Inheritance tax and capital gains tax?
Discussion
We own a few rental properties and we're contemplating the future.
One scenario is we keep them until we die, and the kids inherit what's left after tax.
What I don't know is how that works, so I need ro get my head around it. Let's say our own home took all the inheritance tax allowance, and we had one rental property bought for 100k but worth 200k on my death (without a mortgage). What would the tax siruation be on that property?
Edited to add....
To keep it simple assume single, no capital expenditure to off set etc. It's simply how taxes would be calculated on 200k value, 100k profit.
One scenario is we keep them until we die, and the kids inherit what's left after tax.
What I don't know is how that works, so I need ro get my head around it. Let's say our own home took all the inheritance tax allowance, and we had one rental property bought for 100k but worth 200k on my death (without a mortgage). What would the tax siruation be on that property?
Edited to add....
To keep it simple assume single, no capital expenditure to off set etc. It's simply how taxes would be calculated on 200k value, 100k profit.
Edited by 98elise on Wednesday 1st November 12:43
Surely CGT wouldn't apply on your death it would all be assessed as IHT?
So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
Armitage.Shanks said:
Surely CGT wouldn't apply on your death it would all be assessed as IHT?
So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
Armitage is right, assuming you have already used your IHT allowance of up to £1m. Any Capital Gains die when you do, so all that is left to pay is the IHT on the value of the estate/property over and above the allowance. That said I believe there is a taper on IHT such that if your estate is over £2m as a couple then you start to lose the extra £350k (£175k each) nil rate band allowance. So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
If you are in this position you may want to speak to a specialist as you can mitigate some of this.
Eric Mc said:
What the property cost has no bearing on Inheritance Tax.
It is a crucial part of calculating the Capital Gain for Capital Gains Tax.
I know which is why I gave the value and profit in the example. I want to understand how each tax would apply though. Are they calculated in isolation, or is there a sequence etc.It is a crucial part of calculating the Capital Gain for Capital Gains Tax.
bompey said:
Armitage.Shanks said:
Surely CGT wouldn't apply on your death it would all be assessed as IHT?
So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
Armitage is right, assuming you have already used your IHT allowance of up to £1m. Any Capital Gains die when you do, so all that is left to pay is the IHT on the value of the estate/property over and above the allowance. That said I believe there is a taper on IHT such that if your estate is over £2m as a couple then you start to lose the extra £350k (£175k each) nil rate band allowance. So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
If you are in this position you may want to speak to a specialist as you can mitigate some of this.
So in the example of an additional 200k property (with 100k capital gain) there would simply be an IHT applied on the 200k?
98elise said:
bompey said:
Armitage.Shanks said:
Surely CGT wouldn't apply on your death it would all be assessed as IHT?
So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
Armitage is right, assuming you have already used your IHT allowance of up to £1m. Any Capital Gains die when you do, so all that is left to pay is the IHT on the value of the estate/property over and above the allowance. That said I believe there is a taper on IHT such that if your estate is over £2m as a couple then you start to lose the extra £350k (£175k each) nil rate band allowance. So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
If you are in this position you may want to speak to a specialist as you can mitigate some of this.
So in the example of an additional 200k property (with 100k capital gain) there would simply be an IHT applied on the 200k?
You have 2 allowances, the basic £325K and a further £175K where a property (i.e. your home) is passed directly to descendants (children/grandchildren only).
If you have a spouse you can either gift out to the level of your allowances (and more if you want) & pass the rest through to the spouse or you can pass the lot through in which case any unused allowances go as well - which is where you can get to allowances totaling £1M on the second death.
If you don't have kids the property allowances may not apply.
As a single person, assuming the property allowance does not also apply, then all assets get valued for probate & IHT will apply on anything over £325K
Purchase prices are irrelevant & CGT doesn't come into it. Any capital gains that you might have on paper at that point are irrelevant & effectively wiped out.
Anything you hold in a SIPP (which might also include some property) can also be outside your estate, That might need to be "commercial" property & I don't know what qualifies as that. Different tax rules also apply to that depending on if you keel over before or after you are 75
Edited by Wombat3 on Wednesday 1st November 14:23
We are trying to work this out just now. We have no kids or dependants.
Our house is worth about £700k. We have £500k in the bank. Also have life insurance for fixed £100k.
Our decreasing term insurance paid out 2 years ago as my wife had cancer. (Critical illness but she’s fine).
My death in service is approx £300k. My wives is approx £1.6million.
Don’t know what happens with private pensions after you die before or after pension age etc.
TBH I’ll be dead so not that bothered!
But would like our younger nephews and nieces not to be het for a massive tax bill.
Also what happens to moveable goods like watches, jewellery and other collections worth a fair bit. (Thinking my wife’s shoes and bags and my watches).
Our house is worth about £700k. We have £500k in the bank. Also have life insurance for fixed £100k.
Our decreasing term insurance paid out 2 years ago as my wife had cancer. (Critical illness but she’s fine).
My death in service is approx £300k. My wives is approx £1.6million.
Don’t know what happens with private pensions after you die before or after pension age etc.
TBH I’ll be dead so not that bothered!
But would like our younger nephews and nieces not to be het for a massive tax bill.
Also what happens to moveable goods like watches, jewellery and other collections worth a fair bit. (Thinking my wife’s shoes and bags and my watches).
The private pensions can be inherited tax free and instantly accessible if you die before 75 ( I had 72 in my head for some reason).
The death in benefit is also outside of your estate.
So you should make expressions of wishes and incluse this in your wills. They may look further than just the expression of wishes and so the will backs this up.
The death in benefit is also outside of your estate.
So you should make expressions of wishes and incluse this in your wills. They may look further than just the expression of wishes and so the will backs this up.
shambolic said:
Also what happens to moveable goods like watches, jewellery and other collections worth a fair bit. (Thinking my wife’s shoes and bags and my watches).
They are totted up by the executor and form part of the total value of your estate. If you paying for life insurance I'm not sure why you have it in your position?Work based pensions usually have a casting spousal benefit when you die - usually 50% of what you got until they die then that's the end of it.
I wouldn't worry about nephews etc getting a tax bill, they're going to be getting money for nothing anyway. Although personally in your position I'd be spending it whilst you can both enjoy it.
Armitage.Shanks said:
shambolic said:
Also what happens to moveable goods like watches, jewellery and other collections worth a fair bit. (Thinking my wife’s shoes and bags and my watches).
They are totted up by the executor and form part of the total value of your estate. If you paying for life insurance I'm not sure why you have it in your position?Work based pensions usually have a casting spousal benefit when you die - usually 50% of what you got until they die then that's the end of it.
I wouldn't worry about nephews etc getting a tax bill, they're going to be getting money for nothing anyway. Although personally in your position I'd be spending it whilst you can both enjoy it.
Tbh we redone the mortgage one when we bought our new current house. (It paid out on critical illness). The other one we forgot about. It’s only about £18 a month so it will pay for a lovely funeral and party.
We recently did power of attorney and will after wife’s health scare and my serious car crash as we had done nothing.
I found out in Scot’s law my brother could claim 50% of my estate if no will left.
So we’ve set everything out in our will.
Tbh we do spend it, hence the watches!
Also wife’s shoes and bags and 4 holidays a year.
It’s not really a problem to have as so many folk are struggling, but I just wondered how it worked itself out.
I didn’t have much money growing up so dealing with solicitors etc is a bit daunting.
supersport said:
The private pensions can be inherited tax free and instantly accessible if you die before 75 ( I had 72 in my head for some reason).
The death in benefit is also outside of your estate.
So you should make expressions of wishes and incluse this in your wills. They may look further than just the expression of wishes and so the will backs this up.
So if we funnel everything through the life insurance death in service then no inheritance or tax is paid on this. The death in benefit is also outside of your estate.
So you should make expressions of wishes and incluse this in your wills. They may look further than just the expression of wishes and so the will backs this up.
So we spend the cash and the only inheritance is on the house?
Sounds like a plan! Goes to classified ads to look for a nice car!
I have been through this issue when my father went 5 years ago then my Mother passed away in July
I can not stress the need to seek professional advice especially in these turbulent times because there are some great ways to limit the impact of the above taxes .
The key is to plan ahead and use the 7 year rule for gifting and invest in areas i.e AIM shares( there is a risk of losing money though but you do not pay 40% tax after two years) that impacts how much you pay to the HMRC
I can not stress the need to seek professional advice especially in these turbulent times because there are some great ways to limit the impact of the above taxes .
The key is to plan ahead and use the 7 year rule for gifting and invest in areas i.e AIM shares( there is a risk of losing money though but you do not pay 40% tax after two years) that impacts how much you pay to the HMRC
Wombat3 said:
98elise said:
bompey said:
Armitage.Shanks said:
Surely CGT wouldn't apply on your death it would all be assessed as IHT?
So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
Armitage is right, assuming you have already used your IHT allowance of up to £1m. Any Capital Gains die when you do, so all that is left to pay is the IHT on the value of the estate/property over and above the allowance. That said I believe there is a taper on IHT such that if your estate is over £2m as a couple then you start to lose the extra £350k (£175k each) nil rate band allowance. So the value of your whole estate will be assessed for IHT. Keeping it simple if you've reached the IHT limit anything above would be liable to 40%. So, the £200k property would be liable to 40% tax, would it not?
If you are in this position you may want to speak to a specialist as you can mitigate some of this.
So in the example of an additional 200k property (with 100k capital gain) there would simply be an IHT applied on the 200k?
You have 2 allowances, the basic £325K and a further £175K where a property (i.e. your home) is passed directly to descendants (children/grandchildren only).
If you have a spouse you can either gift out to the level of your allowances (and more if you want) & pass the rest through to the spouse or you can pass the lot through in which case any unused allowances go as well - which is where you can get to allowances totaling £1M on the second death.
If you don't have kids the property allowances may not apply.
As a single person, assuming the property allowance does not also apply, then all assets get valued for probate & IHT will apply on anything over £325K
Purchase prices are irrelevant & CGT doesn't come into it. Any capital gains that you might have on paper at that point are irrelevant & effectively wiped out.
Anything you hold in a SIPP (which might also include some property) can also be outside your estate, That might need to be "commercial" property & I don't know what qualifies as that. Different tax rules also apply to that depending on if you keel over before or after you are 75
Edited by Wombat3 on Wednesday 1st November 14:23
When I say I'm single I'm in the middle of splitting from my long term partner (not married) so need to rethink things.
It's interesting that the extra 175k applies when your house is left to your kids. At the moment my ex-partner and I have mirror wills so she would have inherited the family home.
As I'm in my late 50's I think it's time to take some proper professiinal advice!
Edited by 98elise on Thursday 2nd November 12:27
Blue Mk8 Golf R said:
I have been through this issue when my father went 5 years ago then my Mother passed away in July
I can not stress the need to seek professional advice especially in these turbulent times because there are some great ways to limit the impact of the above taxes .
The key is to plan ahead and use the 7 year rule for gifting and invest in areas i.e AIM shares( there is a risk of losing money though but you do not pay 40% tax after two years) that impacts how much you pay to the HMRC
This ^ I can not stress the need to seek professional advice especially in these turbulent times because there are some great ways to limit the impact of the above taxes .
The key is to plan ahead and use the 7 year rule for gifting and invest in areas i.e AIM shares( there is a risk of losing money though but you do not pay 40% tax after two years) that impacts how much you pay to the HMRC
When I started studying Private Client law (at law school oddly enough...) I remember being completely astonished at the amount of IHT that could be saved by, for example, a married couple of sufficient means, merely BOTH using the annual exemption amount of £3K throughout their adult lives.
Figures for a plausible scenario on the above lines:
Married couple make £3K per annum gifts between the ages of 30 and 80 to their two children.
Over that 50-year period they make a total of £300,000 in gifts.
None of the gifts are ever PETs, because all 100 of them are simply the £3K annually exempt amount.
When they die, if that £300,000 was still in their death estate (because they had not made the gifts through their adult lives), assuming both had used-up their NRB and RBNR in leaving their notional £1m house to their two children, that £300,000 would be worth £180,000 to the children, having been clobbered with £120,000 in IHT.
The above is an extremely simple example, and makes a large assumption that both have sufficient funds to make such generous gifts over a long period of time, but it's a clear demonstration of what can be achieved with the most basic knowledge of IHT law.
The £120,000 saving can be made a LOT more when one start exploring the exemptions for Expenditure out of Income, and the like....
NicoG said:
Blue Mk8 Golf R said:
I have been through this issue when my father went 5 years ago then my Mother passed away in July
I can not stress the need to seek professional advice especially in these turbulent times because there are some great ways to limit the impact of the above taxes .
The key is to plan ahead and use the 7 year rule for gifting and invest in areas i.e AIM shares( there is a risk of losing money though but you do not pay 40% tax after two years) that impacts how much you pay to the HMRC
This ^ I can not stress the need to seek professional advice especially in these turbulent times because there are some great ways to limit the impact of the above taxes .
The key is to plan ahead and use the 7 year rule for gifting and invest in areas i.e AIM shares( there is a risk of losing money though but you do not pay 40% tax after two years) that impacts how much you pay to the HMRC
When I started studying Private Client law (at law school oddly enough...) I remember being completely astonished at the amount of IHT that could be saved by, for example, a married couple of sufficient means, merely BOTH using the annual exemption amount of £3K throughout their adult lives.
Figures for a plausible scenario on the above lines:
Married couple make £3K per annum gifts between the ages of 30 and 80 to their two children.
Over that 50-year period they make a total of £300,000 in gifts.
None of the gifts are ever PETs, because all 100 of them are simply the £3K annually exempt amount.
When they die, if that £300,000 was still in their death estate (because they had not made the gifts through their adult lives), assuming both had used-up their NRB and RBNR in leaving their notional £1m house to their two children, that £300,000 would be worth £180,000 to the children, having been clobbered with £120,000 in IHT.
The above is an extremely simple example, and makes a large assumption that both have sufficient funds to make such generous gifts over a long period of time, but it's a clear demonstration of what can be achieved with the most basic knowledge of IHT law.
The £120,000 saving can be made a LOT more when one start exploring the exemptions for Expenditure out of Income, and the like....
Yes - but those extra gifts over £3,000 are labelled PETs (Potentially Exempt Transfers). This means there is the possibility of them having to be included in the value of the estate if you die within 7 years of making the gift.
The £3,000 annual allowance will NEVER be included in the IHT values.
The £3,000 annual allowance will NEVER be included in the IHT values.
Seems like a good point to ask this. It's vaguely relevant. What happens when a property is valued for probate at say 500k and overall the estate is required to pay IHT of 100k due to other assets. The property is put on the market and sells for 600k six months later. Is there then CGT to pay on the extra 100k or do they adjust the IHT. Similarly what happens if it only sells for 400k can you claim something back? And if the sale isn't for two years does this change things?
Valuation at date of probate is what matters for IHT purposes.
Any land and property at probate then passes to the new owners (whoever they are are). If they subsequently sell the property, and the sale price is higher than the valuation at date of probate, Capital Gains Tax will be chargeable on the difference between the sale proceeds and the valuation at date of probate.
How much CGT is actually PAYABLE will depend on the personal situation of the sellers.
Any land and property at probate then passes to the new owners (whoever they are are). If they subsequently sell the property, and the sale price is higher than the valuation at date of probate, Capital Gains Tax will be chargeable on the difference between the sale proceeds and the valuation at date of probate.
How much CGT is actually PAYABLE will depend on the personal situation of the sellers.
Eric Mc said:
Valuation at date of probate is what matters for IHT purposes.
Any land and property at probate then passes to the new owners (whoever they are are). If they subsequently sell the property, and the sale price is higher than the valuation at date of probate, Capital Gains Tax will be chargeable on the difference between the sale proceeds and the valuation at date of probate.
How much CGT is actually PAYABLE will depend on the personal situation of the sellers.
Thanks EricAny land and property at probate then passes to the new owners (whoever they are are). If they subsequently sell the property, and the sale price is higher than the valuation at date of probate, Capital Gains Tax will be chargeable on the difference between the sale proceeds and the valuation at date of probate.
How much CGT is actually PAYABLE will depend on the personal situation of the sellers.
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