We have £960,000. How much tax would our children have to pay?
08 September 2023
Question by Sheila
We have £960,000 including value of two properties and savings. How much capital gains tax would our children have to pay?
Answered by Lydia Taft
Thanks for your question, which is an interesting one! Without full details of your personal circumstances it's difficult to properly answer your question, however I hope the guidance below is of some use to you and I invite you to get back in touch if you'd like any further information.
There are two taxes that are worth a mention here. Capital Gains tax and Inheritance tax.
Firstly, Capital Gains tax is only payable when an asset/investment is disposed of (or sold) at a higher price than it was purchased for, and this is payable by the legal owner of the asset at the time. Therefore if you own the assets currently, Capital Gains tax would be payable by you (rather than the children), only if they were sold or given away.
Inheritance tax is payable on death (or usually the death of the last surviving spouse if you are a married couple) if the total assets in your possession, exceed the Inheritance Tax allowances. It seems this may be the tax you are concerned about, rather than Capital Gains tax.
Where Inheritance tax is concerned, each individual is entitled to an allowance of £325,000 (referred to as the Nil Rate Band), which can be used to offset against the value of all of the assets they own on death (known as their estate), before Inheritance tax is charged. If you are married and leave everything to your surviving spouse, this is considered as exempt from Inheritance tax and therefore any potential tax charge rolls over to the death of the last surviving spouse. In addition to just passing over the assets to the surviving spouse, the deceased spouse can also pass over their Inheritance tax allowances, to give a combined Nil Rate Band of £650,000 (£325,000 x 2) to offset against the total value of the estate on death of the surviving spouse.
In addition to the Nil Rate Band, individuals may also be entitled to the Residence Nil Rate Band (which is an additional allowance of £175,000 per person). This is available to offset against the value of the main residence providing it is left to your direct descendants (i.e. children) on 2nd death. Please note this cannot be used against the value of a second property or if you are not the legal owner of your main residence i.e. you are renting. This allowance works in the same way as the Nil Rate Band in that it can be passed on to a surviving spouse on death to give a combined Residence Nil Rate band of £350,000 (£175,000 x 2). The amount of this allowance that can be used, is restricted to the value of your main residence if this is lower than £350,000 for a married couple (or £175,000 for a single person). Please be aware that whilst everyone is entitled to the standard Nil Rate Band allowance, those with estates valued at over £2,000,000 on death, will start to lose some / potentially all of their Residence Nil Rate band, so this should not be relied upon for those with larger estates.
Assuming a married couple left all of their assets to each other on first death and then to their children thereafter, providing they are able to use the full Nil Rate Band & Residence Nil Rate band*, assets of up to £1,000,000 could avoid inheritance tax. If the value of the estate exceeds £1,000,000, the excess could attract an inheritance tax charge of 40%.
*Please remember the amount of Residence Nil Rate band available to claim, could be less than £350,000 if the property value is less than this on the date of death.
Whilst the above gives general guidance on the situation, this is a highly complex area and further information about your individual circumstances would be required to confirm any potential tax liability.
Hopefully this is of some use to you. If you'd like any further information, please get back in touch.