When would my DC be expected to pay inheritance tax if I died?

[stirling]

Hello
Just can't my head around this one. I still can't understand why young children are expected to pay inheritance tax. Can understand it for adult children but can someone please clarify the facts for me?

I'm a single mum and financially just about managing. Sometimes barely. On the outside it seems I'm loaded - two properties, but as the cliche goes - the money's all in bricks.

The house we live in is worth £700k and my rental flat about £500k (my only source of income at the moment as have health problems).

If I were to die, would my children be expected to cough up 40% of £700k?? I read that there's a & 500k allowance or something. And how soon after death would they pay?
Who arranges it all? I've left my sister in charge in my will but to be honest she is so poorly herself... Don't trust anyone else that I know.

The maddening thing is I can't transfer the property's into the children's names in a trust because I'm then not allowed to take the income from my flat.
These rules are so absurd.

Thank you for any advice.

If you own both properties outright, that's amazing and you are really rich, even if it doesn't feel that way. It sounds like you had legal advice when you drew up your will - does it go in trust then? It's worth paying for more. You could get life insurance arranged that pays off any iht bill, for example.

You need a will, you also need someone to take over care of the children whilst they are young. IHT is on the person’s estate not ‘young children’.

You definitely need legal advice, which you will have to pay for, not options on MN

It is really annoying. Same situation here. Your spouse can inherit without paying tax but not your dependent children. You have to get life insurance paid into trust so that it’s outside of your estate and that gets used to pay off the IHT.

I would speak to an IFA.

They add up the whole value of your estate, so £500k + £700K, making £1.2m. The first £325,000 is exempt, meaning they pay 40% of £875,000 which is £350,000. Very rough figures but that’s the gist of it.

If they don’t have it sitting in the bank, they’d have to sell one of the properties to pay for it. (This is why you often hear of these massive stately homes have financial problems - it’s paying death duties).

The only way to avoid it is to put everything in a trust for them but that complicated and has some drawbacks so you’ll need really good legal advice.

You need to see an IFA as there might be things which can be done to be more tax efficient.

To answer one of your questions though, the 40% is due on anything above a threshold of £325k. If you own your own home and leave it to your children, that threshold increases to £500k. So as you say, yes they would have to pay 40% of £700k as things currently stand.

The executor of the estate named in the will is responsible for settling any debts of an estate, including IHT, before any beneficiaries can receive any proceeds. If you don't think your sister is capable, you can appoint a solicitor to do so, for a fee, paid from the estate.

I'm not sure why you think young children should be exempt or treated any differently? What's absurd about it?

Just to make it clear, your children aren’t paying the IHT, your estate is. I appreciate it amounts to the same if they are getting all of your estate but it’s worth pointing out the distinction.

As another poster said, get legal and tax advice. If you don’t want to lose the properties you may be able to get an insurance policy which would pay out if you died, which would be outside the IHT scope.

Good point from @Horizons83 which I realise I wasn't clear on initially and rereading my post sound like I was contradicting myself. The IHT is paid from the estate. I used 'they' meaning your executors.

You should get proper advice about this.

I'm not a tax accountant but I am an accountant and have sat exams that included inheritance tax so I know a little.

There is something called a PET, potentially exempt transfer. This is where you gift something (to save on inheritance tax) if you survive 7 years after the gift then no tax shall be due. If you die within 7 years there is a scale which starts off at 40% and the closer you get to the 7 years it goes down in percentage.

You cannot gift your home as you are living in it and that would become a gift with reservation of benefit. You would have to pay them market rate rent to stay in your house for it to be all legal.

You have a rental property though and that's the one I'm thinking about. Could you gift that to them now in trust. Might be an issue though if you are still collecting rent on it, that would possibly need to go to them too.

The executors of the will, will probably need to sell the flat to pay inheritance tax, your children will have 325k outright, then further 175k from main home and 60% of remaining 700k so 920k between them in trust, obviously they have to be housed and cared for until adults, but the trustees should be able to do that from capital your will needs to ensure your children have funds to live until adults as guardians may need some financial assistance

No, you wouldn't have to pay 40% tax on all of your assets, there's an allowance of at least £325k, possibly more (something to do with transfer of property between immediate family, but I don't know what the rules are so won't try to guess).

However, if you want your DC to continue to live in the family home (also think about who would look after them if you died while they were still young) eg if your DSis, would you want her to move her family into your house, or would she need to find a larger property depending on her own situation, there might need to be a sale of something to pay the IHT, but you do get time to pay, they're not knocking on their door the day after your funeral. Or you could get a life insurance policy to cover it.

But you really want to take professional advice on this - you have a considerable estate so it would be worth paying a few hundred pounds/grand or two to make sure you're doing the best for your DC, but I understand that if you're cash poor, despite being extremely asset rich, you might struggle to be able to pay for this.

Another option might be to sell one or both properties, buy a smaller/cheaper property for you and DC to live in and then save/invest the proceeds to provide an income and liquid cash to pay the IHT should the worst happen. But that would depend on the yield on your rental property, possibly your age, ie how long to retirement and any different rules on property/cash and IHT. But again, you need advice from a professional who knows your full picture.

Aside from this, if your health problems are temporary it's fine but if it's not maybe you should sell flat to use some of the capital to live better, there is no point in being long term asset rich and cash poor, if you are struggling month by month financially you need to reassess everything. We are limited cash wise by Covid as income not great but we have assets, but hopefully business will pick up soon but if not we would release some assets not live on baked beans with no heating

Is your health condition something that would prevent you from getting life insurance? Tbh I think the amount you’d be leaving your DC should be adequate unless there’s six of them - and I’d be much more worried about guardianship.

Hi OP,
I don't think what you've been told above is the full picture. Yes, you add up the total, take off the lifetime allowance and pay 40% on the balance (with a few small exceptions) BUT you can pay the IHT on property (at least definitely on the rental property) over 10 years.

Oh my goodness I wasn't expecting any replies so soon. Thank you all, there's some very valuable advice here. I spoke to my accountant a year ago, his advice wasn't clear hence the confusion. Is there some sort of regulated board where I can find a good financial advisor? Will do this as a next step.

Argh, very complicated but I imagine that kids would live with their dad if I died. The easiest option would be him moving here because of their school /friends /.

I currently don't have life insurance. Going to reread your replies.

I'm not sure why you think young children should be exempt or treated any differently? What's absurd about it?

It’s an unfortunate side effect of being a single parent. Spouses are protected from IHT so life doesn’t have to change financially too much in terms of assets. Consequently the children of a marriage are also protected from major asset changes as long as one parent stays alive. Children of a single parent don’t have this protection. Obviously they’d mostly have to move out of the family home to live with other family anyway but not always. In my case a family friend would probably become guardian and move into the house they’ve lived in all their lives to try to create the continuity they would need, as would be the case for the children of a marriage, but this couldn’t happen because the house would have to be sold to pay IHT.

It’s a small unwelcome surprise when you are estate planning. I am not saying there’s a way around it. Just pointing out that there is a particular issue for single parent families compared to married parent families.

Hi OP,
If you don't have life insurance, that's absolutely the first thing to put in place.

As a single parent, did your husband die? was he the children father, if you had a husband.

This will make a difference to the IHT that will be paid on our estate.

If for example you had a husband and he was the children father and died hypothetically 7 years ago then you died next month then the first million would not have any IHT if the father didn't leave anyone anything in his will other than his wife.

as a single mother without being a widow then things will be different but if the money is in property then the estate will most probably have half a million that is not liable for IHT as you get £325k and then there is another £175k if you are leaving your home direct descendant and is called the main residence nil rate, meaning the first £500k is not liable for IHT

When you made your will did you solicitor not give you advice about IHT?

I would also get advice on making your rental property into a trading business by doing Airbnb, as this may have very different implications for leaving a business to your children. Whereas a buy to let is not a business and will not class as a business

Do you own them both outright, without a mortgage? You're pretty well off if so, whatever you might think!

willwritten.com/legacy-advice/seven-inheritance-tax-tips-for-buy-to-let-investors

If your DC were going to be completely alone in the world then that would be a problem, but since they have a father able to home them then it’s not really such a big deal - the amount they’d receive net of IHT should be perfectly adequate.

Thanks again all. ivykaty44 that's an interesting idea. I see the logic in that. No my solicitor didn't really explain anything, she was a bit wooly to be honest.
I also had no idea that life insurance could be an option.
Binterested thank you. That's exactly what I worry about. You put it across well.