Money: Take it as given - but check with the tax experts

READERS' LIVES; Tax on gifts ... allowances for widows ... making the most of an endowment policy ... Your queries answered
My parents have given me pounds 30,000 to use as a deposit for a flat. I've received conflicting views - from friends rather than experts - on whether this is in any way taxable. Can you shed any light?

LS, London

You don't have to pay income tax on gifts, so the only tax you need worry about is inheritance tax. The chances are that there won't be any tax to pay. But any tax bill that does arise would depend on your parents' circumstances, not your own. And tax would only become payable on your parents' death, not when you receive the cash.

For simplicity, let's assume each parent gave you pounds 15,000. And let's ignore certain complications - for example, that some gifts will be tax- free whenever your parents die. This explanation covers your father, although it applies equally, but separately, to your mother. As long as your father lives for seven years after making this gift, there will be no tax to pay. End of story.

Were he to die within seven years, the pounds 15,000 would become "chargeable" for inheritance tax purposes. But in the current tax year, the first pounds 223,000 of chargeable gifts falls within the nil-rate tax band. In other words, there is no tax to pay on the first pounds 223,000 of chargeable gifts.

What if your father's chargeable estate, when added to chargeable gifts made in the seven years before death, does exceed the nil-rate tax band prevailing in the tax year of his death? The estate would have to cover tax for the amount over the nil-rate band. Tax on gifts depends on the order in which he made them. Let's say your money is the first significant gift your father has made in the last seven years. In that case, it would use up the first pounds 15,000 of the nil-rate band. So no tax to pay.

Without wishing to tempt fate, let's say that your father were to die in the current tax year, with its pounds 223,000 nil-rate tax band. If he has made chargeable gifts worth pounds 300,000 in the seven years before he dies, of which at least pounds 223,000 was made before you received your cash, then your gift falls outside the nil-rate band.

Your parents may well be wealthy and use accountants or other advisers. If so, check your position with them. They might suggest arranging short- term life assurance for your parents to cover any possible tax bill.

Inland Revenue leaflets IHT2, IHT3 and IHT15 may also help you. Call the Capital Taxes Office: on 0171-974 2424.

My husband had to give up work because of illness. When I became the main breadwinner I claimed married couple's allowance. My husband died in November. Can I claim the widow's bereavement allowance on top of the married couple's allowance?

ST, Suffolk

Strangely, you can. It's odd because nowadays there doesn't seem to be much logic for having the widow's bereavement allowance. And it constitutes a bit of legalised sexism; there is no equivalent for widowers.

The widow's bereavement allowance is the same as the married couple's allowance. In the 1998/99 tax year the allowance is pounds 1,900, but you save a fixed 15p of each pound of the allowance, regardless of your top rate of tax. That makes it worth up to pounds 285 off your tax bill.

Regardless of any married couple's allowance you received, you can claim the widow's bereavement allowance in the tax year when your husband died. And, provided you don't remarry before the start of the next tax year, you can claim the allowance for a second year. But two years is the limit. So if your husband died in November 1997, you can claim the allowance for 1997/98 and 1998/99.

I no longer have a mortgage but I still have an endowment policy started at the time I took out my mortgage. It seems to be worthwhile only if it goes to its full term, in 13 years' time. I'm retiring in a year's time and can't see how I can afford to keep paying the premiums.

PT, London

You do generally need to let an endowment policy run its full term in order to get the full value from the premiums you pay. The early surrender value is likely to be poor if you cash in before the maturity date. But there are other options.

You could consider selling the policy on the second-hand market. The second-hand value won't reflect the true investment value of the premiums you've paid to date, but it is likely to compare favourably with the surrender value offered by the insurance company. Policies have to be with-profits endowments to have a second-hand value (they can sometimes be whole-of-life policies). They usually need to have been running for at least five years, or a quarter of the total term.

There are several firms to choose from and many are members of the APMM (the Association of Policy Market Makers). You can get a list from the APMM, The Holywell Centre, 1 Phipp Street, London EC2A 4PS.

If you can wait for your money you can discuss other possibilities with the life firm. Can you make the policy "paid up"? This means you keep the policy going for its full term but you pay no more premiums. Instead, the guaranteed pay-outs are reduced, though you should be able to continue getting bonuses added to the reduced value.

Second, could you reduce the term of the loan? Some companies are prepared to consider bringing forward the maturity date. Third, and possibly in conjunction with bringing forward the maturity date, is it worth taking out a loan from the insurance firm to pay the premiums? The figures could make investment sense. Life firms often give cheap loans for which an endowment policy is used as security. The outstanding loan is deducted from the policy proceeds on maturity (if you haven't paid it off earlier). You need to take a view. Find out whether the cost of the cheap loan is more than compensated for by the amount by which you will increase your policy pay-out if you keep the endowment going for its full term.

A word of caution: projections of the eventual pay-out provided by the insurance firm will use standard rates of investment laid down by the regulators. There is some concern that the standard rates are too high and may exaggerate the expected return.

q Write to the personal finance editor, `Independent on Sunday', 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number, or fax 0171-293 2096.

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