H & W both on second marriages. They agreed at the outset to treat their estates separately, each leaving their assets on death to their respective sets of children by previous marriages. H estate worth a lot more than W’s.
H recently told wife that he has drawn up a new Will and ‘left her something’ which will help his IHT situation but was very cagey and would not explain any further. W came to me for advice. I can only assume he has left her his estate or part of it on a life interest trust so that no tax is payable immediately on the gift but instead payable by her estate on her death. W not happy as her estate could be eaten up paying tax on his assets and there would be nothing left for her children.
Assuming H dies first (which is likely due to age difference) is there anything she can do to prevent this? Initially I thought disclaiming would be the answer but if she does this then it would be a gift for tax purposes and her estate could still be liable to IHT. Is there any other way of protecting her estate (likely to be under the combined NRB & RNRB) apart from divorce?
If W disclaims then, provided she has received no benefit, s.93 IHTA 1984 will treat it as never having formed part of her estate for IHT purposes (even if such disclaimer occurred more than 2 years after H’s death).
If W’s entitlement under H’s will includes an interest in the matrimonial home, though, it is probably better to use a variation effective under s.142 IHTA to avoid possible arguments that she has received benefit by continuing to occupy the home.
However, it needs to be borne in mind both that she does not know what H is intending to give her, and that the IHT nil rate allowances will be apportioned rateably between the trust fund (if any) and her own estate, so that her estate will normally only be liable for its proportionate share of any IHT payable on her death.
If W decides to make lifetime gifts, these will take first slice of the NRB allowances upon her eventual death, thus potentially reducing the overall net IHT liability payable out of the assets passing to her children.
I would be inclined to wait and see what happens when H dies and the reality may be very different from what it seems W currently fears.
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.
If, as you say there is an age gap between H & W, it is likely that his estate has been left on a life interest for her with an overriding power of appointment, with the intention that the trustees use to overriding power in favour of H’s chosen beneficiaries. This will be a deemed PET and no doubt H believes there is a reasonable change that W will survive him by 7 years. There is nothing W can do about this, although, given that the beneficiaries of the two estates are different, the trustees should consider taking out insurance when they exercise their power of appointment.
Thank you for your responses. My initial thoughts were to disclaim as executors would be unlikely to agree to a variation if it adversely affects husbands tax position but as has been pointed out she needs to have capacity and remember to do so. In addition if she is living in the matrimonial home at death there is an argument she has taken benefit and so this may make disclaiming impossible? The idea of insurance or better still a clause in husbands will to pay any IHT on her estate seems preferable. Does anyone have a clause of this nature they can post.
Given the way H has gone about the matter without consulting W, W will should ask H to incorporate such a clause with the threat of disclaiming if it isn’t in there at death? That way so long as he plays ball he achieves the tax advantages on his estate and she still gets to leave her estate to her children tax free.
I do not believe living in the house after H’s death would necessarily stop an effective disclaimer-she has the right to live there by virtue of her own interest.
The trustees do not need to be a party to a DOV under which she gives up the life interest.
I recall seeing such a clause in a precedent but cannot remember where it was-perhaps butterworths or the encyclopaedia of forms and precedents.
Not sure that a clause in H’s will undertaking to pay any IHT arising on W’s death is the wisest course. What if she survives him by 10, 15 or even 20 years? Are H’s executors supposed to set aside a fund to cover that eventuality and hold it the entire time? How will they even know how much to set aside?