Inheritance Tax and Property Will Trust with life interest

Trusts Discussion
1

Confused civilian begs your indulgence regarding precisely when Inheritance Tax would be due.

My married parents own their property as equal Tenants In Common.

On Parent 1’s death their share of the family home goes into a will trust (my adult sister and I as the trust’s beneficiaries) with a life interest for Parent 2 and myself.

The will trust has a right to reside for Parent 2/surviving spouse and myself for as long as we want to live in the property or death.

It is the only part of Parent 1’s estate not being inherited by parent 2/surviving spouse.

At what point is Inheritance Tax due on Parent 1’s share of the house that on their death triggers the creation of the Life Interest Will Trust?

  1. Is IHT due on Parent 1’s death for their entire 50% share of the property entering the trust? If yes on Parent 2/surviving spouse’s death is this share of the property (in the trust) subject to IHT for a second time as part of their estate as a ‘Life Tenant’ in the trust?

OR

  1. Is it exempt as the surviving spouse/parent 2 has a life interest in the trust and has spousal IHT exemption? If yes on Parent 2’s death the entire property is then subject to IHT?

OR

  1. Is IHT due only on the share of the property that would be attributed to my ‘Life Interest’ in the trust - ie half of Parent 1’s share of the family home, the remainder not subject to IHT as the Life Interest is for the surviving spouse? If yes IHT on this half is then due on Parent 2’s death as part of their estate?

Apologies for any improper use legal language. Highly confused with conflicting advice being given on when Inheritance Tax is due on Parent 1’s share of the property specifically because I am named as a Life Interest Beneficiary/Life Tenant alongside surviving spouse/parent 2.

Any information would be most appreciated

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2

If the will creates a joint life interest for the surviving spouse and a child, for inheritance tax (IHT) purposes they will each be deemed to have a life interest in a half share of the half share. If the life interest arises “immediately” on the death of the testator, they will each have an “immediate post-death interest” (IPDI) the value of which will be aggregable with their own estate for IHT purposes on their eventual death.

On the death of the testator the interest of the surviving spouse will be exempt from IHT, although on the death of the surviving spouse the then value of their interest will be added to their estate in order to establish the amount of IHT then payable.

As regards the child’s share, the value of this will be subject to IHT on the testator’s death and, as with the surviving spouse’s interest, will aggregate with the child’s own estate on their eventual death.

If the joint life interest on the death of the first to die of the spouse or child accrues to the survivor of them, then it will be a half share of the property value, no just a quarter share, that aggregates with the survivor’s estate on their eventual death for IHT purposes.

It should be noted that as a child of the testator will obtain a life interest in the property on the testator’s death, the IHT residence nil rate band may be available, reducing any potential IHT liability at that time.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

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3

Many thanks for your informative and detailed response.

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