Jamie Favell helps a Money Observer reader with a question about inheritance tax and CGT.
My mother is 89 years old. If she gives away money from her pension regularly without it affecting her standard of living, how will it affect her inheritance tax allowance? Will her nil-rate band be reduced?
In addition, my mother has property in India and she is a UK taxpayer. In the UK, there is no capital gains tax on death, but inheritance tax kicks in. There is no inheritance tax in India, but capital gains tax has to be paid on sale regardless of whether the owner is alive or dead. Do we have to pay capital gains tax in India at the time of sale and pay inheritance tax at 40% in the UK?
Mrs Bose, by email
Jamie Favell at the Tax Advisory Partnership replies: Making regular gifts out of income is a valuable but overlooked inheritance tax planning tool. If your mother has a net surplus annual income, this could be gifted completely outside the scope of IHT, provided these gifts are made regularly and a payment pattern is created. Any intention to make regular gifts should be documented. In addition, an accurate record of annual income and outgoings must be prepared to show that the gifts are from surplus income after maintaining her standard of living. Your mother cannot fund her lifestyle using savings in order to create surplus annual income which can be gifted. Providing these gifts are documented properly and reported to HMRC, and all conditions are satisfied, they have no impact on the nil-rate band and are exempt from IHT.
The issue of your mother’s Indian property is complex and would require professional advice. The UK and India have a double tax agreement for estate taxes; depending on your mothers’ domicile on her death, this could mean the property is exempt from UK IHT. But if the property is subject to UK IHT at 40% and then sold by the donee and taxed in India there would be an element of double taxation.
If you need help with a tax, pension or financial planning problem, please email: email@example.com
- Sweet charity: how the principles of philanthropy can benefit donors and good causes
- Ask Money: how does IHT work in relation to legacies to charities?
- Ask Money: what are the tax rules for my overseas family?