Married couple wants to leave everything to the other of them and then on the second death wish to leave a Right of Occupation for a period of 5 years to their son (A) who is 18 years old. At the end of the 5 year period, the property would then be sold and the proceeds divided between the siblings absolutely.
My understanding is that at the end of the Right of Occupation, it would be treated as a PET. However, is this the same situation if A wants to end the Right of Occupation early?
In addition to this, what happens if A dies before the end of the Right of Occupation? Is this then treated as having been owned by him and the Inheritance Tax then apportioned between the estates?
Any insight would be much appreciated.
Yes, it’s the same. Depending on the value, and other factors, you could look at a Discretionary Trust with LoW re: the property as that will remove the PET issue. But as always, consider other factors.
In your question A’s interest would be an IPDI for a fixed term. On expiry and earlier termination it would be a PET as the siblings would take absolutely. On A’s death before expiry there would be a death charge and aggregation of then then house value with any free estate, so pretty tough on whoever inherits that Residence NRB not available as siblings are not “descendants”
What if A marries and/or has children before expiry of 5 year period.? Does the client want to give the trustees a power to appoint another IPDI to a surviving spouse?
Karl’s DT suggestion is more flexible. It allows A to be given an IPDI under s144 and avoids fixed remainders. It is more flexible. Spouses and children can be eligible beneficiaries as well as the siblings. If A dies during the 5 years dies (no IHT charge and so no aggregation) or leaves (no charge) or the trustees decide to evict him for misbehaviour (no charge). No effect on CGT PRR availability. The RPT IHT charge on a year 6 distribution to the siblings (you do not state their ages) is likely to be preferable to A than a PET even with a full NRB. Five years’ rent free is scarcely enough to be saddled with a 7 year cumulation despite his young age, though insurance might be cheap depending on who pays for it.
Fixed remainders leave it to the siblings to decide whether to sell, or let, of for one or more to occupy or buy a part share on acceptable terms. A DT puts the trustees in control of this subject to balancing all the interests and may be a rare justification for an independent trustee. If the siblings fall out (surprise. surprise) they can train their anger on him or her and not on each other.
Thank you for responding and providing helpful information.