Client has a life interest in deceased H’s share of house, which passes to his children on her death. Entire house is worth £584,000.
She wishes to own the house outright and so has agreed with her step children that she will purchase their interest for £292,000. She appreciates she could have negotiated a lower sum, but is happy with that sum.
Usually the termination of a Life interest trust would be a PET, but she has no gratuitous intent and so is not making a gift. However, from HMRCs point of view, prior to the transaction, her estate for IHT purposes would have comprised her half share of the house, his half share comprised in the life interest trust and the £292,000, totalling £876k. After the transaction, it will just comprise the house of £584k, so there is a reduction in her estate. The HMRC IHT manual appears to have an almost identical situation and states that it is a PET, but I understand that McCutcheon on Inheritance Tax ( to which I unfortunately do not have access) states at para. 2-134 that it is not a PET as the interest in possession has become enlarged as it is being converted into an absolute interest.
Is the McCutcheon point not applicable due to the fact that she is paying £292k for her absolute interest?
Before considering the question of a PET, I think it is necessary to know if the will provides that the life interest will continue, albeit in the proceeds of sale of the share of the house. If it does continue, then there seems to me no loss to the estate as she is merely swapping her ability to occupy the property with her right to the income stream from the proceeds.
When did the husband die? If within the last 2 years, might there be benefit in considering a deed of variation, whereby the life interest is excluded and the widow given an option to purchase the deceased’s interest in the property at the agreed price. This would ber dependent both on the total value of the husband’s estate and the children’s interest in remainder vesting on their father’s death.
Many thanks for your reply, Paul. Although under the terms of the Will, the life interest would continue, the aim is to give the step children the money now, rather than them waiting until she dies, hence why I feel there will be a loss to the estate. Do you agree?
The situation described certainly has all the feel of there being a reduction in the widow’s estate which would be a PET.
I could understand the enlargement point if the remaindermen had gifted the interest in remainder to her, but they are retaining their interest, albeit represented by cash rather than a half-share of the house. I wonder if the background of the paragraph to which you have been referred in McCutcheon is on all fours with the situation you are considering. Like you, I do not have ready access to that work.