Inheritance Tax Confusion

goldbyron

Inheritance Tax Confusion - Home
I am writing as my partner is in a new situation which I am clueless to help her with. Basically her mother has very little time left and has made a will which mostly consists of leaving her property to my partner and her sister equally. There are minor bank accounts which has been distributed to charity, grandchild etc.

My partner's sister is already becoming quite volatile and pressurising in controlling the estate (and already owns several buy to let flats). Additionally her ex partner has been nominated executor of the will (he is self employed within the property sector).

My partner has a small flat with a 100% mortgage and is therefore financially the worse off.

The estate mostly consists of a house in a good part of the North West (miles from us) and has £98k outstanding mortgage and was last valued at £450k (August 2008). Therefore on their mothers death the house (and mortgage) passes to both sisters.

Her sister and ex partner want to rent the home out until prices pick up. However, despite the financial loss, I feel it is less hassle to just get out and my partner can pay her own mortgage off instead of the bother of renting for little income. I also worry that her sister may not agree to sell the home for years thus allowing my partner to be trapped within another mortgage and joint bank account with her volatile sister. My partner is also resident in London and her sister and the ex partner are from Jersey so I am sure they will be exempt from something which my partner isn't.
I will just jump to my questions as I could go on forever with the complications!
1. Does my partner have to pay any stamp duty when the property is transferred?

2. Does she have to pay inheritance tax straight away (or within a short time frame) out of the estate (only the house itself will take the estate over the band)? If so how on earth could you pay this if you have no money and can't sell the property?

3. Does she have to take out another mortgage to own the home?

4. Does renting introduce unnessary complications (such as income tax and captial gains) or is it wise to do so until prices recover a little?

Thank you for any help. It is such a difficult for my partner with her mother dying without the stress of her sister alongside inheritance tax and a house to sell in this climate.

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goldbyron wrote: »

1. Does my partner have to pay any stamp duty when the property is transferred?

2. Does she have to pay inheritance tax straight away (or within a short time frame) out of the estate (only the house itself will take the estate over the band)? If so how on earth could you pay this if you have no money and can't sell the property?

3. Does she have to take out another mortgage to own the home?

4. Does renting introduce unnessary complications (such as income tax and captial gains) or is it wise to do so until prices recover a little?

Q1. Stamp duty is not paid when you inherit the property. It is paid by the purchaser when you come to sell it.

Q2 For the present financial year the tax free IHT band is £312k, so the IHT due ignoring the savings account, and assuming there is no unused taxfree band which can be transfered from the earlier death of the mother's husband, will be calculated as follows (£450k - £98k mortgage -£312k) x 0.4 = £16k.

So that is £8k for each sister. While the house is not sold this can be spread over 10 years, so that will be £800 per year for each sister.

Obviously you can get the house revalued for probate ie its value on the day of death, and with falling house prices you may be "lucky" and its the fall in value may mean there is less IHT to pay. When you do eventually sell there may be Capital Gains Tax, but this is currently at 18% - quite a bit less than the IHT 40% rate.


Q3. Pass

Q4. Whether to sell or rent depends on what you would want to do with the money. eg if you want to make a longterm investment in equities, or else payoff your existing loans, selling might not be so bad an option even at a depressed price.

Reaper

Quite why I am answering this when I know so little about tax I don't know, but maybe it will inspire others to contribute.

My understanding is that you will indeed have to pay inheritance tax in short order. A common complaint is that people have to sell the family home they would like to live in to pay the tax - unless money is also being left which is enough to cover the bill.

Renting for a few years does sound like a reasonable option but the inheritance tax may well do for this plan anyway.

Another option if one wants to sell and other hold onto it is for one person to buy the other one out. This would satisfy you both provided the funds are available to do it. They may need to mortgage the property to do the buyout but that should not be a problem.

Is there insurance attached to the existing mortgage which pays it off on death? There often is and if so that could make a difference to you.

I'm not sure about the stamp duty question, particularly if Jersey residents are involved.


EDIT: There you go - a more informed answer above while I was waffling away typing this!

goldbyron

Thanks for this. Insurance is about £20k so will not cover this. It is helpful to know that any money in accounts may be able to pay the IHT at least. Once the mortgage and IHT problem is resolved I am very worried that her sister is refusing to sell - how can my partner sell her half of the estate? Would this need to go to court unless of course her sister buys her out (which she can’t afford). I have been in a similar situation with an ex partner and it was the most stressful year of my life so I dread if this needs to go down a legal route. Was hoping it may be a different matter if it involves wills and inheritance? The house is also noone’s main residence once their mother passes away so no one can claim to be made homeless. Any suggestions?

lectureral

I am no expert on this but my understanding is that the executors decide whether to sell or not - you have not been quite clear on how many executors there are and who they are. If the executors cannot agree then they should get a court order so that they are protected (eg if the house fell dramatically in value and one of the beneficiaries claimed the loss from the executors). If one executor wanted to sell and the other did not then I would expect the court to order a sale).

Bottom line - your partner will probably need good legal advice - ask around for a good solicitor who deals with probate.

Reaper

Are you sure she can't do a buyout? She needs to raise 50% of the value of the house but I assume she can do that simply by remortaging 50% of it and passing the money from the mortgage company on to you. There seems to be plenty of equity in it and the rental income should roughly cover the mortage payments.

Maybe it's not that simple. Perhaps she has reached the limit of what providers are willing to lend?

goldbyron

Thanks for this. The executor is the sister's ex partner so I am sure there will be some bias there! A court order may be required. Of course my partner could just refuse to pay the outstanding mortgage (as she has no money to pay it) and they may agree to sell as they would not wish to be blacklisted or repossessed.

lectureral

Good luck - I would repeat my advice - she should get legal advice as soon as she feels out of her depth. Maybe worth suggesting that another (extra) executor is appointed as well as the ex partner if that can be done tactfully - it is allowed to have 1 executor (unless beneficiaries under 18) but appointing 2 is good practice.

localhero

I have posted on your other thread re selling the property. Where there is a mortgage on the property, then there is no guarantee that the mortgage company will want to transfer it to any of the beneficiaries.

Therefore it is quite likely that the mortgage would need to be repaid by selling the house - therefore avoiding the argument about not selling it.

By the way, if your partner doesn't wish for it to be rented out, then unless the Will provides a specific power, then she can't be forced to anyway.