Inheritance tax liability

Live-and-learn
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edited 26 January at 4:47PM in Cutting tax
This thread was prompted by the article on inheritance tax dated 11th January 2024 (Inheritance tax: latest thresholds for 2023/24 - MoneySavingExpert).

I am the eldest of 4 siblings and our dad is currently 92.  We lost mum in 2019 and dad has found himself another lady that he would like to marry.  She is from the Philippines and she is currently here on a visitor visa until March.  My dad would like to return with her in March and marry her there, before applying for the more tricky marriage visa to bring her here permanently.

Dad has a 3 bed detached house which is pretty much his only asset aside from say £20,000 in cash.  This house has a huge garden but is run down in every way.  To get it even close to its maximum value would require gutting it and replacing all three bathrooms and the kitchen as a minimum.  I suspect that it's maximum value could be around £600,000 but that in its current state it would be more like £500,000 or less.

Dad wishes to leave the house to us siblings, such that the new wife would only receive anything other than the house.

As dad plans to remarry, he/we have been looking at him making a new will.  The solicitor doing that informed us that a will alone will not cut it and that a pre-nuptial agreement would be required.  This actually means two new (contract) solicitors, one to represent him and one to represent her.  Anticipated costs of this appear to be north of £5000.

Even with the pre-nup agreement, we understand that dad would also require a type of will that acknowledges his intention to be married at some known time in the future, so that its contents will be valid after he is married.

So staying with the house as the main subject of this post, it seems to me that there are just two options available to us:

1) For dad to have his pre-nup agreement written that would state that in the event of his death, the house would go to his children and not default to his new wife

2) For dad to gift the house to his children and use a new will to split up the remainder as he wishes

Option 1
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In this case, following dad's passing (at some point after his marriage), the house would come to us children and (I think) inheritance tax would then be payable by the children on any amount yielded above £500,000.

As at least two of us siblings would not be able to afford to pay any inheritance tax without selling the house, it seems likely that the house would have to be sold.

In the above case, what would happen if the house did not sell for 8 months or a year.  Presumably, HMRC would be baying at the door wanting any taxes due?  Would they be placated by the fact that the house was being actively marketed or what?

Option 2
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One thing that is attractive to dad (and us siblings) is that the cost of getting the pre-nup agreement done would be eliminated with this option.  Dad does not have massive cash balances and much of them would be eaten by such an agreement.

In this case, I believe things are a little more complicated as the 7 year rule will apply.  The house would come to us children in the near future (and before dad's passing and marriage) and  inheritance tax would then be payable by the children on any amount yielded above £325,000 (according to the sliding 7 year rule). 

If dad was to live longer than the 7 years, would zero inheritance tax be due, even if the house yielded more than £325,000 (or even £500,000 see question below).  

No matter how long dad remains with us, after him gifting the house, is it correct that we would not be liable for any inheritance tax due until he actually did die?

Note: There is no mention in the section on gifting and the 7 year rule, about the £325,000 allowance being extended to £500,000 if the house was gifted to the offspring.  Does the extra allowance still apply to this option of gifting?

As I mentioned in option 1, at least two of us siblings would not be able to afford to pay any inheritance tax without selling the house, so it seems likely that the house would have to be sold asap and again, my question relating to what if the house did not sell for 8 months or a year comes up.

As regards selling the house, can the expenses of same be deducted from the sale price before calculating the inheritance tax?

Apologies for the long post.  I hope my questions are clear.  Happy to elaborate if not.
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Comments

  • Keep_pedalling
    Keep_pedalling Posts: 16,121
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    Assuming your mother and father were married at the time of her death and that he inherited her estate you father’s estate actually has up to £1M of exemptions because you mother’s NRB and residential NRB are transferable to his estate. 
  • uknick
    uknick Posts: 1,595
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    Is the prenuptial something to do with the Philippines and their inheritance laws?
  • p00hsticks
    p00hsticks Posts: 12,573
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    A few points
    Re option 1. I'm not sure that a pre-nuptial agreement would necessarily prevent any new wife who is financially dependent on your father from challenging a will that did not sufficiently provide for her, as I don't think pre-nuptual agreements are legally binding in England & Wales. 

    Re Option 2. If your father is intending to remain living in this property (with or without his wife to be) then unless he pays you a market rent then the gift is a 'gift with reservation of benefit' and would not remove it from his estate for IHT purposes .
    The gift also has other potential drawbacks; Unless you also live in the property you are building up a potential CGT liability from the point at which the gift is made until the property is eventually sold.
    From your fathers point of view, he also runs the risk of being made homeless if any of his children go bankrupt or get  divorced and creditors or divorcing spouses then try to force the sale of the property to release the finances.

    As Keep_pedalling points out, it may well be that your father has sufficient allowances availalble to him for IHT not to be a consideration on an estate of the size you describe. 
  • lincroft1710
    lincroft1710 Posts: 17,439
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    The term is "prenuptial agreement" for a reason. There has to be an agreement between both parties. The prenup you have outlined seems to leave the bride to be without anything when she becomes a widow, so her solicitor may well advise her not agreeing..


    Regarding the spousal visa, will your father's income be sufficient to meet the criteria
    If you are querying your Council Tax band would you please state whether you are in England, Scotland or Wales
  • Live-and-learn
    Live-and-learn Posts: 11
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    edited 28 January at 2:21PM
    The term is "prenuptial agreement" for a reason. There has to be an agreement between both parties. The prenup you have outlined seems to leave the bride to be without anything when she becomes a widow, so her solicitor may well advise her not agreeing..


    Regarding the spousal visa, will your father's income be sufficient to meet the criteria

    My dad's income for visa sponsor purposes is indeed another issue that I do not yet know how to solve.  One option would be for him to sell the house himself (now), so that he could meet the liquid cash requirement as a sponsor (which from Spring this year will likely be at least £88,500 by my calculation).  Of course, if he did that, he would have to buy or rent something else and that would be a huge decision for him (and further delay).

    Thanks for the comments.
  • uknick said:
    Is the prenuptial something to do with the Philippines and their inheritance laws?

    No it isn't.  The concern is that if dad marries (any person) while there is no pre-nuptial agreement in place, then the new wife will essentially inherit everything.
  • Live-and-learn
    Live-and-learn Posts: 11
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    edited 28 January at 2:26PM
    The term is "prenuptial agreement" for a reason. There has to be an agreement between both parties. The prenup you have outlined seems to leave the bride to be without anything when she becomes a widow, so her solicitor may well advise her not agreeing..


    Regarding the spousal visa, will your father's income be sufficient to meet the criteria

    Agreed.  This is something I understand and have thought about too.  However, let's not forget that right now, she has zero assets and pretty much zero cash, so if her side of the agreement was simply to inherit dad's cash reserve at time of death, it would still be more money than she has ever had in her hands.  Surely her solicitor would have to take account of that.  If not, then something drastic would need to be done because even before meeting this lady, dad always said that the house belonged to the family and would come to us.
  • A few points
    Re option 1. I'm not sure that a pre-nuptial agreement would necessarily prevent any new wife who is financially dependent on your father from challenging a will that did not sufficiently provide for her, as I don't think pre-nuptual agreements are legally binding in England & Wales. 

    Re Option 2. If your father is intending to remain living in this property (with or without his wife to be) then unless he pays you a market rent then the gift is a 'gift with reservation of benefit' and would not remove it from his estate for IHT purposes .
    The gift also has other potential drawbacks; Unless you also live in the property you are building up a potential CGT liability from the point at which the gift is made until the property is eventually sold.
    From your fathers point of view, he also runs the risk of being made homeless if any of his children go bankrupt or get  divorced and creditors or divorcing spouses then try to force the sale of the property to release the finances.

    As Keep_pedalling points out, it may well be that your father has sufficient allowances availalble to him for IHT not to be a consideration on an estate of the size you describe. 

    Oh - I had not read that pre-nups may not be valid in England.  Thanls for the pointer.

    Thanks for the other points to.  i was sort of peripherally aware of them but they are indeed relevant.
  • Assuming your mother and father were married at the time of her death and that he inherited her estate you father’s estate actually has up to £1M of exemptions because you mother’s NRB and residential NRB are transferable to his estate. 

    Oh my!  I had not considered that.  My mum and dad were married 50 odd years and they were certainly married when she died in 2019.  Does that mean that dad still has her exemption amount?
  • Albermarle
    Albermarle Posts: 20,994
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    Assuming your mother and father were married at the time of her death and that he inherited her estate you father’s estate actually has up to £1M of exemptions because you mother’s NRB and residential NRB are transferable to his estate. 

    Oh my!  I had not considered that.  My mum and dad were married 50 odd years and they were certainly married when she died in 2019.  Does that mean that dad still has her exemption amount?
    He will have her nil rate band of £325K, £650K in total.
    Then if he leaves the house to his children, he will have two times the £175K nil rate band as well. So One Million Pounds in total.
    Be aware there is always a lot of chatter about IHT in the politics area, so things can change.
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