Just starting to look at Inheritance Tax - a few question...

chubsta

Recently married at 58, no children, wife has 3 x children, my 'estate' would currently be worth £450,000 property + £70,000 cash. Her 'estate' would be £350,000 property, £185,000 cash.

Basically, I am just starting to look at Inheritance Tax and have a few questions as I seem to be getting a bit confused. This is all based around me dying, not her...

The 'standard rate' is no tax on first £375,000 of my estate then taxed at 40% above that so if I was single there would be (£525,000 - £375,000)x40% = £60,000.00 to pay, but as I am now married (and I know the 7 year rule thing but am ignoring that) then there would be nothing for my spouse to pay - is that correct?

Once I am gone her total 'estate' would be £800,000 in property and £255,000 in cash.

How best to deal with this in order to minimise any inheritance tax liabilities?

Keep_pedalling

Have you both made wills since you got married? If not that should be a priority.

If you die first are you planning to leave everything to your wife? If you do there will be no IHT on your death and your wife’s estate will only pay IHT on any amount over £1M.

If your wife dies first are you planning to leave anything to your step children? 

chubsta

Thanks for the reply...

If I die first I will leave everything to my wife unless there is a better financial option for her.
If she dies first then I will expect her to leave everything to her children.
Later when I die I would also leave everything to them - although only recently married we have been together 20 years so they are 'mine' in everything except genetics.

One of the main reasons I am asking is that we do need to both make wills as soon as possible - no illnesses in sight but still need to make sure everything is tied up 'just in case'. I am guessing we would be able to make separate wills where she leaves everything to her children should she die first, mine would be everything is left to her and then used/passed on as she sees fit.

My wife is 8 years younger than me and in better shape (I am a bit wrecked from working shifts in a very physical job for 40 years) so it is likely I will 'go' first so, basically, what I would hope to achieve is that everything goes to the her and then eventually the step-children, split evenly 3 ways, and with no tax being paid. 

BridgetTheCat

I’m not an expert but I have looked into IHT a bit for my parents.

Your basic calculations are correct, but there are some other things to consider:
1. Anything you leave to your spouse is exempt from IHT
2. Any unused portion of your tax free allowance also passes to your spouse (eg if you left 100k to your favourite niece or nephew, your wife would still have her 325k allowance plus 225k of yours)
3. Anything you leave to charity is also exempt 

As I keep telling my parents, the best way to avoid IHT is to spend your money while you’re still alive (down to the tax free threshold anyway). 

Nomunnofun1

chubsta said:

Recently married at 58, no children, wife has 3 x children, my 'estate' would currently be worth £450,000 property + £70,000 cash. Her 'estate' would be £350,000 property, £185,000 cash.

Basically, I am just starting to look at Inheritance Tax and have a few questions as I seem to be getting a bit confused. This is all based around me dying, not her...

The 'standard rate' is no tax on first £375,000 of my estate then taxed at 40% above that so if I was single there would be (£525,000 - £375,000)x40% = £60,000.00 to pay, but as I am now married (and I know the 7 year rule thing but am ignoring that) then there would be nothing for my spouse to pay - is that correct?

Once I am gone her total 'estate' would be £800,000 in property and £255,000 in cash.

How best to deal with this in order to minimise any inheritance tax liabilities?

£325000 not £375000. 

Keep_pedalling

chubsta said:

Thanks for the reply...

If I die first I will leave everything to my wife unless there is a better financial option for her.
If she dies first then I will expect her to leave everything to her children.
Later when I die I would also leave everything to them - although only recently married we have been together 20 years so they are 'mine' in everything except genetics.

One of the main reasons I am asking is that we do need to both make wills as soon as possible - no illnesses in sight but still need to make sure everything is tied up 'just in case'. I am guessing we would be able to make separate wills where she leaves everything to her children should she die first, mine would be everything is left to her and then used/passed on as she sees fit.

My wife is 8 years younger than me and in better shape (I am a bit wrecked from working shifts in a very physical job for 40 years) so it is likely I will 'go' first so, basically, what I would hope to achieve is that everything goes to the her and then eventually the step-children, split evenly 3 ways, and with no tax being paid. 

I would recomend that you make an appointment with a STEP qualified solicitor to make your wills. An immediate post death trust clause is likely to be appropriate for the marital home, especially for your wife’s will. Although statistically you are likely to go first there is no guarantee of that so wills need to cater for outside risks.

Between you, you have £1M and an estate slightly over that, so only a small potential IHT liability that you CAN deal with by making some cash gifts to your children. You just have to keep breathing for 7 years to make sure the gifts drop out of your estate. For a quicker solution you could always spurge some of your cash on yourselves.

You have already taken the biggest step to reducing your IHT liability by getting married, congratulations!

chubsta

A further factor we will need to take into consideration will be potential future inheritances from parents, altogether likely to be around £400,000 in total in property, but I always prefer to plan with ‘knowns’ rather than unknowns and will adjust when or if that should happen. 

Trouble is, we are both very good at living within our means so don’t really have anything to spend extra money on!

Jeremy535897

It is vital that you make wills as soon as possible, as any existing wills you both have are likely to be voided by your marriage (unless the earlier wills were made in contemplation of marriage). The intestacy rules are most unlikely to achieve what you want.
The first question is whether you both intend to keep the properties you individually own. If, for example, you both live in her property, it may well be inappropriate if the house is left to her children and she predeceases you. Have you both lived in both properties for a time as your residence? This may affect the residential nil rate band.

Albermarle

What pension provisions do you both have ?
From 2027 unused DC Pension pots will also be included in IHT calculations.

chubsta

I have a civil service db pension which I took early at 57, she has no pension but will receive a full state pension according to the modeller. It was always intended that the cash reserves she has would be her ‘pension’ but we don’t need it as I have done myriad projections based upon differing scenarios and none of them indicate we will ever be short of money. We seem to be in a position where we can maintain our lifestyles within our means going forward, to the point where I don’t see our cash reserves dwindling, or even if they did it would only be small amounts. 

We are also both in line for inheriting further properties from our parents but that is a further complication so don’t want think too much about that.
i never thought I would see the day where not having to worry about money means I need to worry about it…

Keep_pedalling

chubsta said:

A further factor we will need to take into consideration will be potential future inheritances from parents, altogether likely to be around £400,000 in total in property, but I always prefer to plan with ‘knowns’ rather than unknowns and will adjust when or if that should happen. 

Trouble is, we are both very good at living within our means so don’t really have anything to spend extra money on!

You could always make a deed of variation to pass any inheritance on to the next generation which would prevent those inheritances entering your estates.