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Where Taxpayers and Advisers Meet

IHT confusion over estate

Joined:Wed Oct 13, 2021 10:55 am
IHT confusion over estate

Postby BlueDay » Wed Oct 13, 2021 11:37 am


I have a question regarding IHT that I would like clarification on. After speaking recently to a finance advisor I am still left a little confused with regards to tax free limits, 7 year rules etc. so I have put together a little hypothetical scenario which someone may be able to clarify for me?

Lets assume that the total estate of two parents is £2.5m. £2.2m of the estate is in cash / savings etc. and their house has a value of £300k.

The parents decide to make a cash gift of £500k to each of their two sons (£1m total) which reduces the estate value to £1.5m.

One parent dies and the second parent survives for over 5 years but dies on year 6 after gift has been made.

In this situation my understanding is that the total amount of IHT would be calculated as follows:

The tax free allowance for IHT purposes is currently £325k per parent (£650k for both parents) + £175k per person for the house (£350k for both parents).

This gives a total IHT free allowance of £1m so IHT would only be due on the balance of the estate which is 1.5m (including the cash gift of £1m paid to their sons?).

So now the IHT liability would be calculated as follows:

As the surviving parent dies after 5 years of making the original gift, the IHT tax band for years 5-6 is currently 16% and so this would apply to the original gift of £1m made to the sons which equates to £160k. The balance of the estate would be £500k and would be taxable at the rate of 40% which equates to £200k.

Therefore the total IHT liability for the estate of £2.5m in this instance is £360k.

So of the total £1.5m taxable benefit (estate value of £2.5m - £1m tax free allowance) each son would essentially lose £180k of their £1.25m inheritance (£2.5m estate / 2).

Is this correct or am I over complicating things?

In another scenario, if the parents estate was worth say £950k to start with and they gift their sons a cash amount prior to their death, am I right in saying that no IHT would be due at all as the tax free allowance is £1m?

Any comments welcome!

Joined:Fri May 16, 2014 3:47 pm

Re: IHT confusion over estate

Postby AGoodman » Wed Oct 13, 2021 7:52 pm

You're way off I'm afraid - partly because you've simplified it too far.

First death (within 3 years): IHT on half the gift of £500,000-£325,000 * 40% = £70k

Second death:

IHT on half the gift = £500,000-£325,000 * 16% = £28k
IHT on the estate = £1,500,000 - £300,000 * 40% = £480,000

Total IHT is £578,000.

Don't forget that you can only claim the additional nil rate band on the value of qualifying property passing to descendants. If the house is only worth £300k, then that is the maximum that can be claimed. The above also assumes that the gift is made jointly by the two parents - i.e. £500,000 each and that the parents leave their estates to each other.

If these sums are realistic, the parents need proper paid advice from somebody (I'd suggest a solicitor or accountant) with expertise in estate planning.

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