Inheritance tax allowance

melb

Hi all I wonder if anyone can advise. I've searched the thread but not found a specific answer to my query. If a house is left to his two sons in a will by a father (whose wife has already passed away) and the value of the house and land is approx £300,000 firstly will all the value be included for inheritance tax purposes as it is over the £285,000 threshold and, secondly, do the two sons have a personal allowance of £285,000 each before tax is paid or is this the total (shared between the two). Hope I have explained this sufficiently and look forward to receiving any advice.

Debt_Free_Chick

melb wrote:

Hi all I wonder if anyone can advise. I've searched the thread but not found a specific answer to my query. If a house is left to his two sons in a will by a father (whose wife has already passed away) and the value of the house and land is approx £300,000 firstly will all the value be included for inheritance tax purposes as it is over the £285,000 threshold

Yes. The IHT allowance is applied to the total value of the estate, before any distributions are made in accordance with the will. The estate meets the IHT and the beneficiaries of the will get what's left, after the IHT has been paid.

and, secondly, do the two sons have a personal allowance of £285,000 each before tax is paid or is this the total (shared between the two). Hope I have explained this sufficiently and look forward to receiving any advice.

Beneficiaries do not have an IHT allowance. They get what's left after IHT has been paid by the estate.

If the estate were £300k and the IHT was £10k, then they each get a share of £290k. There is no further tax for them to pay, on receipt. But if they put the money in the bank they would, of course, pay income tax on the interest and the normal income tax personal allowances would apply.

HTH

tyllwyd

melb wrote:

If a house is left to his two sons in a will by a father (whose wife has already passed away) and the value of the house and land is approx £300,000 firstly will all the value be included for inheritance tax purposes as it is over the £285,000 threshold

Remember that inheritance tax is only payable on the excess over the threshold, so it isn't payable on the whole £300,000, only on £300,000 - £285,000 = £15,000 (plus whatever other assets are included in his estate, of course).

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_4016736

moonrakerz

At first glance this would appear to have been a case where the parents might have been better going down the the "tenants in common" route, then both could have used their full Inheritance Tax Allowance, rather than it all falling on the father.

lisyloo

Is the father still alove i.e. hypothetical question.
If so then he can gift some of his assets to his sons whilst alive (and I presume this would include a share of his house).
IHT would be payable if he dies up to 7 years afterwards on a sliding scale.
There will be legal work involved to change the shares on the house but small fry compared to the potential IHT.

EdInvestor

You can give away as much as you like as gifts as long as they are from income, not capital. As of April assets under 300k won't be counted for IHT.

moonrakerz

EdInvestor wrote:

You can give away as much as you like as gifts as long as they are from income, not capital.

Interesting !

So if I give ALL my pension income to my kids and live off my capital............... ?

How does this relate to the "seven year rule" and the £3000 a year that I can "give away" free ?

melb

Thanks for all the replies. The father passed away in November 2004.

lisyloo

So if I give ALL my pension income to my kids and live off my capital............... ?

You can give away £3k to each and there is no tax at all.
Anything above that is potentially subject to IHT if you die within 7 years.
This is on a sliding scale so 100% if you die on day 1 but a lot less if you die in year 6 or 7 (don't know the exact rules but it definitely reduces over time).

The only downsides are

1) You can't give it with strings attached. i.e. you can't ask someone to "look after" money for you, once it's given it's theirs.
2) You need to be sure you won't need it.
3) You can't deliberately deprive yourself of assets to get state benefits. So you can't give everything away deliverately and then expect the state to fund your long term care (the local authority can claim the money back).

But if you are sure you don't need it, then yes you can give it away to avoid IHT subject to the 7 year rule.

kennyboy66_2

In Nov 2004 the Nil rate band was £263,000. Thus 40% tax payable on the value of the estate minus £263,000. (£300k - 263k = 37K @ 40% = £14.8k).
Interest may also be payable from June 1st 2005 on amount owed,

Hope this helps

moonrakerz

lisyloo wrote:

You can give away £3k to each and there is no tax at all.
Anything above that is potentially subject to IHT if you die within 7 years.
This is on a sliding scale so 100% if you die on day 1 but a lot less if you die in year 6 or 7 (don't know the exact rules but it definitely reduces over time).

It's a total of £3000, not £3000 each - if only !

This website details it all - I presume EdInvestor's comment was around "Main Exemptions, V "

http://www.westbury.co.uk/content/taxcentre_taxcard/inherit.html

Still doesn't answer my question though !