Inheritance Tax

MG2112

Hi , father passed away this year. My mum has inheritance my father estate .  Will is set up for my mother to pass everything to me and siblings. My question is do we pay the 40% tax on estate above £325 k or is it £325k + £175k ( possible x 2 I.e mum and dad allowance ) confusing! 

Many thanks 🙏 

Keep_pedalling

Assuming your mother and father were married, Her estate would have to exceed £1M before IHT kicks in. As your mother inherited everything from your father none of his allowances have been used so are transferable to her estate.

MG2112

Yes my parents were married. So in other words my mother’s estate that myself and siblings inherit at my mothers death would have to pay IHT on estate above £1m ...... ? 

Thanks for your reply 🙏

Jeremy535897

The £1 million assumes that the full RNRB is available. See:
https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

unkle

MG2112 said:

Yes my parents were married. So in other words my mother’s estate that myself and siblings inherit at my mothers death would have to pay IHT on estate above £1m ...... ? 

Thanks for your reply 🙏

As above assumes RNRB is available in full, also that they don't change the rules or limits in-between. I'd always look, if it is financially possible for your mother, to do a deed of variation of your fathers will to pass some to you and your siblings now.

Keep_pedalling

unkle said:

MG2112 said:

Yes my parents were married. So in other words my mother’s estate that myself and siblings inherit at my mothers death would have to pay IHT on estate above £1m ...... ? 

Thanks for your reply 🙏

As above assumes RNRB is available in full, also that they don't change the rules or limits in-between. I'd always look, if it is financially possible for your mother, to do a deed of variation of your fathers will to pass some to you and your siblings now.

Using a deed of variation is not really appropriate in this situation, it would just use up some of the transferable NRB. Gifting is a better option, as it stands a chance of becoming exempt if the surviving spouse lives another 7 years.

unkle

Keep_pedalling said:

unkle said:

MG2112 said:

Yes my parents were married. So in other words my mother’s estate that myself and siblings inherit at my mothers death would have to pay IHT on estate above £1m ...... ? 

Thanks for your reply 🙏

As above assumes RNRB is available in full, also that they don't change the rules or limits in-between. I'd always look, if it is financially possible for your mother, to do a deed of variation of your fathers will to pass some to you and your siblings now.

Using a deed of variation is not really appropriate in this situation, it would just use up some of the transferable NRB. Gifting is a better option, as it stands a chance of becoming exempt if the surviving spouse lives another 7 years.

Not if the allowances change, which is more than possible, also look at the gifts, the gifts uses up the NRB first anyway despite what 99% of people think if less than 7 years.

What happens if the House element is removed in the future? Or the banding remains static and therefore reduces in real terms? (which is what is happening). If you mother had as an example 800k now, in time, if invested that could grow to 1, 1.2m etc and go above the tax free amount as it stands. Better that it passes to you now and any growth you achieve.

Keep_pedalling

unkle said:

Keep_pedalling said:

unkle said:

MG2112 said:

Yes my parents were married. So in other words my mother’s estate that myself and siblings inherit at my mothers death would have to pay IHT on estate above £1m ...... ? 

Thanks for your reply 🙏

As above assumes RNRB is available in full, also that they don't change the rules or limits in-between. I'd always look, if it is financially possible for your mother, to do a deed of variation of your fathers will to pass some to you and your siblings now.

Using a deed of variation is not really appropriate in this situation, it would just use up some of the transferable NRB. Gifting is a better option, as it stands a chance of becoming exempt if the surviving spouse lives another 7 years.

Not if the allowances change, which is more than possible, also look at the gifts, the gifts uses up the NRB first anyway despite what 99% of people think if less than 7 years.

What happens if the House element is removed in the future? Or the banding remains static and therefore reduces in real terms? (which is what is happening). If you mother had as an example 800k now, in time, if invested that could grow to 1, 1.2m etc and go above the tax free amount as it stands. Better that it passes to you now and any growth you achieve.

You can only really plan on the rules as they exist, anything else is just speculation, yes the allowances could change and could go either way, so trying to guess which way it is going to go could backfire. I don’t disagree that for large estates (and we don’t know if it is the case here) passing money on in your lifetime is something people should consider doing but as it currently stands gifting is the better option where money is inherited from a spouse. 

unkle

Keep_pedalling said:

unkle said:

Keep_pedalling said:

unkle said:

MG2112 said:

Yes my parents were married. So in other words my mother’s estate that myself and siblings inherit at my mothers death would have to pay IHT on estate above £1m ...... ? 

Thanks for your reply 🙏

As above assumes RNRB is available in full, also that they don't change the rules or limits in-between. I'd always look, if it is financially possible for your mother, to do a deed of variation of your fathers will to pass some to you and your siblings now.

Using a deed of variation is not really appropriate in this situation, it would just use up some of the transferable NRB. Gifting is a better option, as it stands a chance of becoming exempt if the surviving spouse lives another 7 years.

Not if the allowances change, which is more than possible, also look at the gifts, the gifts uses up the NRB first anyway despite what 99% of people think if less than 7 years.

What happens if the House element is removed in the future? Or the banding remains static and therefore reduces in real terms? (which is what is happening). If you mother had as an example 800k now, in time, if invested that could grow to 1, 1.2m etc and go above the tax free amount as it stands. Better that it passes to you now and any growth you achieve.

You can only really plan on the rules as they exist, anything else is just speculation, yes the allowances could change and could go either way, so trying to guess which way it is going to go could backfire. I don’t disagree that for large estates (and we don’t know if it is the case here) passing money on in your lifetime is something people should consider doing but as it currently stands gifting is the better option where money is inherited from a spouse. 

Yes and no, although you cannot perfectly predict the future (or we'd all be very rich!) but you can see the track it is on and we know some elements such as the IHT band being frozen until at least 2026, so in real terms is reducing by inflation and/or house price increases. A deed of variation allows you to lock in the current limits on todays values, what we do know is any growth in the estate until 2026 will all potentially be taxable as the OP mentions paying tax above £1m so I had assumed that is what the estate is (or will be) already.

It's highly likely we are going to see greater inflation in the medium term future compared to the recent past, there is also a big deficit to deal with which as again we know from the past governments will pick easy targets such as IHT.

It's all very personal as we do not know the income, expenditure etc. However if an estate is today £1m if that grew by 4-5% over the next 5 years the estate would go from 0 IHT due to tax payable on around £275k (£110k). Do the deed of variation now on £325k nil rate band and the amount of IHT due would be on a much lower amount as 32.5% of the estate has gone and is not growing within the estate.