Hi,
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!
- Home
-
Tax News
- Budgets and Autumn Statements
- Income Tax
- Business Tax
- PAYE and Payroll Taxes, National Insurance, NICs
- Company Taxation
- Savings & Investments, Pensions & Retirement
- Capital Gains Tax, CGT
- Property Taxation
- Inheritance Tax, IHT, Trusts & Estates, Capital Taxes
- Tax Investigations & Enquiries
- VAT & Excise Duties
- Stamp Duty, Stamp Duty Land Tax, SDLT
- International Tax
- HMRC Administration, Practice and Methods
- Professionals in Practice & Industry
- General
- TaxationWeb
-
Tax Articles
- Budgets and Autumn Statements
- Income Tax
- Business Tax
- PAYE and Payroll Taxes, National Insurance, NICs
- Company Taxation
- Savings and Investments, Pensions and Retirement
- Capital Gains Tax, CGT
- Property Taxation
- Inheritance Tax, IHT, Trusts & Estates, Capital Taxes
- Tax Investigations & Enquiries
- VAT & Excise Duties
- Stamp Duty, Stamp Duty Land Tax, SDLT
- International Tax
- HMRC Administration, Practice & Methods
- Professionals in Practice & Industry
- General
- Tax Tips
-
Tax Forum
- Income Tax
- Business Tax
- PAYE and Payroll Taxes, National Insurance, NICs
- Company Taxation
- Savings & Investments, Pensions & Retirement
- Capital Gains Tax, CGT
- Property Taxation
- Inheritance Tax, IHT, Trusts & Estates, Capital Taxes
- Tax Investigations and Enquiries
- VAT & Excise Duties
- Stamp Duty, Stamp Duty Land Tax, SDLT
- International Tax
- HMRC Administration, Practices & Methods
- Professionals in Practice & Industry
- General
- Tax Jobs
- Get in Touch