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‘Will I have pay inheritance tax on my mother’s

Gary Rycroft Gary Rycroft is a solicitor at Joseph A Jones & Co. His column is published twice a month online. Email questions to askalawyer@telegraph.co.uk

QMy mother and I are very close, especially because I am an only child and my father died when I was 10, which was more than 35 years ago. After he died, Mum inherited the family home and for the past 20 years she has lived there with her partner, whom I get on well with. I have my own house with my wife and children.

Mum has told me that when she dies her will says her house is split one third to me, one third to my children when they reach 25 ( they are both under 18 at present) and one third to her partner. She has also left her partner a small cash gift on the basis that he is wealthy himself, so will be OK financially if she dies first. She wants her partner to have a share of the house because he has lived there and it is his home, but the rest of the estate passes to me.

Mum’s estate is worth around £900,000 including the house, which is worth £300,000. I understand that no inheritance tax will be payable because her allowances for IHT will add up to £1m. Is this so?

– Jonathan, by email

A

It sounds like you have a great relationship with your mother and her partner. In this context, it means hopefully you can all have open and transparent conversations about what will happen in legal terms when your mother dies.

A loved one dying is traumatic enough in itself, never mind that person’s will later revealing a plan that affects significantly someone else in a way the individual concerned was not involved in deciding, or at the very least told about.

Here, I am referring to your mother’s partner, who I think should be aware that the plan is for her estate to be shared out in a way that could leave him homeless. It sounds like he has his own financial resources but remember that a cohabiting partner of more than two years’ standing can bring a claim under the Inheritance ( Provision for Family & Dependants) Act 1975 against the estate of their late partner if they feel the provision made for them in the will is not reasonable.

The main concern you raise is about IHT. Over the past 15 years the rules around it have become more complicated and in my view are ripe for simplification. Here, there is a risk of IHT being payable, so let me explain how the position can be improved.

As a widow, assuming she inherited all of your father’s estate and has not made any recent lifetime gifts, your mother has available her own basic IHT allowance called the “nil- rate band” (NRB) as well as 100pc of a transferred NRB from your father. The NRB has been fixed at £325,000 since 2009 and according to the Chancellor is to stay there until at least 2028. Your parents’ combined NRBs, which her estate will be able to utilise, therefore stand at £650,000.

The “main residence nil-rate band” ( RNRB) increases the portion of an estate not subject to IHT to take into account house price rises, and may be transferred from one spouse to another on death. This is the case even though your father died before it came into existence in 2017. As his widow, your mother’s estate will still have her RNRB and his combined.

The RNRB is fixed until 2028, this time at £175,000 or £350,000 for a married couple (and civil partners).

On the face of it, this is good as it means the total allowances available to your mother’s estate are £ 1m, while her estate is £ 900,000. But there is a catch. If your mother’s house is worth £300,000, that is the maximum RNRB that her estate can claim. The two combined NRBs of £650,000 plus £300,000 still come to more than £900,000, the total value of the estate.

However, there are further nuances to the RNRB regime which are traps for the unwary.

Firstly, the RNRB can be used only when a residence is left to a direct descendant. This means the one third of your mum’s house going to her unmarried partner will not qualify. In this case, that reduces the available RNRB to £200,000. ( It is not relevant to your case, but readers may wish to note for these particular rules stepchildren qualify as direct descendants.)

Secondly, while your children are clearly your mother’s descendants, the way you have described the gift to them in her will as being when they reach 25 years means that, if she dies before they reach that age, a trust will automatically be created under the terms of her will.

That intervening trust means in law she is not leaving a share of the house to them directly, so again that means the RNRB will not apply to their gift, shaving a further £100,000 off the available IHT allowances. This means only £750,000 of your mother’s £ 900,000 estate will qualify as not being chargeable to IHT, with the other £150,000 taxable at 40pc. This will give HMRC a tidy sum of £60,000.

This IHT charge can easily be avoided if your mother restructures her will to leave all of her house to you and a cash gift equivalent to the value of one third of the property to your children at age 25 and to her partner.

That way your mother’s wishes will be honoured and HMRC will not receive a penny.

Money

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2022-12-03T08:00:00.0000000Z

2022-12-03T08:00:00.0000000Z

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