I have cohabiting clients each with their own children from a previous marriage. Their respective estates are worth over £325k each.
They want to leave a life interest in their property to each other in their wills with their own children as ultimate beneficiaries.
Am I right that they will lose out on the RNRB benefit if they have LiT wills, unless the trust ends on or before 2 years post death to then count back in?
Also, will the remaining cohabitee need to outlive 7 years before their life interest is not counted into their estate for tax purposes?
The estate of the first to die is taxed in the normal way, but no RNRB can be claimed.
The estate of the second to die will include for iht purposes the value of the assets in the life interest at the date of death, and iht is split between the two funds proportionately.
The RNRB will be available on the second death, but only up to the value of the half of the house going to his/her children, or the amount of the then RNRB allowance, whichever is the greater.
So double taxation applies and the loss of one RNRB, which suggests the best advice you can give is for them to marry to avoid this result.
The two year point you mention, Amye, is presumably s144 Inheritance Tax Act 1984. Section 144 only applies where there has not previously been an interest in possession. There will have been an interest in possession here, so section 144 will not help.
They’re dead against marriage again having previously divorced, so that’s out of the question.
Would anyone have any suggestions for cohabitees on a better way of doing things from a tax point of view?
A LiT just isn’t IHT tax efficient and although serves the purpose of allowing one to stay in the property, the consequences don’t seem to outweigh that particular benefit.
Using discretionary trusts rather than life interest trusts solves the issues you mention and would work with married couples and not married couples. Section 144 is also available for 2 years after death to ensure maximum benefit is received for the legislation at the time.
