UK Inheritance Tax and gifts, etc?

" A, has died. Person B inherits from them, and pays the Inheritance Tax. "

failed at the 1st fence

B doesnt inherit anything until after inheritance tax, and any debts, are paid from A's estate

B doesnt pay anything cos its already paid

That means that C dont have pay anything

a) cos they are not inheriting anything

b) even if they were (e.g B waved his inheritance in favour of C), inheritance tax is already paid before C gets any money

2) No - its a gift so there is nothing to declare - there is no inheritance tax to pay unless B dies within 7 years of giving them the money.

Look up "inheritance tax" if you want the rules,

If YOU cant be bothered then tough

Wrong from first premise.

Person A dies, the executor wraps up the estate, pays the inheritance tax from the estate and then hands on bequests.

B may gift but there is no "identity" to any gift source, the money has merged with B's money and all gifts made by B are then "potentially exempt" gifts by B to the recipient.

1) Not immediately. Depending on the amount and circumstances, this would be a lifetime gift. If B dies within the next 7 years, part of this money could become taxable. However, if instead of taking the money and giving it away again, B waived that part of his inheritance in favour of C, C would pay the tax arising on A's death and would not be taxed on it again if B died within 7 years.

2) No. If the money is invested in a taxable way, he would need to declare the interest, dividends and capital gains, but not the original inheritance.

1. No. Once it's B's money, B can do what they like with it. B can give it to C or anyone else and that's nothing to do with A's inheritance tax, which B has paid out of A's estate. Or in fact it will have been paid by the executors of A's will, or the administrators of A's estate if A didn't leave a will, which might include B but that's irrelevant - B as executor is separate from B as B. Here's a fun one - if A left a house to B, B and the other executors have to sign an assent to transfer it from A to B. B is taking part in giving a house to himself! But it has to be done to put it in B's name.

The question is then about what happens when B dies. There is a small gifts exemption, meaning you can give £250 away each year to any one person and that falls outside inheritance tax. There is an annual exemption of £3,000, and a larger one for wedding presents. All this is so IHT doesn't have to get involved just when you give Christmas and birthday presents, even quite big ones. But anything more is a PET, a potentially exempt transfer. B could give C a BIG sum out of their inheritance and that would be a PET.

That PET falls out of IHT completely if B survives another seven years. If B dies earlier than that, the gift to C is included in B's estate for IHT purposes and B's executors will have to pay IHT on it. If B dies after four years but before seven, a reduced amount of IHT is due. There will be no tax due at all if B's estate, including any PETs, is less than £325,000. Or even if it's more - anything B leaves to their spouse or civil partner is totally exempt for IHT. (Unmarried partners don't count, and this is a big reason for wanting gay marriage. It means gay people can have the spouse exemption.)

All this is in the Inheritance Tax Act 1984 somewhere. http://www.legislation.gov.uk/ukpga/1984/51/conten...

2. No. It's a gift, not income, and does not have to be declared for income tax. Any investment income from investing the gift does, of course, but the gift itself has nothing to do with self-assessment.

All of which can make us think about IHT planning. The point of the 7-year rule with PETs is so you don't get out of IHT just by giving everything away on your deathbed. But if you've got money you're never likely to really need, and you're hale and hearty and not likely to pass on for years yet, think about giving it away now and it falls out of IHT if your bet on how long you will live comes off. Even if it doesn't, the IHT won't be any more so you can't lose. My mother was in that situation after Dad died, and gave me enough out of his money to pay off my mortgage. That was over 7 years ago and she's still around so that was good use of a PET. Any IHT when she goes will be lower and I saved years of mortgage interest. Win-win for both of us.

While I'm at it, the one thing NOT to do in IHT planning is give your house away on condition that you can still live in it for free. HMRC have long since thought of that one and according to the IHT Act 1984 it's a "gift with reservation". Just changing the name on the deeds of the house achieves absolutely nothing and it's still yours for IHT purposes. Give your house to a child and the only way this will work to avoid IHT is if you pay them rent at a reasonable market rate for living there.