Does Spouse Exemption Apply?

Trusts Discussion
1

I am dealing with an estate where the deceased’s Will states:-

“3. I GIVE DEVISE AND BEQUEATH my share in the property I own in common with my Wife to my son A aforesaid and my son B aforesaid in equal shares absolutely PROVIDED ALWAYS that I DIRECT there shall be no sale of my share of my property and contents known as 123 Any Street (or whichever Freehold or Leasehold property I may own and reside in with my wife at the date of my death) hereinafter collectively referred to as “my home” for as long as the same shall be required by my Wife aforesaid as her home subject to her paying her share of the buildings and contents insurance in respect thereof and paying her share of all other outgoings whatsoever in respect of it as long as she shall desire to live therein and that if my Wife aforesaid shall desire to sell and purchase another property in which she shall live as her home then my trustees shall allow the same to take place”

I am completing the IHT forms. My question is, does this give an IPDI to the spouse and, hence, I claim spouse exemption over his share of the property, or is it a gift to the sons, subject the the Wife’s occupation and, hence, spouse exemption does not apply. The deceased’s share of the property is worth approximately £240,000.

Any guidance would be greatly appreciated.

Martyn Dixon
Harold Bell & Co.

2

It looks to be an IPDI to me, as the testator is imposing a trust over
the future use of the monies.

Paul Saunders

3

Wife has a right of occupation under the Will, so spouse exemption will apply

Simon Northcott

4

Despite it looking like it has been drafted backwards, this clause will likely be interpreted as a gift to the trustees to hold on trust for the wife for as long as she desires and thereafter for the sons absolutely in equal shares. There is also a right to change residences. (This analysis assumes H & W held as tenants in common and not joint tenants.) There also seems to be an implied duty on the Trustees to pay for the deceased’s share of the outgoings because the clause only speaks of the wife paying ‘her share’ e.g. of the buildings and contents insurance and of the other outgoings (although ‘her share’ of the electricity for example is likely to be 100%).

The wife will I believe have an interest in possession and so the value of H’s share will be aggregated with her estate when she dies, or if she leaves the property before that, she will make a PET to the sons.

Do the trustees have funds to pay their share of the outgoings and/or any tax that might arise by reason of her death/PET?

Jill MacMahon
Thackray Williams LLP

5

Following this sequence - if wife were to die during her period of occupation - husband’s share will aggregate with her Estate for IHT purposes which might result in IHT becoming payable… Presumably this would be paid by Trustees of husband’s Estate rather than beneficiaries of Wife’s Will which is relevant if the ultimate beneficiaries of both Estates are not one and the same.

Caroline Coles
Waughs Solicitors

6

I thought you would be interested to know that I have now received a letter from HMRC in response to the same question and their response was as follows:-

" I note the contents of the deceased’s Will and my interpretation of the Will is that the deceased has left his half share to his sons who will allow their mother to reside in the property for as long as she desires. This means that spouse exemption does not apply to his half share and his half share of the property will not be exempt from Inheritance Tax."

Martyn Dixon
Harold Bell & Co.

7

In the circumstances a deed of variation seems the obvious option depending on wishes, time frames etc… although I would be minded to write back and put forward an ‘alternative’ interpretation and see if they accept the same.
Haroon Rashid
I Will Solicitors Ltd

8

HMRC are wrong-see below the extract from their iht manual

Simon Northcott

Rights of residence: the leading case

The leading case on rights of residence for IHT is IRC v Lloyds Private Banking [1998] STC 559

In this case Mrs Evans bequeathed her half share of the matrimonial home under clause 3 of her will-

“(1) while my husband remains alive and desires to reside in the property and keeps the same in good repair and insured to its full value with insurers approved by my trustees and pays all rates, outgoings etc my trustees shall not make any objection to such residence and shall not disturb or restrict it in any way and shall not take any steps to enforce the trust for sale or to realise (sell) any share therein or to obtain any rent or profit from the property

(2) On the death of my said husband I devise and bequeath the said property .to my daughter ….absolutely.”

The Special Commissioner agreed with the taxpayers that the devise was a gift of the separate share to the daughter, subject only to a direction to the trustees to postpone sale. HMRC appealed.

In the High Court, Lightman J held that the terms of clause 3 gave Mr Evans an interest in possession in Mrs Evans’s share -

“ the critical question is whether cl 3(1) of the will was dispositive….or merely laid down administrative directions to the trustee (p565 c)….If the will had not included the provisions made in cl 3(1) or if such provisions were without legal effect, the legal position was or would have been that after the death of Mrs Evans, both Mr Evans and the daughter were each equally entitled to occupy the whole property, each paying half of the outgoings and each was entitled to apply for an order for sale; and accordingly not only would Mr Evans’s occupation be non-exclusive, but it would also be precarious, depending on no successful application being made by the daughter for an order for sale.” (p565 h)

“The regime designed by cl 3(1) is quite different. So long as Mr Evans fulfils the conditions…. he is for the rest of his life elevated to the position of sole occupier, free…….from any claim to pay for the right to exclude the daughter and…from her seeking an order for sale. (p565 j).

“In my view, although the drafting and language of cl 3(1) is in terms placing restrictions on Lloyds as trustee, its purpose and effect is to confer upon Mr Evans a life interest in the half share. His own rights as tenant - in- common were not enough to entitle him to exclusive occupation of the property for the rest of his life; he required for this purpose during this period also the rights attaching to the (other) half share, and it was intended that he should enjoy these rights . In short cl 3(1) is dispositive and confers upon Mr Evans a determinable life interest in the half share though it is dressed up as a set of administrative directions. What is decisive, however, is the substance of the provision and not the clothes or label which it wears” (p566 b).

Lightman J sought to establish the intentions of the testatrix.

Note:

  1. The term ‘joint ownership’ is used in this connection although joint property passing by survivorship could not give rise to these problems. However, as joint property passing by survivorship is often turned into tenancy in common by an Instrument of Variation under IHTA84/S142 the wider expression is used here.