Inheritance Tax

JSL_2

With DC Pension Pots due to be in your estate and Inheritance tax in 2027, I'm not clear how the allowances work ?
As I understand everyone has allowance of 325k plus 175k of house value = 500k
Am I Correct in thinking that on first death of a married couple, the surviving spouse does not pay inheritance tax ?  
Also the surviving spouse inhertits the allowances of their partner thus making the allowance of One Million on the second death, before inheritance is due . 650k Allowance + 350k on House Value.
So Children would not get hit with Inheritance Tax if house value and assets are under 1m on second death. ?

Keep_pedalling

Not everyone gets the additional £175k RNRB only those who have direct descendants or adopted children have that, but yes if you meet that criteria you have up to £1M of exemptions. You home would have to be worth £350k or more to get the full £1M otherwise it’s £650 + the value of your home.

We don’t know the full details of IHT on pensions but it is unlikely that they would not get spousal exemption that other assets currently get, something that unmarried couples need to take note of. 

daveshep26

JSL_2 said:

With DC Pension Pots due to be in your estate and Inheritance tax in 2027, I'm not clear how the allowances work ?
As I understand everyone has allowance of 325k plus 175k of house value = 500k
Am I Correct in thinking that on first death of a married couple, the surviving spouse does not pay inheritance tax ?  
Also the surviving spouse inhertits the allowances of their partner thus making the allowance of One Million on the second death, before inheritance is due . 650k Allowance + 350k on House Value.
So Children would not get hit with Inheritance Tax if house value and assets are under 1m on second death. ?

You are generally correct in your understanding - but exactly how parts of the mechamism work (residential allowance) may mean it's not universally true;
Spousal exemption is absolute - unlimited -and
You can transfer remaining allowances (from 1st death) onto spouse/ civ partner, etc..;
The Residential Nil Rate Allowance is the value of property - up to max. level of 175k pp - ie 350k for couple; If the property was only 250k, then the couple's aggregate allowance to descendants would only be 605k + 250k - ie £900k total - Obv -then - if house is >350k, your statement is completely correct!
(!! - bY current rules - as @keep_pedalling notes some changes may arise DC pensions/ IHT regime change)

HTH

saramck

I think I understand but have a fairly unusual complication.  My husband and I own a leasehold house in a retirement community. It is currently valued at £650,000.  However, all properties in the village have to pay 10% of their sale price to our Landlords.
Do our children have to pay any 40% tax on the whole amount or the amount remaining after they have paid out the 10% after it is sold?
Anyone know?
Thanks.

DRS1

Can you actually leave such a house to your children?  Aren't there restrictions on who can own it?

Also you don't say what the value of the rest of your estate would be.

Albermarle

With DC Pension Pots due to be in your estate and Inheritance tax in 2027,

Although the rules are not yet finalised, it has never been proposed ( not yet anyway) that unused pension pots will actually be part of your estate, only that their value will be included in IHT calculations.
They will still be held in trust, and you will still have a separate Expression of Wishes form, and as now they should not be included in your will.
Exactly how it will all work in practice between the executors of the estate and the pension trustees could be complicated, and is as far as I know still being discussed/consulted on.

Aretnap

saramck said:

I think I understand but have a fairly unusual complication.  My husband and I own a leasehold house in a retirement community. It is currently valued at £650,000.  However, all properties in the village have to pay 10% of their sale price to our Landlords.
Do our children have to pay any 40% tax on the whole amount or the amount remaining after they have paid out the 10% after it is sold?
Anyone know?
Thanks.

Inheritance tax is based on the size of the estate at the time if death. Debts which are actually owed by the deceased at the time of death can be deducted from the value for IHT purposes - but not costs of dealing with the estate incurred after death.

This means that costs of selling a house such as estate agent fees, solicitors fees etc don't reduce the amount of tax that is payable; I'd assume that the same is true of a wallet inspection fee imposed by the freeholder.

(10%? Ouch! That feels like it confirms every prejudice I have about the business models of retirement communities.)

(Also, for clarity, inheritance tax is not payable on the "whole amount", just the amount over the relevant thresholds. If the combined value of your estates is £1,001,000 and you have the full nil rate bands, the amount of tax payable is £400, not £400,400.)

(Also, inheritance tax is paid by the estate, not by the beneficiaries. Your children won't have to pay anything, unless they actually want to own a flat in a retirement community. Assuming they don't, the executors will sell the flat, pay any inheritance tax and any other fees due out of the proceeds, then send your children cheques which are slightly smaller than they would have been had IHT not been payable.)

Fermion

Albermarle said:

With DC Pension Pots due to be in your estate and Inheritance tax in 2027,

Although the rules are not yet finalised, it has never been proposed ( not yet anyway) that unused pension pots will actually be part of your estate, only that their value will be included in IHT calculations.
They will still be held in trust, and you will still have a separate Expression of Wishes form, and as now they should not be included in your will.
Exactly how it will all work in practice between the executors of the estate and the pension trustees could be complicated, and is as far as I know still being discussed/consulted on.

Thanks Albermarle - I hadn't realised that. 
However it does raise an interesting question for couples in some scenarios.
Lets say for example with the following assets on 2nd death:-

Property                           £1,000,000
Other Assets (Isas  etc)       £700,000
Residual Pension Pot      £1,300,000
Total                                 £3,000,000

Leaving 10% of the residual taxed estate to Charities means the IHT is reduced to 36% however as the total estate is £3,000,000 I think  RNRB will be zero. Hence tax free allowances are £650,000

Hence £2,350,000 will be subject to IHT at 36% = £846,000 
Estate Gifts to Charities (10%) will be £150,400
Therefore Total estate liabilities, prior to distribution, are £996,000 - this is a big number, leaving Executors with a requirement to either sell the property or liquidate some of the pension pot assets to fund tax/charity liabilities

Possibly not a problem if the Gov allows ultimately a tax free withdrawals solution  from the Pension Pot to pay HMRC or Charities, but a real issue if they insist that the beneficiaries pay tax at their marginal rate. 

Sounds like a minefield to me

LL_USS

Hi, I hope the OP doesn't mind I ask a related question here instead of starting a new thread.

This is regarding claiming for the deceased spouse's unused nil-rate band (NRB).

I have looked on the gov's website https://assets.publishing.service.gov.uk/media/61b753cde90e07043e8ff582/IHT217.pdf to see that the surviving partner has to make this claim within 2 years after the spouse's pass. Our asset value would be quite small at the time.

I did not realise this and it has been over a decade; I have also created a bit of value in my asset now and I am planning how to pass on some of this to our two (almost adult) children. Now I realise I can only have a £500 allowance (325+175 main residence relief) and if something happened to me, my estate value to be used for IHT calculation would be over this amount. I do not have any way to backdate and get the unused NRB from the deceased spouse right?

Triumph13

The deadline is 2 years after the SECOND death.  'The deceased' in these forms always refers to the person whose death you are dealing with now, not the previously deceased spouse.

LL_USS

Triumph13 said:

The deadline is 2 years after the SECOND death.  'The deceased' in these forms always refers to the person whose death you are dealing with now, not the previously deceased spouse.

@Triumph13 oh really? I think I saw something along the line with what you said somewhere but did not understand that. I am reading the form again and can see that now too.

Such a relief. Thank you so much. For a couple of years I have been quite unhappy thinking how I missed that information and missed the two years' deadline. So good to know.

So when my late husband passed away a while ago as his spouse I took over the whole asset - there is still an unused NRB (325+175 main residence).Then if I passed away then I would have my own NRB (325+175 main residence).This means in total my children would still have up to a million in NRB as long as they fill in the form and claim for the unused NRB within the two years after the second death (so gloomy talking about these scenarios)!

I should have little to worry about the IHT that my children would have to deal with then ;-)