Inheritance Tax Query

[ashes]

Hello there!

Sadly my grandad passed away a few weeks a ago. My father (only child) has been helping my nan (his mum) with all of my grandad's financial affairs. It turns out that he was quite the shrewd and smart investor. My grandparents have a house that is worth in excess on £400k, plus my grandad had bank accounts, savings accounts, bonds and shares in excess of £700k.

My father said that he accidentally found and read their Wills and said that when the first spouse dies, their estate goes to the surviving spouse - normal. When both have died, the Wills then stated that my father will be given the house and the car, and that the grandchildren (3 of us) will receive the rest of the estate (cash in the bank, bonds, shares etc... everything else)

I know it might sound a bit callous and morbid thinking about my nan's death, but when the sad day does happen, what will be the likely inheritance tax on the estate?

I've being doing some research, and it appears that if the estate is worth less than £325k there is no IH Tax to pay and anything over that, will be taxed as a whopping 40% (which is outrageous in my opinion) so for argument's sake... say that other associated costs have been deducted and the estate is worth £1.1mil -£325k = £775k. Am I right in saying then that that £775k is taxed at 40%, leaving £465,000 + the house worth £400,000? Tax due being £310k??

So my father will keep the house worth £400k, and us 3 grandchildren receive the £465,000 / 3 = £155,000 per grandchild?

If that is true, then it feels a bit wrong that the grandchildren have to basically pay all the Inheritance Tax out of their share of the Will? Does this sound right? It just seems a bit bonkers to me. - Can someone please help clarify??

Thanks in advance!

[Joanna C]

Re: Inheritance Tax Query

It sounds as if you are residuary beneficiaries. Inheritance tax is paid from the residuary estate first. The house & car as specific gifts are free from inheritance tax unless the will states differently.

[enaid]

Re: Inheritance Tax Query

Hi, the rules seem quite simple put like that.
The 325k figure doubles if unused to 650k when passed on to a surviving spouse, this can then be passed on tax free.
Where part of the estate is property they have concocted some new rules that seem a bit messy but will help in your case I think. The IHT is or should be all sorted by the executor/s before the estate is distributed.

From 6 April 2017 an additional 'residence nil-rate band' of £100,000 per person will be introduced - which will effectively take the threshold at which IHT becomes payable to £850,00 for family beneficiaries.
It's important to note that this allowance will ONLY apply to wealth tied up in your main residence. And it can ONLY be left to direct descendants - children, grandchildren, step, adopted or foster children.

[Peridot]

Re: Inheritance Tax Query

Hi Ashes,
Sorry to hear about your granddad. He does sound like he has had sensible advice on what to do in his Will. Leaving everything to your Grandmother attracts the Spousal Exemption so no IHT to pay at this stage.
In the future when the day comes the Nil Rate Band allowance (which has not been used by Grandad's estate due to the Spousal Exemption) will 'transfer' to Grandmother's estate in effect meaning there will be two NRB allowances to be utilised before IHT is payable. The NRB is the figure in force when your grandmother passes away (currently £325,000 per individual).
In addition as Enaid pointed out, after April this year there will be an additional residential nil rate band that can be utilised where the main home is passing to children, grandchildren etc. Unfortunately the policy makers have made somewhat of a muddle with regards to how this will actually operate but it will be available and nothing to be worrying about at this point.
Once the NRB, the Transferable NRB and the Residential NRB have been included against the estate valuation then the outstanding figure will be taxed at 40%.
I hope that clarifies matters. Do bear in mind the estate may well not be the same as it currently stands as your grandmother will no doubt need to spend some of the assets during her lifetime, if she has no sufficient income. So probably really not worth worrying about at this stage. Hopefully you don't feel quite so irritated at the 40% IHT that may become payable in the future now.

[ashes]

Re: Inheritance Tax Query

Hi Ashes,
Sorry to hear about your granddad. He does sound like he has had sensible advice on what to do in his Will. Leaving everything to your Grandmother attracts the Spousal Exemption so no IHT to pay at this stage.
In the future when the day comes the Nil Rate Band allowance (which has not been used by Grandad's estate due to the Spousal Exemption) will 'transfer' to Grandmother's estate in effect meaning there will be two NRB allowances to be utilised before IHT is payable. The NRB is the figure in force when your grandmother passes away (currently £325,000 per individual).
In addition as Enaid pointed out, after April this year there will be an additional residential nil rate band that can be utilised where the main home is passing to children, grandchildren etc. Unfortunately the policy makers have made somewhat of a muddle with regards to how this will actually operate but it will be available and nothing to be worrying about at this point.
Once the NRB, the Transferable NRB and the Residential NRB have been included against the estate valuation then the outstanding figure will be taxed at 40%.
I hope that clarifies matters. Do bear in mind the estate may well not be the same as it currently stands as your grandmother will no doubt need to spend some of the assets during her lifetime, if she has no sufficient income. So probably really not worth worrying about at this stage. Hopefully you don't feel quite so irritated at the 40% IHT that may become payable in the future now.

Great, thanks for your help everyone! I did find some more articles relating to this £325k doubling if the deceased spouse decides to leave everything to the remaining spouse... and the new changes that were set out in the Summer 2015 budget by then Chancellor, George Osbourne - that by 2020, this will rise to £500,000k per individual, then doubles (as the NRB has not been used my by Grandad's estate, passes to my grandmother) and an estate worth £1m would be IHT free. So technically, by 2020, and all things "ceteris paribus", the £400k home would go to my father (surviving son, only child) and the rest of the estate, cash in the bank, bonds, shares, would be divided equally to his 3 children, as stated in the will, therefore 3 x @ £258,333k per grandchild - IHT free - correct? correctish? Assuming she survives beyond 2020, she is pretty fit and healthy for a lady in her mid-80's, so I am sure she will and would want her to live as long as she can! She's my nan after all!

As people have rightly pointed out though, my grandmother may need to use that money in the coming years. She has a state pension, she also will now receive 50% of my grandad's pension, plus she has her own pension... so it would be unlikely she needed to access that money through any "loss of income". However, I appreciate that she may need to use it later in life is she becomes incapable of looking after herself, and needs to be put in a care home (which is not cheap), alternative medications not on the NHS.. etc.. then of course she could have one final blow out, travel to Vegas, and blow it all on "Red" and us grandchildren get nitto! Haha

Thanks!

[enaid]

Re: Inheritance Tax Query

then of course she could have one final blow out, travel to Vegas, and blow it all on "Red" and us grandchildren get nitto! Haha

Doubt that, but she should enjoy it to the max imho and you are right about care in the future, the cap they have supposedly put on care costs is a myth.
Best of Luck to her x

[ashes]

Re: Inheritance Tax Query

True, although as I say, assuming everything stays the same (which I know it won't, therefore academic) - If by 2020 the estate is worth: £400,000 house + £4,000 car, after all specific gifts are made, and all debts, taxes, administrative fees, probate costs, and court costs are paid from the residual estate (say £50k for sake of maths £775k - 50k), and the residual estate is then worth £725,000 - totalling an estate worth £1.129m - will it work out like this:

Son = House + Cars (gifts) only
Residual Estate £725,000 to be divided by:
Grandchild 1 = £241,666.66
Grandchild 2 = £241,666.66
Grandchild 3 = £241,666.66

Assuming that's by 2020? Technically there shouldn't be IHT to pay because the house and car to the son is a gift, so exempt from IHT - then that leaves the residual estate worth £725,000 which would be under the £1m NRB threshold, therefore IHT free also.

Thanks.
[MENTION=85500]Peridot[/MENTION]

[Peridot]

Re: Inheritance Tax Query

Hi again Ashes,

Not sure I've understood your last post - I understood that everything has passed to your grandmother? Upon her passing the house and car go to your dad and the rest is divided between the grandchildren.

If that is correct all your grandmother's assets at the date she passes away are valued. That includes any property, car and legacies. Once they are all valued that is the gross value of the estate. Then any exemptions are deducted so keeping it simple lets assume she made no significant gifts to anyone in the 7 years before she passed away (life time gifts have to be declared for tax purposes if made in the 7 years before someone dies) so the only available allowance will be her own and the transferred NRB from granddad's death (as she inherited all of his estate).
On today's figures that is £650,000. The cost of the funeral and any debts are also deducted at this stage. The remaining figure will be the one that the IHT is paid upon, so 40% of that remaining figure goes to HMRC.

The testamentary expenses such as legal fees deducted are paid from the estate and any debts etc. Provided there are sufficient funds then the property passes to dad along with the car and any other legacies are paid out. What is left over is the residuary estate, which would be divided equally between the grandchildren from what you say. This is a very basic overview but gives you the idea.

I would say your grandmother needs to go out and not worry about the money or about the future. No doubt her and your granddad worked hard for what they had, so if she doesn't need to she shouldn't be scrimping now. She should go for that latte rather than the instant coffee so to speak. I am sorry for all of your losses and hope that your grandmother is coping with the loss of her husband.

[ashes]

Re: Inheritance Tax Query

Hi again Ashes,

Not sure I've understood your last post - I understood that everything has passed to your grandmother? Upon her passing the house and car go to your dad and the rest is divided between the grandchildren.

If that is correct all your grandmother's assets at the date she passes away are valued. That includes any property, car and legacies. Once they are all valued that is the gross value of the estate. Then any exemptions are deducted so keeping it simple lets assume she made no significant gifts to anyone in the 7 years before she passed away (life time gifts have to be declared for tax purposes if made in the 7 years before someone dies) so the only available allowance will be her own and the transferred NRB from granddad's death (as she inherited all of his estate).
On today's figures that is £650,000. The cost of the funeral and any debts are also deducted at this stage. The remaining figure will be the one that the IHT is paid upon, so 40% of that remaining figure goes to HMRC.

The testamentary expenses such as legal fees deducted are paid from the estate and any debts etc. Provided there are sufficient funds then the property passes to dad along with the car and any other legacies are paid out. What is left over is the residuary estate, which would be divided equally between the grandchildren from what you say. This is a very basic overview but gives you the idea.

I would say your grandmother needs to go out and not worry about the money or about the future. No doubt her and your granddad worked hard for what they had, so if she doesn't need to she shouldn't be scrimping now. She should go for that latte rather than the instant coffee so to speak. I am sorry for all of your losses and hope that your grandmother is coping with the loss of her husband.

[MENTION=85500]Peridot[/MENTION] Sorry - that helps explain things. All I was trying to figure out is what roughly the residual estate would be in the year 2020 -assuming she passed away in 2020 (sorry this sounds awful and callous, but I was just getting an idea).

Keeping things simple; a house and car worth £400k (goes to my dad) and residual estate being £775k (divived by 3 grandchildren - assuming that this is the net estate after ALL costs paid out and before IHT. What would be the IHT due based on these sums, and what would be the net inheritance that each person would receive after IHT - if any is due at all?

[Peridot]

Re: Inheritance Tax Query

£400,000 plus £775,000 = £1,175,000
minus £650,000 = £525,000
There may be a further deduction before IHT is applied, depending on what the residential NRB is at that time so could be less IHT to pay.
IHT @ 40% of £525,000 = £210,000

£775,000 minus £210,000 = £315,000

So £315,000 to be divided equally between the grandchildren.

Now I'd say stop anticipating what may or may not happen in 2020 and make sure Gran enjoys herself for the rest of her hopefully long and fulfilling life. Don't forget she could always change her Will.

[ashes]

Re: Inheritance Tax Query

[MENTION=85500]Peridot[/MENTION] Sorry this seems to be conflicting? Someone earlier said there is no IHT to pay if the house and car passes to the son (my father) as it would be seen as a gift and no IHT due if it's a gift? Also you are basing those figures on today's rates of anything over £650k is taxed - it's set to staircase in the next 3 years isn't it?

I just want to gauge a clearer picture on matters - and of course I want my Nan to live a long, healthy and fulfilling life. I realise she could change the will, or even blow it at the bookies, I'm just asking for the sake of a better understanding on how all this works! Seems very complicated, but it's educational at the same time.

[Peridot]

Re: Inheritance Tax Query

Hi Ashes,

Apologies, I haven't been around for a few days. I'm not sure that I understand your comments about 'gifts' I had understood that the house and car would pass to your father under your grandmother's Will?

If she is thinking of 'transferring' the property to your father before then I would say it is not something I would recommend as she loses basically loses her home. If she did later need nursing home care or assessment of her fees for care in the future then it could be seen that she has intentionally deprived herself of the asset (the property) which the Local Authority may jump on. It may not be likely bearing in mind the assets that she has but you never know.

In addition, should anything happen to your father or if he were to go bankrupt or get divorced then the property would be his asset and would be included in any valuation, again potentially losing your grandmother her home.

In addition, if the property and car were gifted to your father then the values (although tapering) would still be included in the value of the estate for 7 years, thus again being included in any IHT calculation.

Hope that clarifies things.

[enaid]

Re: Inheritance Tax Query

I think it was this statement from Joanna C that confused him, post 2

sounds as if you are residuary beneficiaries. Inheritance tax is paid from the residuary estate first. The house & car as specific gifts are free from inheritance tax unless the will states differently.

So imo the whole estate will go under the IHT rules then the car and house goes to the son and the residue to the 3 grandchildren, do you agree?

My father said that he accidentally found and read their Wills and said that when the first spouse dies, their estate goes to the surviving spouse - normal. When both have died, the Wills then stated that my father will be given the house and the car, and that the grandchildren (3 of us) will receive the rest of the estate (cash in the bank, bonds, shares etc... everything else)

[Peridot]

Re: Inheritance Tax Query

Hi again Ashes,
I think the confusion has arisen as Enaid has pointed out above. Any IHT is on the value of the whole estate, which includes any 'gifts'. However if the estate is solvent then the inheritance tax is paid from the residue. The property and car will remain in tact but the tax still has to be paid. So as I explained in the previous figures above. The House and car pass to your father. Whatever is left once the tax and any debts are paid is the residue and the residue will be the amount that is then divided between the grandchildren.
Hopefully that has explained it better for you?