IHT, transferable allowance and Deed of Variation

paul1867

Hi, Would be grateful if somebody would confirm that I have understood this right.

A husband and wife have separate savings and bank accounts, the house is the only asset in joint name.

Option 1
The husband dies with a total estate of £330K with a will leaving everything to his spouse. Inheritance by spouse is exempt from IHT so none is payable and his whole £325K allowance is transferred to wife. At the death of the wife the estate total value is £700K thus IHT will be due on £700K less £650K combined allowance which is 40% of £50K, £20K.

Option 2

The husband dies with a total estate of £330K with a will leaving everything to his spouse. A Deed of Variation is used to redirect £200K to his daughter leaving his wife to receive £130K. However, this reduces the transferable allowance by the amount redirected so the transferable allowance is £135K. Thus at the death of the wife the estate is £500K and the combined allowance is £450K. The amount subject to 40 % IHT is again £50K.

It’s the reduction in the transferable allowance I need confirming please.

If a DOV is used you will always end up paying the IHT.

If the money is gifted by the wife to the daughter and then the wife survives 7 years then it is IHT free and reduced in earlier years using tapering.

Thanks.

Paul

CLAPTON

well
we don't know whether in the future the IHT limit will be increased
if so then the DOV will be the less good option

and you, in common with many many people, misunderstand the 'taper relief' .. for your purposes it doesn't exist.


basically DOV is unlikely to be advantages in a husband and wife situation

paul1867

Hi Clapton Thanks for your interest.

I understood from the HMRC website at

inheritancetax/how-to-value-estate/gifts

that if the wife survives 3 to 4 years after gifting then you receive 20% relief on the tax due on the gift and so on according to the table at the above location (sorry not allowed to use link). Is that not right?

I understand that allowances can change. My question was about the amount of the husband allowance transferred to the wife. Am I right in saying that the money diverted by the DOV reduces the amount of allowance transferred from the husband to the wife?

Thanks for your interest.

Paul

paul1867

Hi Clapton,

Rereading my first post I can see I was not clear in what I was getting at.

I was trying to say that it is better for the wife to gift the money to the daughter than it is to use a DOV, the husband already being dead,(assuming allowances remain the same) as with the gifting it escapes IHT after the wife survives 7 years. With the DOV it always reduces the transferable allowance. If a gift then surely tapering applies. If the principle is correct then it is then down to consideration of how likely the threshold is to change.



Paul

CLAPTON

DOV reduces the transferrable amount of the first death IHT allowance so is generally not advantageous

if the IHT don't change then it makes no difference

but hopeful the second death will be many years heance and then its likely that the IHT limit will be larger so the DOV is a worse result than no DOV

in any event then the gift will be better or no worse than the DOV

the taper relief... if you read caefully only applies to gifts over the IHT limit i.e only if you give more than 325,000.. you need to read carefully however.

paul1867

Clapton Very many thanks for your trouble over the reply.
How very right you are on two counts.
I didn't understand the taper relief and you do have to read it carefully.
The other interesting point arising now I have read, read and reread the section is that gifts are set against the threshold first, ie before any other form of asset, thus what I was thinking was wrong anyway you look at it.
Many thanks again.