I have taken a 25% lump sum from my self-invested personal pension plan (Sipp). The plan is to gift the £150,000 to my son to help him buy a house. Should I make the gift paperwork in joint names with my wife with no breakdown of the amounts shown? Or should I show 50% from each by way of a £75,000 transfer to my wife’s bank and then send £75,000 from each of our bank accounts? I’m aware of the seven-year inheritance tax (IHT) rule and my son’s IHT liability when I die.
My thoughts are that if I make the gift solely in my name then on my death my son would face an IHT liability. Whereas if the gift was made jointly with my wife, then he would be liable to IHT only on the remaining parent’s death. Could you confirm that this is right?
As the gift you are looking to make is more than the allowance exempt amounts, this would be treated as a potentially exempt transfer (PET) for IHT purposes.
For a PET to be free of IHT, you need to survive for seven years after making the gift.
If you die within seven years of making a PET, and the total of all PETs you make is less than £325,000, then the value gifted will simply reduce your nil-rate band on your death. Your nil-rate band is the amount your estate can be worth before any IHT becomes payable.
So while this means that those receiving the gifts won’t be liable to tax, it also means that you won’t make any IHT savings by making these gifts.
It is only if the total value of PETs that you make is more than £325,000 that your son would face a potential IHT bill on your death. The tax bill would reduce on a sliding scale if your death occurs between three and seven years after making the gift.
So, assuming you make the gift on your own, the total value of gifts you make is less than £325,000, and you die within seven years of making it, your nil-rate band would reduce by £150,000 (assuming you’ve made no other PETs) from £325,000 to £175,000.
If you make the gift jointly with your wife, you will be deemed to have gifted £75,000 each and as a result, if one of you dies, the value of their nil-rate band would reduce from £325,000 to £250,000.
For IHT purposes, the gifts from you and your wife will be assessed separately when each of you dies and won’t be delayed until after the second partner’s death. So, you would be better off gifting the money jointly with your wife.