How does IHT work? some advice required 22 December 2022 at 4:31PM edited 22 December 2022 at 4:32PM in Deaths, funerals & probate 9 replies 298 views

bargainhunter888

Hi All,
just looking for some advice here as to how IHT is calculated.
My dad suffered a massive stroke and as a result he's been paralyse on one side, but also i'm not 100% sure how mentally capable he is right now, I have seen improvements in the months, but I can only hope he makes some recovery mentally

This prompted myself and rest of family including my mum to look at the finances.
My parents have no will.
I have 1 brother

Assets in parents names are: Family home - circa £150k, Rental Commercial Property Income is circa £10k a year and probably worth £150k ish
They have worked hard and pretty frugal most of their lives, they have built up some savings, but I'm not sure how much my dad holds as we never really discussed finances.
they also have life insurance policies.

we just want to try and maximise the IHT allowances to minimise as much tax as possible

can someone explain to me how the £325k NRB and the £175k property band works and how it passes on from 1 parent to another
I have read that property that is owned jointly passes onto the spouse? does that mean that the property is not within the £325k?
as a result if my dad has savings of <£325k then there is no IHT Due?
is life insurance pay outs calculated within the estates?

if so, how does this work when my mum eventually passes? I'm not sure how the shared NRB works, I was assuming that both bands would be combined to avoid paying IHT twice on value of estate?

therefore I will want to try and get a will done for my mum to maximise this.
any examples would be great to help aid my understanding, I'm aware I would probably need a financial planner to discuss further, but I like to have a bit of understanding before I start the process.

Thanks 

handful

As you say the NRB is £325k and if one spouse dies any unused allowance can be transferred to the other for when they die. The Property NRB is £175k and this is added if the property passes to a direct descendent taking the potential NRB up to £825k. NoNRB is used if the estate passes to a spouse. This is my understanding anyway.

Keep_pedalling

It sounds like the bulk of their assets are joint ones, so in the event of one of them dying with no will the survivor would inherit everything as sole assets would be well under £270k (anything over this would not automatically go to the surviving spouse). The entire estate would be fall outside any IHT consideration because of spousal exemption so no NRB would be used. This would any insurance policies not written in trust where the spouse is the sole beneficiary.

On the second death there would be 2 NRBs available plus the residential nil rate band which, with a home worth £150k would provide a total IHT exemption of £800k, so unless those the payouts on those insurance policies are very large IHT is not something that should concern either of them.

The priority should be establishing if your father has the capacity to make a will and probably even more importantly a lasting power of attorney ((LPA). You mother also needs these in place. I say the LPA is more important as it does not sound like intestacy is going to cause any problems but an LPA for finance is going to be critical in handling his finances especially if anything happens to your mother. If an LPA is not possible then I would recommend you apply for deputyship.

https://www.gov.uk/power-of-attorney

https://www.gov.uk/become-deputy/apply-deputy

p00hsticks

bargainhunter888 said:

My parents have no will.

Before you start worrying about IHT, this is probably the bit you need to be concentrating on.

If your father dies without making a will, then, assuming he is in England or Wales, then under intestacy rules your mother would automatically inherit your fathers personal possessions and the first £270,000 of his estate. Anything above that gets divided into two - half also to your mother and the other half divided between you and your brother. 

To make as much use of IHT allowances as possible, and to safeguard your mothers interest, it would be better if he made a will leaving everything to her in the first instance and equally to you and your brother if she pre-deceases him (assuming of course that that is what he wants).

And your mother should make a similar ('mirror') one at the same time.

Marcon

The more I see of the information on LITRG's website the more useful I think it is. In addition to the helpful posts above, see https://www.litrg.org.uk/tax-guides/bereavement/what-reliefs-and-exemptions-are-there-inheritance-tax

macman

Unfortunately it's not clear that the father has mental capacity to make a will now. In which case, intestacy rules will apply if he predeceases the mother.
OP, before anyone can advise you properly, you need to know what other assets there are. At present, all you have stated is property worth c £300k. If that's it, then IHT is not relevant.
The life insurance could be written in trust, so fall outside the estates.

bargainhunter888

macman said:

Unfortunately it's not clear that the father has mental capacity to make a will now. In which case, intestacy rules will apply if he predeceases the mother.
OP, before anyone can advise you properly, you need to know what other assets there are. At present, all you have stated is property worth c £300k. If that's it, then IHT is not relevant.
The life insurance could be written in trust, so fall outside the estates.

I am not sure, I believe both parents have a good amount of cash savings, but I really don't know how much - they used to tell me they would put a deposit in for my house, and now I know the reason why.
if for arguments sake, they have about £300k each of cash, how would this affect the IHT.

with regards to wills, can my mother make a will for my father?
or is there no possibility of that now?

how would the rules of intestacy work? on the numbers above, say £300k property and £300k cash each.

also what mechanisms are in place to avoid paying IHT twice?
for example if there was IHT due from my fathers estate, and it passes onto my mum, is there a process to then avoid IHT on the portion left by my dad if it also goes above the threshold? as this could mean the same assets could be taxed twice?

Keep_pedalling

bargainhunter888 said:

macman said:

Unfortunately it's not clear that the father has mental capacity to make a will now. In which case, intestacy rules will apply if he predeceases the mother.
OP, before anyone can advise you properly, you need to know what other assets there are. At present, all you have stated is property worth c £300k. If that's it, then IHT is not relevant.
The life insurance could be written in trust, so fall outside the estates.

I am not sure, I believe both parents have a good amount of cash savings, but I really don't know how much - they used to tell me they would put a deposit in for my house, and now I know the reason why.
if for arguments sake, they have about £300k each of cash, how would this affect the IHT.

Assuming that £300k was in sole accounts and your father died first without a will then there would still be no IHT on his estate as the vast majority of it would be covered by spousal exemption. Under intestacy rules you mother would inherit £270k plus 50% of the rest (£15k). The other £15k would be shared between you and your sibling, which would use up a small percentage of his NRB. 

If you and you sibling agreed it would be possible to have everything go to your mother by making a deed of variation.

Your mother would then have a total net worth of around £900k, which would avoid IHT if you could claim 2 lots of NRB and 2 lots of residential NRB (£1M) but with the main home being worth only £150 that is the maximum that can be claimed on the residential NRB, so £100k is vulnerable to IHT, so a potential liability of £40k. 

with regards to wills, can my mother make a will for my father?
or is there no possibility of that now?

No, that is not possible, but if all in agreement the rules of intestacy can be got round through a deed of variation.

how would the rules of intestacy work? on the numbers above, say £300k property and £300k cash each.

As far as sole assets are concerned, see above. Joint assets such as the property is covered by survivorship so does not fall under intestacy rules.

also what mechanisms are in place to avoid paying IHT twice?
for example if there was IHT due from my fathers estate, and it passes onto my mum, is there a process to then avoid IHT on the portion left by my dad if it also goes above the threshold? as this could mean the same assets could be taxed twice?

The only way IHT would be have to be paid on both estates of a married couple, would be if  the first to die left more than £325k to someone other than their spouse and the surviving spouse is still left with very significant assets.

As far as your father is concerned just forget about IHT it is not an issue unless your mother dies first. Your mother could take steps to reduce her estates potential liability by making gifts now, but that would only work if she survived 7 years after making the gifts. The alternative action is buy a new home in excess of £250k to take greater advantage of the residential NRB.

Having said all this the priority is not IHT, it is to get LPAs and a will in place for your mother, and to look at getting deputyship in place for your father.

If you have not got your own will and LPA in place then don’t make the same mistake get them done asap. 

getmore4less

Read up about spouse exemption and how both regular and residential nil rate bands work.

You need to establish the property beneficial  ownership status.

The full in inventory of the estates to work out the joint and individual assets.

The rules of intestacy  and the options available with the use of DOV to reduce/eliminate IHT on first death.

If they have previously owned/lived in more expensive property there may be downsize rules that can enhance the residential nil rate band available depending when that was.

bobster2

bargainhunter888 said:

also what mechanisms are in place to avoid paying IHT twice?
for example if there was IHT due from my fathers estate, and it passes onto my mum, is there a process to then avoid IHT on the portion left by my dad if it also goes above the threshold? as this could mean the same assets could be taxed twice?

If assets are passed to a spouse, and then onto the children after the spouse's death then paying IHT twice is not going to be an issue. There will be no IHT due on assets passed to the spouse.

If value of what is passed to the children exceeds the combined thresholds then some of it may be attract IHT once. but not twice.