Tax on possible inheritance? - Please help?

blue_groove

Not sure if this is in the correct forum but here goes....

My Mother in law is due to inherit a fairly large sum of money (although at this stage we have no idea exactly how much)!!

She has promised to "split" the money with her daughter but I don't think this will be that easy.

If I am optimistic and say she gets £100,000, what would be the best way to give £50,000 to her daughter? I am guessing that if she just gives it to her she will have to pay 40% tax on the £50,000?

Is this correct and if it is, is there any way at all to reduce this amount?

Many thanks in advance

Norman_Castle

http://www.hmrc.gov.uk/rates/iht-thresholds.htm

ctdctd

£3000 a year as a tax free gift?

Edit - the IHT thresholds only apply to whoever gets the inheritance in the will. I think the OP is saying the inheritor will give some of it away as a gift?

blue_groove

ctdctd wrote: »

£3000 a year as a tax free gift?

Edit - the IHT thresholds only apply to whoever gets the inheritance in the will. I think the OP is saying the inheritor will give some of it away as a gift?

Correct. Basically she just wanted to split the money between her and her daughter (it was actually left in the will to her late husband but subsequently went to her).

So if (for example) she did transfer £50,000 to her daughter she would pay 40% pay on £47,000?

cte1111

There is no gift tax in the UK. Your friend can give as much money as she likes to whomever she likes without any tax being paid.

If she were to die within 7 years of the gift and her total estate was over £325,000, then the transfer could be liable to inheritance tax.

If she is giving the money away to avoid paying for care or to carry on receiving means tested benefits, then the 'deprivation of capital' rules could apply. As she's keeping £50k herself, sounds like this is unlikely.

Aegis

blue_groove wrote: »

Not sure if this is in the correct forum but here goes....

My Mother in law is due to inherit a fairly large sum of money (although at this stage we have no idea exactly how much)!!

She has promised to "split" the money with her daughter but I don't think this will be that easy.

If I am optimistic and say she gets £100,000, what would be the best way to give £50,000 to her daughter? I am guessing that if she just gives it to her she will have to pay 40% tax on the £50,000?

If this is a traditional inheritance (as opposed to an early one) then the inheritance tax bill should have already been settled by the executor by the time the bequests are distributed. If so, there's no inheritance tax to pay on the £50k transferred.

However, if your mother in law were then to die within the next seven years, the gift would be effectively gathered back into her estate and deducted from her nil rate band (if any was still available), reducing the amount of remaining estate that could be passed tax free.

One way around this would be to ask a solicitor to draw up a Deed of Variation, allowing the gift to pass directly from the deceased's estate to the daughter, thereby removing any issue with potential inheritance tax in future. This is likely to cost though, so it depends on whether this would be worth the money. Also, this can only be done within the two years after death and needs to be agreed by all beneficiaries.

Hope that's some useful information to think about, but please remember to seek appropriate advice before implementing any strategy. In particular, independent legal advice needs to be sought if a deed of variation is deemed necessary.

blue_groove

Aegis wrote: »

If this is a traditional inheritance (as opposed to an early one) then the inheritance tax bill should have already been settled by the executor by the time the bequests are distributed. If so, there's no inheritance tax to pay on the £50k transferred.

However, if your mother in law were then to die within the next seven years, the gift would be effectively gathered back into her estate and deducted from her nil rate band (if any was still available), reducing the amount of remaining estate that could be passed tax free.

One way around this would be to ask a solicitor to draw up a Deed of Variation, allowing the gift to pass directly from the deceased's estate to the daughter, thereby removing any issue with potential inheritance tax in future. This is likely to cost though, so it depends on whether this would be worth the money. Also, this can only be done within the two years after death and needs to be agreed by all beneficiaries.

Hope that's some useful information to think about, but please remember to seek appropriate advice before implementing any strategy. In particular, independent legal advice needs to be sought if a deed of variation is deemed necessary.

Many thanks for your replies. Does this "Deed of Variation" mean my mother in law could legally split the inheritance with her daughter?

There is no hidden agenda here regards benefits etc The money was left to my father in law initially and my mother in law would just like to split the money with her daughter. She has no idea about "taxes" etc so it will be left to me to sort out. I just want to make sure they are not liable to pay a large amount of tax if it is not necessary?

Thanks

xylophone

The Deed of Variation would be on the will of the original testator.All affected beneficiaries would have to agree.
http://www.hmrc.gov.uk/cto/customerguide/page21.htm
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem1815.htm

grey_gym_sock

a deed of variation would variy the will - in this case, of the person who has left money to your mother-in-law. it would make it as if their will had actually left (say) £50k to your m-i-l and £50k to her daughter, instead of £100k to your m-i-l.

without a deed of variation, your m-i-l can receive the inheritance and immediately give half of it to her daughter, and there is no tax to pay - at least yet. but there could be later, if your m-i-l dies wthin 7 years and leaves net assets worth over £281k.

in general, the first £325k that anybody leaves is exempt from inheritance tax, and the rest taxed at 40% (- there are other possible exemptions). but most of m-i-l's £50k gift would count towards the £325k exemption if it takes place less than 7 years before her death. only most of the £50k, because there is a £3k annual exemption; but you can also use last year's £3k exemption if you haven't used it already, so £6k could be exempt, and the inheritance tax allowance would only be reduced by £44k, from £325k to £281k.

thenudeone

A deed of variation has the same effect as if the beneficiaries in the will were the "new" ones.

It won't change inheritance tax on that estate unless the status of the recipients is different.
For example a man leaves £500k to his wife in his will. All of that is free of IHT (because the recipient is his spouse).
The wife is already well off and asks a solicitor to do a deed so that her children inherit all of it (this is no longer exempt from IHT). Now, IHT is payable on the excess over the IHT threshhold.
In that example it would probably be better for the deed to give as much to the children as the IHT threshold, then accept the rest and immediately give the children it as soon as she received it. As long as she lives 7 years there will have been no IHT on the estate even though it was over the IHT threshold.

As you can imagine, it can be quite a complex area and if the estate is big enough to attract IHT it would certainly be worth a few hundred pounds on proper legal advice which could easily save ten times that amount, IMO.

blue_groove

grey_gym_sock wrote: »

a deed of variation would variy the will - in this case, of the person who has left money to your mother-in-law. it would make it as if their will had actually left (say) £50k to your m-i-l and £50k to her daughter, instead of £100k to your m-i-l.

without a deed of variation, your m-i-l can receive the inheritance and immediately give half of it to her daughter, and there is no tax to pay - at least yet. but there could be later, if your m-i-l dies wthin 7 years and leaves net assets worth over £281k.

in general, the first £325k that anybody leaves is exempt from inheritance tax, and the rest taxed at 40% (- there are other possible exemptions). but most of m-i-l's £50k gift would count towards the £325k exemption if it takes place less than 7 years before her death. only most of the £50k, because there is a £3k annual exemption; but you can also use last year's £3k exemption if you haven't used it already, so £6k could be exempt, and the inheritance tax allowance would only be reduced by £44k, from £325k to £281k.

Ok, so if she gifted her daughter £50,000 that would only be subject to tax if my mother in law died within 7 years and left an estate worth over the £300k (or whatever), inclusive of the £50k.

That is very unlikely as she has zero of her own assets (no house etc).