The Lemon Fool

an example and for the death of the survivor of a married couple: my understanding is that for a £1m estate leaving everything to children,grandchildren and great grandchildren entails no IHT liability. Am I Correct?

Now: If a substantial portion, say £100K, is left to a non relative . How does this affect IHT?

You are supposing that the first of the couple to die left everything to the second.

She (say) can then leave her assets to whomever she wishes with the proviso that her owner-occupied house worth £350k or more must go to direct descendants if her estate is to enjoy a full £1,000,000 allowance.

Two comments: (i) Direct descendants includes adopted children, step-children, and previously fostered children.
(ii) I suppose that if her house were worth, say, £500,000 she could leave 70% of it to direct descendants and the rest to somebody else, and the full £1,000,000 allowance would still apply. But that's just a guess; googling will reveal all.

dubre wrote:an example and for the death of the survivor of a married couple: my understanding is that for a £1m estate leaving everything to children,grandchildren and great grandchildren entails no IHT liability. Am I Correct?

Now: If a substantial portion, say £100K, is left to a non relative . How does this affect IHT?

Re: "entails no IHT liability." Surely not? The estate will benefit from the surviving spouse's IHT allowance of £325,000 and, if previously unused, the IHT allowance that benefitted the estate of the first spouse to die. So that is £650,000 in total. If a house is inherited by children or grandchildren than an extra IHT allowance of £175,000 applies to the estate, making £825,000 in total. Anything above that will be taxed at 40% unless any exemptions apply.

You get the house allowance for both parents, double the rate when the second dies

To be more precise:

1. There is a transfer of value of the entire estate assumed to occur immediately before death.

2. The value in (1) is added to the value of any chargeable transfers made in the 7 years before death. If any such transfers occurs 3 or more years before death then note there could be reduction in the tax applied to any such transfers

3. Determine the chargeable transfers (i.e., ignoring any exempt transfers e.g. transfers to charities, political parties &c.)

4. The nil rate band applicable at death is applied to the chargeable value transferred.

5. If the deceased is a surviving spouse or civil partner then determine, for the date of the PRIOR death, the % of the nil-rate band then unused by the first deceased and increase the nil-rate band applicable at the date of the second death by the same amount.

6. If the estate of the deceased includes a main residence of the deceased deduct the residence allowance.

7. If the estate if the prior death included an interest in a main residence that was not covered by nil-rate band or was not credited by the residence allowance then increase the residence allowance of the deceased by the amount due to the deceased.

Accordingly, and returning to the OP questions:

A: In the simple case of a surviving spouse who has an estate of £1m of which at least £350,000 is attributable to the value of a main residence and the pre-deceased spouse had an interest including at least £175,000 in the residence all of which was passed to the surviving spouse by survivorship (and outside the will of the pre-deceased spouse) then the now deceased survivor should be entitled to a reduction of £1m in his or her chargeable transfers at death.

B: As the reduction applies to the chargeable transfer it matters not who is the donee except to the extent that the donee is exempt. An individual who is a non-relative is unlikely to be exempt but, e.g., a charity might be.

Eb.

Many thanks