Cohabiting partners (not married, no civil partnership). One has died. House in his sole name. Will leaves a life interest to surviving co-habitee. and on her death or if the trust is ended sooner the property is divided with a half share to her (or her estate) and a half share to other beneficiares. Tax payable on the first partners estate.
When the second partner dies, a half share of the property will be included in her estate as an inheritance due to her (she has her own assets that mean IHT already would be payable). Is there a double taxation? I.e. the whole property is taxed in her estate because of the life interest and then the half share that she inherits is taxed as well?
We are trying to investigate the merits of a Deed of Variation to mitigate the tax.
The transfer on death under s4 IHTA is deemed to occur immediately before death. So at that time the surviving co-habitant will be deemed to own 100% of the property by virtue of her IPDI in it. But her half of the reversion is excluded property under ss47 and 48.
As it is apparently vested in remainder and not contingent that half will devolve according to her Will or intestacy. It is in her estate for the law of succession but not in her s5 estate for IHT.
This is another illustration of the disproportionate effect of a QIIP owner being regarded as beneficially owning for IHT the underlying property in which it subsists. The value to the owner may or may not be equivalent.
Here it confers on her the right to live rent-free in the property for life so that her other assets are free for her to use rather than to pay rent or buy other accommodation.
The younger she is the more valuable that right. And the longer the other remainderman will probably have to wait to gain access to their 50%: this raises the possibility of her being able to buy them out at a double discount, for the part interest and the acceleration of liquid funds, raising the purchase price with a mortgage if necessary. SDLT may be a disincentive.
Of course, the house might increase in value so it depends on how much the 50% remaindermen currently need the folding stuff. It may also turn on their personal relationship with her or if none goodwill towards her, especially if she and the deceased have children together or children of one accepted by the other as part of the family.
As to a variation, there is no scope for reducing IHT on the death. But a DT might have been better. It could have permitted the trustees to create (more than 2 years after the death because of s144) the exact same structure but entirely within an RPT so there would be no charge to tax on the death of the survivor and so no aggregation with her free estate. The reversions to the life interest would have to be appointed revocably, to avoid an exhaustive appointment and thus an outright full distribution, so entailing a theoretical risk of revocation for both 50% remaindermen. Risk v reward!
The snag will be 10 year charges and exit charges, so much will depend on how big a NRB the trustees would have, the prospective growth in value of the house and, not least, the funding of any tax payable. The effective tax rate cannot exceed 6% but may be much lower if NRB is available, although related settlements can affect the rate and are a hazard where multiple trusts are created by a Will.
The trustees cannot commit to exercising their power of appointment in advance so all the beneficiaries would be taking a risk. Risk is often the price of tax planning that works.
It is not easy to think of another variation that would give the survivor rent-free security of tenure for life but a tenancy for a fixed term likely to exceed her life expectancy (avoiding a lease for life) could mimic the life interest. This could be granted by the trustees of the DT as part of the variation without attracting s144. Or it could just be the only variation in place of the current trust.
There is a downside. On her death the tenancy will attract CGT PPRR and the tax-free revised base cost on death just like a QIIP or even a NQIIP life interest in settled property granted by DT trustees. But the value of the tenancy will depreciate over time and that value will seep into the jointly owned reversion. Her 50 % is also eligible for PPRR (see s.222 (7) TCGA) and CGT-free revision to market value under s.62(1) but the reversion is not excluded property for IHT.
So there is a detriment as it is within charge to IHT and the non-occupying 50% owner(s) will not now benefit from the CGT-free revised base cost of the entire asset when the tenant dies, although she will do so as regards her own 50%. It will be liable to IHT on her death but the chargeable combined value of the unexpired term of the tenancy and the 50% reversion is likely to be about half of the value chargeable on her death owning a QIIP in the whole house.
The more complex the proposed variation is the more difficult it will be to sell it to one or more of the necessary parties.
Jack Harper
It occurs to me that a suitable trust might be a standard DT over income (eligible beneficiaries surviving cohabitant and her children if any and relatives) with the trustee giving the survivor permission to live in the house for two years then a life interest in income.
Fixed 50:50 entitlements to capital but defeasible by the trustees exercising a power of appointment (to keep the RPT alive).
The trustees to be the survivor, alone able to exercise the DT power over income, but a second trustee from the other remainderman camp and the two trustees to be unanimous in exercising power over capital.
The trustees can appoint all or any of each 50% fund to a class of eligible beneficiaries which is different for each fund.
This minimises risk to both camps but does not make the trust illusory or give anyone an absolute interest unless and until income or capital is appointed under the relevant trustee powers. Separate
succession machinery for appointing replacement trustees on behalf of each camp.
Jack Harper
I should have pointed out,to avoid propagating heresy, that CGT-free uplift on death of a beneficiary with a life interest is only available if it is a QIIP which it will not be if appointed out of a DT more than 2 years after the death of the deceased.
Jack Harper