I understand that when someone dies, transfers upon death to their spouse are exempt from IHT. So when calculating the value of the estate for IHT purpose is the following equation correct?
Total value of deceased's assets - exemptions (eg transfers to spouse) - nil rate band limit (255,000ukp) = amount liable for IHT
And what about cash gifts made by the deceased to their children within the last 7 years. Are they included as part of the total value of the deceased's assets in the calculation above or do they all automatically become liable for IHT (40% but taking into account tapering relief).
Finally, if the gifts were paid out from a joint account held by the deceased and their spouse will this have any effect on the amount of IHT payable?
Would really appreciate any answers to these questions.
Effectively yes. Technically no; something makes me think the transfers to spouse are actually included first, but then full relief is given in respect of them. E.g. £510k total assets of which (say) £170k goes to spouse and to each of two children.
By simple method: 510-170-255 = £85k taxable, tax £34k.
By strict method: 510-255 = £255k taxable, tax £102k, less relief of 40% of £170k = £68k, total tax 102-68 = £34k.
Bottom line is the same. I don't know what the point of the distinction is, or even whether I'm just imagining it.
Yes, unless themselves exempt because they are "small gifts" (less than £100 per recipient per year or, if more, then less than £3k per year in aggregate, with special rules for wedding presents and for carrying forward an unused allowance by up to one year (e.g. £6k in two years)) or are "gifts out of income".
They become automatically liable only where they themselves exceed the NRB.
Example 1: Give £300k in year 1 and £300k in year 4. Die in year 7 leaving residual estate of a further £300k.
The first gift uses up the NRB and tax at 40% is due on the excess, i.e. on £45k, giving £18k, but it will be tapered down to 20% or £3600.
The 2nd gift is fully taxed at 40% of £300k, £120k, and tapered down to 80% or £96k.
The remainder of the estate is taxed at the full £120k.
Example 2: As above but all 3 amounts £200k instead of £300k.
1st gift entirely exempt as it's within NRB, £55k of spare NRB is applied to 2nd gift, leaving £145k taxable. 80% of the £58k tax is payable: £46k4. Remaining £200k fully taxable at £80k.
Normally a joint account would be deemed to belong to its joint holders in equal shares, and a gift out of it would be deemed to have come from the joint holders in equal shares. I.e. if Mr&Mrs write me a cheque for £6k it would be treated as a gift of £3k from Mr and of £3k from Mrs.
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