Inheritance Tax Question – NRB and transfer to spouses estate

sprucepilot

I am executor for my father in law who died in May 2024 and also his wife who died in July 2024.

Tax planning gifts of more than the NRB (£325000) were made by the wife alone to her children in the 7 years before her death and will result in PET’s with taper relief which will use up the whole of her NRB.

The wife had other assets, excluding her personal residence in her sole name which is worth £350000 and covered by her RNRB and the RNRB of her late husband.

At the date of the husband’s death his will left all his assets to his wife so there is his £325000 NRB available to be transferred to his wife’s estate. We know we can make a variation of the will within 2 years of his death to transfer his assets direct to his children rather than passing to his wife and then to his children on her death.

My question relates to the husband’s unused NRB.

His wife used all of her NRB with the gifts made to her children within 7 years of her death. As the wife’s gifts within the 7 years were more than £650000 and there are other assets, apart from her residence which is covered by the 2 x RNRB, worth more than £325000. If the husband’s NRB is transferred to the wife’s estate on her death does this mean that her PET’s above her NRB are offset by both her NRB and the husband’s NRB or can the husband’s NRB be ring fenced and set against her other assets which were not subject to her lifetime gifts as he himself made no lifetime gifts?

Neale_C

If your father-in-law's wife's deceased husband left all assets to his at the time wife, she will have had nil rate band of £650k, as well as a residence nil rate band of up to £350k.

I am not a legal or tax expert, but my understanding is that lifetime gifts (PETs) will use up the nil rate band before any transfers that happen on death. 

You mention taper relief, but remember this applies to the tax, not to the value of the PET.

This seems like a tricky situation, and I'd recommend getting an expert involved. Their fees could be dwarfed by the amount of tax they could save you.

poseidon1

sprucepilot said:

I am executor for my father in law who died in May 2024 and also his wife who died in July 2024.

Tax planning gifts of more than the NRB (£325000) were made by the wife alone to her children in the 7 years before her death and will result in PET’s with taper relief which will use up the whole of her NRB.

The wife had other assets, excluding her personal residence in her sole name which is worth £350000 and covered by her RNRB and the RNRB of her late husband.

At the date of the husband’s death his will left all his assets to his wife so there is his £325000 NRB available to be transferred to his wife’s estate. We know we can make a variation of the will within 2 years of his death to transfer his assets direct to his children rather than passing to his wife and then to his children on her death.

My question relates to the husband’s unused NRB.

His wife used all of her NRB with the gifts made to her children within 7 years of her death. As the wife’s gifts within the 7 years were more than £650000 and there are other assets, apart from her residence which is covered by the 2 x RNRB, worth more than £325000. If the husband’s NRB is transferred to the wife’s estate on her death does this mean that her PET’s above her NRB are offset by both her NRB and the husband’s NRB or can the husband’s NRB be ring fenced and set against her other assets which were not subject to her lifetime gifts as he himself made no lifetime gifts?

You first need to be aware of a few  guiding principles:

1) The nil rate band at death including any transferable nil rate band is used to calculate iht in strict chronological order. So in the case of failed PETs, the earliest PETs use NRBs first ( ie first in, first out).  By the way this point might scupper your assumption that some of the gifts benefit from taper relief.

2 ) With the above principle in mind,  tax on failed PETs in excess of NRB/s will be taxed at 40% (subject to taper relief if any) and it is the recipient of the failed ( taxable ) PET who is primarily responsible for paying the tax.

3) The residence nil rate band cannot be used to shelter failed PETs. In this regard you intimated the wife had a property at death so both RNRBs would be applied to it in calculating the tax related thereto.

Having regard to the above I can see no benefit in a DOV of the father's Will to 'ring fence' his  NRB to divert assets inherited by the mother in favour of the children. That would only serve to increase the tax exposure on the beneficiaries of the failed PETs in 2) above.

I would suggest that time is now devoted in listing in chronological order the recipients of the failed PETs which you say exceed £650k to determine  and quantify which of them will have a personal IHT liabilty on their gift, and whether they have the resources to pay without immediate recourse to their presumptive share of the Residuary estate.
In preparing the schedule for the previous 7 years gifting, do not overlook the wife's annual £3000 gifts exemption if she did not knowingly deploy it when making her gifts.


Other contributors to this thread may have further observations that I may have overlooked.

Keep_pedalling

I agree a DoV is of no help here. When were these gifts actually made? The taper relief clock only starts ticking once you have gifted over £325k, so if for example gifts of £650k were made 5 years ago half of that would get TR, if on the other hand if gifts of  £325k were made 5 years ago and £325k 2 years ago TR would not apply.

Albermarle

Keep_pedalling said:

I agree a DoV is of no help here. When were these gifts actually made? The taper relief clock only starts ticking once you have gifted over £325k, so if for example gifts of £650k were made 5 years ago half of that would get TR, if on the other hand if gifts of  £325k were made 5 years ago and £325k 2 years ago TR would not apply.

Would not the fact that the wife had inherited her husbands £325K NRB, affect the above calculations?

sprucepilot

Thanks for all this information.

All the gifts were made 6 years ago so my understanding is that they will all qualify for TR and will use up all of either the wife's NRB or if she inherites the husband's NRB as well then both NRB's. In either case tax on any assets in addition to the gifts - excluding the personal house which is covered by the RNRB's - would be at 40%. so in reality there is no benefit of inheriting the husband's NRB and it may be better used through a DoV to pass his assets direct to his children rather than via his deceased wife's estate. Thoughts on this aspect would be apprciated.

Another question: I know that interest is charged on any IHT due if not paid within 6 months of the death. What happens with the tax on the gifts where the recipient is responsible for the tax. Do they have to pay the tax due within 6 months of the death or do other provisions apply?

Albermarle

Just for clarity, as it is an often misunderstood point. I will use an example ( sorry if you already fully understand this but many people do not)

Single person makes a gift of £100K, but dies 6 years and 11 months after making it. The gift is 100% counted back into their estate. There is no taper relief.

It only applies if the gift is over the NRB, and only applies to the portion above the NRB. 

poseidon1

sprucepilot said:

Thanks for all this information.

All the gifts were made 6 years ago so my understanding is that they will all qualify for TR and will use up all of either the wife's NRB or if she inherites the husband's NRB as well then both NRB's. In either case tax on any assets in addition to the gifts - excluding the personal house which is covered by the RNRB's - would be at 40%. so in reality there is no benefit of inheriting the husband's NRB and it may be better used through a DoV to pass his assets direct to his children rather than via his deceased wife's estate. Thoughts on this aspect would be apprciated.

Another question: I know that interest is charged on any IHT due if not paid within 6 months of the death. What happens with the tax on the gifts where the recipient is responsible for the tax. Do they have to pay the tax due within 6 months of the death or do other provisions apply?

Yes the 6 month post death requirement to pay IHT applies to PETs also,  per link below. Interest will run thereafter.
If still not paid within 12 months, HMRC will pursue the estate executors. So as previously advised the sooner each beneficiary knows their respective liabilities the better.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm30152