Inheritance Tax Anecdotal

[The Ayatollah Buggeri]

Please forgive my need to rant. All I can say in my defence is that this is sort of on topic.

My grandmother died in early December - aged 104, and so not exactly a tragedy, but even so I admired her and was sorry to see her go. My father is her executor. She lived in a very modest, two-up/two-down Victorian former railway worker's terrace, which she owned outright, and which has just been valued for probate at £350k. Even though it's in a relatively sought-after patch on the south London/Surrey border, I still find it staggering that such a modest home could realistically be worth that much, but that's another issue, I guess.

My father assumed that this was the only significant asset in her estate. She moved there following her divorce in 1968: all of the furniture and fittings date from around that time, and they weren't particularly good quality when new. There is nothing else of any significant cash value in the house. Granny lived a very frugal lifestyle, so much so that it even exasperated her three sons. One of her many foibles was that she refused their offer to buy her a colour TV, even after she became eligible for a free licence (she would insist that black-and-white encouraged the imagination!) - in fact, she must have been one of the last people in the country to still have a b/w licence. The place had no central heating (again, despite offers - one of my father's brothers is a very advanced DIY-er, and offered to install a system for her), and I remember it as being very chilly during my childhood visits - she would only have one panel of an ancient gas fire in the front room running, even in the depths of winter. In fact, that £350k valuation reflects the fact that the place is damp-ridden and needs lots of work doing on it: the EA said that in better condition, it could probably fetch in the region of £400k.

However, there then came a twofold shock. Firstly, Dad was informed by the solicitor over the weekend that Granny also left £250k in cash in her building society account. No-one had any idea. She had a small occupational pension plus her state pension, and we can only guess that she saved a significant proportion of it over three decades (Dad is going to look at the archive of statements, to make sure), scrimping and denying herself what most would regard as essentials in order to do so. The second part of this shock is that, given that the value of the house in itself takes the estate to around the inheritance tax threshold, then pretty much all her cash savings will go to the taxman. In other words, she might just as well have used the money to enjoy herself a bit more during the final decades of her life, because her intention - that her sons should get it - will not be realised.

While some would argue that it's inherently unfair for some people to receive a cash windfall in mid-life if they have such a parent but not if they don't, what strikes me is the even greater unfairness that the end result of 3-4 decades of frugal living, self-sufficiency and a determination not to be a burden on anyone will now be taken by HMRC and given to a family with 8 kids who have never done a day's work in their life, five-figure bonuses for public sector middle managers and/or expensive management consultants. If there was a way that the beneficiary of a will could give the value of an estate over a certain threshold to a charity of their choice (or one specified by the deceased in their will), that would be fairer. It just makes me angry that the system discourages and punishes saving to the extent that it does, and from now on I will certainly think twice before passing judgement on OO pensioners spending more or less all their income. If the value of their house absorbs the tax-free allowance, then they would need to have other assets will in excess of £200k before the beneficiaries of their will would see a penny. Below that, there is simply no point in saving, or refraining from spending anything you have saved.

[sims]

Uhm, you do realise that the 40% only apply to the amount in excess of 325k, right? So less than half the cash will be used for IHT.

[fluffy666]

Please forgive my need to rant. All I can say in my defence is that this is sort of on topic.

My grandmother died in early December - aged 104, and so not exactly a tragedy, but even so I admired her and was sorry to see her go. My father is her executor. She lived in a very modest, two-up/two-down Victorian former railway worker's terrace, which she owned outright, and which has just been valued for probate at £350k. Even though it's in a relatively sought-after patch on the south London/Surrey border, I still find it staggering that such a modest home could realistically be worth that much, but that's another issue, I guess.

My father assumed that this was the only significant asset in her estate. She moved there following her divorce in 1968: all of the furniture and fittings date from around that time, and they weren't particularly good quality when new. There is nothing else of any significant cash value in the house. Granny lived a very frugal lifestyle, so much so that it even exasperated her three sons. One of her many foibles was that she refused their offer to buy her a colour TV, even after she became eligible for a free licence (she would insist that black-and-white encouraged the imagination!) - in fact, she must have been one of the last people in the country to still have a b/w licence. The place had no central heating (again, despite offers - one of my father's brothers is a very advanced DIY-er, and offered to install a system for her), and I remember it as being very chilly during my childhood visits - she would only have one panel of an ancient gas fire in the front room running, even in the depths of winter. In fact, that £350k valuation reflects the fact that the place is damp-ridden and needs lots of work doing on it: the EA said that in better condition, it could probably fetch in the region of £400k.

However, there then came a twofold shock. Firstly, Dad was informed by the solicitor over the weekend that Granny also left £250k in cash in her building society account. No-one had any idea. She had a small occupational pension plus her state pension, and we can only guess that she saved a significant proportion of it over three decades (Dad is going to look at the archive of statements, to make sure), scrimping and denying herself what most would regard as essentials in order to do so. The second part of this shock is that, given that the value of the house in itself takes the estate to around the inheritance tax threshold, then pretty much all her cash savings will go to the taxman. In other words, she might just as well have used the money to enjoy herself a bit more during the final decades of her life, because her intention - that her sons should get it - will not be realised.

While some would argue that it's inherently unfair for some people to receive a cash windfall in mid-life if they have such a parent but not if they don't, what strikes me is the even greater unfairness that the end result of 3-4 decades of frugal living, self-sufficiency and a determination not to be a burden on anyone will now be taken by HMRC and given to a family with 8 kids who have never done a day's work in their life, five-figure bonuses for public sector middle managers and/or expensive management consultants. If there was a way that the beneficiary of a will could give the value of an estate over a certain threshold to a charity of their choice (or one specified by the deceased in their will), that would be fairer. It just makes me angry that the system discourages and punishes saving to the extent that it does, and from now on I will certainly think twice before passing judgement on OO pensioners spending more or less all their income. If the value of their house absorbs the tax-free allowance, then they would need to have other assets will in excess of £200k before the beneficiaries of their will would see a penny. Below that, there is simply no point in saving, or refraining from spending anything you have saved.

I don't understand.

IHT is 40% of anything over £325k. So the bill for a £575k estate would be £100k. ?

Edir: Assume a £400k valuation and £250k cash. £650k estate, £130k IHT. (20%)

Now, I've just worked out that so far in my entire working life I've earned perhaps £400k and hence paid about £110k in tax+NI (27%)

Would you like to explain to me why people are more deserving of a huge inheritance which they have done nothing to earn than I am of my wages?

Edited February 14, 2012 by fluffy666

[The Ayatollah Buggeri]

The solicitor told Dad that "virtually all" of the cash savings were likely to go in tax.

[Butthead]

Playing devil's advocate, you might argue that it was the state's money in the first place (state pension) and if she didn't need it which she didn't then they should have it back... no?

[FreeFall]

The solicitor told Dad that "virtually all" of the cash savings were likely to go in tax.

That's one hell of a solicitors fee.

My condolences about your Grandmother.

[Bloo Loo]

The solicitor told Dad that "virtually all" of the cash savings were likely to go in tax.

and fees

[finallysold]

well, it is just another example of where being frugal and saving a lot of money is not going to do you any good. she should have spent the money having fun, sold the house and got shot of the proceeds, become destitute and got council housing . then she should have taken a load of credit cards, spent the money buying rubbish and then become bankrupt. instead she was very frugal and wanted to do what she considered was the right thing. that is not the done thing. if she had gone into an old people's home, they would have used her assets to pay for it. instead if she had no money the state would have paid for it. the way i look at it, anyone saving and scrimping is asking to be pillaged by the state. the more responsibly you behave, the more likely you are to pay for the irresponsible.

[pokercola]

Inheritance tax limits are no secrets:

http://www.hmrc.gov.uk/rates/iht-thresholds.htm

Not many other taxes give you a £325k allowance, so sympathy will probably be in short supply.

[Bloo Loo]

well, it is just another example of where being frugal and saving a lot of money is not going to do you any good. she should have spent the money having fun, sold the house and got shot of the proceeds, become destitute and got council housing . then she should have taken a load of credit cards, spent the money buying rubbish and then become bankrupt. instead she was very frugal and wanted to do what she considered was the right thing. that is not the done thing. if she had gone into an old people's home, they would have used her assets to pay for it. instead if she had no money the state would have paid for it. the way i look at it, anyone saving and scrimping is asking to be pillaged by the state. the more responsibly you behave, the more likely you are to pay for the irresponsible.

we already pay for the homes, the council housing, the benefits...it ALL comes from US.

[StainlessSteelCat]

The solicitor told Dad that "virtually all" of the cash savings were likely to go in tax his fees.

Corrected for you. The reason why he's saying that is that he gets to look like a hero if he 'saves' any of it from the taxman. I guess you could always sell the house for less than its market value to a hard working banker's family .

A salutary tale of the perils of saving - and possible to avoid with a bit of planning. Even giving it to her favourite stray cat charity would have been a more deserving cause than HMRC. Seriously though, I think I would have liked your Gran as I am of a similar mentality. Were it not for the missus' addiction to reality tv I would have hurled the box into the nearest skip years ago (well, that and the fact it is cheaper than crack cocaine). We don't have central heating either. She sounds like a very cool lady (in more ways than one!)

Edited February 14, 2012 by StainlessSteelCat

[Venger]

If the value of their house absorbs the tax-free allowance, then they would need to have other assets will in excess of £200k before the beneficiaries of their will would see a penny. Below that, there is simply no point in saving, or refraining from spending anything you have saved.

The beneficiaries get the house. She could have chosen to minimise her IHT liability whilst alive, including gifting money. At least by the sounds of it she didn't need nursing care for her run up to 104.

Lots of stories out there of kids having to sell the family home because they can't afford the IHT liability when their parents die, with the bulk of the parents wealth in the family home. Unless things have changed in recent years, you can't get probate to be able to deal with the administration of an estate, including selling any house, until you first pay the IHT that's due. That often requires a commercial loan from a bank. At least in your case there is cash to pay it providing the bank releases it with death certificate and explanations for IHT, but no probate.

I sometimes draw breath when some people at HPC outlining their intentions to put down £600,000 to buy a house with mortgages on top. Were both husband and wife to die in quick succession, it's a real gift to the treasury, where a more modest house and any savings substantially over IHT gifted to children and family in advance is the way I'd go in their place.

Edited February 14, 2012 by Venger

[interestrateripoff]

Wow 104, that's an amazing age to reach.

An incredible sum to save, although I'm with the she should have enjoyed it and spent it camp.

[rxe]

If there was a way that the beneficiary of a will could give the value of an estate over a certain threshold to a charity of their choice (or one specified by the deceased in their will), that would be fairer.

There is. It is called a deed of variation, if the solicitor doesn't know about it, get a new solicitor. As a beneficiary you are perfectly capable of saying "I don't want it, please give it to the cats home".

I have the same problem with my mum. Won't spend her money, and she has got more than enough. The house is bloody freezing, and I have resorted to going over and splitting a load of wood every few weeks for her wood burner. She will burn that because it is "free". I have explained to her several times that she needs to spend it - I don't really need it.

[Nuggets Mahoney]

Would you like to explain to me why people are more deserving of a huge inheritance which they have done nothing to earn than I am of my wages?

Afaic if someone chose to save money (they've already paid income tax on) rather than spend it then it's their business what happens to it. Deserve doesn't really come into it. The purity of that point of view is stuffed though by the fact that house prices have shot up so much. There's a case to be made for taxing the property

However, the landed dynasties in the UK seem to tick over from generation to generation without being troubled too much by IHT. So, if you're rich enough or smart enough it would appear to be eminently avoidable

An annual LVT would be fairer, less avoidable and easier to administer than IHT imho

Edited February 14, 2012 by Nuggets Mahoney

[TheMadJock]

The beneficiaries get the house. She could have chosen to minimise her IHT liability whilst alive, including gifting money. At least by the sounds of it she didn't need nursing care for her run up to 104.

Lots of stories out there of kids having to sell the family home because they can't afford the IHT liability when their parents die, with the bulk of the parents wealth in the family home. Unless things have changed in recent years, you can't get probate to be able to deal with the administration of an estate, including selling any house, until you first pay the IHT that's due. That often requires a commercial loan from a bank. At least in your case there is cash to pay it providing the bank releases it with death certificate and explanations for IHT, but no probate.

I sometimes draw breath when some people at HPC outlining their intentions to put down £600,000 to buy a house with mortgages on top. Were both husband and wife to die in quick succession, it's a real gift to the treasury, where a more modest house and any savings substantially over IHT gifted to children and family in advance is the way I'd go in their place.

[TheMadJock]

Sorry about above, trying to reply to Venger's quote.

There is a thing called Quick Succession Relief which if I recall works on a declining sliding scale over 5 years.

Solicitors seem quite patchy on their knowledge of it and HMRC won't go out of their way to tell you. It basically applies where the person inheriting an estate dies themselves within 5 years, the subsequent (if any) Inheritance Tax liability is reduced on a sliding scale based on the years since the first liabiity.

Obviously in this particular case it cannot be applied but it's worth getting knowledge of it's existence in the open.

[concerned_money]

Uhm, you do realise that the 40% only apply to the amount in excess of 325k, right? So less than half the cash will be used for IHT.

oh, that's Ok then

problem it's too late to gift aid the IHT chunk now, so how about just fire the house (accident) and deprive the HMRC this way.

I mean seriously, let the excess go up in flames or allow HMRC/govco to spunk it away.

I know which option I prefer.

I'd destroy value rather than allow them to have it, strip every last bit of copper, strip allow 'salvo features' ie yorkflags, fireplaces, airbricks the LOT !!!

[concerned_money]

I don't understand.

IHT is 40% of anything over £325k. So the bill for a £575k estate would be £100k. ?

Edir: Assume a £400k valuation and £250k cash. £650k estate, £130k IHT. (20%)

Now, I've just worked out that so far in my entire working life I've earned perhaps £400k and hence paid about £110k in tax+NI (27%)

Would you like to explain to me why people are more deserving of a huge inheritance which they have done nothing to earn than I am of my wages?

would you like to explain why they should pay tax twice when you pay only once ?

[fluffy666]

oh, that's Ok then

problem it's too late to gift aid the IHT chunk now, so how about just fire the house (accident) and deprive the HMRC this way.

I mean seriously, let the excess go up in flames or allow HMRC/govco to spunk it away.

I know which option I prefer.

I'd destroy value rather than allow them to have it, strip every last bit of copper, strip allow 'salvo features' ie yorkflags, fireplaces, airbricks the LOT !!!

Moron.

[Frugal Git]

Sorry for your loss. When did your grandfather die - and how much of those savings/house were also his? Did he just leave everything to your gran?

take a look here. http://www.hmrc.gov.uk/inheritancetax/intro/transfer-threshold.htm

If he died after 1975, then you should be able to transfer his nil rate band over to your Gran. I'm not sure if HMRC apply the threshold at the time of the first death - that you'll have to look into.

Either way, under the current system when someone outlives their partner, the nilrate band transfers over. In this case, it could be that your Gran's threshold is now nearly 700k. You might not have to pay tax at all.

The solicitor sounds like he's incompetent to suggest all the cash savings will disappear if, as you've said, her estate is circa 600k. If the nil rate band thing doesn't work a 100k would be the taxman's - ridiculous of course, but them's the rules unless you plan in advance. A lesson though - I suspect most of us with our deep distrust of everything will try and make sure that we don't make the same error now.

[rxe]

problem it's too late to gift aid the IHT chunk now, so how about just fire the house (accident) and deprive the HMRC this way.

No it isn't.

http://lmgtfy.com/?q=deed+of+variation+IHT

[saving since 2005]

Firstly sorry for your loss.

Secondly doesn't this just go to show that OAPs actually have it pretty good and aren't freezing themselves and starving to death. I remember the OAP next door to me, three bed council house and living on her own, always used to say how much money she had and didnt understand the the thinking that pentioners had it hard.

[@contradevian]

we already pay for the homes, the council housing, the benefits...it ALL comes from US.

No you don't. My granny paid for their council house several times over, as ling time council tenants (cheaply built post war concrete prefab basically) then paid for it again under RTB!

[Monkey]

Wasn't IHT raised to £1m a few years ago, and met with rampent applause on here?