I want to share my father’s inheritance with my son and my husband: Do we have to pay taxes?

I’m waiting for an inheritance from my father who passed away a while ago. His assets are in the process of legalization at this time.

I would like to give our son a third of what I receive and my husband will receive the other third.

Can I give this money to my son and if so, will either of us pay taxes? What can we do to mitigate this if so? LP

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This is Money’s Harvey Dorset responds: I’m sorry for the loss of your father.

As for inheritance, there is no tax to pay when receiving the money, neither for your son nor for your husband.

However, things could get more complicated in the future. Essentially, this could result in inheritance tax needing to be paid on the money should you die within the next seven years.

One way to avoid this is by using a legal mechanism called a deed of variation, which would allow your son or husband to directly inherit the assets of your father’s estate, rather than gifts from you.

Neil Winstanley discusses this in more detail below, and the important point is that it must be done within two years of your father’s death. Outside of two years, things get a little more complicated.

After that time, transferring part of your inheritance to your son and husband would be considered a gift from you, and the vast majority would be left out of your £3,000 annual gift allowance.

This means that if you yourself died within seven years of making the gift, the gift would be subject to inheritance tax as part of your estate.

This worries some people more than others depending on their age and health, but it’s always worth keeping in mind.

The donation would also be subject to something called a “donation cone relief.” This means that the closer you get to seven years after making a gift, the less inheritance tax will be charged.

For example, after three years, the 40 per cent rate falls to 32 per cent, and after six years, IHT will be charged at just eight per cent.

This is Money spoke to two financial advisors to find out how you can expect your inheritance to be taxed if you pass part of it to your son and husband.

The information below is accurate ahead of the fall budget, but could be subject to change if new gift and inheritance tax rules are put in place.

Court: Neil Winstanley warns that a variation deed can only be used within two years of death

Neil Winstanley, Chartered Financial Planner at Quilter Cheviot, responds: You can generally donate portions of the inheritance you receive without any immediate tax liability.

Inheritance tax (IHT) is charged on the estate of the deceased, in this case that of your father, and not on you as the recipient of the inheritance.

However, it will depend on the date of your father’s death whether the gift qualifies for a deed of variation.

If your father died less than two years ago, you can vary the terms of the inheritance so that the portion you wish to give to another person, in this case your husband and your son, will not be considered as if it had never existed. enter your own personal heritage.

This is important as the variation will not be classed as a gift for IHT purposes, which could help reduce the inheritance tax bill you will leave in the event of your death.

However, if your father died more than two years ago, then there will be no variation deed available and the full value of the inheritance will pass to your estate. In this case, the two gifts, each from her husband and son, are treated differently.

In your husband’s case, transfers between spouses are exempt from IHT, so there are no problems here when it comes to the tax bill.

Regarding the gift to your child, if you chose to pay it directly in cash and did not retain control, it would qualify as a potentially exempt transfer (PET).

A PET would incur no initial IHT charge and after seven years it would be considered completely out of your estate and no IHT would be payable.

However, it is worth noting that a gradual reduction would apply if you died within seven years.

Whether this would be a factor will depend on the total value of your estate, as well as how your own will is set up.

There will be no tax to pay upon receipt for either your son or your husband, nor will you have to pay any tax.

The assets will become yours to spend, save or invest, so if you made a profit on your investments or savings, then you could be subject to income, dividend or capital gains tax, depending on what you choose to do. with the money. and where it is celebrated.

Wherever possible, and especially as each of you will receive an inheritance, it is worth seeking professional financial advice to help you determine the best and most tax-efficient way to manage the money and ensure that it can be fully utilized. available assignments.

Craig Ridge, Independent Financial Advisor at Flying Colors, responds: I’m sorry to hear about your father’s passing, I’m sure it has been a difficult time.

You’re thinking about how the gains from your estate can be distributed tax-efficiently, which is good to hear, especially since some options may expire after specific deadlines.

Due to the limited information available, I cannot provide you with conclusive answers; Without details of you or your father’s estate, it is difficult to recommend the best course of action. However, here are some things you should consider.

Firstly, you should consider whether your father’s estate is required to pay inheritance tax, as this could affect the amount you receive.

Caution: Craig Ridge Says Smart Planning Could Keep Kids From Paying Inheritance Taxes

Currently, under HMRC rules, on the death of a person, their estate is valued to assess whether it exceeds the nil rate band of £325,000 and, if applicable, the residence nil rate band of £175,000.

In the valuation of the assets, donations made in the seven years prior to death will also be considered.

If the value of the estate is within the available bands, there will be no inheritance tax to pay. Typically, there is also no inheritance tax to pay at death if you leave everything to your spouse.

Once you, as the daughter, receive the money, it will become part of your own estate, which may exceed the value of the property. Inheritance tax bands available in the event of your own death, meaning your estate may be liable for the above taxes.

When beneficiaries receive an inheritance from their parents, they often consider gifting part of it to their own children.

However, caution should be exercised, as intelligent planning can make the difference between your children paying inheritance tax upon the death of the initial beneficiary, a reduced amount, or paying nothing at all.

One option would be for the beneficiary to receive the money from the deceased person’s estate and then gift it to the children.

Assuming this does not qualify for any of the available assignments, it would be considered a potentially exempt transfer.

The key word here is “potentially,” since assuming the initial beneficiary who made the gift survives seven years, this gift will not form part of the value of your estate in the event of your death. The question is: Will that initial beneficiary survive seven years? Is there a better option?

Another option could be to do a “variation”. A ‘variation’ allows you to vary the deceased’s will and redirect assets to other parties in a way that was not previously set out in the will.

The benefit to the initial beneficiaries is that the inheritance that has been diverted from them will not form part of the value of their estate.

Any changes to the will must be completed within two years of death and may need to be agreed with other beneficiaries.

More information about your circumstances will be needed to be able to advise you on the most suitable option, so I strongly suggest that you seek advice from a financial advisor and solicitor to determine the best course of action.

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