‘My mother wants to leave a third of her house to me – will I pay inheritance tax?’

Dear Gary,

My mother and I are very close, especially since I am an only child and my father died when I was 10, over 35 years ago. After she passed away, my mother inherited the family home and has been living there with her partner for the last 20 years, with whom I got along well. I have my own house with my wife and children.

When my mother died, she said in her will that one-third of her house was divided for me, one-third for my children when they turned 25 (currently both under 18), and one-third for her spouse. He also left his partner a small cash gift on the basis that he’s rich, so he’ll be fine financially if he dies first. He wants his partner to get a share of the house because he lives there and it’s his house, but the rest of the inheritance goes to me.

My mother’s property is worth around £900,000, including the £300,000 house. I understand that inheritance tax will not be paid as the IHT benefits will total £1 million. Is that so? I’m asking this on behalf of my mother, who wants to know the answer and wants me to write it.

Jonathan by e-mail

Gary’s answer:

You seem to have a great relationship with your mother and wife. In this context, we hope you all can have open and transparent conversations about what happens legally when your mother dies.

The death of a loved one is traumatic enough in itself, never mind when that person’s will discloses a plan that later has a significant impact on another person in a way that the person concerned is not involved in or at least not told about.

I’m talking here about your mother’s partner, who I think should have been aware that the plan was to share her inheritance in a way that could leave her homeless. They apparently have their own financial resources, but keep in mind that a spouse who has lived together for more than two years can file a claim against their deceased spouse’s inheritance under the Inheritance (Provision for Family and Dependent) Act 1975 if they feel that the judgment has been made. will is not reasonable for them.

The main concern you have voiced is about IHT. Over the last 15 years, the rules around it have gotten more complex and, in my opinion, they’re ripe for simplification. There is a risk that IHT will be paid out here, so let me explain how the position can be improved.

As a widow, assuming your father inherited all his assets and hasn’t made any recent lifetime gifts, your mother has her own basic IHT allowance, called the “zero rate band” (NRB), and 100 percent of the NRB transferred from you. father. The NRB has been pegged at £325,000 since 2009 and will remain at that figure until at least 2028, according to Chancellor Jeremy Hunt. .

The “primary home zero rate band” (RNRB) increases the amount of property that is not subject to IHT to take into account home price increases and is transferable from one spouse to another on death. This is the case even though your father died before it took effect in 2017. As your mother’s widow, her RNRB and her RNRB combined will continue to inherit your mother.

The RNRB is pegged at £175,000 or £350,000 until 2028, this time for a married couple (and civil partners).

On the face of it, that’s fine because it means that the total allowances available for your mother’s estate are worth £1 million and her inheritance is £900,000. But there is a problem. If your mother’s house is worth £300,000, this is the maximum RNRB her property can claim. The two combined NRBs earn £650,000, plus £300,000, more than the property’s total value of £900,000.

However, there are other nuances in the RNRB regimen that are pitfalls for the unwary.

First, the RNRB can only be used when a residence is released directly to the sub-entity. This means that one-third of your mother’s household is not eligible to go to her unmarried partner. In this case, this reduces the current RNRB to £200,000. (Not relevant in your case, but readers may want to note that for these specific rules, stepchildren qualify as direct grandchildren).

Second, while your children are clearly your mother’s grandchildren, the way you explain the gift to them in your will when they turn 25 means that if they die before that age, a foundation will automatically be set up under the circumstances. by his will.

This intervening trust means that he does not legally leave a share of the house to them directly, which again means that the RNRB will not apply to their gifts and will deduct an additional £100,000 from their current IHT allowance. This means that only £750,000 of your mother’s £900,000 property will not be subject to IHT and the other £150,000 will be taxed at 40%. This would give HMRC a regular sum of £60,000.

This IHT fee can easily be mitigated if your mother reconstructs her will and leaves your entire home to you and gives your 25-year-old children and spouse a cash gift of one-third the estate. This way your mother’s wishes will be fulfilled and HMRC will not receive a penny.

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