I understand your comments, Skippyp, but I think it depends upon the situation.Having said this, I haven’t really thought about the underlying rationale (!!) but others may have.
EXample 1
If you own your house worth 500k then on death no IHT arises due to NRB 325k and RNRB 175k (assumes house left to children).
If you chose to settle it giving yourself a life interest there would be no IHT charge on settlement creation but on your death you would have a liability based on 500k as you are deemed to effectively own the house. As above your estate would be entitled to a NRB and RNRB.
The IHT consequences are identical in each case which arguably seems “fair”.
Example 2
Single woman (W) owns her own house worth 500k. On death house left to children so no IHT charge on death.
Prior to dying W marries H with her children living in her house whilst she moves in to H’s house worth 1,050k.
H dies leaving W with a life interest in H’s property with his children benefitting thereafter.
W then dies. On W’s death her estate comprises her own home 525k PLUS 1,050k due to her life interest in H’s property.
IHT on W’s estate = 500k + 1050k - [325k + 175k] = 420k
Estate rate = 420k/1550k = 27%.
IHT on W’s Free estate = 27% x 500k = 135k
IHT on life interest = 27% x 1050k = 284k
This on her own W’s IHT is Nil but marrying H and being given a life interest in H’s property has created for W’s estate an IHT charge of 135k where previously there was none.
W’s children therefore are effectively penalised and inherit less of W’s estate.
Presumably, neither W nor her children are aware of the adverse IHT consequences of W being granted a life interest in H’s home post H’s death. Arguably W and her children are paying a heavy price for W’s occupation of H’s home post his death. Maybe if H’s children and W all “get on” H should not give W a life interest in his property but, informally, W continues to live there??
Malcolm Finney