If I die within seven years of making a gift to a grandchild, I understand it may be subject to inheritance tax. But how is HMRC aware of this gift? Do we need to keep detailed records?
James, Reading
Guy says:
You won’t be surprised to hear that I would always recommend someone pays all the tax that is due. There are penalties for evading tax and the results can be very serious.
Luckily there are lots of legitimate ways to reduce your inheritance tax bill (IHT) without being forced into risky shortcuts.
Do you have to pay IHT?
You have a personal allowance of £325,000 or £650,000 if you are or were married. If your total estate is worth less than this, then there will not be a tax charge on any gift.
On top of this, HMRC is phasing in an additional allowance for your main residence meaning that by 2020 if you were to die your total allowance will be £500,000 or £1m for a couple. This may well mean you don’t have to worry about tax.
If your assets are worth more than this
Let’s start with the basic rules around gifting. There are several exemptions for small gifts. If you intend to give your grandchild less than £250, or up to £2,500 as a wedding gift, or any amount out of your income this will not be taxable.
Amounts over that are called potentially exempt which means there will be tax to pay up to seven years later if you were to die.
The amount reduces gradually after three years from the date of gift until by year seven when no tax is due. Beyond straight forward gifting, as discussed above, there are several alternative ways you could pass wealth to your grandchildren that may be more beneficial to you and them.
Other options to minimise tax
The rules are complex and I am not able to give you a complete breakdown here. But in general, you could consider buying any asset that qualifies for Business Property Relief or making use of trusts if you would like to have some control on how and when the money is spent.
Each approach has pros and cons and the right option will be dependent on your circ*mstances.
If gifting is the right option for you, it’s worth understanding how this is tracked and monitored.
HMRC will not be aware per se that a gift has been made. However, the Executor of your will has to complete a form for HMRC, before probate is granted, which outlines the value of the estate for inheritance tax purposes.
This form asks whether any gifts have been made and the Executor of the estate has to sign a declaration to say that they have accurately detailed all assets, liabilities, trust interests and lifetime gifts.
HMRC will not grant probate without this completed form.
HMRC conducts random sampling of these forms, and this has increased over the past few years. If a gift is discovered which hasn’t been properly declared, then additional inheritance tax will be due, and there may also be a penalty, as well as interest on the unpaid tax.
It is the responsibility of the Executor to submit an accurate form to HMRC. However, if it is found that the recipient of a gift has misled the Executor, then the minimum resulting penalty for this is 50 per cent of the unpaid tax due.
But it could be as much as 100 per cent of the unpaid tax due, and this is payable by the recipient of the gift.
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