IHT exemptions

climber732

A question [simplified to keep the maths easy!]

I am married. I have two friends to whom I would like to leave a legacy. My estate is valued at £2m.

If, in my will, I leave £1m to my wife and £0.5m to each of my two friends, then what IHT is due? The official guide says that none is due if the entire estate [above to £325k allowance] is left to a spouse, but I’m not leaving the entire estate to my wife, only half of it.

MX5huggy

£1m to wife is IHT free. 

£1m to Friends is subject to IHT with the first £325000 Nil Rate Band so £270000 (40%) due on the rest. 

What does the wife think of this plan? Does it involve the family home? Forcing her to sell to pay these friends would be a cruel thing to do. You can arrange things so she gets it all while alive and then it goes to friends after her death. 

climber732

She’s completely happy with the idea, and would want our friends to benefit after my death and not to have to wait for hers. The two £0.5m legacies would come from savings that are in my name and wouldn’t involve selling anything.

So, to summarise, anything left to a spouse is IHT-free. Anything left to a non-exempt person is liable to IHT [with the £325k allowance]?

It would seem that the best course is simply to leave everything to my wife so that she can then make the gifts. I totally trust her to do this. Then, as long as she survives seven years, no IHT is due. But would there be any other tax implications for her?

Secret2ndAccount

All bequests to wife are free of IHT. Gifts to anyone else start eating up the 325k allowance, and beyond that the estate is responsible for 40% tax on the rest.   In the example you gave, IHT would be due on 1m-325k = 675k. That's 270k tax. So do Fred and Jim only get 365k each, or does your wife only get 730k, or ...?  
If your wife were to die first and leave everything to you, you would also get her 325k allowance. Whatever allowance is not used up by the distributions on first death is passed to the spouse for their estate's use on 2nd death.
Agreed, care is needed in writing the will here. Decide whether you want make fixed gifts, or percentages of the estate. Be clear about who pays the IHT - it comes from the estate, so who gets less than their stated share? Is the £2mil likely to grow, or decrease? If it's not £2m at time of your dearth who gets a fixed sum, and who gets extra or less?  Possibly leave 700k to your wife, then split the rest 3 ways? Need to consult a STEP solicitor and go through all the possibilities.

squirrelpie

If you're sure about your plan and you don't need the money, you could give say £350k to each friend now and hope to survive another 7 years so it is excluded from the IHT assessment. That reduces the tax liability on your death. If you died soon after you made the gift, you would still have enough cash in the estate to pay the IHT. If you die after seven years, there's no inheritance tax to pay.

QrizB

Gift £500 k to your wife today, then each of you gift £250k to each of your friends tomorrow. If you both survive for another 7 years there's no IHT, if one of you passes before then you're only going to be liable for IHT on £175k.

Marcon

Have asked for this to be moved to a more appropriate board: https://forums.moneysavingexpert.com/categories/deaths-funerals-probate

climber732

Thanks everyone. That has clarified things considerably.

Keep_pedalling

If you died tomorrow with everything going to your wife, what would the value of her estate be?

squirrelpie

QrizB said:

Gift £500 k to your wife today, then each of you gift £250k to each of your friends tomorrow. If you both survive for another 7 years there's no IHT, if one of you passes before then you're only going to be liable for IHT on £175k.

If the OP dies the day after tomorrow, there'll be the full IHT to pay.

Keep_pedalling

squirrelpie said:

QrizB said:

Gift £500 k to your wife today, then each of you gift £250k to each of your friends tomorrow. If you both survive for another 7 years there's no IHT, if one of you passes before then you're only going to be liable for IHT on £175k.

If the OP dies the day after tomorrow, there'll be the full IHT to pay.

Which could be covered by 7 year term insurance if the OP is in good health and not too ancient.