Sunday, 22 January 2012

The gifts that were never gifts for inheritance tax!

If you gift an asset (e.g. a house) but you continue living in it (or have some benefit from it or you don't pay for the use of the asset), the taxman says, you never gave it away for inheritance tax! So, it will be part of the death estate on the donee's death, even though the donee survives for longer than 7 years.

However, if you die within 7 years of the gift, there is a problem: is the gift to be taxed as a lifetime gift or as part of the deathe estate? The answer is, the taxman will prepare two tax computations and the one with the highest tax will apply. 

If the donee gives up any benefit from the asset just before he/she dies, the asset will not come back into the death estate! But, the taxman will treat it as a lifetime gift - with inheritance tax implications of course if death happened in less than 7 years from the date the benefit was given up! At least that way there is some hope!

Of course, having a gift being taxed as lifetime gift as opposed to being in the death estate has certain advanatages: The amount taxed is often lower for appreciating assets (e.g. houses) and the lifetime gift will attract annual exemptions and taper relief.

So, did you think you were the clever one?

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