s142(1)(b) IHTA 1984 allows for a disclaimer within 2 years of death to be effective for IHT purposes.
If W has an estate of, say, £450k (which could be covered by her NRB + TNRB) and H an estate of £5m (left entirely on life interest trusts W and then for H’s children on W’s death), the worst that would happen is that W’s NRB/TNRB would effectively be apportioned between the estate and the trust. The RNRB would only be available to the estate, assuming that W has a property capable of having the RNRB applied to it. The actual IHT liability would then be apportioned between the estate and the trust, so the estate will not be eaten up by the trust’s tax, but there would be some IHT to pay on W’s estate’s assets.
What seems more likely is that either the life interest is a “short term” trust, which terminates during W’s lifetime after just a short period, or the trustees will exercise a power of appointment/advancement to advance the trust fund on to his children outright while W is still alive. There would then be a deemed PET and H’s children would only have to pay IHT on what they receive if W does not survive 7 years (tapering relief available if she survives at least 3 years). It is a fairly straightforward way of avoiding the IHT, but, as you say, could result in using up W’s NRB/TNRB - if the trust is terminated while W is alive and W then does not survive 7 years, it could be that all of her NRB/TNRB is set against the advancement to H’s children from the trust fund. Possibly H’s children will ask W to take out 7-yr life insurance (which H’s children will pay for) to cover the risk - the level of insurance could even be increased (and written in trust suitably) to compensate W’s own estate/children in the event that she dies within 7 years, so that they do not lose out by the loss of the NRB/TNRB. Of course, W might not insurable or the cost of the insurance might be exorbitant. Query whether, if W has lost capacity (but is still “insurable”), insurance could be obtained, given that W’s consent would be needed for her to be put through the underwriting process.
A disclaimer following s142(1)(b) IHTA should also work from W’s point of view - it would certainly be simpler than trying to cover the loss of NRB/TNRB through insurance - provided that W can be sure to avoid taking any benefit. If the gift into trust is a share of the house that W is living in, it would be difficult to avoid taking any benefit. There are opportunities for W to be very difficult here and potentially cause there to be more IHT payable out of H’s assets, so it really would be in H’s best interests to be open about what he is doing, so that arrangements could be made which are for the mutual benefit of all concerned.
One risk with the disclaimer route is, again, where W has lost capacity by the time H dies. Question: can W’s attorneys/deputy disclaim the life interest on her behalf? I would be interested to know whether anyone has come across this situation before and how the court viewed it.
New Quadrant Partners