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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3816
Experience:  FCCA FCMA CGMA ACIS
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HI. My father died in 2010. My mother therefore has double

Customer Question

HI. My father died in 2010. My mother therefore has double whammy on tax inheritance threshold . She has assets including stocks shares and property valued at 700,000. She has written a will which leaves 50% of everything to me and 50% of everything to my sister.
My mum wishes to start to give us cash towards our own mortgages etc however we are all concerned about what happens if she does, and if she dies within 7 years.
I know that there is a threshold and that would be the £50,000 over the £650,000 threshold she has. however if she was to give us both £100,000 each, where would that leave us tax wise? Thanks.
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.
Gifts are outside the scope of UK taxation for the recipient.
However, such gifts do create a Potentially Exempt Transfer (PET) for Inheritance Tax (IT) purposes in your Mother's estate. PETs run off in a taper over 7 years and are added back to the estate should she pass away within the PET period. PETs are the first items to be exposed to IT. If the funds in her estate on her demise are insufficient to meet PET then the liability cascades down to the beneficiary for immediate settlement. If, of course she survives 7 years after making the gifts then her estate would fall, on the figures quoted, to below the 325K of her IT allowance plus the 325K of her deceased spouse's unused allowance giving her a 650K exemption from IT.
The traditional solution to this is a reducing term life assurance on the donor's life, but I appreciate, depending on your Mother's age, that premiums may be prohibitive.
I do hope I have helped you with your question. IT is levied at 40% flat rate on any surplus over the limits quoted. Should she drop dead tomorrow the estate is looking at a 20K IT bill.
Customer: replied 3 years ago.

Hi

thanks

forgive me but some of the terminology is lost on me.

First of all, what does 'added to the estate' mean exactly?

what does 'outside the scope' of UK taxation for the recipient mean?

Also, yes IT is levied at 40% flat rate over the limits so yes the 20K IT bill is the 40% of the £50,000....is that correct?

I am pretty basic with this sort of thing.... In a nut shell then, if my Mum was to share/gift cash to my sister and myself next week, for example, £100,000 to each of us, a total of £200K, then a) if she survived the 7 years would that be then subject to tax of 40% ? if she dies before the 7 years, then is this is a taper situation.... and therefore a sliding scale?

Sorry to ask for a more basic explanation . thanks

Expert:  bigduckontax replied 3 years ago.
Let me put it in a different order. You and your sister or indeed anybody do not incur any UK tax liability on gifts and bequests received.
Say your Mother from her 700K estate has given you and your sister 100K each. That reduces her estate to 500K. However, PETs are created. If your Mother passes on within the PET taper period then the amount of the PET after taper is added back to her estate to put it back to it's original position. The taper is:
3 to 4 years - 20%
4 to 5 years - 40%
5 to 6 years - 60%
6 to 7 years - 80%
so if she survived 6 years the add back would be 20% of the 200K donated = 40K making the estate 540K which is conveniently below the limit.
40% of 50K = 20K; you have it in an nutshell.
If your Mother gives you 200K between you and survives 7 years her estate is 700K - 200K = 500K, below the 650K allowance; no IT payable.
If she dies within the 7 year period then I have given you an example earlier in this additional explanation.
No problem, delighted to be of assistance. Some of these things are difficult to get one's head around, I know.
Customer: replied 3 years ago.

Thanks.. I appreciate this so much

So ... If my Mum gave us the 200k between us, and she died within the first 3-4 years, the PET would be 20%

This makes the add back ( the taper added back on ) 20%

So , 20% of the total 200K would be 40k.. is that correct? So its the 40k therefore that is exempt from tax?

Or the 40k that is given back to us?

sorry I am nearly there with this... Never been great with numbers.

:-(

Expert:  bigduckontax replied 3 years ago.
Unfortunately, you have it in reverse! If she died in the 3 - 4 year block then the taper is 20% so the PET to be added back would be 200K @ 0.8 = 160K restoring the estate to 500K + 160K = 660K, 10K above the allowance, IT 4K.
I think you probably will have it now.
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.
Customer: replied 3 years ago.

Thank you. I may have some other questions around this sort of tax, and also property tax..... Hopefully the cover I have bought will support this too


have a lovely evening

Expert:  bigduckontax replied 3 years ago.
Delighted to be of assistance.
Customer: replied 3 years ago.
Hi again. I have a flat on which the mortgage is paid off. I am considering letting it out and buying another property to live in. I could potentially purchase a property outright however due to the tax payableincome gal income would I be better off getting a buy to let mortgage on the flat ? If so, does it make a difference tax wise as to the size of the mortgage ?

Thanks
Expert:  bigduckontax replied 3 years ago.
The mortgage interest element on the buy to let property would be allowable against any rental income received. Naturally, the higher the mortgage interest the mire the rental income is reduced for tax.
Customer: replied 3 years ago.
Can we work with some numbers so I cangunner stand it better. I earn 34k per annum and I will receive about £1600 per month rental income from the flat. If I borrowed £100k buy to let mortgage how much tax relief would I get ?
Expert:  bigduckontax replied 3 years ago.
I regret I cannot advise you; you have not told me the amount of interest element on the mortgage! That is the key to this calculation.
Customer: replied 3 years ago.
Oops sorry ! 4.5%
Expert:  bigduckontax replied 3 years ago.
4.5% of 100K is 4.5K. Your rental income is 19.2K, so your rental income for tax purposes would fall to 14.7K, equivalent to GBP 1225 per month.
Customer: replied 3 years ago.
Excellent. Thank you
Expert:  bigduckontax replied 3 years ago.
Delighted to be of assistance.
Customer: replied 2 years ago.

Hi ... I am not sure if I have any credits left ... however I have another question regarding my mums estate/tax/care home fees. Is it true that when / if my mum needs to go into a care home, that unless she gifts the money to me and my sister (all of her assets) then she will pay her own care home fees out of her estate. and if not, then the state pays for her fees? Do you have any more information about this please? Also, can my mum 'sell' her home to me and my sister so that we have her home in our name, saving us from having to sell the house and pay for the care home fees out of the property value? Thanks

Expert:  bigduckontax replied 2 years ago.
This is not a matter for the State, but for each individual local authority and the all have their own rules. They do tend not to like your last suggestion, but whether they are toothless tigers is quite another matter. If she enters a retirement home not owning a property than the situation is much easier if you get my meaning.
Customer: replied 2 years ago.

I see so getting in touch with the local authority is the way forward to check on rules and regulations.


If she did for example she did not have a property of her own, but just had cash in the back, then would they take the cash she has in the bank to pay for her care? Also,I am assuming that they will check her bank for the cash ? Thanks again

Expert:  bigduckontax replied 2 years ago.
How would would they access details of bank accounts? Thus is, I believe, still a free country.

Customer: replied 2 years ago.

So really, then regards of cash she has in the bank, they will go mainly by the value of the property and whether or not she owns it ? I don't know how they would access her bank details or collect information about her assets in general. I don't know if this is possible. Can they check on this also? OR is this a case of us declaring these things to the local authority ? Thanks

Expert:  bigduckontax replied 2 years ago.
I doubt it, please remember that older people get so confused if you get my drift.
Customer: replied 2 years ago.

I get your drift !

Expert:  bigduckontax replied 2 years ago.
Excellent.

I am now opting out of this question.

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