Joint right of occupation and IHT

A will client owns the family home which he lives in with his mother, his wife and children.

He wants to leave his mother and his wife a right to occupy the house for life. There is potential for friction between his wife and his mother and he wants to ensure his mother has the right to live in the house.

  1. On the husband’s death, will the spouse exemption only apply in respect of 50% of the value of house?

  2. On the mother’s death, if she is still living in the house will only 50% of the value of the house be included in her IHT estate?

  3. On the wife’s subsequent death, will the whole of the house be included in her IHT estate if she is still living in the house or will it be limited to 50%?

It seems that that client can only protect his mother at the expense of using part of his nil rate band and potentially a further charge to tax on his mother’s death. An alternative would be a discretionary trust but the house is worth more than the nil rate band so there would be a charge to IHT on the first death.

IHTM16103 suggests that if the wife’s right to occupy is given on condition that she permits the mother to reside with her , this would get round the problem as it is considered that the wife has the sole interest in possession.

Has anyone any other suggestions?

I would suggest an arrangement under which the house is left in a discretionary trust which includes the client’s mother among the beneficiaries. A letter of wishes indicates the testators intention that the Trustees grant the mother a tenancy or licence of her own accommodation within the house, with use of shared parts; the trustees then make an appointment of the house, subject to that tenancy/licence, in favour of the spouse for life. Assuming that is done within two years it will come within sec 144. It would be helpful if the will gives an express power for the trustees to make appointments before the grant of probate although this may not be absolutely necessary.

On a personal level it could be a complete disaster but I think that this should hold the ring between the parties. The difficulty may lie in drafting a suitable tenancy or licence.

I have a current case where we are planning to use this strategy to give the deceased’s cohabitee a short-term licence of the entire house, and following that an appointment in favour of the deceased’s children and adult grandchildren to engage the residence NRB, prior to the grant application.

Tim Gibbons