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bigduckontax, Accountant
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If a friend paid my mortgage off for me (£80,000) & subsequently

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If a friend paid my mortgage off for me (£80,000) & subsequently had to go into care, or died within 12 months, how would this impact on tax payable by either/both of us?

Hello, I'm Keith and happy to help you with your question.


Your friend has made you a gift of GBP 80K. He has created a Potentially Exempt Transfer (PET) in his estate. PETs run off on a taper over 7 years. In the event of the donor's demise within this time frame the PET is added back into his estate for Inheritance Tax (IT) purposes and is the first tranche to suffer IT. If the estate has insufficient funds to meet the PET it cascades down to the recipient for immediate payment. IT only applies to estates over 325K and is at 40%, flat rate on any assets in excess on death. Worst case scenario is a possible PET charge of GBP 32 on you personally. You protect against this through a reducing term life insurance policy. However if his estate on death does not exceed the 325K limit there is no IT.


As for going into care that is entirely a matter for the relevant Local Authority if they are landed with a liability for his care. This is an incredibly complex process, Age UK's guidance notes alone run to a mere 56 pages! As far as I can gather an assessment will look at the income available to a person with care needs as part of the checks undertaken by the authority. You could not under any circumstances whatsoever be held responsible for your friend's care although I have known of cases where there has been a 'try on!'


I do hope my answer has been of help to you.

Customer: replied 4 years ago.

What do you mean by GBP32? Do I have to take out a reducing term life ins policy? I do not have /need life ins. at present. If he went into care he has 2 houses which could be sold. His assets would be about 3k max. Thank you for answer so far.

I am sorry there is a typing error in my answer; paragraph 2 line 4 delete 'GBP 32,' insert 'GBP 32K.' That means 32,000 quid. I can't use a pound sign on my notebook as it hails from the States where they use an odd currency called a dollar and don't have pound signs on their key boards. That would be your maximum possible liability in the event of his estate not being able to meet the IT due on the PET. However, I cannot see how his assets would be only 3K when he has 2 houses to sell. They would form part of his estate priced at the current market value as at date of death, plus the value of any other assets including personal belongings plus the PET. Such assets would undoubtedly attract the attention of a local authority assessing the level of care needed and to be provided from their funds.

It is his life which you would be advised to insure to protect you from being caught by a PET cascade. However, depending on his age it may be prohibitively expensive or even impossible. I am merely giving you the standard guidance about PETs I advise to all my clients.
Customer: replied 4 years ago.
Sorry, my mistake in typing & not re-reading. His assets would be £300,000. He is 68 & in poor health. As his houses would have to pay for his care he is trying to reward me for the 18 yrs we have been together (although living separately) and my care of him in recent times. He has cash assets to cover that. If the sum were less than 80k is there a sliding scale on that PET?

No, the sliding scale on the PET is a time based one. 0 - 3 years 0%, 3 - 4 20%, 4 - 5 40%, 5 - 6 60%, 6 - 7 80%, 7+ 100%. It's a race against the Grim Reaper


.Marry him before the gift and the PET disappears, simple as the meerkat in the TV adverts says. Transfers between spouses are out side the scope of IT. A bit flippant I appreciate, but highly relevant.


I have to put the ball back in your court.

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Thank you for your excellent support.