I have an estate where husband owns the property in his sole name (second marriage). He has granted a right of occupation to his wife for life/until she no longer requires it and thereafter the property passes to his two children. I am aware the RNRB is not available on H’s death but the spouse exemption should apply to this gift.
W has two houses which she rents out. She lives with H in his house but does not own a share in the property. I assume that she would not be able to claim RNRB and TRNRB on her death against the value of the property (given that this will form part of her own estate for IHT) and the entire RNRB of the couple will therefore be lost but I am not entirely sure?
If no RNRB available, would the trustees of the right of occupation be liable to pay the tax in relation to the property on W’s death? (i.e. H’s children would be losing out due to the right of occupation and loss of RNRB).
On H’s death, as you indicate, no RNRB applies (ie no inheritance by lineal descendants).
On W’s death the property in which she has a QIIP (a QRI) at that time pass to H’s two sons (ie W’s step-sons) under the terms of the trust. Step-sons qualify as lineal descendants.
It therefore seems an RNRB applies on W’s death and a TRNRB is also available.
W’s interests in her two rental properties do not qualify as qualifying residential interests; hence no RNRB in respect thereof.
The RNRB is not restricted to offset against the gift of residential property but is offsettable agissnt the deceased’s chargeable estate.
However, the value of the QRI is an essential component of the calculation. If as here the entire QRI is closely inherited the RNRB of W will nonetheless be restricted to the value of her QRI. If that is less than the default allowance (currently £175k) the excess can become a “brought forward allowance” (TRNRB) but here would be lost unless W remarried. See example 1 IHT46027. The statute is impenetrable unless you are Einstein.
On W’s death the value of the trust property and her free estate is aggregated, the values of the TRNRB and RNRB deducted from that total, the net taxed at 0 or 40% (or 105% after the election), and the tax payable is apportioned in the ratio of the respective gross values of the two estate components, the free estate portion payable by the PRs and the trust property portion payable by the trustees.
Jack, I agree with your second paragraph.Not sure about the second.
On W’s death the QRI (in its entirety) is inherited by W’s two step-children. This needs to be compared to W’s “default allowance” (£350k) which is made up of the residential enhancement (£175k) at the date of W’s death plus any “brought forward” allowance (£175k) (ie the unused element of the RNRB arising on H’s death transferred to W on the latter’s death). Any unused element of the default allowance is then potentially transferable (eg if W remarries).
Further to Jack and Malcolm’s replies, I note the widow is given a right of occupation, rather than a life interest, which suggests the interest may terminate automatically whilst she is still alive. Should that be the case, RNRB down-sizing relief should be available on her death notwithstanding that, at the time of her death, she might not own any property in which she then resides.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
If anyone is drafting such a right, and carefully explaining its potential consequences, they should draft precisely the events that will and will not be considered to terminate the right to reside. Leaving this open to interpretation risks costs in ascertaining if it has occurred or not, where this is not obvious like death (is there any other event so clear cut?). It is also, if an IPDI, a chargeable event for IHT on an asset which the family might well not wish to sell, not now or nor perhaps ever.
The alternative is a life interest with overriding trustee powers, permitting them to terminate the life interest at a time of their choosing and without requiring the LT’s consent. The latter does make the LT’s position somewhat riskier than a right to occupy, clearly defined, which the trustees cannot override. And often the remaindermen in these situations are not the LT’s children but the testator’s by a former marriage, with eyes like till rolls. The appropriate choice of trustees will reduce the risk especially if backed up by a Letter of Wishes with a detailed list of circumstances in which the testator would not wish the trustees to terminate the life interest.