Inheritance tax question

[Bobbybobbins]

Please help decide this disagreement between me and DH.

I have been left some money from my uncle's estate. I am aware there is an inheritance tax 'allowance' below which tax is not paid on the estate. I don't know whether this is the case or not given most of the assets have been left to my aunt.

We were talking about if we were left money again and my DH thought that WE have a tax free allowance above which we pay tax on received inheritance.

But I thought the allowance was dependent on the size of the estate?

Eg I receive £50 000 from my uncle's estate then £300 000 from another estate. This takes me over receiving £325 000 in inheritance. Do I then pax tax? Or not because tax would be paid from the estate directly if it was over a certain value?

No you don’t pay IHT in that scenario. If you are receiving cash from an estate on death tax has already been paid on it.

Those who inherit don't have inheritance tax limits - It's the estate that is taxed!

It's taxed before it gets to you. So nothing to worry about

If your aunt and uncle were married then that part of the inheritance isn't taxed anyway.

As above, the estate of each deceased person is taxed (or not, size dependant!).
Any money you receive will already gave been taxed, if necessary, and you dont need to pay further tax on bequests you receive.

Thank you all, that is what I thought. My DH has his own business and we both have to fill in self assessment tax forms. His accountant was saying something today about declaring it and limits or something and I think it has confused him.?

There are lots of different kinds of tax. Income tax, VAT, capital gains tax, inheritance tax, off the top of my head. National Insurance is effectively a tax. Council tax. They all have different rules. This is why tax accountancy is a profitable profession.

A bit late to this but the situation is a bit more nuanced than previous replies have suggested.

First off, yes, it's not your tax free limit that matters, but the tax free limit of the person who you are receiving money from.

If you are receiving money from the estate of a person who has died then there is no problem at all. You don't need to worry about tax one bit.

On the other hand, if you have another uncle and he gave you £300k before he died as a gift, then there is a possibility that you might owe tax on the gift when he dies.

This will only occur if he dies within seven years of giving you the gift.

So, if you are given money in a will after a person has died then there is no problem at all. If you get a gift sometime before they die then you might have to pay tax depending on the circumstances.

I have come to realise that part of the reason questions over who is responsible for paying inheritance tax seem to come up regularly, is that there are many different models for inheritance taxes worldwide. The above discussion is accurate for the UK, which given mention of £ is presumably the relevant country.

I believe that Ireland and the US both have inheritance tax models where the person receiving the bequest has responsibilities and allowances.

@2catsandacomputer

A bit late to this but the situation is a bit more nuanced than previous replies have suggested.

First off, yes, it's not your tax free limit that matters, but the tax free limit of the person who you are receiving money from.

If you are receiving money from the estate of a person who has died then there is no problem at all. You don't need to worry about tax one bit.

On the other hand, if you have another uncle and he gave you £300k before he died as a gift, then there is a possibility that you might owe tax on the gift when he dies.

This will only occur if he dies within seven years of giving you the gift.

So, if you are given money in a will after a person has died then there is no problem at all. If you get a gift sometime before they die then you might have to pay tax depending on the circumstances.

Not sure this is right. Wouldn't it be the estate that owes the tax? The gift would be treated as if it were still part of the estate, unless at least seven years had elapsed between the gift being made and the giver dying. The amount of tax due would be reduced slightly for each year since the gift was made (taper relief).

So, say at the time of the testator's death the estate was £700k, but it emerged that £300k had been given away a few years earlier. For IHT purposes, the value of the estate is £1m. The tax is calculated on that value and paid out of the £700k.

Happy to be corrected by a lawyer or accountant specialising in this area if this is wrong!

Primary responsibility for the tax in that case would be with the person receiving the gift.

@Gasp0deTheW0nderD0g

It can get really complicated. It depends on what other gifts were also given in the seven years before death. Let me give you an example:-

Take your long-lost divorced uncle. He dies in 2020 but in the seven years previous to that he gave various gifts to his nephews/nieces:-

• 2013 A gets 100,000
• 2014 B gets 100,000
• 2015 C gets 100,000
• 2016 D gets 100,000
• 2017 E gets 100,000

Now, the first 325,000 is exempt so A, B and C don't have to pay any tax.

Since A, B and C have used up 300,000 between them, D only gets 25,000 tax free and has to pay tax on the remaining 75,000. But, because it is between 3 and 4 years ago they pay a reduced rate of 32%.

Poor old E, being the last to the party has to pay tax on their full 100,000 gift.

Hope that makes sense?

The recipient of a git is primarily responsible for paying the tax. Now, if D and E refuse to pay the tax (which they might do) then at the end of the day, it is the estate of the deceased that is responsible for paying the tax and would have to pay it.

However, while there is no statutory right for the executors to get the money from the recipient, following a 2015 tax case, it would be open for the executors of the will to sue the person that got the gift but refused to pay the tax.

The tax case in question was:-

Hutchings v Revenue & Customs (2015) UKFTT 9 (TC)

Mr Hutchings died in 2009 and his executors wrote to each member of the family asking if they had received any gifts from him in the previous 7 years. Only one daughter replied saying that she was not aware of anything.

The executors filed the inheritance tax account on that basis and arranged for the inheritance tax to be paid. Nearly two years later, HMRC received a tip-off that one of the sons had received a substantial cash gift from Mr Hutchings. HMRC wrote to the son demanding disclosure of the gift. It turned out that the gift was about £450,000. HMRC claimed an additional £47,000 of tax from the son personally, and, in addition, claimed a penalty from him of £87,000.

The son paid the tax but appealed against the penalty. Amongst other things he claimed that his father's executors had not made it clear to him that he should declare the gift and that they should, as a result, be liable to pay the tax themselves. The Court found against the son, saying that he had deliberately withheld information about the gift from his father's executors.

So, although there is no statutory right for an executor to claim the tax from the recipient, they just need to inform them of what HMRC are likely to do when they report that they have received a gift.

It can all get very nasty indeed.

(I have used a divorced uncle and nephews/nieces to keep it simple as different figures apply where there are spouses, children and property involved.)

Thank you, @2catsandacomputer, that's fascinating, and not what I had expected/assumed at all! Apart from anything else, that seems a very unfair system. I was sure the tax would be the responsibility of the estate and therefore the executors. I'm amazed that Parliament has made it the responsibility of people who got part of their inheritance early, whereas those who get it after the death of the testator have no worries about the tax at all unless they are also executors.

@Gasp0deTheW0nderD0g

I was sure the tax would be the responsibility of the estate and therefore the executors.

Ultimately, it is. If a recipient of a gift refuses to pay the tax then it is down to the executors to pay and then try to recover it from the person who got the gift.

that seems a very unfair system ... I'm amazed that Parliament has made it the responsibility of people who got part of their inheritance early, whereas those who get it after the death of the testator have no worries about the tax at all

The reason for that is that otherwise the person who got the money early would be benefiting at the expense of a person getting the money after inheritance tax has been paid. Another example:-

You are old, divorced and rich without children (spouses, children and property can affect the tax free amounts but not what happens).

You have £500,000 in cash and a house that is also worth £500,000.

You decide to leave equal shares of your wealth to your two nieces.
You gift the cash to niece A and in your will you leave your house to niece B.

You die within 7 years of the gift to niece A. Were it not for this rule, then niece B would not only have to pay tax on the value of the house that her aunt left to her but she would also have to pay the tax on the gift of cash that the other niece got years earlier as well. (which potentially could be £70,000).

Or, should I say, the executors of the will would have to pay the tax for niece A's gift out of the deceased's estate before niece B could take possession of the house. In all likelihood, in the above scenario with having to pay the tax on the house and on the gift that the other niece got then the house would likely have to be sold.

With this rule in place, niece A is still better off than niece B as she gets the whole £325,000 tax free amount but does have to pay some tax. Niece B (or rather the estate of the deceased) will have to pay tax on the whole value of the house but won't have to pay the tax for niece A's gift.

Ah yes, I hadn't thought of that. Something to consider for anyone thinking of making a lifetime gift in later life. Thanks again.