Inheritance tax vs CGT

[tonyjeffs]

If....
Someone has investment property worth 200k which he bought for 100k,
and a life expectancy of less than one year,
is the tax situation better if

a) he sells it now, giving 40k to the taxman, and giving the remaining
160 k to children.
or
b) leaving the property to his children in a will.

Thanks

Tony
9 at tonyjeffs dot com

 

[Ronald Raygun]

If....
Someone has investment property worth 200k which he bought for 100k,
and a life expectancy of less than one year,
is the tax situation better if

a) he sells it now, giving 40k to the taxman, and giving the remaining
160 k to children.
or
b) leaving the property to his children in a will.

It depends on the size of the rest of his estate.

Option (a) involves paying IHT on the 160k gift (leaving aside some use
which can be made of Small Gift exemptions), while option (b) involves
IHT on the whole 200k value.

So if the value of the rest of the estate is already more than the
threshold, option (a) involves paying 24k more tax than option (b):

a) 40k CGT + 64k IHT, 104k total
b) 80k IHT

The same is true if the estate is worth up to 160k less than the
threshold. Take example where it's exactly 160k less:

a) 40k CGT + no IHT
b) 16k IHT (40% of (200k-160k))

If there is even more spare threshold available, option (a) gets even
worse. Suppose the estate is worth 200k less than the threshold:

a) 40k CGT + no IHT
b) no IHT

 

[Robert]

There is no CGT at death.

All gifts made in the last 7 years are included for IHT (with certain
allowances and modifications).

Assuming he will be paying IHT on all the investment:

a) CGT (40k) + IHT of 40%x160k, =. 104k tax.

b) No CGT, just IHT of 200*40% = 80k of tax.

Robert







Robert

 

[Ronald Raygun]

Whilst your total is correct, the way you got there is wrong as is what
you have applied the IHT on.

No it was not wrong. You were probably misled by my simplified wording
where I said "involves paying IHT on the gift". Naturally I meant that
this would be paid on the value of the gift after it's been added back
into the estate. I was calculating the contribution this gift would be
making to the IHT liability.

Assuming no other Potentially Exempt Transfers
then as the gift is less than the Threshold then no IHT will
be payable on it at all, but because the gift is added to the estate
then it may cause the estate to pay IHT at the mount you have calculated

That's technically correct, but because it's irrelevant to the OP's
circumstances, it was not necessary to go into this detail. And no,
I really hadn't forgotten, I deliberately didn't mention it in order
not to confuse.

The distinction is only of relevance to the question of whether, on
what, and how much taper is applied under the 7-year rule.

 

[Robert]

"It [IHT] would be paid on the
marginal value of the estate in excess of the threshold, NOT the value
of the gift itself. This is an important distinction which, in reverse
is especially important in the case of insolvent estates when
determining upon whom the liability to IHT falls which may include the
beneficiary's of failed PETst."

It is also important because the 7 year taper applies to the tax on the
PETs and not to the PETs thelselves. Since the earliest gifts are
taken off the nil band first, the taper has no effect (since the tax is
zero until enough PET's have accumuated to rise above the threshold).

However, as Ronald pointed out, this is not of immediate interest to
the OP since it does not affect whether he chooses (a) or (b).

Robert

 

[Ronald Raygun]

Dont try and wiggle out of it!

No need, I was never in it.

Of course old bean!

Whom are *you* calling old?

But it wouldnt be paid on the value of the gift. It would be paid on the
marginal value of the estate in excess of the threshold, NOT the value
of the gift itself.

But the marginal value of the estate in excess of the threshold (or, to
be more precise, the difference between the marginal values including
and excluding the value if the gift) *is* the value of the gift, as
follows from my stated assumption that the rest of the estate already
exceeds the threshold.

This is an important distinction which, in reverse
is especially important in the case of insolvent estates when
determining upon whom the liability to IHT falls which may include the
beneficiary's of failed PETst.

Yes, of course, but that's not relevant here because I was so bold as
to make the tacit assumption that the estate in question would not be
insolvent.

10/10. Go to the top of the class. Im glad you remembered my earlier
posts in this regard in, er, er, er, sometime towards the beginning of
the last decade of the last century.

<bask>

 

[Peter Saxton]

Whom are *you* calling old?

You accept you are a bean?

 

[Ronald Raygun]

Whom are *you* calling old?

You accept you are a bean?[/QUOTE]

Can you count me?

 

[Peter Saxton]

Can you count me?

1

 

[Tim]

1

I count at least two of him!

Ah, Rainer Thonnes - where are you now?