Inheritance tax - who pays when several heirs inherit?

CalJo99

I have a question about IHT if this is the right place (if not, where is better on this site please?)

Two properties - two heirs! 

In an estate with more than one property, and in respect of the property that is NOT the 'family home' (and so covered by the £175k uplift to the IHT exempt amount), and that second property (which IS therefore assessed for IHT) is left to a different member (call him of the family (not a 'direct heir' - call him A - who is inheriting the 'family home' tax-free property), then who is liable to pay the IHT on that second, non-exempt property?

If it is ONLY the person it is left to,ie, B, then fine. But could it become payable by the person who inherits the tax-exempt property, ie A?  

I would want to ensure that if B wants to be left the non-family-home property then B has to pay the IHT on it, NOT A. And that if B can't afford to pay that IHT that it does NOT then become the responsibility of A.

The family home property will use up all the IHT exempt son, so the other property will be hit with the full weight of the 40% IHT., 

I hope I've explained this clearly!

doodling

Hi,

What you want can be achieved with an appropriately worded will.

I would get a solicitor to write it.

Edited to add:
The will will need to consider what happens if those properties are not owned at the time, or if the non-family-home property is the only one owned or (long list of other possibilities), a solicitor should ask questions to establish what happens in those cases.

Devongardener

Inheritance tax is paid from the estate before any funds  or property title is passed to beneficiaries.    It’s not paid by individual beneficiaries.

RAS

The starting point is that IHT is paid by the estate not by the beneficiaries. And although there may be allowances if a property is passed to an descendent, those aren't directly attached to the property, they belong to the estate.

What do you think is a "direct heir"?

And do you understand that 

a) if the deceased is widowed they may get 2x the property allowance, even if they no longer live there?
b) If they are single or divorced, it's only one allowance.

It's not generally a good idea to leave specific properties. What happens if you need care and the house not lived in by A has to be sold to cover care? Or just is sold at some point?

Or the IHT bill cannot be covered by non-property assets so one or more property have to be sold?

You need some specialist advice from a good solicitor about the IHT and inheritance rules and possibly help estate planning.

And do specify in which country you are domiciled as that affects the rules. 

doodling

Hi,

Devongardener said:

Inheritance tax is paid from the estate before any funds  or property title is passed to beneficiaries.    It’s not paid by individual beneficiaries.

Agreed, but the will can define how the size of bequests are calculated and such a calculation could take into account the prevailing inheritance tax rules at time of death.

In its simplest form, the will would require that the executors calculate the inheritance tax liability both with and without the non-family-home property and then leave B the value of the non-family-home minus the difference in inheritance tax liability, with the option of B either receiving the non-family-home on payment of that difference or being paid in cash after the non-family-home is sold.

CalJo99

Hmm, problematic I see! Thank you for your answers.

To clarify a bit:

I own two houses (yes, lucky me - except when it comes to cost of upkeep etc etc). My main house (the family home) I want to leave to my only child (ie, direct heir) quite outright, and it should not incur IHT because it will fall within the NRB (courtesy of the £175k exempt uplift allowed to direct heirs). He will also get whatever £££ I'm left with at the point of death! 

So far so good. (I think.)

The problem attaches to the second property - worth a lot less than the family home (so I don't want to swap 'main residence' to it), but it will be hit with the full weight of 40% of its value.

I'm thinking (for complicated family reasons) (when are family reasons NOT complicated!!!!!), of possibly leaving the second property to my niece and nephew (their father once owned the property - long story!).  

But ONLY ONLY ONLY if the niece and nephew are liable for the hefty IHT whack. I DO NOT WANT that IHT to be paid by my son if he does not inherit the second property.

In other words, if the niece and nephew want their dad's old house back 'free' as a legacy, they are going to have to pay the IHT due on it.

The nightmare scenario is that they get the second house, and my son has to pay their IHT on it!! NO THANKS.

If I go down the niece and nephew path, I must absolutely be sure they pay the IHT if they inherit the second property. And, if they refuse, or cannot afford it , that it passes instead to my own son, and he has to pay the IHT (or sell it, which is most likely, to raise the IHT amount) (he won't be able to sell it to the niece and nephew, as, if they can't afford the IHT, they certainly can't afford the whole value of the second property!)

As I say, it's a complicated situation. 

It's only the second property I'm considering leaving to my niece and nephew, nothing else from my estate. 

poppystar

Have you spoken to B to see if they actually want the property? 

Are they really still likely to want it if they have to pay 40% of its value for it?

If they have their own homes that’s a hefty price to pay for an additional property and the complications that come with that, especially as they would be sharing the ownership. 

Would it not be simpler to leave them a sum of money and also leave a letter of wishes saying that should they then wish to purchase the property at market value they should have first refusal - with a time limit on taking up the offer? 

uknick

Before you get involved in drafting, what could be, a will with some complicated conditions, how much do you think your estate will be worth?  Then, how much IHT will be due and based on what assets?

For example, if your estate will attract IHT, will the house you're leaving to your child incur any IHT, i.e. value exceeds the RNRB?  If so, how will this be paid?  From non property assets left in the estate?  Will there be enough cash left to pay any IHT due on the other property?

Keep_pedalling

it is usually a very bad idea to leave specific properties to people as there is a reasonable change you may no longer own it at the time of death and so could accidentally disinherit your beneficiary.

IHT comes out of you residuary estate unless there are insufficient assets left to meet the bill, which again could have a major impact on the residuary beneficiaries.

You should Sid down with a local solicitor to discuss what you want to achieve and they will cover the risks and what if situations before drafting the will.

Marcon

CalJo99 said:

Hmm, problematic I see! Thank you for your answers.

To clarify a bit:

I own two houses (yes, lucky me - except when it comes to cost of upkeep etc etc). My main house (the family home) I want to leave to my only child (ie, direct heir) quite outright, and it should not incur IHT because it will fall within the NRB (courtesy of the £175k exempt uplift allowed to direct heirs). He will also get whatever £££ I'm left with at the point of death! 

So far so good. (I think.)

The problem attaches to the second property - worth a lot less than the family home (so I don't want to swap 'main residence' to it), but it will be hit with the full weight of 40% of its value.

I'm thinking (for complicated family reasons) (when are family reasons NOT complicated!!!!!), of possibly leaving the second property to my niece and nephew (their father once owned the property - long story!).  

But ONLY ONLY ONLY if the niece and nephew are liable for the hefty IHT whack. I DO NOT WANT that IHT to be paid by my son if he does not inherit the second property.

In other words, if the niece and nephew want their dad's old house back 'free' as a legacy, they are going to have to pay the IHT due on it.

The nightmare scenario is that they get the second house, and my son has to pay their IHT on it!! NO THANKS.

If I go down the niece and nephew path, I must absolutely be sure they pay the IHT if they inherit the second property. And, if they refuse, or cannot afford it , that it passes instead to my own son, and he has to pay the IHT (or sell it, which is most likely, to raise the IHT amount) (he won't be able to sell it to the niece and nephew, as, if they can't afford the IHT, they certainly can't afford the whole value of the second property!)

As I say, it's a complicated situation. 

It's only the second property I'm considering leaving to my niece and nephew, nothing else from my estate. 

It's not complicated, but you do need a solicitor to draw up the will - definitely not a DIY job. And you do need to take the emotion out of it (always easier said than done) and just recognise this for what it is: a pretty straightforward situation for a legal professional.

Leave your main residence to your son.

Don't leave the other property to anyone, but put a provision in your will that your second property is to be sold and the proceeds should be used firstly to pay any IHT due on the estate, and secondly the remaining balance from the sale to be divided as follows [insert whatever you fancy here]. If the niece and/or nephew want to buy the property, then that's for the executors to deal with at the time.

Add any other provisions you want to cover everything else you are leaving.

Grumpy_chap

Won't this second property be liable for CGT at time of death?  After that has been met, to also make the second property carry all IHT for the estate, it may become a negative value overall.