Question re inheritance

[Autumnalsky]

Suppose Family Member A (FMA) owns a flat in which Family Member B (FMB) lives. FMA also owns their own house, in which they live with their spouse and children.

FMA dies, leaving the flat to FMB in their will. FMA's own house, which they leave to their spouse and/or children, is worth more than £325, so inheritance tax is payable. The flat in which FMB lives is worth considerably less than £325, and FMA leaves them nothing other than this flat (i.e. no money or anything).

Would FMB have to sell the flat in which they're living in order to pay inheritance tax, because of the fact that FMA's total estate is worth more than £325? Or would FMB have no inheritance tax to pay, because what they're inheriting is worth less than £325?

Many thanks to anyone who can let me know what the law is on this.

Important to know how is B related to A ? Brother /sister /child/cousin etc ?

FMA's own house, which they leave to their spouse and/or children,

"Spouse and/or children" is important I think. Which is it? Spouse or children?

If the properties are owned jointly by fma and their spouse then the inheritance tax applies to both people. There’s an increased amount if they leave their estate to their children so that inheritance tax is only payable after £1,000,000.

However important to remember that IHT is paid by the estate of the deceased not the beneficiaries..

It's more complex than that. If FMA lives with a married spouse and he inherits the house, there is additional tax free amount of £175k on top of the £325k usually available https://www.gov.uk/government/publications/inheritance-tax-nil-rate-band-and-residence-nil-rate-band-thresholds-from-6-april-2026/inheritance-tax-nil-rate-band-and-residence-nil-rate-band-thresholds-from-6-april-2026-to-5-april-2028

This is presuming FMA owns the house outright and spouse does not own as joint tenant. If spouse owns as joint tenant, property passes to spouse automatically. It wouldn't even be included in a legal and properly drafted will.

If spouse co owns by tenant in common say 50%, only 50% of house is left by FMA to spouse/children so IHT doesn't apply as assume less than £500k.

If we assume house is owned by FMA outright and left to spouse or child, there is 500k IHT relief, so unless flat and house values added together are more than 500k, no IHT payable. If over 500k then IHT only payable on money over 500k.

If FMA is not married to partner, no spousal relief (there's no such thing as common law marriage in uk). FMA would have to leave to children as direct descendents to benefit from additional NRB of 175k.

If FMB is a direct descendant of FMA (child or parent, not cousin/niece/etc) then NRB also applies.

Your best take from this is to go and see a lawyer if you're FMA or FMB (I'm just a student!)

If the house is left to spouse then no inheritance tax to pay.
If family home js left to children then the limit is raised to 500k
If there was inheritance tax to pay then I'm not sure how that would work.
It would be better for FMA to gift the flat to FMB so that after 7 years it wouldn't be counted towards IHT.

Ok. Setting aside the implications of marriage which would affect everything, FMA can leave their principle main residence to their children or direct descendants up to the value of £500,000 IHT free (£325,000 nil rate+£175,000 main residence relief). If the main residence is worth £325,000 then everything else is taxed at 40%. If the main residence is worth £300,000 then £25,000 of extra assets can be included up to the £325,000 nil rate band. If main residence is £425,000 then that will be IHT free and everything else will be taxed at 40%.

Marriage means that everything passes tax free to the spouse. The spouse can then pass on up to £1 million of main residence tax free (2x£325,000 and 2x£175,000)

As others have said, if the house is left to FMA's spouse it will be exempt from IHT. If it is left to their children, there will be an additional £175k nil-rate available.

However, let us imagine that there will be IHT to pay. It must be paid by the executors out of the estate before it is distributed. How will that affect the beneficiaries?

The executor pays IHT and other bills, then deals with specific bequests and whoever is left the residue of the estate gets whatever is left. In effect, IHT is paid from the share of whoever is left the residue. So, for example, if FMA leaves the flat to FMB with the residue of the estate (which would include the other house) to their spouse/children, the IHT would come out of the spouse/children's share.

Another thing to explore:
If either FMA or their spouse require care home costs the family home could not be made to be sold to pay for it while the other spouse lives there. But if there are not sufficient savings to pay, the flat could need to be sold because it is an asset and not the primary residence of FMA or spouse.

Thank you for the replies.

FMA and FMB are siblings. The flat is owned just by FMA, not jointly with their spouse.

FMA’s own house, which they own jointly with their spouse and live in with their spouse and child, is worth about £750k.

The siblings in question are currently in their forties, so any death would be the result of illness or accident. There would therefore not be care home costs in the foreseeable future.

FMB is unable to work owing to long-term illness. This is why they are living in a flat owned by their sibling.

Taking all this into account, if FMA had a premature death owing to illness or injury, would FMB have to sell the flat that they are living in, to pay inheritance tax on it?

It depends whether the will states that the gift is to be free of inheritance tax or not. If it says it's free of, the estate pays. If it doesn't, it's for the receiving party to pay.

It's a complex situation and your family member needs to seek legal advice.

The beneficiaries are not responsible for IHT if it's due.

It's the responsibility of the Executor to discharge the wishes expressed in the will and pay any IHT from the estate before the benefits are passed to the beneficiaries.

The short version - no one inherits anything until after the Executor has dealt with the IHT.

@DogInATent but if there isn't enough cash in the estate, assets might need to be sold to cover any IHT paid? Which I assume is OP's concern.

That is exactly the concern. Would this disabled person, who can’t work, lose their home if their sibling died?

Your family member needs to seek tailored legal advice to their situation and estate.

The owner of the properties should put his/her spouse name on the deeds of their home as joint tenants. Then the property will be outside of their estate when they die.

@itwasnevermine is wrong. IHT is always paid by the estate, not the beneficiaries, regardless of what it says in the will. The only circumstances under which beneficiaries or others may have to pay are:

• when they have received gifts from the deceased in the 7 years before they died
• when their inheritance is put into a trust and the trust does not or cannot pay
• when the executors fail to pay IHT before distributing the estate

As per my previous post, whether the flat would be sold to pay IHT depends on the terms of the will. The executors must first pay any IHT and other debts. Any specific bequests are then dealt with and whatever is left goes to the residual beneficiary or beneficiaries. So if the will leaves the flat to FMB and the residue of the estate (including the house) to their spouse (which, given that FMB isn't getting anything other than the flat, sounds like what is happening here), IHT would come out of the spouse's portion of the estate. If they leave the house to their spouse and the residue to FMB (which would be the flat and everything else not specifically left to the spouse), IHT would come out of FMB's portion of the estate. Even if the IHT came out of FMB's portion, the executors would sell the flat if necessary and pay the IHT, not FMB.

However, it is not clear that there will be any IHT payable if FMA dies prematurely. If FMA dies before their spouse and leaves the house to their spouse, the house will be exempt from IHT as will anything else FMA leaves to their spouse, so there will only be IHT to pay if the remainder of the estate comes to more than £325k. If the will is that the spouse gets everything apart from the flat and the flat is worth less than £325k, there will be no IHT to pay.

If FMA's spouse dies first and the house goes to their children, FMA's estate will be eligible for the Residence Nil Rate Band (£175k) and their spouse's unused Residence Nil Rate Band. They will also be able to use any portion of the nil rate band that their spouse didn't use. If their spouse leaves everything to FMA, their entire nil rate band would be available for FMA to use, so they will potentially be able to leave a total estate of £1M before IHT was payable.

Yes, but there are two properties and it's the responsibility of the Executor to decide how IHT is paid - balancing the wishes expressed in the will. FMB will not be the one having to decide whether or not to sell the flat.

Plus, we're talking about two siblings in their forties. Excluding accidents or illness, the situation may be very different in 20-50 years time when the will is exercised. In the meantime, a specialist will writer can help FMA structure their will to consider multiple scenarios and ensure their wishes are fully understood.

Can we assume you're FMB OP?

Could FMA take out a life insurance policy written in trust (so not forming part of the estate) with FMB as a beneficiary? This could cover any potential IHT liability (it is impossible to know what the tax rules might be in five years' time, let alone potentially four decades, and there could also be other deaths, divorce, care needs or who knows what to complicate the situation) and if not needed to pay IHT then would provide extra funds for the disabled sibling?

But you need proper legal and financial advice to make sure that all possible scenarios have been thought of and covered.

If the home A owns with their spouse is owned jointly it passes directly to their spouse. No IHT would be due. When the spouse dies assuming the house is still worth under £1m and the rules haven't changed then again no IHT payable if it is passed on to their children.

There would be IHT on A's estate if the value of the flat and A's savings were above the threshold.

No im not.

Yes, you are. See How Inheritance Tax works: thresholds, rules and allowances: Overview - GOV.UK (www.gov.uk). IHT is only paid by beneficiaries in the circumstances I have set out.

This is the best answer by far, OP. I believe there are ways to protect FMB but FMA needs a solicitor’s advice, and a will

@Autumnalsky can A not just have B's name added to the deeds of the flat? then it would be B's in the event of A's passing and A's in the event of B's passing. as it would be jointly owned, it also cannot be sold to pay for care of B? I think???

That is a very sensible question. For reasons too long-winded to go into here, unfortunately there would be problems with that.

It sounds as though specialist legal advice is needed. I didn’t realize how complex it is!