Inheritance Tax Q&A

Inheritance Tax Q&ADo you believe yourself to be middle class/or working class? How shocked would you be if your parents were to die and soon after you received a letter from the HMRC requesting an Inheritance Tax bill for thousands of pounds?

This is becoming more common for people who don’t class themselves as ‘rich’ or even ‘wealthy’. With rising house prices and the nil rate band parked at £325,000 until 2020-21 estates are increasing in value, above the IHT threshold.

We put some questions to a client in their late 20’s and another in their mid 50’s to see how their answers differed…

What are your thoughts about inheriting assets when your parents are dead?

I was surprised when I did the maths, and even though I’d class my family somewhere between working and middle class, when my parents both pass away, there will be an Inheritance Tax bill. Our family home is valued at around £450,000. That alone wipes out all of one of my parents IHT allowances (£325,000 + the additional £125,000 residence nil rate). My parents also own a second home, cars, motorbikes and each have savings in ISA accounts. When all this is taken into account I know that my sister and I will be facing a 40% IHT charge on any money above the two allowances added together.

This will have to be paid to HMRC before ANY of my parents assets are released to me and my sister. Previously I wouldn’t have known where to start or who to contact to understand why I was being charged to receive my parent’s hard earned money! I’m sure there are many people that will be in this position because they have never used a financial adviser.

I have been aware of my parent’s estate being potentially liable to IHT for some time. I am in a position where I do not need to inherit and if I did it would only make things worse for my children eventually. Happily my parents have already been advised on IHT mitigation, they have set up a Discretionary Trust, this will allow me to inherit, should my situation change, but if things remain the same the Trust will bypass me and pass the inheritance to my children. My parents and I are Trustees so we have control of the Trust during their lifetime and I will be in a position to decide the best course of action on their eventual death.


What do you think about the 40% tax charge?

The 40% does sound like a lot of money, I mean that’s almost half! However there are two schools of thought with IHT, and I’ve seen arguments for both online. Some people think IHT shouldn’t exist, that it’s a second tax on money that has already been taxed when it was earned. Whereas others believe the charge isn’t enough, that it isn’t fair some people inherit personally unearned money while others do not.

The IHT charge is hefty particularly as it is taxed on money that my parents have already paid tax on during their working lifetime. However the tax is only chargeable if the assets of an estate are above the nil rate band, with so many planning opportunities to move money outside the estate during lifetime it is possible to minimise the IHT. Only those that can’t be bothered will end up paying a large amount.


Should parents pass over wealth if they can afford it? What if they needed some back later to pay for care?

I understand that there is an important rule to think about when it comes to IHT – the 7 year rule! Anything someone gives away in the 7 years prior to their death can be added back into their total estate. I also understand there are individual gift allowances though; anyone can give away up to £3,000 per year as well as £250 per year to as many individuals as they like without that money being included in their estate at the date of death.

Personally if my parents earnt the money or inherited it themselves it should be their choice whether to pass it on or not. However, the problem with parents or anyone giving away their money is, most of the time, they have no idea how much longer they will live. They could run out of money and then need to rely on the family/friends they gifted the money to originally, to help support them.

This is a difficult one as Care is such a big issue. I think it makes sense for parent to either actually give money away if they can afford it or put money into IHT mitigation plans. Personally I would happily give assistance for the cost of Care if it was required in the future and my parents own income did not provide sufficient for their needs. But equally I understand that not all families are the same so parents need to protect themselves first and foremost. I understand that there are IHT planning opportunities that could move money outside an estate in 2 years rather than the usual 7 so individuals could always wait until later if they were not sure how their finances were going to pan out.


What if the person receiving wealth from a parent squandered it?

Parents are probably in the best position to know whether the person they are gifting the money to can be trusted. Obviously there could be issues if the person has a known drug or gambling problem. Could you trust yourself not to waste the money? Not just after they had passed away but if they wanted to use IHT planning to move their wealth into your name so the eventual bill wouldn’t be so large.

I suppose that if someone is likely to do this, whatever the reason, they will do so regardless of whether it is during their parent’s lifetime or after their death. Once it’s gone, it’s gone so there is little that can be done.


If a child inherited sufficient money that they never needed to work, would they ever reach their full potential in life?

There are a numbers of ways to look at that question. Sure, I believe they could reach their full potential, however they may never appreciate the real value of money. Reaching your full potential doesn’t have to mean finding a job and working. It could be a hobby, travelling, or raising money for a project /charities. On the other hand if someone has never needed to work to pay rent, bills or buy possessions then surely they’d never know the real cost of giving up their own time to earn these adult duties/luxuries?       

This would certainly be a concern of mine, as a parent I want my children to do as well as they possibly can and achieve their goals. I worry that if they felt that financially they didn’t need to work that they may not achieve as much as they might otherwise. I have set up pensions for each of my children, they have no idea of this and will not be able to touch it until retirement age. I am also not letting my children know what the financial position is when they inherit either from their grandparents or me. Hopefully by the time they do start to question and do their own calculations they will already be set on a good path.

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