I need to share my father’s inheritance with my son and husband: Do we now have to pay tax?

I am waiting for an inheritance from my father who passed away a while ago. His estate is going through probate at the moment. 

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

Can I give my son this money, and if so, will either of us be taxed? What can we do to mitigate this if so? L.P

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Harvey Dorset, of This is Money, replies: I am sorry to hear of the loss of your father. 

In terms of the inheritance, there is no tax to pay on receipt of the money, for either your son or husband. 

However, things could become more complicated further down the line. Essentially, this could result in inheritance tax needing to be paid on the money in the event that you yourself passed away in 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 from your father’s estate, as opposed to as gifts from you. 

This is discussed in more detail by Neil Winstanley below, and the important point is that it must be done within two years of your father’s passing. Outside of the two years, things become a little more tricky.

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

This means that if you yourself were to die within seven years of making the gift, then the gift would become liable for inheritance tax as part of your estate.

This is more of a concern to some people than others depending on their age and health, but is always worth bearing in mind.  

The gift would also be subject to something called the ‘gifting taper relief’. This means that the closer you get to seven years after you made a gift, the less inheritance tax is charged. 

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

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

The information below is accurate ahead of the Autumn Budget, but could be subject to change if new gifting and inheritance tax rules are set out.

Neil Winstanley, chartered financial planner at Quilter Cheviot, replies: You can generally gift portions of the inheritance you receive without any immediate tax liability. 

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

It will depend, however, on the date of your father’s death as to whether the gift qualifies for a deed of variation. 

If your father passed away less than two years ago, you will be able to vary the terms of the inheritance so that the portion you wish to assign to somebody else, in this case to your husband and son, will not be deemed as ever having come into your own personal estate. 

This is important as the variation will not then be classed as a gift for IHT purposes, potentially helping to reduce the inheritance tax bill you leave in the event of your passing.

However, if your father passed away more than two years ago then a deed of variation is not available, and the full value of the inheritance will come into your estate. In this case the two gifts, to each your husband and son, are treated differently.

In the case of your husband, transfers between spouses are exempt from IHT, so there are no issues here as far as any tax bill is concerned. 

With regard to the gift to your son, if you opted to pay it outright from cash and there was no control retained by you, it would qualify as a potentially exempt transfer (PET).

A PET would not attract any initial IHT charge, and after seven years it would be deemed completely outside of your estate and no IHT would be payable. 

However, it is worth noting that tapering would apply if you were to pass away within seven years. 

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

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

The assets will become theirs to spend, save or invest, so if they were to make any gains on their investments or savings then they may then be subject to income, dividend or capital gains tax, depending on what they opt to do with the money and where it is held.

Wherever possible, and particularly as you will each be receiving an inheritance, it is worth seeking professional financial advice to help you determine the best, most tax efficient way of managing the money and to ensure you are able to fully utilise any allowances available.

Craig Ridge, independent financial adviser at Flying Colours, replies: I’m sorry to hear of the passing of your father, I’m sure it has been a difficult time. 

You are thinking about how the proceeds of his estate can be distributed tax efficiently, which is good to hear, especially as some options can expire after specific timescales.

Due to the limited information available I can’t provide you with conclusive answers – without details of yours or your father’s estate it’s hard to recommend the best course of action. However, here are some things that you need to consider.

First, you should consider whether your father’s estate needs to pay inheritance tax – as this could impact the amount you receive. 

Currently under HMRC rules, in the event of a person’s death, 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. 

The valuation of the estate will also consider any gifts that have been made in the seven years before the death. 

If the value of the estate is within the bands available, there will be no inheritance tax to pay. There is also not normally inheritance tax to pay at the point of death if you leave everything to your spouse. 

Once you as the daughter receive the money, it becomes part of your own estate, which may take it above the value of the 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 parents, they often consider gifting some of this to their own children. 

Caution should be taken however, as clever planning can be the difference between their children paying an inheritance tax charge on the initial beneficiary’s death, a reduced amount or not at all.

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

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

The key word here is ‘potentially,’ as assuming the initial beneficiary who made the gift survives seven years, then this gift will not form part of their estate value on death. The question is will that initial beneficiary survives seven years – and is there a better option?

Another option could be to make a ‘variation’. A ‘variation’ allows you to vary the will of the deceased and redirect assets to other parties in a manner that was not previously stated by the Will. 

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

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

Further information would be required regarding your circumstances to be able to advise you on the most appropriate option, so I strongly suggest you seek advice from a financial adviser and solicitor to determine the best course of action.