Reducing IHT - pay off mortgage?

[IHTQUESTION]

Any financial peeps around? Does anyone know what might happen in the following scenario...

• couple die & child inherits
• house valued at approx £50k over IHT limit
• mortgage not paid off but the equivalent cash is invested elsewhere...

I'm assuming that the investment proceeds - whilst they're needed to pay off the mortgage - will actually go towards paying the taxman? This resulting in child (the guardians) having to sell house to pay IHT bill?

Why would the couple not have life insurance to clear the mortgage? I thought that'd be a given.

In other words, if you can afford investments, get some bloody life insurance! It's a no brainer.

You don’t have to have life insurance in place. It’s not a given.

IHT liability will be 40% over the threshold so simplistically £20k. Could remortgage. It wouldn’t cost much for so little if you didn’t want to sell.

If you're worried about dying with a mortgage and your children having to sell the home..... what's a better alternative than life insurance?

The guardians will only be able to remortgage if they have the finances and wish to do so, which isn't a given. It won't be the kids paying that new mortgage, will it? It'll be the guardians.

You won’t pay any more or less IHT if the mortgage is paid off. I’m not sure I understand the question!

When you say you’re above the threshold have you taken into account the residence NRB?

I believe a couple can pass on 325k x 2 so 650k and then there is the new property allowance of 125k per individual, rising by 25k per year, by 2020
Thats £1 million a couple can pass on.... how big is this house????

I also thought debts had to be cleared first and the residual amount subject to IHT ?

Remember that the IHT threshold is now different for houses and other investments due to the main residence allowance. So the investments will have a lower IHT threshold than the house. (Bonkers, but that's what the government decided.)

By 2020 the total allowances on second death (assuming all assets go to spouse on first death) is up to £1,000,000 for an estate with a main residence inherited by a direct descendant.

If you are 50k over 1m, I think it's a small hit to take in the grand scheme of things. The child could arrange to get a mortgage for the remainder.

It wouldn’t work like that though. The fact that they own and occupy residential property (plus the other conditions obv) would just give them the extra allowance. There isn’t a different threshold for the two parts of the estate. So as jasjas says, £1m from 2020 regardless of what the estate consists of, as long as there’s been some residential prop at some point after 2016.

£1m doesn’t get you much house round here sadly.

If you are 50k over 1m, I think it's a small hit to take in the grand scheme of things

Agreed, it’s a very low effective rate of tax.

Also, payable over 10 years if house is retained so £2k per year plus interest.

You can borrow money to pay the IHT bill if you need to, it is best avoided if possible because it can take ages to get money in via probate and it would be worth checking the HMRC website because I think they do accept staged payments now for IHT.

So if you have the paperwork to show that you have investments that would cover the IHT bill but can't access them at the moment, the bank may lend against that (because they know that there is an excellent chance of getting the money back). We've done this years ago as executors.