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IHT on Death Estate

Transfer of interest in home

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My client's father passed away in 2014 (2014/15) and as per his will, 50% of his share in family home (50% held by mother) was transferred to 5 donees.  1/5th to deceased's wife and 4/5th to his 4 children.

I was reviewing IHT calculations done by the previous accountant in 2014/15 and he has calculated £675,000 (£1,350,000 was the valuation on death) as the transfer value on which IHT was paid.  

Shouldn't the transfer value be £540,000 (£675,000/5 x 4) as 1/5th transferred to the wife wouldn't be subjected to IHT? Or am I missing something? 

I understand how releif and allowances work for IHT but I can't believe that the previous accountant would have made such a mistake so wanted to confirm before getting back to the client.

Thank you.

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By Tax Dragon
24th Feb 2021 07:02

To be fair, the average accountant's IHT knowledge is next to zero. For the most part, they really should steer clear of IHT computations - whether as preparer or, as in your case, as reviewer.

Had you actually understood the way spousal exemption works, you'd've known that it doesn't reduce the ToV, as per your OP. And had you known more about the death rules, you might have mentioned domicile, you might have told us whether the house was in the residue (split 5 ways) or as a specific legacy, etc. You might at the very least have provided enough information about the calculation for us to comment on whether it was correct (the bit you have told us, the ToV, is correct - thanks to the related property rules).

As it is, you haven't told us enough. It starts right but may well be wrong further down. No-one here can know. But remember that IHT is an HMRC-assessed tax and HMRC would have corrected an error as basic as the one you are suggesting. Have a look at the HMRC assessment - far more relevant than an accountant's computation.

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Replying to Tax Dragon:
Zia Tahir
By sphericalaccountants
24th Feb 2021 09:44

Thank you for your detailed reply.
Yes, my question should have been worded differently as currently it focuses more on ToV but it was more about computations and tax paid.

I know spousal exemption doesn't change the ToV but in this case 40% tax has been paid on £352,100 (£675,000 - £322,900). £2,100 of £325,000 was used up by a LT transfer. No taper relief available.

Both husband and wife were UK domiciled (not deemed domiciled so 17 of 20 years rule doesn't apply).

There were no debts/expenses to pay so not residue.

House was always and still is the family home so no APR or BPR.

HMRC's assessment on valuation was in line with the computations.

I can't get my head around why spousal exemption was not applied.

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Replying to sphericalaccountants:
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By Tax Dragon
24th Feb 2021 10:55

If the deceased somehow had no other assets and left a will that simply said "I leave everything equally to my widow and children", then I think the computation would be as simple as you suggest, "everything" would translate to the house (and the previous accountant was wrong). [I may be inviting some ridicule, but first responders risk that! :-)]

But I find every part of that scenario unlikely. I don't believe there were no other assets. I question whether the will made no specific reference to the house (and, in so doing*, took it out of residue... by the way, look up residue of the estate, so you know what I'm talking about). And I'm doubting that the computation is so simple. But you're right - spousal exemption should have been considered. And it's disappointing if HMRC did not raise that point: the exemption is not a claim, and HMRC is duty bound to apply it, if provided with the facts.

*For clarity here, "so doing" means making reference. (I've fallen over my poor English a bit, I think, in the sentence as written.)

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Replying to Tax Dragon:
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By Tax Dragon
24th Feb 2021 12:14

Tax Dragon wrote:

[I may be inviting some ridicule...

I may have to ridicule myself. Simple example, no remaining NRB, £1m estate split equally between widow and child. On OP's simple approach, tax is £200k (40% of half of £1m). But who pays it? Is that equal? If so, then widow gets £400k - so spousal exemption is £400k, not £500k as per OP.

Sigh... I'm going to have to look up the rules again. [I always do real-life IHT comps with with the rule-book open. Make sure I gross up when I should and not when I shouldn't, etc. So my opening remarks about accountants should not be taken as overly harsh. Tax students might remember the rules (so delegate the comps to one of them if there's one handy); people with real jobs not so much.]

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By Taxain
24th Feb 2021 14:43

The first thing to ascertain is whether the property was held as joint tenants (this is normally the case for married couples) or tenants in common.

If the couple were joint tenants (which would probably be the case for married couples) then the property fully transfers to the wife before even the will kicks in. Thereafter the will shall only transfer those assets which remain after any joint property has passed to the wife.

If this is the case then no IHT should have been paid provided his remaining assets were below the available NRB. (This is why it is advised to go to a probate lawyer when dealing with these matters rather than an accountant). There may be a potential claim for professional negligence here.

If for whatever reason, the property happened to be tenants in common, then
Wife's share is exempt for IHT purposes due to spousal exemption.
Therefore, transfer value is £1.35m x 50% x 80% = £540,000
Less available NRB of £322,900, means taxable amount is £217,000 (and not £352,100). Hence inheritance tax paid should have been £86,840.

Just a point to note, if joint tenants then the husbands Residential NRB may be available for wife to use as only one couple died before RNRB was introduced (April 2017). Gov website:

"Any RNRB that’s not used when someone dies can go to their husband, wife or civil partner’s estate when they die. This transfer can also happen if the first of the couple died before 6 April 2017, even though the RNRB was not available at that time."

Just something to consider for future tax planning.

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Replying to Taxain:
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By Tax Dragon
24th Feb 2021 15:52

Taxain wrote:

If for whatever reason, the property happened to be tenants in common, then
Wife's share is exempt for IHT purposes due to spousal exemption.
Therefore, transfer value is £1.35m x 50% x 80% = £540,000
Less available NRB of £322,900, means taxable amount is £217,000 (and not £352,100). Hence inheritance tax paid should have been £86,840.

No the transfer value is £1.35m x 50% = £675k; the question is how much of that is exempt due to passing to the widow. I don't think that's just me being pedantic - I think it's fundamental to understanding grossing up (see eg IHTM26131). You haven't grossed up - I don't think you ever would if you thought exemptions reduced transfer values. Of course, you may be right in this instance not to gross up: IMHO we've not been told enough to conclude with certainty.

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By Tax Dragon
24th Feb 2021 16:16

OP, compare and contrast your summary with HMRC's summary in IHTM26171. I'm not saying your scenario is the same [it may or may not be]; I'm saying that it's not necessarily an easy question, that the answer can turn on one or two words in a will [or, as Taxain says, might not be governed by the will at all] and that by and large these matters should be left to people who know what they are doing. Also, as you have (surely!) painted only part of the picture for us, there could be other factors in play.

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