1 No problem with W’s NRB or TNRB on her own death as the surviving spouse, in relation to her own QRI in a residence co-owned as TIC with H, as long as its value is £350k or more. If less, all or part of TRNRB can be wasted if she also has an IPDI in H‘s former QRI where the remainder to that is a DT.
2 If her Will on her dying second leaves her own QRI on a DT, just as you say, the trustees of that
DT in her Will can appoint her own QRI, her share in the house, to one or more beneficiaries eligible to inherit, either outright or for a IPDI with remainder over. Reading back applies automatically under s144 on such an appointment made within 2 years of her death. Its value can be offset by her own RNRB or any TRNRB up to £350k.
3 Her estate on her dying second is NOT entitled to RNRB or TRNRB in relation to the value of H’s QRI held in his will trust where that is structured as an IPDI followed by a DT. It is not correct to say that the DT in H’s will is “only set up on W’s death”. H’s entire will trust, initial IPDI with remainder on a DT, comes into existence on his death if he dies first, although the DT part becomes fully operative in a sense only upon W’s future death. It is vested from the outset but in remainder. The trustees can use their powers in the DT in principle while W is alive as to the remainder. W’s IPDI is an immediate vested interest but in possession. s144 can only be activated within 2 years of HIS death, not W’s, and s144(1) and (2)(a) direct that her IPDI prevents s144 from operating even on HIS death to read back the effect of an appointment out of HIS DT, even within 2 years of HIS death. It certainly cannot be used to vary the DT on HER later death. For s144(1) the property is not settled by her Will but by his.
- When W dies H’s QRI cannot be “closely inherited” because it is then held on a DT. The trustees can appoint it to a beneficiary of the DT but not with reading back under s144 so such an appointed interest is not “inherited” by the recipient beneficiary within s8J. Subsection(5) says that where the deceased’s interest was an IPDI after the death of the holder the remainderman must take an immediate outright interest in the QRI. A remainder on a DT or even an IPDI does not work.
So if H wishes to pass his QRI to W on his dying first by giving her an IPDI in it and then to an eligible beneficiary who can “closely inherit” it per ss8J and K on her death, the remainder(s) to her IPDI in HIS will must be fixed and outright. It could strictly be a contingent remainder.
I do assert that this is a cruel trap for the drafter of H’s Will because I cannot discern any valid logical objection to W’s IPDI being followed by another IPDI as the general thrust of the tax is to equate an IPDI with outright ownership. But the problem with s144, that it cannot operate once an IPDI (or pre-2006 IIP) has subsisted in the asset in question, has long been advisory state of the art. Still a trap but one lurking for yonks in plain sight.
5 H’s options when his Will is being drafted, and he wants the s18 exemption if he dies first, is to give W his QRI outright (and risk she will leave it by her Will to the milkman, unless it is a genuine “mutual” will), or to give her an IPDI followed by outright fixed remainders, or to add to those the twist of a power of appointment structure over them as I suggest.
An IPDI for W followed by a DT in his QRI, once he dies first, confers s18 exemption on W but on her death she can only claim RNRB and TRNRB for her own QRI‘s value (if”closely inherited” under her own Will) and, dying second, her own DT will be immediate (H having pre-deceased) so s144 can operate to secure that outcome. But where her husband’s former QRI on her death goes into his DT upon her IPDI terminating it is lnot then inherited under s8J by anybody. Its value is therefore chargeable but not eligible for RNRB or TRNRB in its own right. All is not lost if her own QRI’s value exceeds £175k in value as she can claim TRNRB on the excess up to a combined total of £350k
- There is no detriment to W where the value of her own QRI is £350k or more. If it is less, then RNRB and TRNRB will have been wasted if she also has an IPDI in H’s QRI whose value is chargeable to tax but would have benefited from those amounts if it had been closely inherited on her death.
So broadly where spouses are equal co-owning TICs and the house is worth less than £750k part of the £175k TRNRB goes to waste. Above that value W’s own QRI’s value can absorb the maximum RNRB plus TRNRB.
7 You could be forgiven for wondering why this is so? The law could have provided that a QRI is closely inherited if appointed out of a DT following an IPDI within 2 years after the owner’s death. The most likely explanation is that the soi-pendant cognoscenti who design tax law are apparently intellectually incapable of looking round even the most obvious corners. Paranoiacs like me may conclude that they have it in for smaller estates (as well as for virtually all farmers). Downton Abbey meanwhile can pass down the generations free of IHT via s30 et seq.
- In my variant on the fixed interest remainder(s) I suggest that all the beneficiaries of the trust including all the potential objects of the power of appointment must be eligible to closely inherit or the GAAR might apply; certainly to defeat an actual appointment to one who is non-eligible but safer to assume it would do so even where that was merely a possibility.
9 HMG and HMRC often exude with false piety an avowed zeal for tax simplification. The complexity of the RNRB rules debunk that. Simplicity would have enacted an exemption for any interest in a PPR, defined conveniently as for CGT where its precise meaning has been long thrashed out at taxpayers’ expense, up to a monetary limit.
Jack Harper