My 85-year-old mother has substantial assets and was leaving me a property, free of inheritance tax (IHT), in her will. She is now considering giving it to me before she dies. Does this change the IHT position?
Helen Freely, partner of solicitors Ambrose Appelbe, says that if your mother gives you the property in her lifetime, this is a potentially exempt transfer (PET).
In order for it to fall outside your mother’s estate for IHT purposes, she must survive the gift by seven years. If she does not survive the seven years, there will be IHT payable on the failed PET – and you would be liable for that.
However, because your mother says she does not want you to be liable for IHT on this gift, then, at the same time as transferring the property to you, she should change her will to give you a legacy equal to any IHT liability in the event of the PET failing.
If she does not do this, you would be liable for IHT in respect of the gift: it does not come out of the residue of the estate.
Similarly, if your mother gave away her entire estate before she died to a variety of beneficiaries and did not survive seven years, there would still be IHT due and it would be the beneficiaries who would have to pay the tax.
Will I breach pensions limit?
Does the new £50,000 limit for pensions tax relief include employer as well as employee contributions? I am a member of the defined-benefit Universities Superannuation Scheme (USS), which also has a money-purchase additional voluntary contribution (AVC) plan. As there is no explicit employer contribution with either, how would I calculate whether I will breach the £50,000 limit – and therefore be subject to a tax charge?
John Lawson, head of pensions policy at Standard Life says the £50,000 limit covers total personal and employer contributions to an individual’s pensions.
Because the employer’s contribution into a defined-benefit scheme is not an explicit amount, a notional contribution of 16 times the increase in annual benefits is used to calculate whether the £50,000 limit has been breached.
For example, assume that as well as being in the main USS scheme – which gives 1/80th pension and 3/80ths cash benefit – you pay £10,000 a year into the AVC. Let’s also assume you earned £140,000 last year and had 20 years’ service, while your pensionable pay then rises to £150,000 and you gain another year of pensionable service.
To calculate the increase in annual benefits, you need to work out the starting and end benefit for the year.
Your starting benefit is 20/80ths x £140,000 = £35,000 x 16 = £560,000, plus 60/80ths cash = £105,000, ie a total of £665,000. This is then increased by the consumer price index (say 3 per cent) to £684,950, so that only the real increase in benefits is considered.
Your end-benefit is 21/80ths x £150,000 = £39,375 x 16 = £630,000, plus 63/80ths cash = £118,125, plus AVC of £10,000, ie a total of £758,125. So the increase is £758,125 - £684,950 = £73,175. In this example, you would have exceeded the annual allowance by £23,175.
You could carry forward unused allowances from the previous three tax years to reduce this. If this is not possible, you will have to pay tax as if this were additional income – in this case, the charge would be 50 per cent, or £11,587.