H & W have been married before. W has 2 adult children from first marriage, one of whom is disabled.
W’s Estate is worth in region of £4m. Husband’s is around £300,000. W’s house (in sole name) worth £800,000.
One of her assets is a loan of £2m which is currently being repaid monthly, interest being applied.
She wants to leave:
(1) house on life interest trust for husband, along with the loan repayments (including income and capital) for his lifetime which she is envisaging will cover cost of upkeep of house/living expenses.
(2) house (and whatever is left of loan ) will go to non-disabled son on death of H.
(3) Residue split equally: half to non disabled son and half into discretionary trust to be used primarily for disabled son.
My issue here is the IHT on the house. W’s NRB will be used up on her death. Value of house will then be taken into account in H’s estate. I know that the IHT is split between the trust and H’s estate, but where does the cash come from to pay it?
What is the best way around this? My initial thought is for the house and loan to go into a discretionary trust on W’s death with a letter of wishes stating that H should have right to live there. But this will then remove availability of RNRB.
Or the house/loan go into discretionary trust after H’s death and the trust bears cost of IHT. Again the issue of the loss of RNRB.
If the house and loan are to be subject to an IPDI in favour of H, will not any IHT be payable using the proceeds of the loan?
Even if, at the time of H’s death, the loan repayments are insufficient to pay the IHT then due, that liability will remain outstanding against the interest in remainder and the trustee(s) should retain title to the loan and/or house until the IHT is settled.
I can see no obvious reason why a discretionary trust should be created just to manage IHT on H’s death.
I have been faced with situations like this where the elderly property owning spouse wants to allow the other, also elderly, whose estate is modest and on its own would be covered by the NRB, to be able to live in the property and on death it passes to the owners children. If the surviving spouse’s NRB + where available, RNRB + TRNRB is less than the value of the property, that spouse’s children are going to have to pay a proportion of the tax which could of course be substantial depending on the value of the property.
One way of compensating those children would be for the property owner to include a legacy in the Will of such sum as would be equal to the proportion of inheritance tax payable by those children as a result of the aggregation of the property value with their parent’s estate. The legacy would of course need to be charged on the property.
Alternatively instead of giving the spouse a life interest or right of occupation, a provision could be included requiring the spouse to be granted a lease at market rent but then income tax et cetera becomes involved.