Ending a life tenancy

H + W own property as tenants in common and W is granted a right of occupation of H’s share under his Will H died on 03.06.16. W has decided to sell. Beneficiaries of H’s estate are his children by previous marriage. It is agreed they will get H’s share of proceeds on sale as W does not need it. When the life tenancy comes to an end during lifetime of the tenant rather than death what are the tax implications for the executors. Is there additional IHT to pay at the date of sale? Is it a PET? I should know the answer to this basic question but I can’t remember.

sharon edelstyn
Phoenix Legal Group

If it is only a right of occupation the interest in possession automatically terminates on sale, and this is a PET by the trustees and the widow. CGT should not be an issue if it is the principal residence. The trustees will be potentially liable to iht on the PET for 7 years, and even then they will not get iht clearance until the widow’s death, in case the rules change in the meantime.

If it is a full life interest, the same tax consequences apply, but you will need to deal with the termination of the trust.

Simon Northcott

It appears that the right to occupy would end within two years of the death, so I would anticipate that s.142 read-back would apply and additional IHT may become due (depending on the values) as the value of the half share of the property in the estate is now passing to chargeable beneficiaries rather than for the spouse.

Naomi Neville

I do not believe s144 (not 142) IHTA would apply, as there has been an intervening interest in possession

Simon Northcott

I wonder if Naomi is thinking of s.142(4) IHTA 1984, which only applies
if s.142(1) applies to the creation of the life interest.

Whilst it would be possible to use a variation to write out the life
interest from the date of death, there will usually be a tax benefit in
the termination of the trust being a PET as, at the very least, this
Will defer the payment of IHT, and eliminate it if the widow survives 7
years from the relevant date.

Paul Saunders

I agree with everything Simon Northcott has said.

Another thought – could W not effect a disclaimer of her life interest or a deed of variation of her entitlement to income (redirected to H’s children to merge the income and capital interests) under s.142 IHTA 1984 so that it reads back? The disclaimer route might cause a difficulty as HMRC could argue (given the passage of time since death) that W has enjoyed a benefit before disclaiming such that the disclaimer is invalid. If effective, this would get around the PET issue.

Stuart Adams
Mishcon de Reya LLP