Tax liability on the death estate
Until now, the examples have simply given a figure for the value of a person’s estate.
However, it may be necessary to calculate the value.
A person’s estate includes the value of everything that they own at the date of death such as property, shares, motor vehicles, cash and other investments.
A person’s estate also includes the proceeds from life assurance policies even though the proceeds will not be received until after the date of death.
The actual market value of a life assurance policy at the date of death is irrelevant.
The following deductions are permitted:
Debts due by the deceased provided they can be legally enforced. Therefore, gambling debts cannot be deducted, nor can debts that are unenforceable because there is no written evidence.
Mortgages on property. This does not include endowment mortgages because these are repaid upon death by the life assurance element of the mortgage. Repayment mortgages and interest-only mortgages are deductible.
Andy died on 31 December 2018.
At the date of his death he owned the following assets:
A main residence valued at £425,000 - this was not left in his will to a direct descendent.
This had an outstanding interest-only mortgage of £180,000.
Motor cars valued at £63,000.
Ordinary shares in Herbert plc valued at £54,000.
Building society deposits of £25,000.
Investments in individual savings accounts valued at £22,000, savings certificates from NS&I (National Savings and Investments) valued at £19,000 and government securities (gilts) valued at £34,000.
A life assurance policy on his own life.
On 31 December 2017, the policy had an open market value of £85,000 and proceeds of £100,000 were received following Andy’s death.
On 31 December 2017, Andy owed £700 in respect of credit card debts and he had also verbally promised to pay the £800 legal fee of a friend.
The cost of his funeral amounted to £4,300.
|Ordinary shares in Herbert plc||54,000|
|Building society deposits||25,000|
|Other investments (22,000 + 19,000 + 34,000)||75,000|
|Proceeds of life assurance policy||100,000|
|Credit card debts||700|
|325,000 at nil%||0|
|232,000 at 40%||92,800|
The promise to pay the friend’s legal fee is not deductible because it is not legally enforceable.
Unlike capital gains tax, there is no exemption for motor cars, individual savings accounts, saving certificates from NS&I or for government securities.
The IHT liability on the life assurance policy could have easily been avoided if the policy had been written into trust for the beneficiaries of Andy’s estate.
The proceeds would have then been paid directly to the beneficiaries, and not form part of Andy’s estate.
Joe Kerr died on April 6 2018, leaving £25,000 to his friend and the remainder to his nephew.
At the date of his death Joe owned the following assets:
His principal private residence valued at £300,000 upon which the outstanding repayment mortgage at the date of death was £80,000. The house was not left to a direct descendent.
A holiday home valued at £140,000
Bank and Building Society Deposits amounting to £230,000
12,000 Shares in Joe Ltd valued at £20 per share
A life assurance policy with an open market value on April 6 2018, of £125,000 from which proceeds of £140,000 were received into trust following Joe’s death.
Joe had no outstanding expenses at the date of his death.
Joe's wife only used 50% of her NRB at the date of her death and Joe never made any gifts previous to his death, so his NRB is fully available.
How much will his nephew inherit?
Repayment mortgage (£80,000)
Holiday home £140,000
Bank deposits £230,000
Shares (12,000*£20) = £240,000
Total estate £830,000
NRB available (£325,000 + 0.5*£325,000) = (£487,500)
Chargeable estate = £342,500
IHT payable = 40%*£342,500 = £137,000
Therefore, his nephew will inherit:
£830,000 - £25,000 (gift to friend) - £137,000 (IHT paid from estate) = £668,000
The life assurance policy was written into trust for the beneficiaries and so it does not become chargeable to IHT in the death estate.