Inheritance Tax in respect of a life interest trust and sucessive interests?

Trusts Discussion
1

We are dealing with an estate of which the deceased was a life tenant of a property. The property is aggregable with the deceased’s free estate for inheritance tax purposes and then the inheritance tax will be apportioned between the Trust and the Free Estate.

Now the life trust has ended, it will be distributed to the remaindermen. One of the remaindermen died sometime ago and under the terms of their Will they leave 50% of their residuary estate to my deceased. The earlier estate was also subject to inheritance tax.

My question is about the IHT. Since my deceased is also entitled to a share of the net proceeds of the property under the terms of the Will of one of the remaindermen, am I right in thinking that we need to disclose it in the free estate and get taxed on it again?

If this is correct, H M Revenue & Customs are receiving inheritance tax on the following:-

  1. The whole share of the trust property* when it is aggregated with the free estate
  2. A one third share of the net proceeds of sale from the property* when it is paid to the remainderman’s estate (which was a taxable estate)
  3. A 50% share of the proceeds from the estate* (in 2 above) which will now form part of the free estate

Are there any reliefs available?

Thank you

2

As the remainderman died before the life tenant, their interest in remainder will have been exempt from IHT under s.48 IHTA, so no IHT on that death.

Whilst the life interest and the share of the interest in remainder to which the life tenant became entitled could not have merged on the remainderman’s death as the property is an indivisible asset, for IHT purposes I believe the life tent should be treated as the absolute owner of the share she inherited, with her life interest limited to that proportion of the property she did not inherit from the remainderman.

If I have correctly understood the detail, the intertest in remainder passed equally to 3 persons, and the life tent was entitled to a half share of the estate of the deceased remainderman. On that basis, I suggest she is treated as absolute owner of one-sixth (1/3 x ½) and a life interest in five-sixths.

As regards reliefs applying on the death of the life tenant - RNRB provided an interest in the property is closely inherited.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

Thanks Paul

This is extremely helpful