INHERITANCE TAX - 02.02.2006

Care for gifts

Offer of help

Scenario. Let us say that Mr and Mrs X are finding it increasingly difficult to look after themselves; a combination of a recent accident in the home or the onset of some form of infirmity. However, they are adamant that the last thing they are going to do is sell the family residence and move into a care home. If Mr and Mrs X are thinking about paying someone to provide the support/care for them to stay at home what’s the best way of going about this from a tax point of view?

Option 1. A weekly wage. What would be the position be if Mr and Mrs X were to pay, say, £200 a week as wages?

PAYE scheme. Paying for a third party carer or home help through an agency or local authority has no PAYE implications for Mr and Mrs X. However, if they employ a carer direct, PAYE would need to be applied at this level of remuneration. Excessive administration, but these are the Taxman’s rules.

Tax-free? No tax and NI is due if you pay less than £94 a week (£97, 2006/7). In our example of £200 a week, Mr and Mrs X would have to pay employers’ NI of £13.57 (£200 - £94 x 12.8%) on top of the wage. They would also need to set up and administer a PAYE scheme for the tax and NI deducted from the employee’s wage in excess of £94 a week.

Not all bad news. If family members provide care (or other services) to a relative, it could be financially beneficial for them to be paid a commercial wage (or commercial rate for their services). If the carer also earns, say, £500 a week in another job, these additional earnings from Mr and Mrs X would be taxable. Although the recipient is taxable on the income (see Q13 “Any other taxable income?” on a tax return), no NI is due, and income tax is paid just once a year.

Appreciative gifts

Option 2. A time for gifts.What if, instead, Mr and Mrs X were to be extremely generous to their carer at Christmas, their birthday etc. or even paid for a holiday?

Love and affection. Looking after parents is an expression of love and affection. The gift of a sum of money by Mr and Mrs X to a carer from their own family is an expression of gratitude in return, not remuneration for gainful employment.

Out of income? There is always the possibility that if the payments were made regularly, the Taxman might be able to class them as habitual in nature, meaning they would only fall out of the IHT calculation if you could prove they came out of your parents’ spare income (not capital!) (s.21(1) Inheritance Tax Act 1984).However, you canprove payments for care are out of income, not capital, by calculating the surplus income for each year.

Tip. Care provided by family members will not implicitly be classed as employment. Help your parents keep a record which shows that the carer has been rewarded with presents as opposed to wages. These are gifts for IHT purposes not wages. Have small gifts treated as “out of income” and use the £3,000 per person per year capital gift exemption for other larger gifts (like paying for a holiday).

For an example of a record of gifts visit http://tax.indicator.co.uk (TX 06.08.05).