IHT liability calculation

[hiriskpaul]

I was speaking to a friend yesterday who thinks most of her inheritance from her mother will be swallowed by inheritance tax. I think she is wrong. The situation is that her mother’s house is jointly owned by my friend’s sister (Joint tenants, half the house gifted to sister about 20 years ago) and her mother has savings and investments of about £600k. The Will is straightforward and divides the estate equally between the 2 sisters. There is nothing in the Will about inheritance tax.

On her mother’s death, the house will pass to her sister by survivorship. She is not entirely happy about this, but resigned to it. The house is worth about £2.8m and the total nil rate and resident nil rate bands are £1m, so IHT is payable on £1m (£1400k house plus £600k savings minus £1000k NRB/RNRB). IHT at 40% is £400k. Who pays the IHT?

My friend thinks that the residual estate is liable for the IHT, which comes out of the savings and investments, leaving just £200k to divide between the sisters. I think she is wrong and that her sister is liable for a higher proportion of the IHT due to the house being passed by survivorship. Pre-IHT, her sister inherits £1.7m, my friend £300k, so her sister should bear the cost of 1.7/2.0 of the IHT, which works out at £340k and my friend should bear 0.3/2.0 of the IHT, £60k.

Who is right? Or are neither of us right? Or is it nuanced?

If I am right, another issue is that my friend’s sister will have to pay £40k in IHT from her own pocket. I can see that leading to strife. What happens in circumstances like this if a beneficiary refuses to pay IHT? Or more extreme cases when there is insufficient money in the estate to pay IHT because of property passing by survivorship?

[scrumpyjack]

I was speaking to a friend yesterday who thinks most of her inheritance from her mother will be swallowed by inheritance tax. I think she is wrong. The situation is that her mother’s house is jointly owned by my friend’s sister (Joint tenants, half the house gifted to sister about 20 years ago) and her mother has savings and investments of about £600k. The Will is straightforward and divides the estate equally between the 2 sisters. There is nothing in the Will about inheritance tax.

On her mother’s death, the house will pass to her sister by survivorship. She is not entirely happy about this, but resigned to it. The house is worth about £2.8m and the total nil rate and resident nil rate bands are £1m, so IHT is payable on £1m (£1400k house plus £600k savings minus £1000k NRB/RNRB). IHT at 40% is £400k. Who pays the IHT?

My friend thinks that the residual estate is liable for the IHT, which comes out of the savings and investments, leaving just £200k to divide between the sisters. I think she is wrong and that her sister is liable for a higher proportion of the IHT due to the house being passed by survivorship. Pre-IHT, her sister inherits £1.7m, my friend £300k, so her sister should bear the cost of 1.7/2.0 of the IHT, which works out at £340k and my friend should bear 0.3/2.0 of the IHT, £60k.

Who is right? Or are neither of us right? Or is it nuanced?

If I am right, another issue is that my friend’s sister will have to pay £40k in IHT from her own pocket. I can see that leading to strife. What happens in circumstances like this if a beneficiary refuses to pay IHT? Or more extreme cases when there is insufficient money in the estate to pay IHT because of property passing by survivorship?

I think you are correct and the sister will have to pay the IHT on her inheritance unless the Will says otherwise, and it probably does not say anything on this.
https://www.gov.uk/tax-property-money-s ... 0not%20pay.

As the asset is property, the IHT can be paid in instalments over 10 years by the sister.

[Lootman]

another issue is that my friend’s sister will have to pay £40k in IHT from her own pocket. I can see that leading to strife. What happens in circumstances like this if a beneficiary refuses to pay IHT? Or more extreme cases when there is insufficient money in the estate to pay IHT because of property passing by survivorship?

If all assets are passing by survivorship to a non-spouse then the situation is similar to that where someone gives away all their assets and then dies. In both cases any Will is moot. And since the Will is moot then there is no need for probate either, since there is no estate to distribute.

Now in the normal situation where probate happens then there is an executor who administers the estate. And that executor can be held personally liable for any unpaid debt or liability of the estate, including taxes. Which is why most executors would decline to act on an estate which has debts but no assets.

However where there is no probate and no executor, then the determination of IHT due would have to happen outside of probate, via an interaction directly with the taxman. Quite who would take on that role in such a situation is an interesting question. But no doubt the beneficiaries are supposed to make an effort to contact the taxman and volunteer to pay any tax due. If they fail to and the taxman discovers the omission, then presumably they would be in the same kind of trouble as anyone else who fails to declare taxable receipts.

[monabri]

"The Will is straightforward and divides the estate equally between the 2 sisters"...

Doesn't look that way to me! Sister 1 already has 50% of the house. What we now have left to divide up equally is mum's half share of the house and £600k.

The assets to be divvied up equally are £1400k and £600k - allowance ....but there's IHT on that at 40%, leaving a mere £1600k for equal distribution.

So each sister should receive a further £800k after IHT is paid.

How does sister 1 plan to pay sister 2 the £800k? (How the IHT gets paid is another matter).

[hiriskpaul]

I was speaking to a friend yesterday who thinks most of her inheritance from her mother will be swallowed by inheritance tax. I think she is wrong. The situation is that her mother’s house is jointly owned by my friend’s sister (Joint tenants, half the house gifted to sister about 20 years ago) and her mother has savings and investments of about £600k. The Will is straightforward and divides the estate equally between the 2 sisters. There is nothing in the Will about inheritance tax.

On her mother’s death, the house will pass to her sister by survivorship. She is not entirely happy about this, but resigned to it. The house is worth about £2.8m and the total nil rate and resident nil rate bands are £1m, so IHT is payable on £1m (£1400k house plus £600k savings minus £1000k NRB/RNRB). IHT at 40% is £400k. Who pays the IHT?

My friend thinks that the residual estate is liable for the IHT, which comes out of the savings and investments, leaving just £200k to divide between the sisters. I think she is wrong and that her sister is liable for a higher proportion of the IHT due to the house being passed by survivorship. Pre-IHT, her sister inherits £1.7m, my friend £300k, so her sister should bear the cost of 1.7/2.0 of the IHT, which works out at £340k and my friend should bear 0.3/2.0 of the IHT, £60k.

Who is right? Or are neither of us right? Or is it nuanced?

If I am right, another issue is that my friend’s sister will have to pay £40k in IHT from her own pocket. I can see that leading to strife. What happens in circumstances like this if a beneficiary refuses to pay IHT? Or more extreme cases when there is insufficient money in the estate to pay IHT because of property passing by survivorship?

I think you are correct and the sister will have to pay the IHT on her inheritance unless the Will says otherwise, and it probably does not say anything on this.
https://www.gov.uk/tax-property-money-s ... 0not%20pay.

As the asset is property, the IHT can be paid in instalments over 10 years by the sister.

Yes, I have been through quite a few links such as this, but it is unclear how IHT should be attributed. The link says that someone who receives property by survivorship may have to pay IHT if not paid by the estate, which i think is fairly obvious. HMRC will go after beneficiaries to collect IHT.

In my friend's scenario there is sufficient money in the estate to pay the IHT. The question is more about how the burden of IHT should be shated across beneficiaries. How is that burden shared between those who inherit by survivorship and those from a share of the residual estate.

[scrumpyjack]

"The Will is straightforward and divides the estate equally between the 2 sisters"...

Doesn't look that way to me! Sister 1 already has 50% of the house. What we now have left to divide up equally is mum's half share of the house and £600k.

The assets to be divvied up equally are £1400k and £600k - allowance ....but there's IHT on that at 40%, leaving a mere £1600k for equal distribution.

So each sister should receive a further £800k after IHT is paid.

How does sister 1 plan to pay sister 2 the £800k? (How the IHT gets paid is another matter).

No, the Will cannot deal with the jointly owned property.
Per HMRC website
Joint tenants
As joint tenants (sometimes called ‘beneficial joint tenants’):

you have equal rights to the whole property
the property automatically goes to the other owners if you die
you cannot pass on your ownership of the property in your will

What is key here is that the executor must refuse to pay the IHT on the property. So look carefully at who will be the executor!

[hiriskpaul]

"The Will is straightforward and divides the estate equally between the 2 sisters"...

Doesn't look that way to me! Sister 1 already has 50% of the house. What we now have left to divide up equally is mum's half share of the house and £600k.

The assets to be divvied up equally are £1400k and £600k - allowance ....but there's IHT on that at 40%, leaving a mere £1600k for equal distribution.

So each sister should receive a further £800k after IHT is paid.

How does sister 1 plan to pay sister 2 the £800k? (How the IHT gets paid is another matter).

Interesting, but I think it is wrong. That is certainly a fair way to look at it, but fairness and the law do not always align. I am reasonably confident that beneficial ownership of property held as joint tenants passes to the survivor, trumping anything said in the Will.

[monabri]

"The Will is straightforward and divides the estate equally between the 2 sisters"...

Doesn't look that way to me! Sister 1 already has 50% of the house. What we now have left to divide up equally is mum's half share of the house and £600k.

The assets to be divvied up equally are £1400k and £600k - allowance ....but there's IHT on that at 40%, leaving a mere £1600k for equal distribution.

So each sister should receive a further £800k after IHT is paid.

How does sister 1 plan to pay sister 2 the £800k? (How the IHT gets paid is another matter).

Interesting, but I think it is wrong. That is certainly a fair way to look at it, but fairness and the law do not always align. I am reasonably confident that beneficial ownership of property held as joint tenants passes to the survivor, trumping anything said in the Will.

I agree about fairness and the law . I bet the mother was thinking along the same lines that she'd leave the 2 daughters equal shares in her assets. It will be interesting to see how this plays out. I feel sympathy for "sister 2".

[hiriskpaul]

another issue is that my friend’s sister will have to pay £40k in IHT from her own pocket. I can see that leading to strife. What happens in circumstances like this if a beneficiary refuses to pay IHT? Or more extreme cases when there is insufficient money in the estate to pay IHT because of property passing by survivorship?

If all assets are passing by survivorship to a non-spouse then the situation is similar to that where someone gives away all their assets and then dies. In both cases any Will is moot. And since the Will is moot then there is no need for probate either, since there is no estate to distribute.

Now in the normal situation where probate happens then there is an executor who administers the estate. And that executor can be held personally liable for any unpaid debt or liability of the estate, including taxes. Which is why most executors would decline to act on an estate which has debts but no assets.

However where there is no probate and no executor, then the determination of IHT due would have to happen outside of probate, via an interaction directly with the taxman. Quite who would take on that role in such a situation is an interesting question. But no doubt the beneficiaries are supposed to make an effort to contact the taxman and volunteer to pay any tax due. If they fail to and the taxman discovers the omission, then presumably they would be in the same kind of trouble as anyone else who fails to declare taxable receipts.

In that case I assume it would be up to the HMRC to go after the beneficiaries. When they do that, how do they attribute IHT across beneficiaries? A mixture of those receiving gifts that are liable for IHT by virtue of the 7 year rule and those inheriting by survivorship.

Maybe the HMRC would estimate the value of the estate (ie overestimate) then go after some big assets, such as property passed by survivorship, to recover their estimate of the IHT - all the IHT. That might prompt one or more of the beneficiaries to go through probate...

One thing I have learned about the HMRC is that they have infinite patience and all the time in the world to cause headaches for people they consider to owe tax. Dunno how HMRC would go about collecting IHT in the circumstances you describe, but definitely going off topic! My friend would not be interested in going down that route.

[hiriskpaul]

"The Will is straightforward and divides the estate equally between the 2 sisters"...

Doesn't look that way to me! Sister 1 already has 50% of the house. What we now have left to divide up equally is mum's half share of the house and £600k.

The assets to be divvied up equally are £1400k and £600k - allowance ....but there's IHT on that at 40%, leaving a mere £1600k for equal distribution.

So each sister should receive a further £800k after IHT is paid.

How does sister 1 plan to pay sister 2 the £800k? (How the IHT gets paid is another matter).

Interesting, but I think it is wrong. That is certainly a fair way to look at it, but fairness and the law do not always align. I am reasonably confident that beneficial ownership of property held as joint tenants passes to the survivor, trumping anything said in the Will.

I agree about fairness and the law . I bet the mother was thinking along the same lines that she'd leave the 2 daughters equal shares in her assets. It will be interesting to see how this plays out. I feel sympathy for "sister 2".

AIUI, my friend was given something at the time her mother gave half the house to her sister, but the value of the house (central London 3 bed) has shot up since, probably more so than the gift to my friend. Even if it did, I doubt it would compensate for the other half being passed by survivorship.

[Lootman]

What is key here is that the executor must refuse to pay the IHT on the property.

Yes, otherwise the executor would have to try and reclaim that amount from the sister, which might be a doomed enterprise.

The executor would presumably still have to identify the asset that passed by survivorship and the identity of the person to whom it passed. And then it is a matter between the taxman and the recipient as to how much tax is due on that asset's value and how it will be paid.

So the executor still has to have knowledge of the asset and its disposition, even though it is not subject to the provisions of the Will. It is somewhat similar to how gifts in the prior 7 years (i.e. failed PETs) are handled.

[hiriskpaul]

What is key here is that the executor must refuse to pay the IHT on the property.

Yes, otherwise the executor would have to try and reclaim that amount from the sister, which might be a doomed enterprise.

The executor would presumably still have to identify the asset that passed by survivorship and the identity of the person to whom it passed. And then it is a matter between the taxman and the recipient as to how much tax is due on that asset's value and how it will be paid.

So the executor still has to have knowledge of the asset and its disposition, even though it is not subject to the provisions of the Will. It is somewhat similar to how gifts in the prior 7 years (i.e. failed PETs) are handled.

The property will have to be valued for IHT purposes, even if it does not feature in the Will.

I cannot see how an executor/PR could refuse to pay IHT as it is their responsibility. The executor may subsequently have to resort to litigation to recover the money from those responsible to pay it. Unless an executor can ask the HMRC to collect the money directly from the survivor?

[scrumpyjack]

The Executor has a duty to arrange for IHT to be paid and should not distribute assets until it has been arranged. Indeed the executor is unlikely to be granted probate until IHT has been paid. IANAL so I don't know how the executor can enforce this. Perhaps notify the Land Registry of the liability in respect of the property and register a charge?

This would really need to be sorted out by the sisters between themselves. Legally it is clear, I think, that the IHT liability is apportioned to the assets passing to each sister. If they can't agree this, call in a solicitor. Presumably Mum does not want to get involved?

I would have thought any sensible executor would decline the appointment unless this issue had been resolved!

[hiriskpaul]

The Executor has a duty to arrange for IHT to be paid and should not distribute assets until it has been arranged. Indeed the executor is unlikely to be granted probate until IHT has been paid. IANAL so I don't know how the executor can enforce this. Perhaps notify the Land Registry of the liability in respect of the property and register a charge?

This would really need to be sorted out by the sisters between themselves. Legally it is clear, I think, that the IHT liability is apportioned to the assets passing to each sister. If they can't agree this, call in a solicitor. Presumably Mum does not want to get involved?

I would have thought any sensible executor would decline the appointment unless this issue had been resolved!

Is it clear though that the IHT liability is apportioned to the assets passing to each sister? I think that is true, but I am unsure where I read it.

The only executors are the sisters! So yes, it does need to be clear. Note that the mother is not dead, so this is more about what will happen if nothing changes, the Will, size of inheritance, etc. I don't think the sisters are particularly close, so when the time comes I think a solicitor would likely be the best way to go, unless they both agree totallt about how the IHT should be apportioned.

[hiriskpaul]

Here is how i think about this. Let's say that nothing was passed by survivorship as the house was held as tenants in common, but the Will said that one sister was to receive 75% of the residual estate, the other 25%. How would IHT be apportioned?

In that case, £400k would be paid by the estate and the residual £1.6m would be divided 75/25, ie £1200k/£400k. In other words a larger burden of the IHT would effectively have been apportioned to the sister receiving 75%. I am then extrapolating that case to the one where the house is past by survivorship and assuming the law is logical. But that is quite an assumption.

[Lootman]

One thing I have learned about the HMRC is that they have infinite patience and all the time in the world to cause headaches for people they consider to owe tax. Dunno how HMRC would go about collecting IHT in the circumstances you describe, but definitely going off topic! My friend would not be interested in going down that route.

Yes, a problem for the sister who gets the house is that, unless the tax is paid, she will never know for sure that she is free of the potential obligation. This is similar to being a recipient of a failed PET.

So she can never really enjoy the proceeds because she would always be looking over her shoulder. I suspect that there is no time limit for tax that is owed because of a failure to report and pay a taxable item. It could haunt her forever unless she deals with it.

The only executors are the sisters!

In that case they would both have to sign all the probate documents, and probate could not happen without both signatures. So if they don't/can't agree then probate won't happen and they won't get the balance of their inheritance. So surely they will both be motivated to resolve this?

[scrumpyjack]

Note that the probate value of the deceased's share in the property is discounted by 10% per HMRC

Joint tenants
Joint tenants automatically pass on any assets, such as land or property, to the other owners if one of them dies.
If the asset, such as land or property, was owned as a joint tenant with the person’s spouse or civil partner, divide the value of the asset by 2.
If land or property was owned with other joint tenants, for example friends or siblings, do both of the following:
-divide the value by the number of owners
-take 10% from the share of the person who died

As for getting title, I have a feeling the sister simply needs to fill in a form with a copy of the death certificate and send it to the Land Registry. No grant of probate is needed. I may be wrong and IANAL!

[eisman]

hiriskpaul wrote:

I was speaking to a friend yesterday who thinks most of her inheritance from her mother will be swallowed by inheritance tax. I think she is wrong. The situation is that her mother’s house is jointly owned by my friend’s sister (Joint tenants, half the house gifted to sister about 20 years ago) and her mother has savings and investments of about £600k. The Will is straightforward and divides the estate equally between the 2 sisters. There is nothing in the Will about inheritance tax.

On her mother’s death, the house will pass to her sister by survivorship. She is not entirely happy about this, but resigned to it. The house is worth about £2.8m and the total nil rate and resident nil rate bands are £1m, so IHT is payable on £1m (£1400k house plus £600k savings minus £1000k NRB/RNRB). IHT at 40% is £400k. Who pays the IHT?

My friend thinks that the residual estate is liable for the IHT, which comes out of the savings and investments, leaving just £200k to divide between the sisters. I think she is wrong and that her sister is liable for a higher proportion of the IHT due to the house being passed by survivorship. Pre-IHT, her sister inherits £1.7m, my friend £300k, so her sister should bear the cost of 1.7/2.0 of the IHT, which works out at £340k and my friend should bear 0.3/2.0 of the IHT, £60k.

Who is right? Or are neither of us right? Or is it nuanced?

It is indeed nuanced.

Analysing the issues:

The house is worth about £2.8m and the total nil rate and resident nil rate bands are £1m, so IHT is payable on £1m (£1400k house plus £600k savings minus £1000k NRB/RNRB). IHT at 40% is £400k.

(I assume the reference suggesting 'total nil rate and resident nil rate bands are £1m' is because the mother's spouse died leaving their entire estate to the mother. If this is not the case, the total available NRB indicated below will be lower)

If the sister owning the joint interest does not occupy the property with her mother, the mother's original gift is likely to be treated as a 'gift with reservation of benefit' (GWR*). See HMRC inheritance tax manual at IHTM44331 et seq.
https://www.gov.uk/hmrc-internal-manual ... /ihtm14331

This would mean that the entire (undiscounted) value of the property would be included in the mother's estate for inheritance tax purposes. This in turn would mean that, as her total estate is over £2.35 million, she will not qualify for the Residence Nil Rate Band, so her total NRB would be only £650k. On a total estate of £3.4m (£2.8m house, plus £0.6m investments), this would mean an IHT liability of £1.1m.

Even if the sister occupies the house with her mother, the original gift could still be treated as a GWR unless strict conditions regarding, inter alia sharing of property and household costs, have been met.

*If the gift did not constitute a GWR, it may alternatively have been caught by the Pre Owned Asset Tax (POAT) rules. The POAT was introduced with effect from the tax year 2005-06. See HMRC inheritance tax manual at IHTM44001 et seq:
https://www.gov.uk/hmrc-internal-manual ... /ihtm44001

Who pays the IHT? My friend thinks that the residual estate is liable for the IHT, which comes out of the savings and investments

Your friend is correct - IHT is a liability of the Executor(s), initially payable out of the estate assets (in this case the £600k of investments, meaning your friend would inherit nothing). If the estate assets are insufficient, any excess liability falls on the recipient of the gifted asset treated for IHT purposes as part of the estate (the sister owning the property).

HMRC would only be interested in collecting the tax; they are not normally concerned with any unfairness this creates between beneficiaries under the will.

To enable your friend to receive at least something from the estate, she could suggest that the mother severs the joint tenancy to create a tenancy in common. I believe this merely involves her writing to the other joint tenant, giving notice that she wishes to hold her interest as a tenant in common. The other joint tenant’s agreement is not required. Following severance, the principle of survivorship will then no longer apply to the mother's interest in the property. (NB No tax implications arise from the severance itself).

The mother perhaps would accept that the dramatic increase in property value has created iniquity as between the previous gifts to each sister. In any event, it is worth explaining to her that her intention to treat the sisters equally in her Will are currently negated by the issues noted above.

As the share would then form part of her estate assets for probate purposes as well as for IHT, it can be bequeathed in accordance with her Will. Although this does not save tax, it would mean the estate assets would be £2m which, after payment of £1.1 million IHT, would leave £900k divisible between the sisters (£450k each).

How the 'property owning' sister funds the excess IHT liability of £500k (the £600k investments would, as indicated above, be used to part pay the £1.1m liability) and the £450k inheritance due to her sister would be an issue. It is likely the property would need to be sold (note that the sister's CGT base cost will be the value at the time of the original gift, and this is unaffected by the IHT issues above).

If the sister actually occupies the property with her mother AND the gift is not otherwise caught by the GWR and POAT rules, the valuation discount that would be applied to the mother’s half share for inheritance tax purposes should be 15%. Her taxable estate would then be £1.79m, less £1m NRB/RNRB (as total IHT estate value now less than £2m), suggesting an IHT liability of £316k.

Eisman

[Clitheroekid]

It seems to me that the mother firstly needs competent advice regarding her tax situation, and secondly to make a new Will as a matter of priority, otherwise this grossly unfair division will almost inevitably cause a serious, and probably lifelong rift between the sisters.

[Lootman]

Who pays the IHT? My friend thinks that the residual estate is liable for the IHT, which comes out of the savings and investments

Your friend is correct - IHT is a liability of the Executor(s), initially payable out of the estate assets (in this case the £600k of investments, meaning your friend would inherit nothing). If the estate assets are insufficient, any excess liability falls on the recipient of the gifted asset treated for IHT purposes as part of the estate (the sister owning the property).

IHT is only a liability of the Executor if there is one. In the case of the example you gave - the estate having insufficient assets to cover the IHT - I suspect that most Executors would renounce the role, to avoid the risk that the recipients default and then there is an attempt to hold the Executor personally liable for the IHT.

In fact in any case where the estate has inadequate assets to cover the liabilities, I would expect the Executor to renounce. It could easily happen that all assets of an estate pass to recipients either via survivorship or via prior failed PETs. It would then be bold or naive to continue with the Executorship. Far better to stand down and leave it to the taxman to figure it out with the recipients. If there are no net assets in the estate then there is nothing to distribute anyway, so no need to instigate probate at all. Let the creditors handle it; executorship is a voluntary role.