IHT on principal residence as specific legacy
Discussion
Question for those with more Estate and IHT experience...
Imagine an Estate comfortably in excess of Nil Rate Band. Testator passes away, leaves a Will and states a specific legacy - that they'd like their principal residence to be left to (for example) their house keeper. Remaining assets to be divided amongst family.
Am I correct in my understanding that after the granting of probate, the IHT due would be paid from encashment of other assets of the Estate and the housekeeper would then receive the house in it's entirety and free from any tax liability?
Theoretically the other beneficiaries could receive virtually nothing if the value of other assets (excluding the house) is only just sufficient to meet the IHT liability, correct? or does the Will need to state that the house is gifted free of IHT?
Imagine an Estate comfortably in excess of Nil Rate Band. Testator passes away, leaves a Will and states a specific legacy - that they'd like their principal residence to be left to (for example) their house keeper. Remaining assets to be divided amongst family.
Am I correct in my understanding that after the granting of probate, the IHT due would be paid from encashment of other assets of the Estate and the housekeeper would then receive the house in it's entirety and free from any tax liability?
Theoretically the other beneficiaries could receive virtually nothing if the value of other assets (excluding the house) is only just sufficient to meet the IHT liability, correct? or does the Will need to state that the house is gifted free of IHT?
larrylamb11 said:
Question for those with more Estate and IHT experience...
Imagine an Estate comfortably in excess of Nil Rate Band. Testator passes away, leaves a Will and states a specific legacy - that they'd like their principal residence to be left to (for example) their house keeper. Remaining assets to be divided amongst family.
Am I correct in my understanding that after the granting of probate, the IHT due would be paid from encashment of other assets of the Estate and the housekeeper would then receive the house in it's entirety and free from any tax liability?
Theoretically the other beneficiaries could receive virtually nothing if the value of other assets (excluding the house) is only just sufficient to meet the IHT liability, correct? or does the Will need to state that the house is gifted free of IHT?
I'd suggest it depends on what the rest of the will says. IHT is paid by the estate so if wording is along the lines of "after payment of all taxes, expenses etc. Housekeeper get the house and Children get the remainder of the estate divided equally" and it's clear that there are plenty of assets in the estate to cover the IHT then yes, the residual beneficiaries would in effect suffer the IHT. Whether or not you consider this equitable is something to discuss with the Testator before they kick the bucket but perhaps that is too late? If there aren't enough assets to cover the IHT without selling the house then the executor would have to make a decision about perhaps allowing the housekeeper to take a mortgage out to pay the IHT or just selling the house and leaving them the residual proceeds.Imagine an Estate comfortably in excess of Nil Rate Band. Testator passes away, leaves a Will and states a specific legacy - that they'd like their principal residence to be left to (for example) their house keeper. Remaining assets to be divided amongst family.
Am I correct in my understanding that after the granting of probate, the IHT due would be paid from encashment of other assets of the Estate and the housekeeper would then receive the house in it's entirety and free from any tax liability?
Theoretically the other beneficiaries could receive virtually nothing if the value of other assets (excluding the house) is only just sufficient to meet the IHT liability, correct? or does the Will need to state that the house is gifted free of IHT?
TLDR: Need more information.
If the housekeeper does get the house, they could be liable for CGT if sold later for a profit (based on market valuation at time of inheritance) plus, if they already own a house they have to tell HMRC which is their main home within two years or HMRC will decide for them when one of them is sold.
larrylamb11 said:
Am I correct in my understanding that after the granting of probate, the IHT due would be paid from encashment of other assets of the Estate ....
You can't get probate then pay the IHT, it's the other way round. Probate will not be granted until AFTER an IHT declaration has been made to HMRC and any IHT due from that declaration has been paid (or a portion of it paid and a staged payment plan agreed with HMRC for the remainder).Edited by siremoon on Wednesday 29th March 07:54
siremoon said:
You can't get probate then pay the IHT, it's the other way round. Probate will not be granted until AFTER an IHT declaration has been made to HMRC and any IHT due from that declaration has been paid (or a portion of it paid and a staged payment plan agreed with HMRC for the remainder).
Errr....that's not what happened when my mother passed away last July. We made the IHT declaration and got a payment plan, but probate was granted well before the first IHT installment was due (thankfully, as we had to sell assets to pay the IHT).Edited by siremoon on Wednesday 29th March 07:54
More info: The Testator's intention is that the housekeeper inherits the house with no liability, so I'll need to double check that the wording is appropriately explicit in the Will - it's not too late to amend this.
Luckily, in this case, there are no offspring involved and very little direct family - those there are have already benefitted from a prior generational inheritance, so it is likely the Testator's wishes will be judged as equitable.
Some payment towards IHT liability needs to be made prior to probate being granted, but not all of it so long as a plan is in place. There should be sufficient additional assets within the estate to cover the IHT liability without needing to sell or mortgage the house.... there'll probably be enough for a worthwhile inheritance for the remaining family too, even after the payment of the tax liability, but I just wanted to check the theory that IF the testator experiences a significant decline in the value of their assets, the housekeeper would still inherit as the testator wishes, whilst the remaining family pick up the IHT tab (upto the value of the other estate assets excluding the principal residence).
The CGT issue is a valid point to raise, thank you for that. It probably won't have any bearing on the testator's wishes, but is certainly something for the housekeeper to take advice on if the time comes.
Luckily, in this case, there are no offspring involved and very little direct family - those there are have already benefitted from a prior generational inheritance, so it is likely the Testator's wishes will be judged as equitable.
Some payment towards IHT liability needs to be made prior to probate being granted, but not all of it so long as a plan is in place. There should be sufficient additional assets within the estate to cover the IHT liability without needing to sell or mortgage the house.... there'll probably be enough for a worthwhile inheritance for the remaining family too, even after the payment of the tax liability, but I just wanted to check the theory that IF the testator experiences a significant decline in the value of their assets, the housekeeper would still inherit as the testator wishes, whilst the remaining family pick up the IHT tab (upto the value of the other estate assets excluding the principal residence).
The CGT issue is a valid point to raise, thank you for that. It probably won't have any bearing on the testator's wishes, but is certainly something for the housekeeper to take advice on if the time comes.
BertBert said:
Are you allowed to dispose of assets before probate to get enough cash to pay the IHT bill? Otherwise how do you get enough cash?
No you can't. You can agree a payment plan but HMRC will (usually *) want some of it up front. Many banks have a scheme whereby HMRC can be paid directly from the funds in the deceased's bank account, and also many banks will release funds from the deceased's account to the executor if the balance is below a certain amount. Otherwise the executor has to fund it themselves and reimburse themselves from the estate later or borrow the money."*" I say "usually" because I've never known HMRC not to want some up front but another poster says they didn't in their case so maybe there's scope to avoid it.
Edited by siremoon on Thursday 30th March 14:21
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