Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about tax on bailout payments from parents to their daughter.
‘Our daughter requires assistance as she is currently facing some serious financial difficulties. If my husband and I give her an amount of money from our joint savings how is the seven year rule applied for inheritance tax purposes if one of us dies before the seven years have elapsed? Or does any money have to be given by only one nominated person/parent?
Also, if we require that our daughter pays us back the money in instalments, as a way of teaching her to become more financially responsible once she is back on her feet, would we have to declare these repayments on one or both of our tax returns? We intend that the money will ultimately be hers so we are even thinking of perhaps setting up a separate savings account for her to pay into.
What do readers think?’ Query 19,941 – Frustrated.
Terry Jordan’s reply: Were the daughter a minor or still in full-time education, the gifts might well be exempt.
‘Frustrated’s query is very similar to Confused’s under the heading PET (Query 19,873 earlier this year). HMRC’s Inheritance Tax Manual at IHTM04057 stipulates that a transfer must be made by an ‘individual’ to be capable of being a potentially exempt transfer (PET). There is a cross-reference to IHTM04053 which explains that an individual is a human being. Accordingly, in Frustrated’s example she and her husband would each be making a PET within IHTA 1984, s 3A. If either or both were to die within seven years his, her or their PETS would fail and become chargeable. If the nil-rate band is exceeded, then ‘taper’ relief will be available on a sliding scale if the donor(s) have survived at least three years. The adult child recipient of the PETs would be primarily liable for any IHT due. That treatment is on the premise that the gifts are outright.
However, Frustrated goes on to say they might require that their daughter repay the money in instalments. That suggests that the transfers might be loans, not gifts, or that the inheritance tax gifts with reservation of benefit provisions in FA 1986, s 102 and Sch 20 might be engaged. Jersey law has a principle ‘Donner et Retenir ne Vaut’: literally to give and to hold back at the same time does not work.
Frustrated asks if they would have to declare the repayments on their tax returns. No entries would be required unless they were to charge their daughter interest. If their daughter pays the money into her own savings account that would be a non-event so far as the parents are concerned and there would then be no worries about gifts with reservation of benefit.
It is implicit in the query that the daughter is an adult. Were she a minor or still in full-time education the gifts might well be exempt under ibid s 11 ‘Dispositions for maintenance of family’.’
The article is also available on the Taxation website.
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