Inheritance tax question

fluffnutter

Apologies if wrong forum, but I've looked on the HMRC site and couldn't find the answer/got bored...

Say I inherit from my parents a house worth £500K (for argument's sake there are no other assets). Clearly there will be an inheritance tax liability for the portion over £325K.

When calculating that liability, will this be based on assumed value of the house, i.e. a valuation will be carried out as part of probate? If so, I assume that, as sole beneficiary, I can then pay the tax bill and continue owning the house.

What happens if the house is then sold and it makes £600K? Does that affect the liability, i.e. would I owe more? What if it only sold for £400K? What then?

The HMRC site suggested that inheritance tax was paid by the executor out of the estate (before the estate is then passed to the beneficiaries I assume) but this would surely necessitate the selling of the house (to realise the cash) but I'm assuming that, provided the tax bill can be settled, you're not forced to sell any assets...?

le_loup

The estate pays the tax based upon the market value at the time of death. If you are the sole beneficiary and can raise the tax without selling, you can keep the house. If it subsequently rises in value and it is not your main residence, when you sell it will be subject to capital gains tax.

p00hsticks

fluffnutter wrote: »

The HMRC site suggested that inheritance tax was paid by the executor out of the estate (before the estate is then passed to the beneficiaries I assume) but this would surely necessitate the selling of the house (to realise the cash) but I'm assuming that, provided the tax bill can be settled, you're not forced to sell any assets...?

I'm not an expert, but I think it may also depend on how the will is worded .. There is a subtle difference between leaving someone 'my property x' and leaving them 'my entire estate'. The former I imagine would mean that that executor is obliged to ensure that the deeds of the property are passed on to the beneficiary (although, as you say, I'm not then clear how any IHT bill would be met), whilst I guess that the latter may give the executor the freedom to sell the property and dstribute the proceeds after any IHT is paid ?.

But as I said, I'm not an expert.....

getmore4less

You use the term parents

If there are 2 and they are married then you may have upto £650k nill rate band.

If a house sells for more or less than the probate valuation there can be adjustments, depends a bit on timescales and the plans.


You can pay any tax due if the estate does not have the assets, some/all of the tax usualy needs to be paid before probate is granted.

fluffnutter

getmore4less wrote: »

You use the term parents

If there are 2 and they are married then you may have upto £650k nill rate band.

If a house sells for more or less than the probate valuation there can be adjustments, depends a bit on timescales and the plans.


You can pay any tax due if the estate does not have the assets, some/all of the tax usualy needs to be paid before probate is granted.

That's interesting but I assume that would necessitate them dying at the same time. If one died leaving everything to the other, then I guess I'm technically inheriting from just the one parent (when he or she dies).

And what kind of timescales would be usual?

This is a bit macabre, and trust me, I'm not waiting for the old ducks to cark it or anything, I'm just curious as to how it works!

CLAPTON

fluffnutter wrote: »

That's interesting but I assume that would necessitate them dying at the same time. If one died leaving everything to the other, then I guess I'm technically inheriting from just the one parent (when he or she dies).

And what kind of timescales would be usual?

This is a bit macabre, and trust me, I'm not waiting for the old ducks to cark it or anything, I'm just curious as to how it works!

the way it works is this

if one dies first and leaves everything to the survivor then when the second dies their estate 'inherits' the IHT allowance from the first
i.e. the estate then has 650,000 allowance and in your example there would be no tax to pay.

John_Pierpoint

You have a lot to learn - as usual it is not a simplistic situation.
"Which?" publish three books about inheritance, they over lap, but all three cost about £25. It is vital that you get editions published since 2007. That is the versions with writing/diagrams only on the covers not photographs Viz:-

What to do when someone dies.
Wills & probate.
Giving & inheriting.

Even these are not 100% accurate, as administrative procedures change, and our "judge made law" could be changing as we read this.

Any estate from the first death of a legal couple goes initially to any beneficiaries that are not "the legal partner" and these use up a percentage of the nil rate band for IHT
For example Mr Wealthy gives his two children a deposit on a house worth £50K each and then dies within 7 years. At the date of death (yesterday) the nil rate band is £325K so he has given away 100 * 100 / 325 percent of his nil rate band. ie he has given away roughly 30% of his nil rate band. His widow Mrs Wealthy inherits roughly 70% of a nil rate band and of course has 100% or her own nil rate band.
So when she dies her estate benefits from 170% of a nil rate band. geddit?

Valuing and then possibly selling the house is another whole can of worms, because it will be valued as at the date of death but obviously not sold for some considerable time there after.

In the meantime, Mrs Wealthy might well have made a will and left everything to the local cats home charity or booked her self into a £1,000 a week hotel called a care home and spent a big chunk of it.

cosmic_gateway

sorry new to this site could someone tell me is it correct if you live in the inherited property for two years you dont have to pay inheritance tax hoping for help with this question

CLAPTON

cosmic_gateway wrote: »

sorry new to this site could someone tell me is it correct if you live in the inherited property for two years you dont have to pay inheritance tax hoping for help with this question

totally false.

John_Pierpoint

There are two principle capital taxes.
If you "get" something and it goes up in nominal value and you realise that value by selling it, that gain is subject to the rules of Capital Gains tax (CGT)
[Needless to say there are all sorts of ifs buts & maybes, because out tax system has grown to be an illogical monster and needs an army of the best brains in the country to play games of keeper versus poacher]
The biggest exception is that most people/couples are allowed one Principal Private Residence. The current rate for most largish capital gains - the sort that could be made by a wealthy person selling a second home - is approaching 28% to the government in CGT.

When we die everything we own is valued and reported to the Government. Everything an individual owns on the date of their death that increases the valuation over £325,000 (ie up to £650,000 for a couple at the second death) has to pay IHT at 40%.

I think your confusion may be because of the time between death and the time when the deceased's house is sold. The valuation at death will always be a guestimate and if the wealth of the deceased person pushes that house into liability for IHT then every pound of under valuation saves 40 pence in tax.

However if the house is sold within two years, then the selling price can be substituted for the guestimate and some 40 pences reclaimed.
The tax man would like it to work the other way round: If the house sells for more than the guestimate, he would like 40% of the gain.

Perhaps the beneficiary/executor decides not to sell and perhaps turn the run down home of an elderly person into a modern palace and then sell it? Then the beneficiary tries to claim that all the extra value should be subject to CGT and so taxed at 28%, while the taxman probably thinks 40% IHT would be a better idea.
So the beneficiary could move in and tell the tax man that this is now his PPR, and over time turn it into a palace and sell it or better still get planning permission to turn it into something more valuable. Voila a CGT exempt gain
(unless the tax man can demonstrate that this was "a venture by way of trade" and thus be able to charge income tax on the gain).

[Needless to say there are all sorts of ifs buts & maybes, because our tax system has grown to be an illogical monster and needs an army of the best brains in the country to play games of keeper versus poacher]

If you look back through this forum you will find dozens of threads explaining the rules in detail, when given specific examples.

lilab_2

I am confused by all of this. My step-father died in December. He left his entire estate to my mum. She has now been diagnosed with cancer and the prognosis is not good - she will not be with us for much longer. What then happens with inheritance tax in this case? She has some small savings, and her house is valued at around £400k. No other real assetts. Is the inheritance tax allowance to me and my siblings still £325k? Is the value of her estate calculated after legal costs, funeral etc have been accounted for?