Marital Home IHT Exeption Still Apply If Estate Varied To Son?

woodbine66

Current IHT rules state that if a marital home passes to the surviving spouse/partner, it is free of inheritance tax. If some or all of the value of that house was varied in a deed of variation to a son, is the house's value still free of IHT? Or does HMRC consider that as some or all of the houses's value is no longer passing directly to the surviving spouse/partner, it is liable for IHT?

Thanks in advance for anyone who can answer this question.

Keep_pedalling

Making a DoV to shift an inheritance from a spouse to someone else is rarely a good idea. Yes this would subject to IHT although no IHT may be payable as the variation may not use up the NRB exemptions. The other issues would be setting up a CGT liability in the future and if the son does not already own their own home they will lose their first time buyer status and would have to pay additional  SDLT on any purchase they make.

Also if they owned the home as joint tenants the house will automatically pass to the surviving spouse so does not form part of his heritable estate so a DoV is not going to be possible. 

What are you trying to achieve here?

Marcon

Keep_pedalling said:

Making a DoV to shift an inheritance from a spouse to someone else is rarely a good idea. Yes this would subject to IHT although no IHT may be payable as the variation may not use up the NRB exemptions. The other issues would be setting up a CGT liability in the future and if the son does not already own their own home they will lose their first time buyer status and would have to pay additional  SDLT on any purchase they make.

Also if they owned the home as joint tenants the house will automatically pass to the surviving spouse so does not form part of his heritable estate so a DoV is not going to be possible. 

OP's wording (either by design or accident!) is clear that they are asking about the value of the house, NOT the actual house, which I think might alter your answer - and might actually complicate things even more, since it won't be a direct descendant inheriting (part) of the house.

Keep_pedalling said:

What are you trying to achieve here?

Quite. OP...?

woodbine66

Apologies for my very late reply. I can now see that varying the part of an estate that consists of the marital home transferring wholly to one spouse on the death of the other wouldn't work. I'll outline the situation and see if there is another way to minimise IHT liability in the estate - poss again with a deed of variation.

My father is 91 and terminally ill in hospital. Main assets between my parents are marital home value £435,000 in joint names, father's £100,000 savings in his sole name and rental property in his name only valued £400,000. My mother is almost 89 and will inherit everything.

Alternative/latest updated plan is -

We're considering a DOV following my father's imminent death, so that my mother holds the minimum in cash and assets above the IHT threshold when she eventually passes away in the future. Our thinking is that if my mother inherits all of my father's estate and keeps everything in her name (ie. no DOV in place), when she dies, everything in her estate will be taxed a second time as it passes to me and my brother. 

If alternatively she keeps, for instance only the marital home and everything else is varied to me and my brother - when she passes away there will be very little in her name above the IHT threshold to tax.

I hope all of the above makes sense. Please tell me if anything is wrong or unwise, or if you have any alternative suggestions or thoughts. All advice gratefully received.

poppystar

Are you taking into consideration that with her own NRB and your father’s plus the residential NRBs of both it means there would need to be more than  £1m before IHT kicks in on the second passing?  With the figures you’ve given it would seem unlikely there would be any IHT due on either death as it currently stands. A DoV would make the situation worse in that case. 

bobster2

woodbine66 said:

If alternatively she keeps, for instance only the marital home and everything else is varied to me and my brother - when she passes away there will be very little in her name above the IHT threshold to tax.

Well that would be because your father's estate would have paid IHT already on various assets. Approx £70k IHT on estate consisting of £400k rental property and £100k savings. There could end up being no IHT if these passed into your mothers ownership first - as @poppystar describes.

However, given your mothers age - she could need some of those savings, or income from or sale of the rental property to fund her care needs.

Disposing of those assets through a deed of variation would be inadvisable and could be viewed as deliberate deprivation of assets.

RAS

Does dad have a will leaving everything to mum? If so, best leave it that way as it will all transfer without an IHT liability on his death. 

The sums you quote mean that under current regulations, mum's estate is likely to be under £1M anyway, so no IHT to pay on her death either. 

What you really need to get your head round urgently is the rules round being a landlord, as mum inherits all the legal responsibilities for that and has to comply with the rules, even if she uses an agent to manage it. She will need probate to transfer the properties to her. 

I'd suggest going over to the housing buying  renting and selling subforum to check on the responsibilities of the executors before probate and mum when it is granted. Not least informing the tenants as otherwise legally rent does not have to be paid.

Keep_pedalling

Your scheme is utterly pointless and will leave your mother asset rich and cash poor which is a horrible situation to be in when you are elderly.

Under the current rules there will be no IHT on your father’s death because of spousal exemption and none on your mother’s death because her total assets (£935k) are covered by her NRB and RNRB plus the transferable NRB’s from your father’s estate. 

All a DoV will do is remove most of your mother’s liquid assets and take away some of your father’s transferable NRB from her estate. If the rules don’t change that will be tax neutral, but one of the changes that may come about to IHT in the budget is the simplification of the NRB system which could see the RNRB scrapped and the NRB increased so that everyone gets £500k not just those who own their own homes and have children. If you did a DoV that lost 25% of the transferable NRB before such a change came in it would have a negative tax implication because 25% of £500k is considerably higher than it is on £325k 

woodbine66

poppystar said:

Are you taking into consideration that with her own NRB and your father’s plus the residential NRBs of both it means there would need to be more than  £1m before IHT kicks in on the second passing?  With the figures you’ve given it would seem unlikely there would be any IHT due on either death as it currently stands. A DoV would make the situation worse in that case. 

Thanks for your reply. Can you tell me how these exemptions/thresholds work please in his case? Ie. marital home of £435,000, other property of £400,000 and approx £100,000 cash.

I was lead to believe that the marital home passed to spouse IHT free, and anything over £325,000 of the remaining estate was taxable. It appears there may be more/bigger exemptions that I'm not aware of.

Could you also explain how my mother's estate would pass to my brother and I on mother's death free of IHT?

woodbine66

RAS said:

Does dad have a will leaving everything to mum? If so, best leave it that way as it will all transfer without an IHT liability on his death. 

The sums you quote mean that under current regulations, mum's estate is likely to be under £1M anyway, so no IHT to pay on her death either. 

What you really need to get your head round urgently is the rules round being a landlord, as mum inherits all the legal responsibilities for that and has to comply with the rules, even if she uses an agent to manage it. She will need probate to transfer the properties to her. 

I'd suggest going over to the housing buying  renting and selling subforum to check on the responsibilities of the executors before probate and mum when it is granted. Not least informing the tenants as otherwise legally rent does not have to be paid.

Unfortunately I don't know if he has a will. He's quite private and very controlling. Doesn't get on with my mother although still married and under same roof. He has dementia and alzheimers and wasn't aware of our presence last two hospital visits.

Keep_pedalling

woodbine66 said:

poppystar said:

Are you taking into consideration that with her own NRB and your father’s plus the residential NRBs of both it means there would need to be more than  £1m before IHT kicks in on the second passing?  With the figures you’ve given it would seem unlikely there would be any IHT due on either death as it currently stands. A DoV would make the situation worse in that case. 

Thanks for your reply. Can you tell me how these exemptions/thresholds work please in his case? Ie. marital home of £435,000, other property of £400,000 and approx £100,000 cash.

I was lead to believe that the marital home passed to spouse IHT free, and anything over £325,000 of the remaining estate was taxable. It appears there may be more/bigger exemptions that I'm not aware of.

Could you also explain how my mother's estate would pass to my brother and I on mother's death free of IHT?

First off anything left to a spouse is exempt from IHT regardless of how much. If everything is left to a spouse then none of their NRB is used and can be transferred to the surviving spouses estate on their death, giving a total exemption of £625k.

In addition where a home is passed to direct descendants each parent has a residential NRB of £175k which is also transferable giving a total exemption on the second death of £1M.