IHT on release of Life Interest

Wife owns a property and leaves this in a Life Interest Trust for husband (second marriage). Husband now intends to release his life interest and accelerate the terms of the Trust. This will be a PET for IHT purposes.

I understand that IHT attributable to failed PETs are assessed on the recipients but am not clear as to how to protect the Trustees in this situation; there are many reversionary beneficiaries who will share in this PET.

A claim for spouse exemption was made on the value of the property passing into the estate. CGT will not be an issue as Husband has remained in occupation [until likely sale].

How would practitioners deal with this in case husband were to die within 7 years?

Justin Wallace
Brewer Harding & Rowe

My understanding is that it is the trustees who are primarily liable for any IHT charge that may arise if the life tenant fails to survive 7 years from the date of the release/acceleration.

If the husband remains in the property after the release/acceleration, the arrangement could fall within the gifts with reservation scenario, and the 7 year period start from the date on which he actually ceases occupation.

Consideration might be given to the trustees retaining a cash balance to satisfy any potential IHT liability, or for the husband to take out appropriate insurance and assign it to the trustees.

Paul Saunders

The trustees will not get iht clearance until after H’s death. It could be longer than 7 years if the survival period is extended retrospectively, and the rate of tax is the rate at the date of death. Therefore the trustees’ only protection is to retain the trust asset/proceeds until after H’s death. In the meantime the reversioners will have a right to income.

Simon Northcott