Inheritance yax on a life interest

T’s will grants an interest in her property to her partner for life, remainder to her children. The property is worth £600,000.
On second death the partner’s estate has to pay IHT on an asset passing to someone else’s beneficiaries, which seems unfair.
a) what happens if the partner’s estate is too small to pay the tax?
b) who claims RNRB?

Iain Cameron
Acer Legal

The tax on T’s share of property will be payable by the trustees of T’s estate- but you have a point nevertheless; T’s trust fund has ‘stolen’ part of the partner’s NRB.

T’s trust cannot claim RNRB. The partner’s RNRB goes to reduce the overall IHT liability shared between T’s trust and partner’s estate.

If this result seems strange, remember that inheritance tax is a tax on the partner’s estate (in the extended meaning provided by sec 52 IHTA) , not on individual beneficiaries.

Tim Gibbons
Gibbons Solicitors Limited

I have always found this a little strange.

In effect the surviving partner has a cost attached to the right to live in the property following the other partner’s death, For example:

P1 has estate worth £1.325 million, includes home worth £800,000.
P2 has total estate worth £325,000.

If P2 died there would be no IHT charge and P2’s beneficiaries inherit 325,000.

Assume P1 dies first and grants P2 the right to live in P1’s home passing to P2’s benefs on P1’s death.

On P1 's death estate comprises 325,000 plus home of 800,000.
Less: One RNRB say 150,000 and one NRB 325,000 i.e. 475,000.
IHT 40% of 650,000 i.e. 260,000.

IHT 260,000: allocated to P1’s estate 260,000 x [325,000/1,125,000] i.e. c75,000.

Hence for the privilege of living in P1’s home, P2’s estate has a cost of 75,000.

I’m not sure how may couples (married or not) realise this?

Malcolm Finney