Where a life interest trust creates an IHT liability on the death of the life tenant, can the trust accept full liability for all tax created by the trust interest?
H and W live in a property held in Hs sole name. H would like to give W a life interest in the property following his death and leave all other assets to his children from a previous relationship (the children would also be RM of the trust). However, he is concerned that the life interest will give rise to an IHT liability for W’s estate, as the IIP trust would be aggregated with W’s estate and tax paid on the aggregate value. Ws estate is below the NRB threshold without the life interest and the whole of her estate is passing to her children under the terms of her Will.
Typically, where an estate and trust are aggregated, any IHT would be apportioned between the estate and trust. However, in our case this would create an unfair result for the beneficiaries of Ws estate, as they would be paying tax where an IHT liability would not have arisen but for the IIP. Is there any way to address this? H is happy for the trust to assume liability for all tax relating to the trust, including any tax which would be apportioned to Ws estate, but I’m not sure this is possible or indeed desirable.
Have I understood this situation correctly? Any suggestions would be much appreciated.