Q. We are considering making a substantial ‘gift’ to one of our daughters, she is wanting to purchase a house and like many grandparents and parents we want to assist while we are alive and would like to see her get some pleasure out of the gift.
My query is about Inheritance Tax (IHT). I am told that ‘gifts’ are liable for IHT if the donor dies within 7 years. Do you know if this rule is negated (if the worst happened) if the recipient was NOT liable to IHT at the time of the donor’s demise?
A. IHT is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime. However, a certain amount can be passed on tax-free, which is known as the ‘nil rate band’. Your question refers to the status of the recipient at the time of the donor’s death, but this is not relevant. It is the estate of the deceased person which is assessed for inheritance tax (this differs from some European countries, where I understand there is a threshold per beneficiary).
Everyone has a nil rate band (an amount they can leave behind tax free) of £325,000. The fact you say “we” in the question suggests that the gift is coming from two of you, so you have £325,000 each. If death occurred within 7 years of making the gift, it would be added back to your estate to see if your overall estate exceeds the tax free amount. Please remember also that you each have an allowance of £3,000 you can make each tax year, and if you have not used last year’s allowance, this can be used as well, reducing the amount of the gift which stays in your estate for 7 years by £6,000 each. So if for example you give £200,000 jointly from you both to your daughter, that is a “Potentially Exempt Transfer” of £94,000 each, if you both have the annual exemption available. If one of you dies within seven years, the amount of nil rate band available to their estate is reduced from £325,000 to £231,000, with tax payable only if the taxable estate at that time exceeds this figure. Remember that on first death, anything left to a surviving spouse is exempt, so it is only what is left to others which counts towards the nil rate band.
Q. In your column you have mentioned that the government is allowing some people approaching retirement age to top up their state pension. Is it a good deal or would I be better deferring my pension past my state retirement age?
A. Since 12 October 2015 those who reach their State Pension Age before 06 April 2016 are able to apply to make a ‘Class 3A voluntary contribution’ to top up their State Pension by up to £25 per week. Whilst this may appear to be an attractive proposition, the cost is such that a 65-year old basic rate tax payer may need to live for 21 years to get their money back (for a 65-year old non tax payer this would reduce to around 17 years). However, if you are optimistic about your life expectancy, it could prove to be a prudent investment. Bear in mind too that upon death 50% of any additional State Pension purchased via Class 3A voluntary contributions could continue to be paid to a surviving spouse or civil partner. As you have pointed out, there is an alternative way to increase your state pension by deferring it past your state retirement age. The pay back period for basic rate tax payers can be much shorter than the class 3A route. As always though, it would best to take advice from a financial adviser specialising in pensions to take into account all of your personal circumstances before making any decisions.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
