IHT - The Final Stages

zippity_2

Hi all!!

Long time lurker, first time poster!!


Be gentle!!


I have, what I suspect, is a question with a simple answer - however, I have exhausted my knowledge of the subject and so fall at your collective feet for advice....


My father-in-law passed away in the middle of last year. His estate comprised of some stocks and shares, together with his house. The estate is being shared between my wife and her sister.


My mother-in-law had died back in the mid-90's, and so we made full use of both IHT allowances.


A solicitor was appointed and the necessary paperwork was all drafted and submitted along with a "deposit" on the IHT. Probate was granted and the stocks and shares encashed.


In addition, the house was put on the market. After a few weeks this then sold for roughly £30,000 less than the probate valuation (we found out about some covenants on the property during the course of the transaction that were not apparent at the time of the probate valuation).


We are now in a position where the solicitor has informed us that they are still "waiting for the Inland Revenue" to confirm what remaining IHT is due.


I am confused as to what this ACTUALLY means?


When the IHT forms were filled in, the total IHT due was roughly £27,000, of which £6250 was paid so as to gain probate.


Don't we just now "pay the rest"? I know that we may be entitled to a rebate (as the property sold for less than the valuation), but my understanding is that this is a separate process - i.e. we pay all the IHT due on the original form, and then claim back any rebate.


So - the position is this:-

• We HAVE probate.
• All assets (including the house) have been cashed in
• A deposit against the IHT was paid (of about £6250) so as to get probate
• We are now waiting for "something" from the Inland Revenue which will enable us to pay the remaining IHT.

I'm wondering what that "something" is, and whether we are all actually waiting for one another!! (and at the same time incurring interest charges!)

Our solicitor is very good, but I was just wondering if someone "in the know" could give me the "Janet and John" version......?

John_Pierpoint

As an amateur going through this process, I made an interim claim for refunds (the shares had gone down in value and the funeral/wake/memorial came out as more expensive than my initial estimate), after a few months. I got a cheque back for the over paid IHT.

My bet is that the solicitor wants to make a full and final settlement with the number one beneficiary: HMRC and get a letter of agreement that every thing is in order before paying out to the other two beneficiaries. This will be required for Income tax/CGT if any/IHT. These three taxes do not tie up very well within HMRC. [In my case it took months to agree the income tax position of the deceased and obviously until that (refund?) was agreed it was impossible to agree the final IHT payable]

In my case, I made interim payments of both income (R185) and capital to the beneficiaries, as the estate evolved but that is extra work and expense for the solicitor.

If the deceased died in (say) July 2011 his tax return for 2010/11 only needed to be submitted today; let alone his tax return for 2011/12, which may not have been processed yet?

Here is a link to the joys of closing off the life of a tax payer:

http://forums.moneysavingexpert.com/showthread.php?t=3740257&highlight=

zippity_2

Ah - that'll be it then.

The solicitor has been making interim payments to my wife and sister-in-law as the two beneficiaries of the estate, but is retaining a fairly substantial sum of money as they are "waiting for confirmation of the IHT" position.

Given we have only just heard that the estate is due a Income Tax refund of about £500, it must be that the solicitor was waiting for this value so that the IHT could then be calculated precisely.

Now that this value has been received, I would imagine that the solicitor can now inform the Inland Revenue of the IHT position, get their agreement and then pay the final amount of IHT. The remaining funds can then be distributed to the two beneficiaries and th estate wound up.

The only remaining (separate) task is to claim back IHT relief on the loss incurred through the sale of the property.

Sound plausible?

John_Pierpoint

The solicitor won't want to accept the certification that the estate is complete from the Capital Taxes Office of HMRC BEFORE he gets back 40% of the loss made on the sale of the house (note the rules for IHT are different from the rules for CGT but I presume that taking the loss against 40% IHT rather than potentially 28% CGT makes sense for the beneficiaries. )

I found myself in the bizarre situation of the Capital Taxes office writing to say "can we close the case" and having to write back saying "No I'm still messing about with your Income Tax section".

Presumably the solicitor will be supplying the executors with accounts once the final figures have been reconciled and getting their sign off?

Personally I would recommend anyone buying a new house to let the garden run on for a year to see what comes up - similarly it is generally accepted that most estates take a year before the executors can reasonably be blamed for delays and some beneficiaries have a right to claim interest. (interestingly HMRC claims interest after 6 months and the local authority claims council tax 6 months after probate).

A lot depends on the state of the deceased's accounts and the knowledge of the executors.
I managed to get an award of back pension about 6 months after the death and found an forgotten insurance policy about 18 months after the death.

Presumably the house was sold by the de facto trust that is the estate (rather than by the beneficiaries as individuals) so the trust is now generating interest on the monies on deposit so the beneficiaries will get both income and capital accounts for the final settlement.
Unfortunately most of the expenses of the administration come out of the capital rather than the income, the last expenditure set against IHT being the funeral/wake/memorial.

If you want to get really confused write and explain the total tax treatment of a large share dividend declared but not paid, plus a large untaxed interest sum, accruing in an account but not yet credited to that account. Just to make the situation extra exciting assume the beneficiary is a higher rate tax payer.

[Fortunately only one of my dozen beneficiaries was a higher rate tax payer and she agreed to forgo her potential allowance of already paid IHT]

getmore4less

John_Pierpoint wrote: »

The solicitor won't want to accept the certification that the estate is complete from the Capital Taxes Office of HMRC BEFORE he gets back 40% of the loss made on the sale of the house (note the rules for IHT are different from the rules for CGT but I presume that taking the loss against 40% IHT rather than potentially 28% CGT makes sense for the beneficiaries. )

I found myself in the bizarre situation of the Capital Taxes office writing to say "can we close the case" and having to write back saying "No I'm still messing about with your Income Tax section".

Presumably the solicitor will be supplying the executors with accounts once the final figures have been reconciled and getting their sign off?

Personally I would recommend anyone buying a new house to let the garden run on for a year to see what comes up - similarly it is generally accepted that most estates take a year before the executors can reasonably be blamed for delays and some beneficiaries have a right to claim interest. (interestingly HMRC claims interest after 6 months and the local authority claims council tax 6 months after probate).

A lot depends on the state of the deceased's accounts and the knowledge of the executors.
I managed to get an award of back pension about 6 months after the death and found an forgotten insurance policy about 18 months after the death.

Presumably the house was sold by the de facto trust that is the estate (rather than by the beneficiaries as individuals) so the trust is now generating interest on the monies on deposit so the beneficiaries will get both income and capital accounts for the final settlement.
Unfortunately most of the expenses of the administration come out of the capital rather than the income, the last expenditure set against IHT being the funeral/wake/memorial.

If you want to get really confused write and explain the total tax treatment of a large share dividend declared but not paid, plus a large untaxed interest sum, accruing in an account but not yet credited to that account. Just to make the situation extra exciting assume the beneficiary is a higher rate tax payer.

[Fortunately only one of my dozen beneficiaries was a higher rate tax payer and she agreed to forgo her potential allowance of already paid IHT]

MY understanding it is a lot simpler than this.

At DOD all capital includes the divi due on Xdivi shares but not yet paid.
All interest accrued and divis paid belong on the final tax return along with the other income upto DOD.

After DOD any divis paid including those from Xdiv at DOD and interest belongs on the estate tax return.

Any distribution comes with a tax credit for the recipient to do their own taxes.


I don't know of any relationship between IHT paid at DOD and a 40% tax payer benifitiary.

John_Pierpoint

Take it from me, it is more complex than that.
For a start the accruing interest (gross) pays IHT; then it is paid out some time later less 20% standard rate tax (or not as was the case with my late uncle, as he had an investment that is no-longer available to us UK residents).
Then the executor sends the details to the beneficiary on an R185 and does a tax return to HMRC.

So this looks all incredibly unfair to 40/50% tax paying beneficiaries, and there is indeed a routine to allow them to offset some of the extra tax due on their personal tax returns, against the IHT already paid.

http://www.hmrc.gov.uk/trusts/ben_iht.htm

Now the solicitor/accountant is starting to earn his fees.

Life would be a lot simpler if organisations paying interest automatically closed the account and crystallised the interest (and its tax), that being the figure for IHT, then promptly reopened it designated "The personal representatives of XYZ dec'd".

In the mean time, if you are thinking of dying go onto monthly interest.:eek: