How to calculate beneficiary payments following IHT

[Cloisters]

I am an executor of a will that has left part of a house to someone and then divides up the remaining estate between three other beneficiaries i.e. four beneficiaries in total.

To calculate the IHT due the value of the house portion, plus the residual estate, minus allowances, will result in the IHT figure.

My question is (given that nothing states it in the will), is does the person who inherits the part of the house become liable for a proportion of the IHT bill?

For example:

Say the house portion was worth £100,000 and the remainder of the estate (investments, deposits etc) £300,000.

IHT would be £400,000 - £325,000 (allowance no RNRB) = £75,000 *40% = £30,000

So do the beneficiaries of the residual estate inherit £90,00 each - as £10,000 is their portion of the IHT bill

OR

Is the IHT burden split with the person who inherited the house and they must raise that money to pay in to the estate for distribution
i.e. £7,500 being one quarter of the tax due?

If there are any UK GOV examples of such I would be most interested in link or similar articles etc.

Many thanks in advance.

[someone]

My question is (given that nothing states it in the will), is does the person who inherits the part of the house become liable for a proportion of the IHT bill?

This is a legal question, not a tax question.

If there are PET gifts in scope, then they use up the IHT allowance first, oldest gift first, and the recipient of any failed PET is liable for the IHT due on the gift (possibly at a reduced rate). The executors do have a secondary liability if the recipient can't or won't pay - so they should take legal advice before distributing anything if this situation looks possible.

But once that is dealt with, I don't know whether named bequests are made before IHT is paid or after. I also don't know what happens if the residue isn't enough to pay the tax and there are multiple named bequests and some, but not all, need to be sold to pay the tax.

IHT on PET gifts is described here:
https://www.gov.uk/inheritance-tax/gifts

I don't know of a good source to look for stuff about how to share the tax burden amongst beneficiaries. It's probably not covered by HMRC advice as from their PoV the tax is calculated on the estate and the question of how to distribute the estate is irrelevant to how much tax should be paid and by when.

[AGoodman]

The general rule is that inheritance tax is all born by the residuary beneficiaries, so not the legatee of the house. - s.211 IHTA 1984

Exceptions are where the will says different or if the subject of the legacy (i.e. the house) is outside the UK.

It's common practice (at least mine) to make it clear in the will that all legacies are free of tax but if the will is silent, this general rule should still apply.

[Cloisters]

Thanks for the responses, much appreciated.

I understand the position that the IHT is borne by all legatees, but surely it is in proportion to their benefits? i.e. if one person is receiving £100,000 and another £10,000 then the higher beneficiary would pay 90% of the inheritance tax I assume.

The problem here is that the house value far outweighs the other beneficiaries and the IHT would wipe out the cash beneficiaries, so unless the person who gets the house pays into the estate somehow, then I can't see how it works out fairly.

My original numbers were an example but a better one would be a house worth £400,000 and other residual amounts split between three beneficiaries of £100,000.

So with an IHT bill of say £100,000 on the entire estate does the person who gets the house pay their "share" (i.e. 80,000) of the IHT or does it all come out of the estate and the residual beneficiaries get nothing?

There must be cases where someone inherits property and no money is left so they have to contribute to the tax. I assume this is a similar situation but can't find clear examples anywhere?

It would have been nice (for the person getting the house) if the will had been clear on the tax status of it, but sadly not.

[someone]

You, as the executor, have to do it according to the law. If you don't then any beneficiary who loses out will potentially have a claim against you personally for their shortfall.

[Cloisters]

Thanks I’ll leave it to the solicitor

[AGoodman]

Just echoing what "someone" has said.

in the example you gave, the residuary beneficiaries would not get anything - they were never going to get anything as the estate expenses absorbed all the residuary assets.

If the residuary estate is insufficient to cover estate expenses (including tax) then legacies are reduced (or, if the legatees prefer, they can contribute to the IHT to avoid the sale of the asset). There are a lot of rules governing how this is done.

[Cloisters]

Thank you