Inheirtance Tax on large estate and no will

Bolt1234

Hi,  I have some friends who havent done a will (never got round to it!).  They are married - 2 children age 17 and 21.  Their estate is worth circa £2m.  I know that the estate wont automatically go free of IRT to the wife if there is no will but if the husband passes away without doing a will will the share after £250k of his estate be liable to Inheirtance Tax i.e the children's element.  

I have tried to look online and got myself a little confused.  I have told them they MUST do a will to resolve all of this but somehow people seem to think that as long as its in your head somehow all your wishes will come to pass

Mickey666

Given there is no will then the intestacy rules will apply.

This means the first £270k goes to the spouse.
Then 50% of the remainder goes to the spouse.
Then the remaining 50% is divided by between the children.

Spousal inheritance is not subject to IHT and does not use up any of the deceased's IHT allowance.

So the issue is the children's inheritance for which £500k is allowable before IHT.  Anything over that will be subject to IHT.

So by my reckoning, if the estate is worth exactly £2m then the spouse will receive £270k + (50% of £2m-£270k) =  £1135k free of any IHT.

The children will share £865k, of which £500k will be free of IHT, leaving £365k liable to IHT, which at 40% will be £146k

So the children will receive a total of £865k - £146k = £719k or £359,500 each.

Assuming my calcs are correct and the parents are happy with that outcome then I suppose they don't NEED to write a will because the intestacy rules are a form of 'default' will, and the executor will have no choice but to implement that outcome.

There will likely be practical complications arising from the house value, however, because if the children's share of the estate cannot be paid without selling the house then it would mean the children gain partial ownership, which could give rise to further complications.

One final thought, about which I'm not so clear.  The £500k IHT allowance is comprised of £325k plus an additional £175k because the house is being left to the children (even under the intestacy rules).   

However, I'm not clear about whether than means the PHYSICAL house or just the VALUE of the house.  If the estate sells the house before distribution, is the £175k IHT allowance lost?

I don't know the answer but the implications are clear.


But they should definitely write a will.  I'd have thought that anyone with a £2m-ish estate can afford a few £100 to ensure that things are properly distributed as they wish.

Bolt1234

thank you Mickey - that is very useful.  Yes, why wouldn’t you write a will.  You just say what you want to have happen, the solicitor turns it into legal speak, you sign and get it witnessed and you are done for a few £100 pounds.     You then save £££ in inheirtance tax. 

So I didn’t realise that the 50% of the remaining estate is NOT subject to inheritance tax either when it belongs to the remaining spouse.  

Giving a share of a house to a young person when the other parent lives in it is fraught with issues.  What if they want to sell it to get a deposit for their own place, what if they want to live in it with their latest girlfriend for free?

I am a great believer in being able to leave their money to whomever you like but please - write a will!

Keep_pedalling

Unfortunately the would is full of idiots who think they are immortal so don’t need a will. Your friends should not only make wills, they need to take professional advice about IHT planning from an IFA. They should also put LPAs in place, but as they are immortal none of those things are likely to happen.

Mickey666

Bolt1234 said:

thank you Mickey - that is very useful.  Yes, why wouldn’t you write a will.  You just say what you want to have happen, the solicitor turns it into legal speak, you sign and get it witnessed and you are done for a few £100 pounds.     You then save £££ in inheirtance tax. 

So I didn’t realise that the 50% of the remaining estate is NOT subject to inheritance tax either when it belongs to the remaining spouse.  

Giving a share of a house to a young person when the other parent lives in it is fraught with issues.  What if they want to sell it to get a deposit for their own place, what if they want to live in it with their latest girlfriend for free?

I am a great believer in being able to leave their money to whomever you like but please - write a will!

Just my amateur interpretation of the rules.  I don't see why being intestate should affect the tax rules on spousal transfers and the intestacy rules themselves really just act as a default will.

I entirely agree that giving beneficiaries a share in a physical property is fraught with difficulty, especially when one of them is reliant on the property as a home.  There are countless examples of the problems that can arise on this very forum and they are very sad to read and imagine families falling apart as a result.

Keep_pedalling

Mickey666 said:

Given there is no will then the intestacy rules will apply.

This means the first £270k goes to the spouse.
Then 50% of the remainder goes to the spouse.
Then the remaining 50% is divided by between the children.

Spousal inheritance is not subject to IHT and does not use up any of the deceased's IHT allowance.

So the issue is the children's inheritance for which £500k is allowable before IHT.  Anything over that will be subject to IHT.

So by my reckoning, if the estate is worth exactly £2m then the spouse will receive £270k + (50% of £2m-£270k) =  £1135k free of any IHT.

The children will share £865k, of which £500k will be free of IHT, leaving £365k liable to IHT, which at 40% will be £146k

So the children will receive a total of £865k - £146k = £719k or £359,500 each.

Assuming my calcs are correct and the parents are happy with that outcome then I suppose they don't NEED to write a will because the intestacy rules are a form of 'default' will, and the executor will have no choice but to implement that outcome.

There will likely be practical complications arising from the house value, however, because if the children's share of the estate cannot be paid without selling the house then it would mean the children gain partial ownership, which could give rise to further complications.

One final thought, about which I'm not so clear.  The £500k IHT allowance is comprised of £325k plus an additional £175k because the house is being left to the children (even under the intestacy rules).   

However, I'm not clear about whether than means the PHYSICAL house or just the VALUE of the house.  If the estate sells the house before distribution, is the £175k IHT allowance lost?

I don't know the answer but the implications are clear.


But they should definitely write a will.  I'd have thought that anyone with a £2m-ish estate can afford a few £100 to ensure that things are properly distributed as they wish.

There are some complications to those figures. It is likely that the family home is owned as joint tenants, so the house will pass to the surviving spouse and will not count as part of the inheritable estate. The survivor therefore get the house + £270k + 50% of the remainder. In those circumstances the residential NRB would not be usable, so IHT would only an issue on the first death if the amount going to the children exceeds £325k, so if the house makes up more than half of their net worth then IHT on the first death is unlikely.

Bolt1234

So, if I am following this correctly.  If they DONT do a will then the house which is the vast majority of the wealth would not be counted but on the second death the two surviving children wouldnt be able to use the full allowance of £1 m (which includes the £325 x 2 people plus the NRB x 2 people).

Have I got that right?  I totally agree regarding wills - there is a thread going on saying that all of the estate will go to one person and that person is going to be trusted to share the proceeds out.  Really? My BIL has only just finished sorting out the legal ranglings regarding his Mother's estate.  She left her house in equal share to all her children plus her second husband of many years.  Some of the children were not his.  It caused huge rifts and it used up nearly half the estate in legal costs.

getmore4less

it depends.........  and this is for spouse and kids situation

if there is a mortgage that complicates it a bit



If the house is joint tenants 

that passes by survivorship to spouse.

the rest of the deceased estate then gets split first £270k to spouse  then the rest 50:50

if the 50% going to kids then uses up the NRB and if over £325k  there is IHT to pay.


if the house is TIC 50:50

50% of the house forms part of the estate and the same as above re £270k then  50:50


This time that 50% that is subject to IHT will be bigger 



In the later case the house can be sorted by using a DOV to create an IPDI trust giving the spouse a life interest.

that gives the second to die,  2 RNRB 1 NRB and the residual transferable nil rate band if any


With a combined  estate around £2m+(chances are it is growing)  it is important to get advice to mitigate as over £2m it impacts RNRB as well


It will depend on the split of assets and what gifting option there are how to plan this going forward no where near enough information to do any meaningful calculations

Mickey666

Keep_pedalling said:

Mickey666 said:

Given there is no will then the intestacy rules will apply.

This means the first £270k goes to the spouse.
Then 50% of the remainder goes to the spouse.
Then the remaining 50% is divided by between the children.

Spousal inheritance is not subject to IHT and does not use up any of the deceased's IHT allowance.

So the issue is the children's inheritance for which £500k is allowable before IHT.  Anything over that will be subject to IHT.

So by my reckoning, if the estate is worth exactly £2m then the spouse will receive £270k + (50% of £2m-£270k) =  £1135k free of any IHT.

The children will share £865k, of which £500k will be free of IHT, leaving £365k liable to IHT, which at 40% will be £146k

So the children will receive a total of £865k - £146k = £719k or £359,500 each.

Assuming my calcs are correct and the parents are happy with that outcome then I suppose they don't NEED to write a will because the intestacy rules are a form of 'default' will, and the executor will have no choice but to implement that outcome.

There will likely be practical complications arising from the house value, however, because if the children's share of the estate cannot be paid without selling the house then it would mean the children gain partial ownership, which could give rise to further complications.

One final thought, about which I'm not so clear.  The £500k IHT allowance is comprised of £325k plus an additional £175k because the house is being left to the children (even under the intestacy rules).   

However, I'm not clear about whether than means the PHYSICAL house or just the VALUE of the house.  If the estate sells the house before distribution, is the £175k IHT allowance lost?

I don't know the answer but the implications are clear.


But they should definitely write a will.  I'd have thought that anyone with a £2m-ish estate can afford a few £100 to ensure that things are properly distributed as they wish.

There are some complications to those figures. It is likely that the family home is owned as joint tenants, so the house will pass to the surviving spouse and will not count as part of the inheritable estate. The survivor therefore get the house + £270k + 50% of the remainder. In those circumstances the residential NRB would not be usable, so IHT would only an issue on the first death if the amount going to the children exceeds £325k, so if the house makes up more than half of their net worth then IHT on the first death is unlikely.

Agreed - there usually are because OPs rarely give full information and any 'complications' have to be teased out of them.  Not really a criticism, more an observation -  it's just the way most threads work.

I usually try to state my assumptions but missed the possibility of joint tenants ownership of the family home, so good catch.


One thing I'm not entirely sure about is the £175k residential NRB for IHT calculations.  Is this only valid if the PHYSICAL property is passed on to the children or can it be sold by the estate and the proceeds distributed to the children and still qualify for the additional £175k NRB?

Keep_pedalling

Mickey666 said:

Keep_pedalling said:

Mickey666 said:

Given there is no will then the intestacy rules will apply.

This means the first £270k goes to the spouse.
Then 50% of the remainder goes to the spouse.
Then the remaining 50% is divided by between the children.

Spousal inheritance is not subject to IHT and does not use up any of the deceased's IHT allowance.

So the issue is the children's inheritance for which £500k is allowable before IHT.  Anything over that will be subject to IHT.

So by my reckoning, if the estate is worth exactly £2m then the spouse will receive £270k + (50% of £2m-£270k) =  £1135k free of any IHT.

The children will share £865k, of which £500k will be free of IHT, leaving £365k liable to IHT, which at 40% will be £146k

So the children will receive a total of £865k - £146k = £719k or £359,500 each.

Assuming my calcs are correct and the parents are happy with that outcome then I suppose they don't NEED to write a will because the intestacy rules are a form of 'default' will, and the executor will have no choice but to implement that outcome.

There will likely be practical complications arising from the house value, however, because if the children's share of the estate cannot be paid without selling the house then it would mean the children gain partial ownership, which could give rise to further complications.

One final thought, about which I'm not so clear.  The £500k IHT allowance is comprised of £325k plus an additional £175k because the house is being left to the children (even under the intestacy rules).   

However, I'm not clear about whether than means the PHYSICAL house or just the VALUE of the house.  If the estate sells the house before distribution, is the £175k IHT allowance lost?

I don't know the answer but the implications are clear.


But they should definitely write a will.  I'd have thought that anyone with a £2m-ish estate can afford a few £100 to ensure that things are properly distributed as they wish.

There are some complications to those figures. It is likely that the family home is owned as joint tenants, so the house will pass to the surviving spouse and will not count as part of the inheritable estate. The survivor therefore get the house + £270k + 50% of the remainder. In those circumstances the residential NRB would not be usable, so IHT would only an issue on the first death if the amount going to the children exceeds £325k, so if the house makes up more than half of their net worth then IHT on the first death is unlikely.

One thing I'm not entirely sure about is the £175k residential NRB for IHT calculations.  Is this only valid if the PHYSICAL property is passed on to the children or can it be sold by the estate and the proceeds distributed to the children and still qualify for the additional £175k NRB?

The house does not have to actually pass to the children, it can even be sold before death to move into care or more suitable accommodation.

Marcon

Bolt1234 said:

I have told them they MUST do a will to resolve all of this but somehow people seem to think that as long as its in your head somehow all your wishes will come to pass

They clearly aren't listening and there is no 'must' about it if they don't want to. Disappointing that everyone seems to have focussed on the tax position and not considered that the absence of a will means there were never any guardianship arrangements in place for the children - one of whom is still under age.

Instead of faffing and fuming about tax, point that out to them and see if they care enough about the child to make a will.