Inheritance tax and NHS death in service lump sum

[Cashpoorequityrich]

Name change as I’ve discussed this with colleagues recently.

DP and I aren’t married. Don’t have much, no savings to speak of and a second hand car in my name. However, our house has just topped £400k (south east England, I know it’s ridiculous) so in theory if one of us dies the other gains their half of the house. We’ve ensured this will happen legally (joint tenants, joint wills etc). I know the inheritance tax threshold for unmarried couples is £325k so wasn’t worried as my half of the house at £200k isn’t anywhere near this.

However, a chat with a colleague recently had me wondering about my death in service lump sum. DP will get my lump sum as well as the survivor pension. The pension shouldn’t be IHT liable, from what I can find, but the lump sum I’m not so sure about.

The NHS scheme is non-discretionary rather than discretionary, which my colleague says means it’s IHT liable. My lump sum death in service payout is 100k. I’ve read round it lots but can only see “may be liable” rather than a definite is, and I was wondering if anyone had experience of the death in service lump sum being subject to inheritance tax? Just want to know so we can accurately reassess our options (marriage, basically!) if required.

It’ll only be an issue if the house goes up in value another 50k, but that might only be a few years away. Worse problems to have, I’m aware, but it’s theoretical money as we aren’t moving anywhere.

Thanks for any advice.

Sorry I'm not an expert but isn't IHT on payable on any amount above £325k? So let's say your estate went to £350k with the house value and death in service, IHT would only be payable as a percentage of the excess £25k, eg, not very much. And he could use the death in service to pay it off if necessary?
Someone more knowledgeable may be along to clarify.

I think if you've nominated your partner to receive the lump sum on death it passes directly to him and is outside your estate. The analogy is life insurance which, in effect, is what we're talking about.

That was certainly our assumption in a similar position when I was a serving Civil Servant with my death in service lump sum nominated to my partner.

Might well be different if the sum went into your estate.

You need to check (a) the employer's understanding and (b) best to take professional advice.

@movintothecountry yes it’s only payable on the proportion above £325, so even once it tips over £325k it won’t be a large amount of IHT just on whatever was above the threshold but I’d like to know for sure if the lump sum counts. If it doesn’t, then we don’t need to think about it at all!

@Bromptotoo that was what I thought! However colleague has muddied the waters with her non-discretionary comment. I agree professional advice is the way to go but I figured I’d ask for any real life experience with this before I pay for that (cash poor despite the dubious benefit of being worth a fair bit dead!).

If you are passing on your primary residence the threshold is 500K for IHT. If you are married you can pass on your whole estate to your spouse IHT free. If your spouse then dies and you did not use any of your IHT allowance and you are passing on your primary residence, your spouse can use your allowance too (500K + 500K) so you can pass on upto 1 million. You can see the Tories set these rules!

DMIL lost her husband at 48. She automatically inherited his estate but never used his 325k IHT allowance. She will be able to pass on 1 million pound worth of assets. The 2 bed bungalow she has lived in for 60 years is now worth 480k.

There are some good youtube videos about this sort of stuff by financial companies/pension experts.

If you own your house as joint tenants then the house passes to the other, as they already own all of it, without being part of your estate - so IHT free. It's only if you own as tenants in common that your half becomes part of your estate.

They're not married @diian

I don't think that's right. The survivor will automatically acquire the whole property but AIUI their share will still count for IHT.

That’s not right, we took legal advice on this when we bought together and made our wills. He will have to pay IHT on my half of the house.

Oh really Get married!

Apologies, my previous reply was to @titchy but the quote function hates my phone!

Only if we have to financially 😂 we aren’t fussed otherwise

Avoiding IHT (plus all the other benefits) would seem to be worthwhile financially no?

The 500 k includes 175 residence nil rate band which only applies if house left to direct dependent so child not partner. The lump sum needs to be left in trust so it goes straight to partner and bypasses your estate. However if he dies 1st the market value of it will be included in his estate

@Cashpoorequityrich

You are tenants in common then rather than joint tenants. Your half is essentially separate. If you are joint tenants then there is no iht to pay on the house element

I assume the NHS death in service benefit is outside of my estate. I believe it’s akin to life insurance as it will be paid directly to my nominees without probate being required I.E. soon after my death so no inheritance tax will be payable.

It looks as if it might be taxable unless you're married. Have a look at the BMA website pay and contracts info.

Is the point not that it IS financially worthwhile? It’s a legal contract which brings legal rights, the biggest being no IHT between spouses

I’m not sure that’s correct. My understanding is that joint tenancies aren’t exempt from IHT - they just pass automatically to the other owner. Often there’s no IHT to pay because the joint tenants are married, but that is because of the spouse exemption, not anything to do with the tenancy.

It’s been quite a few years since I worked in this area, though, so if it’s changed then I’d be interested to see a link.

Not being difficult or confrontational but can you quote a source/legal authority for a joint tenant taking their share outside of an IHT calculation.

As a joint tenant with my partner of 40 years that's not the advice we have had.

It is the relationship that is the important bit. Most spouses do as joint tenants. But it is the spouse bit that is relevant

We have done it as joint tenants and we still have to pay IHT, that doesn’t exempt us. We had legal advice on that when we bought.

To the posters who have said we should get married, we probably will if it turns out the lump sum is subject to IHT! If it isn’t, my estate (ie my half of the house) is “only” worth 200k so no financial benefit. We’ve discussed it and we can’t really see any other tangible benefits. We are already on record as each others next of kin, and we carry cards stating that in our wallets/are registered at GP as NOK.

I can’t tell from the public NHS website whether the death benefit nomination is binding on the scheme. If it is non-discretionary as you say, then it would potentially be liable for IHT. If it is not binding on the scheme (i.e. discretionary), then it would not be liable for IHT.

The HMRC guidance is here if you want to trawl through it, but it isn’t the easiest reading… https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm17052

Don’t forget, as time goes on, your house may well increase in value. But then again, hopefully you won’t die before you finish work, so won’t a]have the death in service lump sum to contend with!

Yes I tried to wade through it and got my brain turned backwards and inside out! Thank you.