Inheritance tax on first death

[JonnyT]

If someone leaves a Will and the following applies, where is tax applied:
The majority of the estate is passed to the spouse
The estate is over the threshold for tax
Small amounts are left to grandchildren

Is any or part of the estate liable for Inheritance tax?

[Dod101]

My understanding is that if their are specific amounts left for the grandchildren (known as pecuniary legacies) provided they are in aggregate not more than the tax free band (currently £325,000) no IHT is payable because the residue passes to the spouse tax free. If the aggregate amount left to the grandchildren exceeds the IHT tax free amount, IHT may be payable on the excess, but the residue still passes IHT free to the spouse.

Dod

[genou]

My understanding is that if their are specific amounts left for the grandchildren (known as pecuniary legacies) provided they are in aggregate not more than the tax free band (currently £325,000) no IHT is payable because the residue passes to the spouse tax free. If the aggregate amount left to the grandchildren exceeds the IHT tax free amount, IHT may be payable on the excess, but the residue still passes IHT free to the spouse.

Dod

This is correct. For completeness - the legacies to the grandchildren will use up a percentage of the IHT allowance of the first to die, so that on the second death the spouse will have 100% of their own allowance plus ( same allowance * remaining percentage of first death's allowance ) plus two time RNRB if there is a qualifying house. Gets more complex on RNRB if the final estate is over £2m.

[scrumpyjack]

Also don't forget that if you and your wife own your house as Joint Tenants the house passes automatically to the surviving spouse and is not part of the estate. It is not included in Probate so this may help avoid the higher probate charges that are being introduced on larger estates.

[hiriskpaul]

Also don't forget that if you and your wife own your house as Joint Tenants the house passes automatically to the surviving spouse and is not part of the estate. It is not included in Probate so this may help avoid the higher probate charges that are being introduced on larger estates.

AFAIK this is not true. I would be pleased to have confirmation of this as I am sorting on someone's Will right now and this is pertinent.

My understanding is that the house passes to the other joint tenant(s), but it is still part of the estate. This means that if the Will says divide the deceased assets between X, Y and Z, but the joint tenants are only X and Y, then Z does not get a share of the house. i.e. "Jointly held assets" takes priority over what the Will says. Now if the joint tenant is a surviving spouse, there is no IHT to pay, but that is because any assets passed to the surviving spouse is free of IHT, not because the house is not part of the estate. If the joint tenant was not a spouse, then half the value of the house is included in the IHT calculation. Does that sound right? Pleased to be corrected if wrong!

Not sure what the rules are with respect to the new higher probate charges, so that part might be true. Hoping to get the application in before the new charges come in!

[scrumpyjack]

This article confirms that Joint Tenancy does avoid probate (Tenants in Common does not)

https://www.thebalance.com/who-inherits ... on-3505229

[PinkDalek]

Scrumpyjack is talking, correctly, about joint assets passing automatically by survivorship.

hiriskpaul is talking about IHT. Yes, those assets should be included on the IHT404 (and IHT405 as appropriate) https://assets.publishing.service.gov.u ... IHT404.pdf

If the joint tenant was not a spouse, then half the value of the house is included in the IHT calculation. Does that sound right? Pleased to be corrected if wrong!

There is normally a standard valuation reduction of 10% where property is owned 50/50.

[hiriskpaul]

This article confirms that Joint Tenancy does avoid probate (Tenants in Common does not)

https://www.thebalance.com/who-inherits ... on-3505229

That is a US web site!

The part about avoiding Probate still may be true however, depending on other circumstances but I suspect only if the surviving joint tenant is a spouse. Not sure it would avoid probate if say the joint tenants were siblings.

[hiriskpaul]

There is normally a standard valuation reduction of 10% where property is owned 50/50.

Thanks, I remember reading something along those lines somewhere. Do you have a link to details on this valuation reduction? In the case I am dealing with, the joint ownership was between a father and 2 surviving son's. The deceased's third sits within his and his late wife's residence nil rate band, so no valuation reduction needed, but it would be good to have some more details on this valuation reduction.

[PinkDalek]

I’ll forget to reply later (there’s a cricket match on) but this might be one of the places to look:

https://www.gov.uk/guidance/inheritance ... ded-shares

[PinkDalek]

There’s also this Practice Note 2, which goes into further detail:

https://www.gov.uk/guidance/inheritance ... ded-shares

[Lootman]

The part about avoiding Probate still may be true however, depending on other circumstances but I suspect only if the surviving joint tenant is a spouse. Not sure it would avoid probate if say the joint tenants were siblings.

No, it is in the nature of a joint tenancy that it over-rides any Will, and bypasses probate. The other tenant can be anyone and not only a spouse.

What a joint tenancy actually does is set up a trust under the covers.

So if your Will denotes a beneficiary (spouse or not) then you can avoid probate by transferring all your assets to a joint tenancy with that person. You won't necessarily avoid IHT however. In theory three or more people could own an asset jointly but that is more rare.

What you cannot do with a joint tenancy is divide an asset up anything but equally. So if you want to own 2/3 of a house with the other owner having 1/3, then you have to use a TIC, or else set up some kind of side agreement.