Inheritance tax on a house

[GeeKayChesterton]

I understand the basics of inheritance tax (40% on assets over the threshold, 6 months to pay then interest starts to be accrued). But how does it work if someone we're to leave a house (a holiday home, not residence) to a specific person? Does the tax have to be paid out of the remainder of the assets? Can the executor force the sale of the house to cover inheritance tax? Would the person inheriting the house be liable for 40% of the house value? How does it work?

I've tried Googling but can't find an answer on this specific scenario. If it helps - there's a residence, a holiday home, and some assets. The holiday home would be left to one person (not the executor) and the rest split between relatives (including the executor). Is it even possible to leave a house to someone without providing specific provision for the tax?

TIA!

If the holiday home is gifted to the person 7 years before death, there is no IHT to pay.

If someone dies, and they have not left everything to their spouse (they may not have one) then IHT is payable on the whole estate above the threshold. If it was all left to a spouse, no IHT is payable on the estate of the first death.

You have to understand that it is the estate that pays the tax. If there are not enough liquid assets to pay it, the executor has to sell something to raise the money. Where else would the tax come from? It would have to be a fair arrangement for all the beneficiaries, not just the person getting the residence or the holiday Home.

Therefore anyone making a will really needs to understand who will actually get what out of their estate. If, for example, the holiday Home was given 7 years before death, as a gift, it is exempt from the estate and IHT. Just the main residence and the assets would be liable to tax. But is this fair? The holiday home owner gets it but the main residence is sold to pay the tax. The tax liability would be less but only some beneficiaries lose out by having an asset sold that was left to them.

To minimise IHT, there needs to be professional help with IHT tax planning and the will for this estate. All the assets and residences should be considered and if the person making the will wants to ring fence the holiday home they can give it away 7 years before death. If they give their main residence away but continue to live there, they must pay a market rental to the owners.

The main thing is, IHT is payable on an estate, by the estate, not by the people who inherit. The executor administers it.

Thank you. So is it actually possible for someone to leave a house to somebody? Wouldn't it be entirely contingent on how the executor deals with the inheritance tax?

The executor must ensure it’s paid. If it is the estate as a whole (none given away in advance), that has to pay, why would one beneficiary not have their bequest in the pool? It would, in my view, be wrong to exempt parts of the estate. I would see it as a huge recipe for argument and resentment. If the IHT is not taken from all the assets will some people inherit more than others because of the tax situation only being paid by the liquidation of some assets, but not the holiday Home. I think that’s unfair, but there should, perhaps be some discussion about it. I would be cross if someone had the whole of their inheritance protected but I had to sell something to pay the tax so my inheritance was less than expected because I had to pay the tax on the value of the holiday Home. It’s morally wrong.

I believe the will can be written to specify that a particular bequest is made after tax, which means that the tax will be paid for out of the residuary of the estate - if possible. If not possible they will have no choice but to sell the house to meet the liability.

So yes, the remaining beneficiaries would get less in that instance.

If any IHT is payable it comes out of the residual estate first (the bit that says A & B get what is left) unless the will provides for the contrary. There is a strict hierarchy that the executors must follow. The executors don’t get to decide which of the beneficiaries lose out.

The estate pays the tax which means that the proportion of the estate going to the person getting the holiday home might be more than you expected unless you word the will carefully.

Say the applicable threshold is £325k (ie assuming the testator is single) and that the whole estate is house A worth £300k, house B worth £200k, and liquid assets worth £150k. Total value £650k.

If the will says house A to relative X, house B to relative Y and the residue to relative Z then the whole IHT bill of £130k will come out of Z's share leaving Z with just 20k.

If instead you want each relative's legacy to be reduced by a fair proportion of the IHT (£60k from relative A, £40k from B and £30k from C) they can elect to pay from their own assets in order to take possession of the properties.