I have never married and live with my 92-year-old mother, whom I care for. The house we live in is mortgage free, worth about £500,000 and is in my mother’s sole name since my father’s passing over 20 years ago. Her will requests that the house is left to me. I have modest savings, but a friend told me that on my mother’s passing I might need to sell the house to pay a large inheritance tax bill. Is this correct and, if so, can I do anything now to remain in the property?
Merry Abbott, a solicitor in the London office of law firm JMW, says inheritance tax (IHT) is something many people worry about as they and close relatives get older.
Broadly speaking, there are two allowances to keep in mind that can affect your mother’s estate. First, the nil-rate band, which is the threshold above which IHT is payable on an estate. An individual’s estate will benefit from up to £325,000 IHT-free depending on whether they have made significant gifts during their lifetime which could reduce the amount available.
The second factor to consider is the residence nil-rate band. This can be used on estates where an individual’s main home is passing to their children or grandchildren. The allowance is £175,000 for the 2022-23 tax year and is available to individuals whose estates do not exceed £2mn. The next review for the tax-free thresholds will be in 2026, meaning that the £325,000 nil-rate band and £175,000 residence nil-rate band are frozen until then.
Unless your mother owns other assets of significant value, for example large cash reserves, shares or other properties, it is likely that your mother’s estate will benefit from both the nil-rate band and the residence nil-rate band, giving her estate a tax-free allowance of £500,000.
You mention that your father passed away some time ago. If an individual dies leaving their entire estate to their spouse or civil partner, no IHT will be due because of the spouse exemption to IHT.
Additionally, if a spouse or civil partner does not use all their available tax thresholds then any unused part can be passed to their surviving spouse. It sounds like your father left his estate to your mother, potentially also leaving with it his tax-free thresholds. This means that your mother’s estate may well have use of up to £1mn in tax-free allowances and it will be unlikely that IHT will be charged on her estate.
Subject to the above, if tax is due on your mother’s death. HM Revenue & Customs’ rules dictate that tax on properties can be paid in equal annual instalments over 10 years. The first instalment is always due at the end of the sixth month after an individual has died and subsequent payments are due every year on that date thereafter. HMRC allow this in recognition of the fact that it is not always possible to sell a property immediately after an owner has died.
Families in your situation may well consider whether gifting the property from parent to child would help to mitigate future taxes. Gifting a property from a parent to a child, where the parent intends to continue living in the property, will not remove the value of the property from the parent’s estate for IHT purposes unless the parent pays a market rent to their child as the owner of the property. If this is something you are considering, you should seek thorough legal and tax advice before entering such an arrangement due to the complexities involved.
Will my late husband’s gifts attract tax?
My husband died in 2021 and I’m still trying to sort out his financial affairs for probate. While looking through his bank statements I discovered that in 2019 he gave his two children from his previous marriage £25,000 each as a gift. It was out of his savings and didn’t affect his everyday spending. Is IHT payable on this? If so, roughly how much tax will I have to pay on it?
Ian Dyall, estate planning specialist at wealth manager Evelyn Partners, says that any gifts made by a deceased person are declared by their executors on the IHT403 form, so HMRC can assess whether any inheritance tax is due. The form will ask you for details of any gifts in the last seven years and any gifts in the seven years before the earliest of those gifts. It also asks for any “gifts with reservation of benefit” and any gifts made from “normal expenditure out of income”.
A gift with reservation occurs when someone makes a gift but continues to benefit from the asset they claim to have given away. The best example is where someone puts their house in their child’s name but continues to live in it rent free. Gifts with reservation are included in the value of the estate when calculating inheritance tax irrespective of how many years ago the gift was made. There is no indication that there was any reservation of benefit on the gifts your husband made.
You make the point that the gifts “didn’t impact his everyday spending”. This may be because you were wondering if the gifts qualified for the “normal expenditure from income” exemption. To qualify for this exemption the gift must be from income rather than capital, it must be a regular gift (so it wouldn’t apply to a single one-off gift) and it cannot affect the donor’s standard of living. As your late husband’s gifts were one-off gifts from capital in a bank account this exemption is unlikely to apply.
If the gifts were the only ones your husband made they should qualify for the annual exemption, at least in part. The annual exemption allows a person to make lifetime gifts up to a total of £3,000 per tax year and those gifts will be immediately exempt. Once the current tax year’s allowance has been used, you can then utilise any unused allowance from the previous tax year, but that is as far back as you can go. In your case that means if there were no other gifts earlier in the tax year the gift was made, or in the previous tax year, then £6,000 of the £50,000 gifted will be exempt.
The remaining £44,000 of the gifts will be treated as potentially exempt transfers (PET). There is no inheritance tax payable on a PET at the time it is made, irrespective of its size, and if the donor lives for seven years after making the PET, then it becomes exempt. However, if the donor dies within the seven years it becomes chargeable. Your husband died two years after making the PETs, so they will now be chargeable. However, that does not necessarily mean there will be any liability to IHT on his estate.
If your husband left most of his estate to you, then the transfer is likely to be covered by the inter-spouse exemption. Any transfers between spouses or civil partners, during life or on death, are exempt (although there is a restriction on this if the receiving spouse is not UK domiciled). Provided your husband didn’t leave more than the value of his nil rate band (currently £325,000) to people other than you, or to certain types of trust, then there will be no inheritance tax payable on his death.
However, there will be an impact caused by the gifts on your death. On death, each person has a nil rate band that can be used to mitigate inheritance tax. If a deceased spouse (or civil partner) doesn’t fully utilise their nil rate band on death, then their surviving spouse can claim the unused percentage to use on their death.
In your case, the failed PETs will have used £44,000 of your husband’s £325,000 nil rate band, which equates to 13.5 per cent. You would therefore only be able to transfer 86.5 per cent of his nil rate band to use on your death. On your death you will have your own nil rate band plus 86.5 per cent of another nil rate band that can be used. This is based on whatever the nil rate band is at the time of your death. There will therefore be a slightly higher liability on your death than there would have been had your husband not made the gifts.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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