I AM CONFUSED ABOUT INHERITANCE TAX

HUMBUG
HUMBUG Posts: 327
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edited 23 September 2023 at 7:33PM in Deaths, funerals & probate
I have some questions and hoping someone can clarify whether I am correct or not.

Background

My mother died back in 2019 . 
All her assets (including her savings) were transferred to my father IHT free .

My father has passed away recently and I've tried to assess the value of the total estate:
1. Property is a 3 bedroomed terrace house which requires a lot of renovation but I still think it's worth between £550-600k.
2. His savings is about £260k. 
3. Shares held is about £1k.
4. A paid up life insurance which will pay me, the beneficiary, about £14k for his funeral expenses.
5. House possessions worth about £2k.
6. My Brother owes my father 18k. 
7. No gifts.
8. Funeral expenses will be £10k.

The 'will' requests the grandchildren will each get £6k each while the rest of the savings to be split between myself and my brother. My sister will inherit the house.

Questions:
a.  Am I correct in assuming that my mothers £325k IHT tax free threshold is transferred to my father and he will therefore have £650 IHT tax free threshold that can apply across the estate (ie. all his assets including property/savings/possessions/life insurance paid out on his death) ?

b. That my mother and father each have an 'Inheritance Tax residence nil rate band'  up to £175k?

c. That when my mother died , this £175k can be requested via HMRC to be transferred to my father who will then have  'IHT Nil Rate Band '  up to £350k?

d.  So can I assume that if the house is worth £600k  I can deduct £350k  which will leave the IHT taxable value of the property as  600-350 = £250k?

e. Will the value of the estate now be:
Property  = £250k
Savings = £260k
Shares = 1k
Life Insurance = £14k
House Possessions = £2k
Money Owed =18k
Funeral Expenses  =  - £10k  

Grand Total Value Of Estate= £535k  ?

f.  So can I assume that  my father does not have to pay IHT because the grand total value of the his estate £535k  is now below the £650 IHT tax free threshold?

I'm unsure what forms need to be completed but I suspect I will have to phone HMRC for some guidance.

Comments

  • It does not quite work that way. The net value of his estate is around £870k (the insurence falls outside his estate) which is well under the combined exemptions of £1M (2xNRB + 2xRNRB) which means there will be no IHT to pay. 

    As you will have to claim both RNRBs to avoid the tax you will, however have to file a full IHT return.
  • HUMBUG
    HUMBUG Posts: 327
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    edited 23 September 2023 at 9:03PM
    It does not quite work that way. The net value of his estate is around £870k (the insurence falls outside his estate) which is well under the combined exemptions of £1M (2xNRB + 2xRNRB) which means there will be no IHT to pay. 

    As you will have to claim both RNRBs to avoid the tax you will, however have to file a full IHT return.
    Many thanks.

    What confused me was HMRC  'Check If you need to pay Inheritance Tax ' checker (link below)

    Date of death – Guidance – GOV.UK (tax.service.gov.uk)

    I tried inputting all the details in my previous post but it wouldn't allow me to add IHT resident nil rate band for my father (£175k)  +  the inherited £175k RNRB (from my mother)  into the calculator.

    It asked the question : What was the value in pounds of any tax-free allowance that the person who died inherited? 

    So I tried inputting £325k + £175k = £500k,   but it said that was wrong and that the maximum amount allowed was £325k

    The result at the end said the information I entered meant I had to pay IHT.

    I'm therefore unsure whether I need to first complete specific  forms to transfer the £175k to increase my father's IHT. Then once that transfer is confirmed, to complete other forms where IHT isn't due.


  • HUMBUG
    HUMBUG Posts: 327
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    I think I have to complete IHT400 form but then it says:

    Fill in this form if the deceased died on or after 18 March 1986, and there’s Inheritance Tax to pay, or there’s no Inheritance Tax to pay, but the estate does not qualify as an excepted estate.

    -------------------------------
    What counts as an excepted estate
    An estate is usually an excepted estate if any of the following apply:

    its value is below the current Inheritance Tax threshold  --  No
    the estate is worth £650,000 or less and any unused threshold is being transferred from a spouse or civil partner who died first  ---- No 
    the deceased left everything to a spouse or civil partner living in the UK or to a qualifying charity and the estate is worth less than £3 million (search the charity register for registered UK charities) --- No 
    the deceased was living permanently outside the UK (a ‘foreign domiciliary’) when they died and the value of their UK assets is under £150,000   ---- No
    --------------------------------------

     The HMRC wording so difficult for me to decipher.

    So do I fill in IHT400 form as if there is IHT to pay (according to the calculator)  or there's no IHT to pay as per 'Keep _pedalling' post above ?

    " £1M (2xNRB + 2xRNRB) which means there will be no IHT to pay. "
  • If you need to transfer the residence nil rate band then your second answer is incorrect,as Keep Pedalling has signposted
  • HUMBUG
    HUMBUG Posts: 327
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    edited 23 September 2023 at 10:10PM
    Here's another section of HMRC website which confused me about life insurance policy. My father has a life insurance policy for 14k for which I am the beneficiary, not a spouse or civil partner. Does that criteria apply to me?  Or when they say 'and also had an annuity'  mean it's not applicable?

    ----------------------------------------------------------

    When to send full details of the estate’s value even if no tax is due
    You’ll need to send full details of the estate, even if no tax is due, if the person who died:

    gave away over £250,000 in the 7 years before they died
    gave gifts then continued to benefit from them in the 7 years before they died
    left an estate worth more than £3 million
    was ‘deemed domiciled’ in the UK
    had foreign assets worth more than £100,000
    was living permanently outside the UK when they died but had previously lived in the UK
    had a life insurance policy that paid out to someone other than their spouse or civil partner and also had an annuity
    had increased the value of a lump sum from a personal pension to be paid after their death, while they were terminally ill or in poor health
    had agreed that property they’d given away during their lifetime would be part of their estate rather than pay a pre-owned asset charge
    -----------------------------------------------------------
  • poppystar
    poppystar Posts: 1,251
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    HUMBUG said:
    I think I have to complete IHT400 form but then it says:

    Fill in this form if the deceased died on or after 18 March 1986, and there’s Inheritance Tax to pay, or there’s no Inheritance Tax to pay, but the estate does not qualify as an excepted estate.

    -------------------------------
    What counts as an excepted estate
    An estate is usually an excepted estate if any of the following apply:

    its value is below the current Inheritance Tax threshold  --  No
    the estate is worth £650,000 or less and any unused threshold is being transferred from a spouse or civil partner who died first  ---- No 
    the deceased left everything to a spouse or civil partner living in the UK or to a qualifying charity and the estate is worth less than £3 million (search the charity register for registered UK charities) --- No 
    the deceased was living permanently outside the UK (a ‘foreign domiciliary’) when they died and the value of their UK assets is under £150,000   ---- No
    --------------------------------------

     The HMRC wording so difficult for me to decipher.

    So do I fill in IHT400 form as if there is IHT to pay (according to the calculator)  or there's no IHT to pay as per 'Keep _pedalling' post above ?

    " £1M (2xNRB + 2xRNRB) which means there will be no IHT to pay. "
    As you have correctly worked out it is not an excepted estate therefore you will need to do a full IHT400 return.

    Completing the return is the same whether iHT is due or not. The main form will guide you through the process. At the end you will find it then confirms no IHT is due. 
  • If you look at pages 5&6 on the IHT400 form you will see that you will have a lot of the supplementary forms to fill in.

    https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1164692/IHT400_English.pdf.

    One tip when you value the house make sure you get a professional valuation, and to avoid a CGT liability if selling, be cautious and value on the high side.
  • sheramber
    sheramber Posts: 18,608
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    HUMBUG said:
    Here's another section of HMRC website which confused me about life insurance policy. My father has a life insurance policy for 14k for which I am the beneficiary, not a spouse or civil partner. Does that criteria apply to me?  Or when they say 'and also had an annuity'  mean it's not applicable?

    If the policy did not have an annuity then it is not applicable.
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