I would like to leave my house to my grandson but in the current state financially he would not be able to pay the inheritance tax.
I wouldn’t want the house to be sold in the long term because he has children, but I don’t see any other solution.
My house is currently valued between £825,000 and £1 million. Do you have any suggestions on how to keep the house in the family?
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I want to leave my house to my grandson and keep it in the family, but he can’t afford inheritance tax (File image)
Heather Rogers responds: One of the most common problems that can arise when someone dies is that they have a lot of assets but very little money.
If the value of the estate, even after applying the deceased person’s personal reliefs plus any transfer of deceased spouse relief (see box below), still leaves an estate tax, then this invoice should be financed from outside the estate.
This can cause financial headaches for the person looking after the estate, as it means finding money to pay the estate tax bill before probate is granted and the property of the deceased person is released.
But there are options to address this issue both for you now and for the eventual personal representative of your estate, who is usually an executor and/or the person applying for the grant of probate.
These are explained below, along with what you might consider before deciding how you want to pass on your property, which you are obviously attached to.
Inheritance tax thresholds
A 40% tax is usually levied on a deceased person’s assets worth more than £325,000, the so-called zero-rate bracket, explains Heather Rogers in a previous column on inheritance tax .
Many people are allowed to leave an additional £175,000 of estate tax free, if their home forms part of their estate and they leave it to their direct descendants.
This means children, including adopted, step or foster children, and the lineal descendants of those children.
This additional sum is known as the zero residency rate band, and it can be claimed in the event of death on or after April 6, 2017.
The two protected amounts or ‘bands’, totaling up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.
How to find the money to pay inheritance tax in advance?
Personal representatives can pay inheritance tax personally through an estate loan and claim it after the property is sold.
They can also apply for a loan to pay it off using assets from the deceased’s estate as collateral. Anyone doing this should seek professional advice first, including on interest rates.
It is also possible for individuals, during their lifetime, to take out an insurance policy to cover the cost of paying inheritance tax, if they believe that their estate will be liable.
It is worth seeking the help of a financial adviser on the best course of action, as well as the cost and affordability of insurance premiums. Your age at the time will be a factor.
When do you have to pay inheritance tax?
It must be paid at the end of the sixth month following the person’s death. However, it is possible to pay inheritance tax in installments if the estate includes:
– Unlisted shares/securities
– Shares and listed securities
– Commercial interests.
In this case, inheritance tax must be paid in 10 annual installments, the first being due at the end of the sixth month after the death of the deceased.
Interest is not charged on the first payment, but on subsequent payments. Interest is charged on the total value of unpaid tax as well as on installments that are not paid on time.
In addition, if the property that allows for the staggered payment of inheritance tax is sold (for example, a house or shares), the entire outstanding balance of tax must be paid.
Note that obtaining probate may be trickier in these circumstances, so talk to a lawyer first.
Inheritance tax can also be paid in installments if it can be shown that paying in one installment causes financial hardship.
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
What happens if you offer your house during your lifetime?
There would be a capital gains tax charge on the transfer, and inheritance tax may also be payable if you continue to benefit from the property.
This is called a “gift with reservation of benefit” which would nullify the gift, meaning it remains in your estate for estate tax purposes.
What else should you think about before bequeathing property to your grandson?
Passing on assets to grandchildren is a good estate tax planning measure because it removes those assets from their parents’ estate.
Adult children may already have assets of their own which, when passed on, may give rise to an inheritance tax charge on their estate.
By leaving your home to your grandson, he could claim the £175,000 ‘zero residency bracket’ relief on inheritance tax because he is one of your direct descendants, in addition to the ‘nil residency band’ relief of £325,000.
If you also inherited allowances from a former spouse, these would total £1million.
Therefore, if your property is your only real estate, your grandson may not have to pay inheritance tax under the rules as they currently exist.
You should also consider your own needs. You may need your property yourself to fund custody costs, or you may want to downsize at a later date for health or financial reasons.
If you tie up the property as a guaranteed inheritance, it can cause you problems later.
The easiest option if your grandson is your primary or sole beneficiary is to leave him the appropriate percentage of your estate, then if he wishes to keep the property when he inherits, he can do so.
Ask a tax question to Heather Rogers
Tax expert Heather Rogers answers questions from our readers
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.
If you would like to ask Heather a tax question, email her at email@example.com.
Heather will do her best to respond to your message in an upcoming monthly column, but she won’t be able to reply to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will remain confidential and will not be used for marketing purposes.
If Heather is unable to answer your question, you can find out about getting tax help here, including sources of free professional advice if you are elderly and/or on a low income.
You can also contact MoneyHelper, a government-backed organization that provides free assistance on financial matters to the public. His number is 0800 011 3797.
Heather gives tips on how to find a good accountant here, including when to ask for help, hiring the right type of company, and typical costs.
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