Gifts in excess of £3,000 per donor per year, which are not paid out of income, are known as Potentially Exempt Transfers (PETs). This means that they are not subject to Inheritance Tax (IHT) provided the donor survives for seven years from the date of the gift.
In the unfortunate event that the donor does not survive for seven years, there is a double sting in the tail. Not only will the gift become chargeable to IHT (at up to 40%), but the liability will fall on the recipient of the gift and not the estate of the donor.
The likelihood that the gift recipient will have retained any funds to cover this contingency may be remote. After all, the point of the gift was to invest in bricks and mortar. A lifeline is thrown by HMRC in that the recipient can elect to pay the IHT in annual instalments over 10 years (plus interest) where the asset consists of immovable property.
As a last resort, and provided all parties are in agreement, arrangements can be made for the IHT to be paid from the deceased’s estate. Unfortunately, this is not as straightforward as the payment by the personal representatives of the tax, due by the gift recipient, is treated for IHT purposes as further gift!
For more information on tax efficient way to make gifts please contact your usual Buzzacott contact or Mary Hase.
This article was taken from the Winter 2017 issue of the Private Client team's Quarterly Tax Digest. You can access all the other articles here.