Money Box Live: Inheritance Tax

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Hello. In today's Money Box Live podcast, we're looking at a topic you email us about a lot, inheritance. It's sometimes called the death tax, and it's money paid by the estate of someone once they die, as long as the total value of all their property, possessions, cash, and soon pensions are worth more than a fixed threshold set by the government. It can be very unpopular.

But the latest figures from the government show fewer than one in twenty estates actually paid it in the financial year beginning twenty twenty two. So what is going on? Why are so many people worried? Here to answer as many of your questions as possible are today's experts. I'm joined by Claire Moffitt, pension and tax specialist at the Mutual Life Pensions.

and investment company Royal London. And with me in the studio is Nina Sperring, weath uh wealth protection solicitor and partner at the law firm Price Slater Gorn. Hello. Hello. Hello. Good to have you both with us. Before we get into people's questions and all the complications. Let's make sure we've got the basics right, Claire. How much is inheritance tax and who pays it?

Okay, so everybody has something qu that's called the nil rate band and that's three hundred and twenty five thousand pounds. and inheritance tax will only be charged once they're over that. Now if you're passing property on to direct d descendant, so that's children or grandchildren, you have another one hundred and seventy five thousand pounds. So so that adds up to half a million pounds if you are passing property um to children.

Uh you mentioned that only about five percent of estates pay it just now. That is going to increase with some of the changes we're seeing, but there are a lot of misconceptions about

who's going to pay it. And I think a lot of people are worried when they don't need to be worried. Hm. And if a couple are are are married then th that that's doubled, isn't it? It's up to a million. That's right. If if um someone passes all of their wealth on to their husband or wife, um Once the first day There'd only be inheritance tax on the second death and it's transferable it's called and it just means there's up to a million pounds.

Thank you. Nina, the threshold hasn't changed in a while, has it? Now at the moment, as we've said, it's about five percent of estates pay it according to government figures. Claire's saying it's it's it's expected to increase, it's expected to double in the next five years. So it's a small number, but it is growing. It is growing, and I think part of the problem is that house prices have risen sharply over the f over the last few years. Some regions more sharply than others.

Um and that main no rate band of three hundred and twenty five thousand hasn't changed since two thousand and nine. So I think more families are starting to feel a bit more exposed to IHT. Our old friend fiscal drag, yes. Um it's also I suppose While we're doing a subject like this, it's worth acknowledging there are many people who won't get any kind of inheritance at all. Um, Nina, as a survey from Canada Life, the insurance and financial services provider that suggests.

Fifty four percent of people consider inheritance tax to be the most unfair tax. What is it that people really don't like? Wow. Well I think a lot of people are thinking they've saved all their lives and then all of a sudden there's a tax that's due when they pass away, um, that reduces their estate value for the people that are going to receive the inheritance tax. So

Yeah, it's not easy. Well, people have very strong opinions. People are uh hitting our inbox with some very strong opinions right now. Um Claire, give us some context here though, because this is not actually a new tax. No, we've had some form of death tax for over three hundred years. So this is something that has been around um for quite a long time.

I think it's it's more in the news just now because we do have some changes happening. So changes this year in relation to agricultural and business relief and changes from next year when pensions are going to be subject to inheritance tax. Well we did ask the Treasury uh about those those those thoughts from some people that it is an unfair tax and it told us individuals will still be able to pass on up to five hundred thousand pounds tax free each.

and up to a million pounds in some situations, as we've been discussing. Let's get to some specifics then. Here's Ed with our first listener question. My wife and I act as um we live in Scotland, by the way, and we act as attorneys for my father in law, who has dementia and mental incapacity.

He's recently moved into a care home. And as you'll know, these things are pretty expensive. So in order to pay for the fees for the care home, my wife and I have sold his flat, which was his only home. Having done that, We're concerned that we may have inadvertently removed the residential nil rate banned tax allowance, which is I think it's one hundred and seventy five K for my father in law.

It's a really good question. A are you concerned then that without that uh allowance for a family home, his estate might might go over the threshold or you'll have a a bigger tax bill? That's correct. And and his his wishes are to leave. everything to his children and grandchildren. So we know he's keen to leave it all, but he would be likely to be over the sort of personal tax allowance and we would need the residential tax allowance to minimize his inheritance tax.

When he passes. Thanks, Ed, for that. And we've had a a lot of people actually asking similar questions. Nina, this must be an increasingly common issue: selling a home to pay for care costs. Does it mean you lose that inheritance tax housing allowance? Not necessarily, no. So there if you go onto the government website actually you can see there are some exceptions and for example if you have

Rydyn ni'n ddysgu eisiau panik. Mae'n unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw unrhyw. before you do sell your home if you have to sell it for care home fees. Yes, and there is some good d good advice though on the that gov.uk website. Well I should also say Ed was in Scotland. Broadly speaking, the rules are the same across the nations.

We've also had this email from someone who didn't give their name and it's being read by a member of the team. I am planning to shift to co-owning my house with my daughter, the aim being her and my grandson's security to stay in the house when I'm gone. Should I gift her half in terms of inheritance tax, or is it better that she own it all? If so, should I gift it to her or sell it to her?

Claire, what are the rules around this?'Cause we're getting a few different emails on it, especially if you're planning to stay in the home. Yeah, so I I'd say be careful of gifting and definitely look up the rules on this. So gov dot uk has got loads of really easy to understand information on this. Giving gifts if you can still benefit for them from them, so if you're still living in a house, can be tricky and it might be called a gift with reservation. Um

that means that it could still count towards your estate for inheritance tax purposes. Now, if you pay a market rent f for living in that house then there might not be an issue. But I just say if you are doing anything like this, always take legal financial advice. The other thing to mention when

gifting things like houses is it's not just inheritance tax that's worth thinking about. If someone is gifting a a home, for example, and they're in ill health then be a bit careful because local authorities can challenge gifts as well and they can look at the timing, the intention and the amount and it might still be assessed as being owned by you if you do need long term care. Oh I see, so they they might potentially come after it for the care costs. Yes. Okay, thank you.

Right, we've looked at the thresholds. Uh married couples with children, including step and adopted children, can pass on up to a million pounds tax free, but single people without children can't combine allowances. And of course they don't get the extra Tax free allowance for passing a house on to direct descendants. Here's Mary, who's been in touch about her siblings, children, and grandchildren. I actually have seven great nieces and great nephews and two great-great nephews.

I I was a teacher and I think that at some time I have given tuition to every one of my great nephews and great nieces. some money. The problem is that when I pass, obviously Mae'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer is hard-earned money. Obviously I had to buy my property from one salary.

and now they're just going to take it away. I mean, I I consider my great nieces and my great nephews to be my children. I just feel that it's unfair to single people that we seem to be paying a disproportionate amount of the Come, seven great nieces and nephews, two great great nephews. Mary, that must have been an expensive Christmas. Uh but we had the same question from Angela actually asking uh if she gets uh that that extra allowance that she can leave to her nieces.

Claire, uh on that point then, about a disproportionate amount being paid by single and child-free people, i is is is Mary right? Well it's true that there's different rules for single people and married peop people, but I think it's worth remembering why that's the case.

And what happens is if you're in a couple, you wouldn't want um you know, one person to die and the house to have to be sold to pay for an inheritance tax bill, for example. So basically the tax bill is waiting until after the second death. Whereas if you're a single person and your estate is passing on to people who don't live with you, who are going to receive a benefit but, you know, it it's not this sort of similar circumstances, then that's really kind of why it's different.

Um so it it might it probably does seem like it's a little bit unfair, but that's the reasoning behind it. And the the latest figures uh that we could find, twenty twenty-one to twenty twenty-two, government figures showed about twenty-five percent of inheritance tax liabilities came from single person estates. Um Claire, but we we we should be absolutely clear. There isn't there isn't really a way around this, is it has to be a direct descendant?

It's got to be a direct descendant. So grandchildren, children, that's the only people that can be passed on to. Uh well we asked the Treasury for a comment on fairness for single people. They didn't provide one. Um Nina Gillian has been in touch to ask what is the inheritance tax? free amount that can be passed on to the child of a single person who owns property worth over half a million.

Well, the rules are different obviously for individuals and unmarried couples, but the single person has the nil rate band of 325. You've not got the benefit of spousal exemption if you're not married.

And it's not just single people, is it? Yeah, we're we're talking about, you know, married couples getting up to a million pounds. Unmarried people don't get those breaks. No, they don't. So the rules are different and that is something to be aware of. But there are things that you can do. You can um try and do some estate planning. look at gifting to reduce the value of your estate before you pass away. So maybe even get married. Yeah, well you could get married, but I think I think

It's worth taking advice because it's you know, there are financial implications of getting married as well with blended families. It's not just

something that should be driven by tax. No. It's not always straightforward and a new hat. Um Claire, some people try to reduce their tax bill by giving wealth away while they're alive. What are the rules around gifting? Okay, so this is something we've had a huge amount of questions on in the last um year or so.

And um Royal London research found about thirteen percent of UK adults say they plan to give um away money when they're alive. Now part of that will be to reduce um IHT bills. So there are l lots of different ways you can give away money while you're alive and and one of the reasons for that is people want to gift um with warm hands. That's often a phrase that you would hear and give money to family when they need it rather than waiting kind of years and years later. So...

One of the main main mi mm misconceptions that I've heard is that all you can gift is three thousand pounds a year. And people have often heard of that. Now there is an annual exemption of three thousand pounds a year. But actually there are other exemptions. So one that's being asked about a lot just now um is one where you can make unlimited regular payments to another person as long as they're from your income and they don't reduce your standard of living. So that is unlimited.

So you could be gifting a thousand pounds a month if you have enough income to be able to do that and it's unlimited. The other one we're seeing quite a lot of is people um gifting large lump sums, so say fifty thousand pounds and that's gifted to a child or a grandchild to help with a house purchase. So In that situation, there's no inheritance tax due on that gift if you can survive for seven years. Now, if you die within the seven years,

then there will be inheritance tax due. It will reduce over that seven year period though. So that is um something that, you know, we are seeing a lot more of that people are thinking, Well actually I don't want to have as big an inheritance tax bill. What can I do now? Um and gifting is a way to achieve that.

Nina Simon is emailed to ask, are gifts above the annual limit automatically subject to IHT inheritance tax, or is the value added to our estate and only taxed if the threshold is exceeded? Rydw i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd

Um but if you could give up to the value of your nil rate band up to three two five, that refreshes every seven years. So that's worth knowing as well. And it doesn't automatically then come into the scope um of inheritance tax. Um Claire, you uh you've explained the rules. What kinds of things those should people actually think about before they give large amounts of money away while they're still alive?

Well think about are you going to have enough money left? Because you want to enjoy your retirement. You want to make sure you've got enough money for care home fees potentially in later life and not be giving everything away and Often people think, Well, it's okay because I've given my house to my children or money to my children and they'll help me out later.

But sometimes there's family arguments and so it's just good to be aware of potentially kind of what might happen. I'd say also it's all about keeping really good records as well. Make sure it's really clear who you've gifted to when that happened because otherwise your family not only have to deal with th a death and the really sort of sad times but also, you know, undue paperwork. So

Think about that at the time you're gifting. But it is just about thinking um about how much and when and you know, how you want to give that money. And actually giving smaller amounts regularly could be a much better idea than giving larger amounts. Du, jag skulle ju köpa några nya palpställd i lagret. Det kanske blev lite mer grejer. De hade ju allt, man hade en skribord, jag köpte en sån här, och kontorstolar, och så hade de en skit snygg tippkontor.

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Well, in April, farmers were due to face inheritance tax on agricultural assets worth more than a million pounds, ending the 100% tax relief that had been in place since the 1980s. It was hugely controversial, and following months of protests the government recently raised the threshold to two and a half million pounds. So how is that going down? Well I've been to Redbank Farm in Newton Lawillos in Merseyside to speak to a family of farmers. Hello. Good morning. My name's Angela.

I'm farm manager. You're hit at Redbank Farm. We've got my daughter Nicola with us. Hello. And I'm Dad. So yeah, my name's Gary and I I do the dirty end of the farm. So if I said who's the farmer, it's it's all of you. Yeah, it's just a matter of get stuck in. Predominantly we we're a livestock farm. In this shed here we've got some Mae'n rhaid i'n rhaid i'n rhaid i'n rhaid i'n rhaid i'n rhaid i'n rhaid. Impact.

Having pigs. As we're walking round I've noticed that there's there's several houses. There's the farm cottage as we came in. There's a a more new build house around there. Do you do you all have your own home on the farm? We do, we're like a little farming commune. My brother and his partner have two children. I have two children and my Sister has a has a son as well. So it's it's very much a family business. It is. Yeah. We're we're totally a family business.

all five of us work on the farm. The pigs don't go, hang on, we'll we'll have this piglet at nine o'clock in the morning. It could be three in the morning. And you have to be there. Some piglets down here. We can't let you in the shed. Just port your head through. We actually bought this farm in 2002. It was completely derelicts and I would honestly say, hand on heart, It's really the past two or three years that it has all come together.

We are a partnership, myself and my husband. That has been the worry. When the inheritance tax was announced, it was Right, okay, you've given us this number, m but what is our number here on the farm? How do we work this out? Rydym wedi'i ddod â'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio'n gweithio. To two and a half million from the one.

Does that still affect us? It's like you're thinking, have we all worked for twenty odd years? to then give them a massive tax bill, really? Is that what I've been doing? You know. Some people might say though that two and a half million pounds now is is quite a high number in terms of of what you're able to pass on as the family farm. It's not actually money though, is it? It it's it's like you saying, right, I'm gonna buy this car.

But in order to pay for it we're gonna take the back wheels off. There's so many farmers in this country that have other jobs. They work in supermarkets. Do you know roughly what value this business has? Not a clue. I mean does it go off turnover? Does it go off profit? If it goes off profit then it's worth nothing. And and people say, well, look at he's got two tractors, he's got three tractors.

Yeah, but they're not paid for. Bank manager owns'em. We don't know how much that land is worth. We don't know how much the buildings are worth. We don't know how much the house is worth.'Cause'cause you get somebody coming on this farm and saying, Well, that's it's a big house and anywhere else would be worth so much. Yeah, but sound of a pig sty, it's not.

For our listeners then, explain why you're still in this family business. What is it about farming and farming with your parents and your rest of your family that's so important? How many families can live all together in one place? and all the children can run around in the garden and play together. We work late night

Seven days a week but for some reason we find a joy in it, don't we? Most farmers th th they wanna grow crops, they wanna feed the country. British and Irish farms are the best farms in the world. That's it. Well thank you to the Watkinson family for showing me round their farm and showing me the piglets. Uh they clearly love what they do, but

As we've heard throughout the whole programme, there's confusion over how this tax actually works. Claire, we were talking about the allowance rising to two and a half million pounds, but is that per farm or is that per person? So for a married couple that would be double.

For a married couple that would be double, so there'd be five million pounds. And that's um agricultural and business relief combined because often it's a bit of a mixture when you have a farm. Um one thing I think it is worth saying is that Um, things like a farmhouse it can be quite complicated whether that's actually um going to receive that relief or not. So it has to actually um

be kind of part of the farm and and for example farming business is operated from the farmhouse. Now that can be tricky if you have older farmers, for example, that have retired from the business and are still living in the house.

um and there's not really farming activity going on. So again I would always say take a bit of advice um, you know, if you are in this situation to work out actually what what you will get relief for, especially if you are going to be over that five million pounds mark. But Nina, five million pounds is still clearly a lot more than than those farmers potentially thought, and the the tax rate that's paid isn't the same as the As inheritance tax more widely is

I think I think the difficulty is that farmers often hold value in the land but generally it's considered that the uh their income is modest. So yes, that is problematic. But anything over that is fifty percent, anything over the reliefs that are available. Is is is fifty fifty percent on the well it's quite complicated. It's complicated to explain, but anything abo above that five million is at the rate of fifty percent.

Well, we asked the Treasury and HMAC about this. We were pointed to the gov dot UK website. There is a lot of information there, uh where there is a step by step guide on what to do when someone dies, which includes estate valuations. Uh John's email though, he's an unmarried farmer.

with three children. He says he's done his calculations. He thinks his estate will be liable for a hefty tax bill, but if he was married and therefore could combine his allowance then he could pass on the farm with no tax.

Pay, which is a very interesting point. Let's get into some real specifics now, shall we? We've had this from John. My mum died in June and although she left a will, she's left it to my siblings and I to share out our inheritance. with her grandchildren and uh great grandchildren. The inheritance is free of uh inheritance tax, which is great, and I'm now looking to use a deed of variation to change the will and share a pro portion of my inheritance with my children and grandchildren.

I understand that using a deed of variation will ensure that the gift remains free of tax. under the provisions of the government's seven year gifting roles. Because, you know, I'm in my early sixties now, I'm always conscious of the fact that something might happen to me

And then anything that I've engaged to them would come under the seven year gifting rules. So my questions are around HMRC's guidance, which primarily sets out what I don't need to do, but is there a guide on the format or the contents of this deed? Should I involve a solicitor?

Thank you very much, John. Jenny has also emailed asking about this. So a deed of variation, that is a legal document that allows the people who are inheriting assets to change how they're distributed after someone has died. Nina John wants to share his inheritance with his children, but he doesn't want to turn it into a gift from himself that could then incur inheritance tax if he died within seven years. What are the rules and does he need us a list?

Well, you don't need a solicitor, but it is always a good idea to get some advice. It doesn't come into the seven-year rule, so that's a common misconception, but it's such a good estate planning tool. It will redirect the inheritance as though he's never received it. So it completely bypasses his estate. It must be done within two years of the date of death for it to have tax effect. And the you can be really clever with it as well, and you can vary intertrust.

still get the benefit as one of the potential ven beneficiaries of the trust and not a lot of people know that. So this is really gold. What I'm hearing is get advice. This is quite complicated. Uh lots of you getting in touch as as I knew you would. One person who doesn't give their name has

has texted to say uh inheritance tax should be a hundred percent. Most people get nothing. A lot of people will use up all their remaining money paying for social care. Inheritance increases the inequalities in a society which is already increasingly divided. Thank you for sharing your thoughts there.

Uh let's go on to this question from Philip. Dear Money Box, as any unused pensions bequeathed become subject to inheritance tax next year, would putting the pension pot into a trust fund avoid this? and or indeed income tax.

Okay, well we've looked at the pension changes coming in April next year in more detail in the first Saturday money box of the new year, which you can listen back to on BBC Sounds. Why not subscribe while you're there? Um but Claire, just quickly remind us what the change is. Okay, so um from April twenty twenty seven um pensions are going to be subject to inheritance tax. Now just now most pensions aren't subject to inheritance tax.

So f I mean for most people this isn't an issue because they've not got enough pension to last um for their retirement. But for some people they have been using since twenty fifteen because before twenty fifteen you would have had a big tax charge if you did this, but since then you've been able to pass on pensions and use up assets that aren't subject to H T before you used um your pensions up. Okay, so what about Philip's idea then of of using a trust instead?

So trusts are actually normally about control and not about saving tax. Now pensions can be paid out to another trust. So when someone dies that money can come out of the pension and go into a trust. But after April twenty twenty seven that money is still going to be part of the estate because it's coming out of the pension, IHT will be charged and then it's going into that trust. Um so

you know, it it might not be the best side, it might not save as much as you think and actually it doesn't save income tax in that situation either. The other thing I would say is that if you set up a trust and you're married, the spical exemption doesn't apply and that's because the money is coming out of the pension. then it's going into a trust and even if the trustees

pay to the spouse of the person who had the pension, um, that spiceal exemption is not going to apply. So if you're married, be very careful. Thank you very much. Let's squeeze in a message from John who says, I'm 73, single and have no children. My estate will be around 750,000 pounds. I would rather the tax went to a charity of my choice than to the government. Could I make a will leaving three hundred and twenty five thousand to my siblings?

and the rest to a nominated charity. Nina, very briefly, he can, can't he? Yes, uh y you know, he has the freedom to leave his estate to anybody who wants, but gifts to UK charities are fully exempt, so that's worth something to be aware of. But if ten percent or more of your estate is left to a UK charity or charities, then the overall standard rate of inheritance tax goes from forty percent to thirty six percent. Ah, okay, very useful. Um Claire, in a sentence

I hope we've cleared up some of the confusion. If people still have questions, where could they go for advice? Gov.uk, lots of great information and also Money Helper is a really good source of information. Nina, your tip for where to find advice? I would go to advisingfamilies.org. That is the Society of Trusty and Estate Practitioners website. Thank you very much indeed.

That's all we've got time for in this Money Box Live podcast. Thank you to everybody for their great questions and everyone whose questions we didn't get to. We will come back to this in the future. Thanks of course to our panel. We've been hearing from Nina Sperring from Price Slater Gawn. And Claire Moffat from Royal London. I'm back with Money Box on Saturday, and I'll be looking at restrictive covenants on people's homes, from banning immoral acts.

To banning washing lines, how enforceable are they and what do they mean for your money? Do get in touch on that, or about any story you want us to cover. And here's Ed from earlier in the programme to tell you how. If you want Moneybox Live to look at a story or even appear on the programme like I did, then get in touch. You can email moneybox at bbc dot co dot uk. Or you can send the team a message or a voice note on WhatsApp. The number is O3306.

seven eight three one eight three. They really do read and listen to every message. Thanks, Ed, we really do. In this podcast, the producer was Sarah Rogers, the studio manager Olivia Michelli, production coordinator Ema Devlin, our editor is Jess Quayle, I'm Felicity Hannah, and this was a BBC News Money and Work Production for BBC Sound.

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