Inheritance Tax and Life Interest Trusts

Trusts Discussion
1

I am making a Will for a client who owns two properties and wants to leave life interests for both of them for different life tenants.

The client only has his NRB so his estate would be taxable, but I understand with IIP trusts they are treated for Inheritance Tax purposes as part of the Life tenant’s estate. So this means no IHT is due on the estate as his estate without the properties is c. 100k

I understand from the client neither life tenant has much in the way of assets themselves. So say the properties are under £325k and each life tenant still has their full NRB, this would mean no IHT is due at all.

While I think this is how the law works, it seems like a bit of a loophole but I am sure has come up many times before so I am not sure if I missing something crucial.

Any thoughts on this would be appreciated as I am not sure I have got this quite right but cannot find any alternatives.

Thanks

2

Your second paragraph makes a great leap in incorrect logic. The entire estate would be subject to IHT.

3

IHT would be due on the Testator’s estate and, most likely, the estates of the Life Tenants on their death.

IHT will be payable on the Testator’s death as his estate, with the properties, exceeds £325K. IHT on the life tenant’s estates will be payable if their Free Estate and the value of the property held on Life Interest for them, at their date of death, exceeds their available NRBs.