Inheritance Tax. Who pays and how much?

Gimpster

Hi

I am being left a house in a friend's will. The total estate will probably be around £500,000 with the house in the region of half that. At first I assumed I would have to sell it to pay inheritance tax at 40% but unless I have completely mis read the HMRC website, I think I had this wrong.

As I understand it now the WHOLE estate gets valued first: £500,000
Minus the nil rate part £325,000
The remaining £175,000 gets taxed at 40% so a total tax bill of £70,000

Is this right?

If so two further questions. The other beneficiaries cannot force me to pay the whole £70,000 can they?

And am I right in thinking that as its a property I can chose to pay my share over a ten year period if I keep the property and only all at once if I sell it?

Thanks for any help and guidance if I have got this wrong. The stress of this is having a huge impact on. My health.

Mojisola

If the property is left to you, you should receive the property directly.

If there is IHT to pay on the whole estate, that should be paid by the executor(s) from any capital available.

Gimpster

There will likely be some cash and shares in the estate plus an additional property that will be in the other 'pot' as it were. So I would not be liable to pay the IHT?

They couldn't for instance force me to sell to clear half the bill?

getmore4less

Depends on the wording of the will and the order/type of the legacies and how much is in the residual estate.

Mojisola

The estate pays the IHT, not the beneficiaries. The tax isn't divided between the beneficiaries.

If there isn't enough cash available to pay the tax on an estate, the executors might have to sell a property in order to pay the tax.

It's one of the problems with leaving "things" to some people and cash to others - "I leave my house to X, my old masters to Y and all the cash in my accounts to Z" - if the cash has to be used to pay for the funeral, taxes and other expenses, Z could be left with nothing.

Mojisola

getmore4less wrote: »

Depends on the wording of the will and the order/type of the legacies and how much is in the residual estate.

This really needs to preface every answer to questions about wills - we can give general answers but the wording of the will can mean something else has to happen.

holly_hobby

Any estate taxes are paid BEFORE the estate may be administered as per the will (or under intestacy division, if no valid will at time of death). The administrator/executor has the duty of satisfying any HMRC IHT liability the estate holds before any such divison.

If the estate does not have enough to pay the tax (which can actually wipe it out where there is a substantial bill), and there are non-exempt PETs, the PET Donee's may be approached by HMRC to settle the respective tax on their unexpired PET.

Was your friend married or in a civil partnership, where the partner has already pre-deceased them ?

If so, the 325k applicable to their own estate, may be increased via the addition of spousal/civil partner tsf of full un-used nil rate band (if no non-exempt tsfs made in their lifetime), or a % portion if they did make non-exempt tsfs during their lifetime. Any such spousal tsf is effected via HMRC application by the decd's (your friend in this case) administrator/executor.

Just something else to consider, which may make a difference to the exposure - or not as the case may be.

Hope this helps

Holly

Gimpster

I believe the original will said free from taxes but a replacement possible doesn't mention that part. Apart from a couple of small £2,000 each legacies everything else is lumped together and divided between 4 other people as far as I know.

If all the cash and shares were together I suspect it wouldn't quite cover the IHT. The other property will be sold anyway as no one wants it. So all the taxes would come from that?

Gimpster

Sorry Holly, we crossed posts there.

She was married but the husband died probably 20 years or more ago.

I am unsure about some of the wording in your post as this is all rather new to me. What is a PET?

holly_hobby

Hi

PET = Potentially Exempt Transfer - which refers to a gift (money, consideration or asset) and its value a continued inclusion within the Donors estate for 7 yrs from death.

Right we have a decd spouse .... which is potentially good news for her estate.

If her husband died 20 yrs ago in 1993 (and as this was after 1975 the full tsf of unused will be permitted). Which means her executors may apply to HMRC for the addition of his unused nil rate band (either entirely if there were no non-exempt transfers made pre death), or as I say a % of the remaining unused nil rate band if some non-exempt tsfs were made pre his death.

This should be raised with the administrator/executor to ensure any unused allowance is both applied for with HMRC and inc in your friends estate administration - which can mean that upto 650k will be IHT free for your friends estate, and could mean you will walk away with the property in its entirety (ie without having to sell to pay os IHT).

Hope this news helps with the stress levels !!!

Seriously do hope this helps ... (and sorry for the loss of your Friend x )

Holly x

Gimpster

Thanks for the explanation and sorry to be a bit thick about this.

I will try to find out a little more.

But worse case scenario and the estate was say£250k the house I will inherit+ £200k other property + £50k cash/investments, was I right in thinking an IHT of £70k?

If so and the estate expect me to share the cost at say half that. Could I pay it by the instalments to the HMRC. Obviously hoping it won't come to this but if it did I would then be able to keep the house which for sentimental reasons I would wish too?