Hi
Could anyone clarify if under a Will the testatrix has granted a licence to occupy their property for 12 months post death to her partner with her children thereafter inheriting the property, does this allow the RNRB to be claimed? Or would this lose the RNRB as it would if the property were to be held on trust/given a right to reside? For context the client is unmarried.
Any advice greatly appreciated.
It would have been better if s.8J had been a little clearer rather than a little tortuous. By a combination of subsections (2) and (3)(a) property is inherited if, by Will intestacy or otherwise, the deceased D made a disposition of it to another person B but not where the the property became comprised in a settlement (unless under subsection (4) B has an IPDI or an interest under a bereaved minor’s trust or an 18 to 25 trust).
It seems that here the children take absolutely subject only to the partner’s licence; that does not create a settlement or make the children’s interests contingent. On that basis they do “inherit” and RNRB can be claimed in principle.
Jack Harper
The position might not as clear cut as Jack suggests, as it will depend upon the wording of the will itself which may place conditions on the occupancy by the surviving partner. The observations of Lightman J (as he then was) in IRC v. Lloyds Private Bank (1998) may be instructive.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Not at all to deflect from Paul’s valid warning but we have no choice on here but to respond to the question asked. A “licence” is definitely not the kind of term a lay person would employ so I take it that it was prescribed with some degree of legal formality in the Will. Especially as it seems to have been granted for a fixed term.
If it is apparently not such then it is indeed possible that it could be a QIIP. Home made wills are more likely to be so construed because such a testator may well have used the word in a non-technical sense. In any Will however there is such a risk unless the drafting is totally clear to the contrary.
A licence is generally distinguished in law from a lease or tenancy in lacking exclusive possession. In essence can it be said that the testatrix really intended that? It is self-evidently not a lease for life so the interpretation point is whether or not the Will has created a settlement within s.43(2)(a) IHTA: a trust for persons in succession.
Only the precise drafting can reveal whether the children’s’ interests can be construed as not vesting in possession until the end of the 12 month period so that the partner has a prior interest and with both interests arising under a single trust or as an immediate gift to the children burdened by the partner’s licence.
Too late here but it may be preferable for the testatrix to express only a wish, and to do so ideally in a non-binding Letter of Wishes, that the executors will grant such a licence. The identity of the trustees will be important or if they are just the children they might refuse.
If there is no question of saving IHT because the partner is not within s.18 a discretionary trust could be created by the Will. The trustees can then grant a formal licence to the partner for 12 months and afterwards trigger s.144. The same risk applies of a QIIP arising but if the licence is granted by the trustees pursuant to a LOW it is arguable that the trustees are using an administrative power (which must therefore be capable of being so used) and not a dispositive power and the partner should not be a beneficiary of the trust. It would be a breach of trust for the trustees to benefit the partner under the trust but a licensee need not be a beneficiary if the power can be exercised to grant a licence to a non-beneficiary for a limited time. This can be justified as avoiding the property being left empty and so in the interests of the beneficiaries.
There may be a chargeable gain and s.225 would not apply as the licensee is not a beneficiary. No hold-over relief as no exit charge. CGT on the increase in value since death is likely to be cheaper than IHT on the termination of an IPDI and much fairer on the partner than the making of a PET with a 7 year cumulation tail and nasty risk of aggregation with the free estate.
Jack Harper
The chargeable gain risk will not be a concern if the house is sold after 12 months.
Jack Harper
Thanks Paul - much appreciated as always
Thanks Jack - much appreciated
It has since occurred to me that a DT is a viable alternative where a non-spouse is to be given by Will a short-term occupational right. A QIIP and later termination PET really would be a disproportionate outcome. This is so whether the house is to be retained long-term or is to be sold in the near-term.
The plan would be to avoid s.144 by not distributing the house until after 2 years have expired since death. The trustees give the occupant a NQIIP. This need not be for a fixed period, which may be more convenient, but either is revocable or simply terminable by exercise of the trustees’ overriding powers.
For CGT PPRR will be clearly available while the individual is in residence and even if he moves out after 12 months the final 9 months of the trustees’ ownership period will reduce the chargeable gain to 1/8th before up to £1500 annual exemption.
If the property has increased in value on distribution to the children they will acquire at that uprated value. If the house is not to be sold soon either the CGT will be an acceptable cost, it will surely be if it is in fact sold soon, or a hold-over relief claim will be possible as the distribution is an IHT exit charge.
Will that exit charge be an acceptable cost? On the worst view the deceased will have a cumulation of £325k or more and/or there is a related settlement of that value. The maximum rate of charge is 6% but with only 8 quarters expired that is reduced by 32/40 to a maximum of 0.48%. On the actual facts the headline rate may be less than 6%; that depends on the deceased’s cumulation just before death, any related RPT(s) created by the Will, and the initial value of the house when settled. The increase in value does not affect the rate of charge on an exit event before the first TYA though the chargeable amount is the house value on exit.
The rate could even be 0%.
This is surely a better proposition than s.52 termination of a 12 month duration QIIP even if a PET. Particularly if the individual is elderly and/or in poor health.
Jack Harper
Hello All
I would like to ask the forum a question and would welcome your comments.
If a Will includes a right of occupancy or a life interest trust for a partner (not married) remainder to children, the RNRB is lost, however, if the partner accepts the life interest and then decides after a week/6 months or before 2 years to relinquish their life interest are we able to then claim the RNRB on a corrective account?
The entitlement to RNRB is decided at the date of death.
If the unmarried partner is given an IPDI there are only 2 ways to enable the children, who would presumably be eligible to “closely inherit”, to be regarded as having directly inherited from the deceased:
In so far as concerns a benefit to them, as is required by s.32, that would seem to be fulfilled in principle but the trustees would need to take into account on the precise facts the desirability of each child becoming so entitled, especially a minor who could only be distanced from his or her share by the trustees’ right to withhold it until 18.
The OP, as ever, omits the information as to whether the property is the entirety or a half share with the survivor owning the other half, a common situation. How comfortable is the survivor going to be with the children owning half or all of her home? This issue is relevant in both 2 and 3 below.
The other main problem with a disclaimer is, although strictly it has no time limit, it is precluded by the acceptance of a benefit. This will usually be inevitable where the disclaimed property is a house which the person concerned was already living in at the date of death and/or has done so since. This is not clear cut where that person owns a separate interest in the property carrying an entitlement to possession.
For example, often an estate contains a NRB DT and a gift to a spouse of the main residence or the deceased’s share in it, or the survivor separately owns their own share. All or part of the deceased’s share is then appropriated to the DT. The question then arises for s225 TCGA whether the survivor’s occupation of the property qualifies for CGT PPRR if he/she is in fact entitled in his/her own right as part owner to occupy it. There is no HMRC guidance but the opinion of Counsel is that relief is due as the trustees can still permit the survivor as an eligible beneficiary to reside e.g. by not seeking an order for sale.
In the context of a disclaimer this opinion would work against the person making it: they could not safely argue that they lived in the house after the death purely in right of another interest of theirs in it, so no acceptance of the trust interest. If they own no such other interest a disclaimer might well be challenged by HMRC on the grounds of prior acceptance.. That is a pity because it requires no third party consent.
As explained in 1 the trustees must be able to first tidy up the remainders to the children. A variation by the LT alone assigning his/her life interest to the children will mean, with reading back, that they inherit directly for RNRB. This would not require the children to consent as it only affects the LT’s interest: IHTM35041 and compare 35047 for a failure to tidy remainders as a preliminary step..
As well as these facts much may depend on whether the house is going to be retained or sold and if the latter how soon. Plainly the stakes are likely to be higher the longer the house is retained. It would be unwise for the children to gift their interests back to the LT as this might be consideration for a variation in 2. or, even if not, be within Ramsay or GAAR.
Jack Harper
Thank you @jack I am very grateful for this, we have discussed some of these but it is interesting to hear your commentary on this.