Tax advice: your questions answered Inheritance tax queries

Couple confused about inheritance tax

Our Money Helpline receives a lot of queries about the new inheritance tax rules

Which? receives hundreds of questions about about inheritance tax every year. Depending on your situation, dealing with someone's estate can become very complex.

If you're a Which? member and you would like a personalised answer to your own inheritance tax query, our Money Helpline is here to guide you. 

The Which? Money Helpline is a free service for all Which? members, providing one to one help and guidance on any personal finance matters over the telephone. If you're not a Which? member, and you'd like to speak to one of our money experts, you can subscribe today for just £1 for one month.

Here, we answer some of the most common inheritance tax (IHT) queries we've received.

Your inheritance tax queries

Q. My husband and I have assets worth around £500,000, not including our home, which is probably worth about £350,000. We plan to leave everything to our children once we both pass away. 

How will the new tax regulations being introduced in 2017 affect their inheritance tax liability?  

Our experts say: At present, you each have an individual nil-rate band of £325,000, meaning your heirs would face an IHT bill on an estate of more than £650,000.

However, from April 2017, the new main residence nil-rate band of £100,000 each (£200,000 total) will apply to those leaving their family home to children or grandchildren, increasing your total IHT-tax exemption to £850,000.  

Provided your estimates are correct, this would mean there would be no IHT bill for your children to pay.

The main residence nil-rate allowance will rise each year from 2017 to 2020, potentially protecting you against house-price inflation.

Find out more: New inheritance tax rules – the new allowance explained in full detail

Q. I want to reduce my inheritance tax liability, but I already gifted away the annual allowance of £3,000. What else can I do?

Our experts say: There are exemptions from inheritance tax, on top of the £3,000 annual allowance, for regular gifts you give from income rather than from savings and investments. But these gifts only qualify if you have enough income left after making them to maintain your normal lifestyle.

You should also make a written declaration that the gifts you’re making are expenditure out of income, not from savings or investments.

Another option is to make one-off larger gifts to reduce the size of your estate. However, do bear in mind that if you die within seven years of making the gift, your heirs may still need to pay tax on them.

Find out more: Tax-free gifts - explore your other options

Q. I recently read a Which? Money article about ‘Inheritance Isas’ and was confused. I had understood that on the death of a spouse or partner, one could always inherit their Isa savings with the tax-free status, regardless of whether it was in a special 'Inheritance Isa'. Could you clarify?

Our experts say: Following changes in April, anyone whose spouse or civil partner has died on or after 3 December 2014 can inherit their loved one’s savings tax free. 

This comes in the form of an additional tax-free contribution, equivalent to the value of their spouse’s Isa, into their own Isa, and is on top of your £15,240 annual Isa allowance. 

The extra allowance is called the Additional Permitted Subscription (APS). Isa providers aren’t obliged to accept the APS, and not all do. 

So, some providers have set up special ‘Inheritance’ Isas to make clear that they will accept an APS, and can be used specifically if you’re inheriting someone’s Isa. However, that doesn’t mean that your existing Isa provider won’t accept the APS, so check with your bank.

Find out more: What happens to my Isa savings when I die? - learn about the new inheritance rules

Q. My mother died recently and we want to make a gift to charity from her estate. I understand that, as well as benefiting a charity, this can also reduce the IHT liability. What do I need to do?

Our experts say: If your mother did not leave instructions to donate to charity in her will, you’ll need to set up an 'Instrument of Variation' to make this happen. You must then calculate your IHT liability. If, for example, your mother's estate was £500,000, you'd need to subtract both the 10% donation (£50,000) from the estate and the tax-free inheritance allowance of £325,000. 

This leaves you with £125,000, on which IHT at 36% is paid, leaving a £45,000 bill. You'll need to complete an extra tax form, called IHT430.

Find out more: Avoid inheritance tax - some more tips to reduce your IHT bill

Q. I’m divorced and I bought a house 13 years ago for £195,000. At the time, I gave it to my sons – they are named on the deeds as owners. However, I have continued to live there rent-free, and the house is now worth £580,000. What are the tax implications?

Our experts say: You can give your home to your children, or someone else, at any time. If you continue to live in it and pay no rent, however, this is called a 'gift with reservation' and would still be considered as part of your estate for IHT purposes.

But as the property is not your sons' main residence, they could be liable for a much bigger capital gains tax bill when they sell it than had they inherited it.

Although at 40%, IHT is much higher, it'll only be paid on your estate above the £325,000 threshold, whereas capital gains tax will be paid on the full capital gain, which at the moment stands at £385,000.

You can take action to stop the property being part of your estate and subject to IHT by paying a full market rent to your sons for your use of the property. Provided that, at the time of death, the property has not been a gift with reservation (ie you have been paying the full market rent) during the previous seven years, it will not count as part of your estate.Your sons will have to declare the rent for income tax.

Find out more: Gifts with strings attached - more IHT regulations to bear in mind

Q. My daughter is in the process of buying her first flat with her partner. I want to contribute £5,000 towards their deposit. I didn’t give away any money gifts last year. How do I record giving a money gift so that my daughter doesn’t risk having to pay inheritance tax if I die within a year?

Our experts say: Your gift of £5,000 to your daughter is tax-free, in that you can give up to £6,000 (£3,000 for this year, £3,000 from the previous year's allowance) and that this will have no IHT implications.

Strictly speaking, the only record that's needed is your bank statement for the year if you die within seven years of making the gift. However, a formal letter to your daughter stating the amount given, the date of the gift and the fact that is a gift might also be useful for your executor.

Find out more: Tax-free gifts - we list the scenarios when you don't have to pay IHT on gifts

Q. My father recently went into care. For the past 15 years, he has been using his £3,000 gift allowance for inheritance tax purposes. I hold a lasting power of attorney (PoA) for him. Can I continue making these gifts?

Our experts say: If a donor has previously made gifts to friends, relatives or charities, or might be expected to make gifts if they had the capacity, then section 12 of the Mental Capacity Act 2005 allows someone with PoA to continue this. 

Gifts should only be made on customary occasions, such as birthdays, and the value of the gift must not be unreasonable considering the circumstances and the size of the donor's estate.

Find out more: What is power of attorney? - a comprehensive guide

Q. I made a significant gift in December 2007 and I want to know when it becomes IHT exempt.

Our experts say: Gifts become inheritance-tax-free seven years after the gift is made. The seven years doesn't count in terms of tax years. It works as a calendar year, meaning that a gift made in December 2007 would become exempt in December 2014.

More on this...

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.