IHT is it deducted according to the actual % inheritance?

[CuriousRunner]

Sorry. That's a REALLY clumsy title. I can't think of the right words. I'm trying to ask where is the IHT deducted/paid from? Is it deducted as a % according to the sum to be received by different beneficiaries?

Ok. The reason I ask.

PIL. When the time comes. Three children. Estate will be "cash" and property. For all very above board and well known within the family reasons the estate won't be divided equally between the three children. Cash would be equal. But property between two of the three children.

Obvs the cash is an easy source to pay the IHT from. But is the IHT burden "divvied" up fairly according to the value to be inherited? Or does it come from the estate before any individuals are considered?

I hope I'm making a modicum of sense.

(Don't get bogged down by what might appear to be unfair. I've dumbed my example down for (hopeful!) clarity. )

Thanks!

It can be either but if it’s not set out in will it comes out of estate before anyone is paid.

so in the case you describe there will be less cash to divvy up.

Estate is valued including the value of the properties and the inheritance cash paid before distributions made. if there isn't enough cash then the properties will have to be sold.

It comes from the estate before it is passed on to individuals. Otherwise it would be easy to avoid tax by passing on to several people in one family instead of just one person.

So the problem in your case is that there won't be enough cash to give the person who is only getting cash their share?

Is it expected that the house will be sold, or will one or both of the siblings inheriting it be planning to live there? If the latter, is taking out a mortgage an option?

But is the IHT burden "divvied" up fairly according to the value to be inherited?

No, I don't believe so.

If I'm understanding you correctly, you're asking if (for example) there was £100k of IHT to pay, a property worth £600k and cash of £400k, would £60k of IHT come from the property and £40k from the cash, so that everyone's inheritance is reduced proportionally, or would it all be taken from the cash?

I could be wrong, but my understanding is that it would come from the money left, unless that wouldn't be enough to cover it.

Thanks!

The Wills are being reworked at the moment. And the accountant is involved too. The project is work in progress. So good call @aodirjjd that it can be set out in the Will.

I'm not sure the depth (sums involved) of this issue just yet. But I can see the problem at a high level in-coming. There might be enough cash @Bjorkdidit but it would seem extra unfair that one son would bare the burden on his inheritance of the overall estate value.

Thanks @JoyousEagle Yes, I think that's what I mean. Of the IHT bill was £100k would it be divided 40%/40%/20% (for example) with each son then deciding how the bill is paid - eg own cash savings vs having to sell property.

But is the IHT burden "divvied" up fairly according to the value to be inherited

This is a separate issue and complicated by allowances that apply differently to property and cash.

It's not the case that if A and B inherit £400k of property and £100k in cash while C just gets £100k of cash then A and B have £50k of tax taken and C £10k.

The estate would be valued and allowances applied, eg there is no IHT payable on the main residence up to £1M, if this was owned by a married couple passing on to their DC/GC. But then there would be 40% tax applied to any value above that, plus on any cash/shares/other non property assets (I think).

But if you're worrying about IHT, a lot of money is at stake, so it's probably worth getting advice from a professional who has the full picture, not from posting confused questions on a chat forum.

Cross posted, but in effect that's how it works, which is why I said that A and B to follow on with my example, might have to take out a mortgage (or hand over cash) to C so he gets his inheritance.

It's not a case that one son is 'bearing the brunt of IHT' unfairly, but the situation is not helped by the unequal (but not necessarily unfair, it sounds like there are reasons why it is being done like this) distribution of the assets.

If A and B inherit a £1M property between them, no IHT is due because of the allowance. But if there is also £300k of cash/shares etc, that will be taxed at 40% because the nil rate band has been used by the property (made up numbers that hopefully illustrate the point I am trying to make, also hope I have got it right).

They would be better off stipulating that property is sold but that 2 of the DC get more of thecassets eg 40%, 40% and 20%.
Then they can buy a property if there us sufficient left after IHT.
Otherwise if they say property1 to A and property 2 to B and residue to A,B,C there may be no residue...

From my understanding, all the tax is paid for out of the estate before its divided up according to the will.

Say the total inheritance is worth £1,000,000, of which £700,000 is house and £300,000 is cash. Inheritance tax will be on £500,000 (if the house is left to children I think) so 40% of that 500k will be £200,000 in tax (ouch!). That 200k will come out of the £300,000 cash which means only £100,000 left, so if the 3 children are splitting the cash then they each get £33,000.

If the house was sold and not inherited directly by a child, then the tax threshold is £325,000, so 675,000 is taxible, which would mean a bill of £270,000. If the whole estate was then split equally each child would get £243,333. two of the children could pool their money together, and add in some more and buy the house privately.

@Bjorkdidit oh Lordy, yes the different allowances...remembering...

Thanks All. I only needed a little understanding to help my ignorance. Accountants are well involved for advice. But my brain works faster than their investigation and report writing. Hence posting for high level info Accountant bill will be £10k plus. It's not a half-arsed job.

If you think it's expensive to pay a professional, wait until you see the cost of not paying a professional.........

I didn't give an opinion on expense. Anything these guys can do to take the pressure off (amongst other things) is worth its weight in gold. Happy to pay a professional a fair price for a fair job.

No it would be paid from the estate before -the estate value is declared to HMRC at probate application.
IHT would be met with the cash and/or sale of the property
Then the individual inheritances are distributed

It depends on the wording in the will, a gift may be given “free of taxes” otherwise it will be divided equally, meaning someone only inheriting a house may have to pay money to the ones getting the cash.

that accountants bill seems totally mad.

Would expect it to be in the hundreds.

@aodirjjd I've had to pare the details right back. The actual details are kind of irrelevant to my high level question. The accountant is having to work out the value of the estate, the IHT impact and the possible options for reducing it. It's a big old job.

I'm going to put this in simplistic terms (the reality is more complex but the accountant should be able to sort it out). It is possible to state in a Will that a gift bears its own tax. This might be a good way to resolve the issues on the properties as tax on properties which are not sold can be paid in installments over 10 years. Then the IHT on the properties is taken out of the equation, the cash bears its own IHT and each beneficiary gets a share in the cash left after tax. It is also possible to specify that a legacy is to be paid out in full with the balance of the estate bearing the tax on that legacy. So if there was £300K of cash and two properties worth £500k then Child A who is only getting cash would get £100k, Children B & C would get half of the cash pot after the tax on the cash has been paid along with the first installment of tax on the properties and they would each get a property plus the responsibility to pay the annual installments of tax on their properties for the next 9 years (or until they sell it when the full balance is due).

Agree it would be better to avoid unforseen complications to simply divvy up inheritance by percentage. Mixing specific items or amounts with percentages or residue estates can cause all kinds of problems.

My mum has left her large estate to her three kids but has left considerate and specific lump sums to various charities. Its very possible that should the estate be deleted, that all her assets would end up going to charity rather then us. Fine if it's what she wants but that isn't the case. She can't forsee this being an issue (because she plans to die suddenly in her sleep aged 90). So there's nothing to be done.

It is deducted from value f estate before it is distributed so none pays a %

Later posts more accurate than earlier.

It depends on how the will is worded, to which we don't have the detail.

If there is a desire for any taxes due to be attributed between all, or in a proportionate way, or just on the cash beneficiaries, it would be wise that this is stipulated in the will.

Assets falling into the ‘residue’ are distributed after the payment of IHT and any debts etc.
however if they are making a specific gift of the property to certain beneficiaries, it won’t fall into residue. It should therefore be stated in the will whether this gift is ‘free of’ or ‘subject to’ tax.
this is further complicated by the IHT standard allowance being £325k and an additional £175k allowance where a property is left to (broadly) direct descendants. This means that the property will attract extra IHT allowances. If the first of a spouse to die didn’t ’use’ their allowance (for example if left to a surviving spouse or on an IPDI trust to surviving spouse) the allowance is transferable to give £1m max total on second death.

if their estate is a level where they will pay IHT then they need to take advice on the IHT affect and possible imbalance in what the beneficiaries will receive.

I’ve had a similar situation with my father’s estate. I have inherited the house (my brother will inherit my mothers) and any money was to be split between us. But the money wasn’t a great amount and well below the amount payable in IHT. So I have said I’ll pay my brother my share of cash too after solicitor’s fees. But the problem is probate and signing the property over hasn’t been easy, and has only just gone through after 2 years, so my brother won’t receive anything until our house sells. It’s taken so long to empty my father’s house, he was a hoarder. I think my brother is running out of patience, but he will end up with double what he should have, and he hasn’t helped at all sorting out dad’s house!

I'd shop around for a cheaper accountant if you don't think the issue warrants a £10k bill.
Don't forget this will come from the estate and will be more like £6k (I'm sure why the costs get inflated so much)

@CuriousRunnerdid you get anywhere with this?

we have a similar issue as my Aunt passed away recently - she’s left her main house in life interest trust for benefit of her (unmarried) partner, and will go to daughter on partners death. There are other cash stocks also going to daughter. But the house is by far largest % of the estate. It doesn’t seem fair that the shares etc have to be sold to pay the IHT (which won’t be enough to cover IHT anyway) on the house which daughter likely won’t inherit for a long time, and which we understand would also then be subject to 40% IHT when the partner dies.

Should the trust somehow be forced to take a loan for IHT, and who (and how) is that supposed to be repaid? Or should the house be sold to pay IHT despite being in trust?

None of the assets stated ‘free of tax’ so the situation is not very clear.