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My grandparents are gifting me £7000 towards the cost of buying my first home. Depending on the price of the house I buy, this will probably go towards the deposit, fees associated with buying a house and things such as furniture etc. for the house.

For example, if I purchase a house at £180000 with the current circumstances I would need a 15% deposit at £27000. If I have £25000 of my own money then £2000 of the gifted £7000 would go towards the deposit and the remaining £5000 would go towards fees and furniture if there is any left over.

However according to the GOV.UK website only a maximum of £3000 can be given each tax year as part of my 'annual exemption'. It then goes on to say that tax on gifts starts at 40%, reducing down to 0% after 7 years before their death.

So would this mean if my grandparents passed away within 3 years I would have to pay 40% on the £4000 (£7000 less the £3000 'annual exemption') so £1600, reducing as time goes on?

Also how would this work if only one of my grandparents passed away?

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    It's not that there is a tax on gifts, it's that if the person giving a gift (over £3,000) dies within 7 years, the gift is counted as part of their estate and subject to inheritance tax (on a sliding scale). The intention is to stop someone giving away all their assets on their death-bed and avoiding IHT.
    – TripeHound
    Jul 11 '20 at 15:08
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    Not related to IHT, but your mortgage lender may well want to see something in writing from your grandparents confirming that the 7k is a gift not a loan, to satisfy their 'source of funds' compliance. It doesn't have to be fancy.
    – AakashM
    Jul 13 '20 at 8:45
  • @AakashM - Yes I am aware of this but still a great comment for those who aren't.
    – Jsk
    Jul 13 '20 at 8:53
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I think you have things slightly backwards in your head. The £3000 gift exemption is not yours, it is theirs.

TL;DR: In no circumstances would you have to pay out money as tax on the gift after the fact, even if the person dies within 7 years. The worst that might happen is that any subsequent inheritance you received would be lower to account for the tax.

Here's how it works in detail:

  • Person A gifts person B £7000 (and doesn't make any gifts to anyone else)
  • Person A dies within 3 years
  • The value of Person A's estate is added up, including the £4000 (£7000 - £3000 gift exemption) because it was gifted within the last 7 years
  • If the value of Person A's estate is over £325,000 then the portion above that is liable for IHT at 40% (if not, then no IHT is due and this whole conversation is irrelevant)
  • The IHT is taken out of the estate before the remainder is distributed to the beneficiaries. If Person B is also a beneficiary of the will then their portion may be reduced to compensate for the additional tax on the £4000, but if they are not a beneficiary of the will then nothing happens. In neither case do they come after Person B for the tax on the gift.

The taper relief on gifts means that if Person A died between 3 and 7 years after giving it, that portion of their estate would not be taxed at the full 40%.

The fact that the £3000 exemption is theirs not yours means that if Person A also made similar gifts to other grandchildren, say, Person C and Person D, then the exemption would be split between them.

If one grandparent dies before the other, assuming they have written sensible wills then usually the whole estate would pass to the surviving spouse and there's no IHT implication, so this would only kick in when the second grandparent died. If they have not written a will things get more complicated (see https://www.gov.uk/inherits-someone-dies-without-will/ and note that the law is different in England & Wales / Scotland / Northern Ireland.)

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    I think in theory HMRC can come after past gift recipients if there isn't enough money in the estate to cover IHT (e.g. because of large past gifts), but it seems highly unlikely in this case. Jul 12 '20 at 11:00

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