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I am filling out IHT403 for my mum who died last year. She

made no cash gifts, but...
I am filling out IHT403 for my mum who died last year. She made no cash gifts, but her surviving spouse (my dad) did make gifts out of the joint account that they had. Are there rules about how the gifts must be allocated between mum & dad?
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Answered in 54 minutes by:
7/9/2013
TaxVince
TaxVince, Accountant
Category: UK Tax
Satisfied Customers: 965
Experience: Chartered Accountant >20 years + Qualified IFA
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MamaTax :

Hi Its MamaTax Here!

MamaTax :

Thanks for the question.

MamaTax :

If its a joint account, by default the account is taken be 50:50 unless there are other supporting documents to proof otherwise.

MamaTax :

However if the deceased person provided all the money in a bank account and the account may be in joint names just for convenience. In that case, you need to include in your valuation all the money that was in the account on the date the person died. And if another person had provided some of the money in the account, you only include the amount that the deceased person provided.

MamaTax :

Could you confirm who provided the funds and how was the income earned by the joint account prior the death reported, ie in whose account was the income recorded?

MamaTax :

With regards XXXXX XXXXX should account for the gift, we need to understand how the funds in the joint account should be accounted first -if you could answer the questions above. Hope that your mother's spouse was donating his share and not both donating both parties' share.

MamaTax :

Hi there. Let me know if you are still online?

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Customer reply replied 4 years ago

Sorry for the delay.


It turns out that my parents had a variety of bank accounts, mostly joint.


The income, from employers & state pensions was in an approximate ratio of 3:1 (father:mother) - ie my mothers income was about 25% of the total.


 


There were a variety of gifts, some about £3,000 over the 7 years, all from different joint accounts. If I canot allocate these 100% to my dad, can I at least allocate them 25% mum, 75% dad - the ratio of income?


 


Also, throughout the 7 years, my father gave a regular gift of £100 per month to each of 3 grandchildren to help with University education. This also came out of the joint account. This I would consider to be a regular gift out of income, as I can show that this did not eat into savings. Again, can I allocate this all to him (his income alone is sufficien to show he can afford this) of do I have to split it between mum & dad, and if so can I make that split 25% mum, 75% dad?

Thanks Nigel

Firstly you should only be concerned with gifts and inheritance thereof if your mother's estate is worth more than the Inheritance Tax threshold - £325,000 for the 2013-14 tax year. If not then there is no IHT implications on the gifts.

Also worth pointing out that gifts worth up to £3,000 in total in each tax year are exempt from Inheritance Tax when the donor dies. One can carry forward any unused part of the £3,000 exemption to the following year, but if you don't use it in that year, the carried-over exemption expires.

Whilst looking at the gifts you also need to consider gifts that are exempt to be excluded from the workings. A list of these are shown HERE under Exempt Gifts. Also any regular gifts made out of after-tax income are exempt from Inheritance Tax. These gifts will only qualify if you could prove that the donor had enough income left after making them to maintain their normal lifestyle. Hence the regular gift of £100 per month to each of 3 grandchildren to help with University education would qualify if your mother was left with a substantial pension income or investment income after this.

I also agree with you that for any gifts that you cant prove to be 100% relating to your dad, you should at least follow the a logical allocation based on how the joint accounts funds were owned: 25% mum; 75% dad.Its also worth putting additional notes on the IHT form if the allocation is not straight forward.

Hope this helps.

Thanks


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Customer reply replied 4 years ago

My mum's estate (including share of house) is over the £325,000 threshold.


So I assume that you are saying I should apportion all the gifts in the 25/75 ratio. In other words I only allocate £25 of the regular gifts to my mum.


Does this also mean that I can exclude any (non-regular) gifts that add up to effectively £12,000 per year, as I will be only allocating 25% - ie £3,000 to my mum?

Yes -25% to your mum. Yes - Of the 25% relating to your mum and if the total for the year is less than £3000 - ignore. If more than then you can take the excess only.
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Customer reply replied 4 years ago

Thanks. I assume these rules apply to


The situation with my mum's will is that everything up to the nil-rate limit £325,000? goes into a trust, the rest passes to my dad. So in principle no IHT is payable at this point (until my dad dies), but I need to calculate these gifts to add to the estate to work out what is put in the trust.


I understand that gifts "eat up" the tax threshold first, so does that mean that I need to add 25% of the gifts (less the exemptions above) first, then add other assets, in calculating the value of the estate?


Can you also confirm that I cannot use the 3-7 year taper of the gifts that apply to tax calc, for the purposes of estate valuation?

Hi Nigel. Once the estate is valued then you need to work out the IHT tax liability on it. To do this, as you have rightly pointed out you will need to include gifts less annual exemption and then take into account taper relief. All these eat into your £325k threshold. Any excess on this is taxable at 40% even if its put into a trust. If there a number of transactions involved the past 7 years, it may be necessary to get a qualified IHT expert to do the workings and preparation of the IHT return for as little as £100. All you need to do is google for IHT tax expert or use sites which allow you to get quote from experts instead of you doing the hunting like this one HERE.
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Customer reply replied 4 years ago

Hi - thanks for the tips. I do not think IHT is liable, as the will states that the first £325 goes into the trust (so no tax liable), then the remainder is transferred to my dad (spouse transfer so no tax liability).


The hard part, I think, is going back through all his records to find the dates & amounts of gifts etc, which I will have to do anyway.

I see - there is Spouse transfer. Will an example help of how the gifts and taper relief affect the £325 threshold. I can send you one on a spreadsheet format tomorrow as its now late.

Let me know if you have any further comments. If you are sorted could you please rate the question before you go.

thanks
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Customer reply replied 4 years ago

Yes, a spreadsheet example would help. Assume she has shares of £10,000 in her own name, ISAs in her name worth about £150,000, other bank accounts worth about £40,000 and owned half the house that is worth about £600,000. Her most significant goft was £7,500 (25% of £30,000) she gave to my brother in December 2005, which is 6y 8months before she died in Aug 2012.


Thanks

Thanks Nigel


Firstly apologies on the format of the answer below - its just a problem with this site. If this is not clear i have attached an excel spreadsheet of the answer HERE.


How to Workout Inheritance Tax:

Based on the numbers you provided your IHT workings would look this (see below):



1. Taxable on Death (which can be transferred to Spouse)

The Potential Exempt Transfers (PET) made by mum in the last 7 years prior death now becomes a chargeable transfer because it is made within 7 years of death. However, because there are more than 6 years between the date of gift and the date of death, any death tax to be incurred by the donee can be reduced by taper relief.


Value at death (£10,000 in her own name, ISAs in her name worth about £150,000, other bank accounts worth about £40,000 and owned half the house that is worth about £600,00)£500,000
Less: exempt transfers (****assuming she plans to utlise full NIL Band remaining and transfer the rest her estate to the spouse - see (i))-£176,500
Chargeable estate£323,500
Nil band at death 325,000
Less: CTs in 7 years before death (£7,500- £3,000- £3000) -£1,500
Nil band remaining (i)-£323,500
Taxable£0
Taxable @ 40% NIL
The nil band on death is reduced by any chargeable transfers in the 7 years prior to death.
2. Tax on PET incurred by Donee
Based on the fact that the only gift was £7,500 (25% of £30,000) in December 2005.£7,500
Annual Exemption in year 2005-£3,000
Annual Exemption in year 2004 (assuming no other gifts done in that year) -£3,000
PET (December 2005)1,500
Nil band at death (2012/13) 325,000
(ii) Less: ALL chargeable transfers in 7 years before December 2005 XX
Nil band remaining (assuming (ii) above is NIL) -£325,000
IHT to be incurred by Donee (No need to worry about taper relief then) NIL



In addition its worth your dad start looking into IHT planning to reduce the tax bill- either by gifting some of the assets now, using trusts, investing in IHT efficient assets etc

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