Inheritance Tax When Second Parent Dies

What happens with inheritance tax when my second parent dies?

When your second parent dies, their estate is valued. Inheritance Tax is due on the portion exceeding the nil-rate band (and any nil-rate band left from the first parent). Assets passing to a surviving spouse/civil partner are usually exempt, but this doesn’t apply on the second death.

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Understanding the Nil Rate Bands

Before delving into the specifics of second parent deaths, it’s essential to understand the nil rate band (NRB) and the residence nil rate band (RNRB).

Nil Rate Band (NRB)

The NRB is the threshold below which an estate is not subject to IHT.
Currently, the standard NRB is £325,000.
Any unused NRB from the first spouse or civil partner’s estate can be transferred to the surviving spouse or civil partner.

Residence Nil Rate Band (RNRB)

The RNRB is an additional allowance for those passing on their main residence to direct descendants (children, grandchildren, etc.).
Currently, the RNRB is £175,000.
Like the NRB, any unused RNRB from the first spouse or civil partner’s estate can be transferred.
Specific conditions apply, including the property being the deceased’s main residence and being passed to direct descendants.
The RNRB is tapered for estates worth over £2 million.

First Parent’s Estate: Key Considerations

The actions taken when the first parent dies significantly impact the IHT liability of the second parent’s estate.

Accurate Valuation and IHT Calculation

Accurately valuing all assets in the first parent’s estate is crucial.
Correctly calculating the IHT due ensures the accurate determination of any unused NRB and RNRB.
Professional valuations and tax advice are recommended.

Claiming Transferable NRB and RNRB

Executors must claim the transferable NRB and RNRB on the first parent’s IHT forms (IHT400 and IHT402).
This involves providing details of the first parent’s estate and the percentage of the NRB and RNRB used.
Failure to claim these transfers can result in a higher IHT liability for the second parent’s estate.

Maintaining Records

Retaining detailed records of the first parent’s estate, including valuations, IHT calculations, and transfer claims, is essential.
These records will be required when dealing with the second parent’s estate.
Records should be kept indefinitely, as time limits for HMRC challenges can be extensive.

Planning for the Second Parent

Consider the potential IHT liability of the second parent’s estate.
Explore options for reducing IHT, such as gifting, trusts, or life insurance.
Ensure the second parent’s will is up-to-date and reflects their wishes and tax planning.

Second Parent’s Estate: Key Considerations

When the second parent dies, the executors must consider both the remaining NRB and RNRB from their own estate and any transferred amounts.

Calculating Total NRB and RNRB

The total NRB available is the standard NRB plus any transferred percentage from the first parent.
The total RNRB available is the standard RNRB plus any transferred percentage from the first parent.
For example, if the first parent used 50% of their NRB, the second parent would have 150% of the standard NRB.

Applying the RNRB

Ensure the property qualifies as the deceased’s main residence.
Verify that the property is being passed to direct descendants.
If the estate’s value exceeds £2 million, the RNRB will be tapered.
Be aware of the downsizing rules, which allow the RNRB to be claimed even if the deceased downsized or sold their main residence.

Time Limits and Reporting

Executors must report the second parent’s estate to HMRC within 12 months of the date of death.
IHT must be paid within six months of the end of the month in which the death occurred.
Form IHT400 and supporting schedules (IHT402, IHT435) must be completed.
Claims for transferred NRB and RNRB must be made on these forms.

HMRC Challenges

HMRC can challenge valuations and IHT calculations.
Providing detailed records and professional valuations strengthens the executors’ position.
HMRC has up to four years from the date of the IHT account to challenge the valuation of assets, or six years if they believe there was negligence.
If there was a deliberate error, there is no time limit.

Practical Steps for Executors

Gather all relevant documents: Wills, death certificates, property deeds, bank statements, investment records, and records from the first parent’s estate.
Obtain accurate valuations: For all assets, especially property and significant valuables.
Calculate the IHT liability: Including the transferable NRB and RNRB.
Complete and submit IHT forms: Accurately and within the time limits.
Pay the IHT due: From the estate’s assets.
Distribute the assets: According to the terms of the will.
Maintain records: For future reference and potential HMRC queries.

Key Considerations and Tips

Downsizing Rules

If the deceased downsized or sold their main residence after July 8, 2015, the RNRB may still be available.
Specific conditions and calculations apply, so professional advice is recommended.

Trusts

Assets held in trusts can have complex IHT implications.
The type of trust and the beneficiaries’ circumstances will affect the IHT liability.
Professional advice is essential for dealing with trusts.

Gifts

Gifts made within seven years of death may be included in the estate for IHT purposes.
Keeping detailed records of gifts is crucial.

Professional Advice

Engaging a solicitor, accountant, or financial advisor specializing in IHT is highly recommended.
They can provide expert guidance on valuations, calculations, and tax planning.
Professional advice can help minimize IHT liability and ensure compliance with HMRC regulations.

By understanding these considerations and taking appropriate actions, executors can navigate the complexities of IHT when dealing with the estates of two parents and ensure the correct amount of tax is paid.

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