Our clients are married. It is a second marriage, both having children from their first relationships. Each wish to grant a life interest to each other in their property. On second death, the predeceased’s half share will pass to the children from the previous marriage and the surviving spouse’s half share to their own children from their previous marriage.
Does anyone have any guidance regarding the inheritance tax burden on second death? Due to the trust aggregation the survivors children will be unduly burdened. Any advice would be appreciated.
On the second death, the value subject to IHT will include both what they own and, on the basis that it is an immediate post death interest (IPDI), the half share of the property in which they have the life interest. Whilst IHT will be calculated by reference to the combined value, the liability will be apportioned between the estate and the trust in proportion to their taxable value – i.e. if the estate is valued for IHT at £750k and the share of the property in trust £250k, the IHT will be split in the ration 3:1.
Under the current IHT regime, the survivor could alter the balance by making substantial lifetime gifts to their own children, effectively securing the NRB for their own children and reducing their estate as a proportion of the total value passing on death (thus increasing the proportion of the IHT payable out of the trust fund). Of course, tax would not be the only aspect to be considered: they would have to have sufficient to live on, and would also need to be conscious of any potential “depravation” issues.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Assuming the trust is a qualifying IIP which based on your email it would be, there would be an apportionment, that being the executors having to pay their share of the IHT and trustees of the life interest trust their own share.
In simple terms, if the IIP is valued at £600,000 and the free estate valued at £600,000, IHT therefore at 40%, the apportionment would essentially be half, that being the fact that the IIP accounts for 50% of the taxable estate.
So the trustees would pay half and the executors the other half.
Andrew Drakes
Countrywide Tax & Trust Corporation Ltd
Assuming no IHT on the first death the deceased’s NRB will remain in tact as will the RNRB. Or maybe some part of the NRB will be used depending upon to what extent the taxable estate exceeds the 50% settled on the IPDI.
On the survivor’s death the survivor’s estate comprises the 50% interest in the house held absolutely (plus any other assets in the free estate) plus the value of the IPDI.
The survivor’s estate is reduced by possibly two NRB’s plus two RNRBs. The net estate (after IHT, if any) is then apportioned between the survivor’s free estate and the trustees of the IPDI interest.
These two apportioned amounts of IHT will be equal if the survivors free estate equals in the value of the IPDI interest. Neither of the spouses beneficiaries will then be worse off then the other.
However, an unequal allocation of IHT only arises if the surviving spouse’s free estate is greater than the value of the IPDI; eg free estate 350k and IPDI 150k. In this case the free estate bears 350k/500k (70%) and the trustees of the IPDI (150k/500k) 30%.
The NRBs and the RNRBs are simply deducted from the the aggregate (free plus IPDI) taxable estate of there survivor and cannot be allocated separately against the free estate and the IPDI. The RNRBs are deducted first.