How To Deal With An Estate On Death As Lifetime Gift Clawbacks Rise
Dealing with someone’s death is never easy, and unpicking their affairs once they have gone, especially if there has been no forward planning for this inevitable event, can be very hard on those left behind. This isn’t helped if there are taxes to pay on the estate from gifts made during the person’s lifetime, a problem that is on the rise. Data from HMRC shows that the average tax payable by beneficiaries on lifetime gifts was £171,186 in 2011/12 but reached £196,923 in 2020/21 according to data obtained by Evelyn Partners via a Freedom of Information request.
So, the tax charged to beneficiaries on big lifetime transfers from the deceased has risen considerably, especially in relation to the Potentially Exempt Transfer (PET) rules, which state you can make any size of gift you like in your lifetime, but you must survive this by seven years for it to be free from inheritance tax (IHT). If you don’t, then it is considered to still be part of your estate and could be taxable at as much as 40% as a result.
If this is the case, then the beneficiaries would be the ones chased for the payment, as they would be the ones who had received the gift while their loved one was alive, and this could come as a real shock, especially if they have invested the gift in something illiquid, like a property for example.
How does this work?
The PET rules are straightforward, but there could be a problem if someone is, say, in good health when they make the gift but then die suddenly in an accident, or from a condition they may not have known they have. If a gift is made under the PET rules, then there is a reducing percentage that would need to be paid depending on how many years the gift is survived by.
The different rates in this Taper Relief as it is called that would apply are currently:
Three to four years between the gift and death – 32% tax
Four to five years – 24%
Five to six years – 16%
Six to seven years – 8%
Seven or more years – 0%
Source: HMRC
A gift can be any type of asset, such as a property, land, shares and so on. But if the person who is giving the asset away retains a benefit, this will still be deemed to be inside the estate and is known as a ‘gift with reservation’. If the gift is from an estate worth less than £325,000 for an individual or £650,000 if the first spouse to die did not use any of his or her IHT allowance, then there would be no tax to pay at all. There are additional allowances of £175,000 each to pass on property to direct descendants for those who have children.
Telling HMRC about someone’s death
When someone dies, you must let all relevant organisations know about their death. For the Government organisations, which includes HMRC, there is a service called Tell Us Once, which means you tell one Government department about the bereavement and they will inform all other departments so you don’t have to tell each one separately.
You can also now use a form P1000 to inform HMRC about who is going to be dealing with the deceased’s estate. The form, which can be found on Gov.uk, allows you to give details of the person who has died, along with information about any agents who will be handling their tax affairs up to the point of their death and for income tax and capital gains of ‘informal’ administration periods.
The aim is to help speed up the time it takes to deal with an estate, but this will be kept under review. But it doesn’t replace any other means of giving information to HMRC about someone who has died, or about their estate.
We can help you meet your obligations
Dealing with a death is a tough, emotional time, and it can be difficult to get to grips with the necessary admin. If you would like us to help you at such a distressing time, please ask us for advice and we will do what we can to help.
