisting an older relative.

If you give gifts to the same person, you can combine ‘normal expenses from income’ with any other consideration, for example your annual gift of £3,000.

However, you cannot combine the periodic benefit with the supplement for small gifts.

When do you pay inheritance tax on a gift?

Any gift not covered by the tax-exempt rules above is subject to the seven-year rule.

If you are still alive for seven years after the date of the gift, inheritance tax is due depending on the time elapsed from the date of the gift and your death.

The value of the gift is not reduced, only the tax rate applied to it.

Gifts between 0 and 3 years: 40 percent

Gifts between 3 and 4 years old: 32 percent

Gifts between 4 and 5 years old: 24 percent

Gifts between 5 and 6 years old: 16 percent

Gifts between 6 and 7 years old: 8 percent

No inheritance tax has to be paid on gifts made seven years and older before your death.

If the gifts made within seven years of death add up to less than £325,000, that means because gifts are first calculated at zero rate before all other assets, they are not subject to tax.

If you gave away more than $325,000 in the seven years before your death, anyone who receives a gift from you must pay personal inheritance tax on their gift at the above tax rates.

The latter can catch a lot of people.

What about converting gifts into trust?

Gifts to trusts are subject to an immediate 20 per cent estate tax when the value of the gift exceeds the available zero rate bracket of £325,000.

However, the zero-rate band restarts every seven years, and this means that significant gifts can be made free of inheritance tax during a person’s lifetime.

Beware though, because in some cases, donations to trusts lead to immediate estate tax assessments, and if you’ve made a series of donations over time, donations can affect the tax rate up to 14 years before your death. that must be paid for it.

What records do you need to keep?

Your executors will need to find out what gifts you gave in the seven years before your death. You must keep the following records:

– What you gave and to whom you gave it

– The value of the gift

– The date you gave it.

It sounds like your grandfather is documenting his gifts through the bank transfers he makes to his relatives.

What common pitfalls do people fall into over gifts?

– Donations to another person that you still benefit from – for example, if you gift your house to a relative but still live in it without paying market rent, it is subject to inheritance tax.

– Money donations with which you buy something that you then benefit from. For example, if you give money to a family member to buy a house, but you then start living in it yourself, inheritance tax will also be levied on this.

– Gifts of assets instead of cash can also give rise to capital gains tax on the person who disposes of the asset.

What should you pay attention to with your grandfather’s gifts?

If the gifts made by your grandfather in the seven years before his death do not exceed £325,000 then (as explained above) they will be calculated before all other assets in the estate, no inheritance tax will be paid on them.

Otherwise, estate tax will be charged in full on the estate, less the £325,000 unused and subject to any other available allowances.

These allowances may include his residence limit (up to an additional £175,000 of his estate) and any zero-rate brackets that can be transferred from a spouse who has previously deceased him (worth a further £500,000).

Ask Heather Rogers a tax question

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, estate taxes, income tax, capital gains tax and much more.

If you would like to ask Heather a question about tax, please email Please put TAX QUESTION in the subject line.

Heather will do her best to answer your message in an upcoming monthly column, but she won’t be able to answer everyone or correspond privately with readers. Nothing in her answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be treated confidentially and not used for marketing purposes.

If Heather is unable to answer your question, you can also contact MoneyHelper, a government-sponsored organization that provides free financial assistance to the public. It can be found here and the number is 0800 011 3797.

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