I recall there is some issue where an IPDI is followed by anything other than an absolute entitlement on the life tenant’s death, regarding the RNRB.
For example, if W owns the matrimonial home and leaves it on an IPDI for H for his life and then to pay the income to their only son S for his life, is there a residence nil rate band available on the later death of H?
Can anyone clarify what the issue is &/or set my mind at rest if there isn’t one?
There is an issue. S does not “inherit”: s8J (2) and (3)(b) IHTA 1984.
Jack Harper
I am struggling to find and answer so wonder if you could help by expanding on above. My query is whether can claim RNRB on 2nd death if W’s Will specified IPDI for H and thereafter a s89 IHTA trust for a child?
As Jack identifies, the problem is in s8J Inheritance Tax Act 1984. In your case, unlike the hypothetical one with which I started this thread, you are presumably saved by subclause (4), part of which says “B inherits the property if— (a) B becomes beneficially entitled on D’s death to an interest in possession in the property, and that interest in possession is … a disabled person’s interest”
No. S.8J(2) and (3)(b) IHTA. Subsection (5) is explicit: where the deceased D had a QIIP the person inheriting B must inherit the property itself, become “beneficially entitled” to it rather than “beneficially entitled to an interest in possession” in it. I agree with HMRC: IHTM46014.
This seems deliberate policy rather than oversight, because apart from s.89 any other IIP that follows a QIIP must necessarily be a NQIIP. (The remaining exceptions to that rule are a TSI (now rare) and an IPDI created by a general power exercisable by the Will of the QIIP owner).
I do not agree with the policy because a successive QIIP within s.89 seems an entirely benevolent and so laudable desire on the part of the testator and does not prevent a general charge to IHT on the original QIIP (IPDI) holder’s death or lifetime termination event: it just denies RNRB on what may well be the disabled person’s home with customised adaptations. On the other hand there is no exemption for a transfer into a s.89 trust except that a self-settlement on such a trust is not a TOV at all nor is one in a case within s.89A.
Given the meaning of “disabled”, and no special treatment on or after the death of the disabled person, this is scarcely an area on which the avoidance paranoia of the authorities should be fixated.
Jack Harper
The reason why subsection (4) exists is to allow B to “inherit” in the first place as the holder of the IPDI under the Will. Here rather than describe the necessary QRI as one to which B is beneficially entitled for an interest in possession it explicitly prescribes only the 2 requisite QIIPs, even though they are made such by s.49(1A)(a) and (b), so specifically excluding those QIIPs in (c) and (d).
A TSI in (c) is historical as to s.49C and ss.49D and E anyway exclude a disabled person’s interest. A s.5(1B) interest is somewhat obscure and cannot apply to a trust created by Will (or following a termination of a QIIP) as these are deemed TOVs and s.10 does not apply to them: IHTM04025 with which, astonishingly, I also agree.
Jack Harper
To try and be helpful, not reputedly my strong suit but then a Prophet is invariably without honour in his own home. If you are not utterly stuck with the situation because the IPDI owner has already died, there are ways to avoid it in drafting a Will (see 1 below) and possibly in remediating things during the lifetime of the IPDI owner (see 2 below).
It is not clear to me whether Skippy’s query is about drafting a new Will or dealing with an existing IPDI will trust.
In Skippy’s query (see 2 below) if the IPDI owner is alive it could be possible to appoint the QRI to them so they can leave it by Will on a disabled trust (s.8J(4) applying on the future death) or by a lifetime (insurable?)PET into such a trust (which if survived will possibly save more tax than RNRB). RNRB will be possible when the disabled person dies as long as a QRI is then “closely inherited”, which, if the remainder is not initially fixed, can be secured by appointing one or more such during the lifetime of the s.89(2) QIIP owner, which should be possible as an initial DT remainder is typical because the trust itself is a DT in form, suitably twiddled about a bit.
Alternatively it may be possible for the existing remainder to be made absolute so that the child could settle it within s.89A either now or when it falls in. Arguably, a remainder is still within s.8J(5) despite being so settled when it falls in: there are 2 trusts not one. The remainder to the house trust is absolute; the disabled person’s trust is a separate trust over a separate asset, that remainder. This does not confuse an hopelessly indoctrinated trust lawyer but it might faze the poor dears at HMRC: so ask them in advance by a non-statutory clearance application.
A. Absolute interest (s)
B. DT with a view to appointing absolute interests per s.144 in time
C. NQIIP(s) subject to a power of appointment which may be exercised to appoint absolute interests during life of IPDI owner or with them in default of appointment.
D. A suitable power of appointment can be exercised as in 1C
E. If there is no power of appointment as in 1C the IPDI owner B can terminate it by a PET, if that accelerates suitable remainders. If not but there is a power to appoint capital to B this can be exercised first. B can then leave the appointed house interest by his/her own Will or make a s.89 lifetime trust by a PET. PPRR should negate CGT. Such a power must be express but is nowadays common.
F. An express or s.32 power of advancement can first be used to create absolute remainder interests. If the remaindermen have reversionary NQIIPs but no right ever to capital they may be able to surrender/disclaim those to ensure that their own remaindermen succeed absolutely to the original IPDI. This will depend on the actual drafting of the IPDI and NQIIPs, available relevant powers, or relevant parties being adults with capacity: the termination of the NQIIPs must, or must be capable of being made to, immediately accelerate the vesting (in interest though not possession) of the substitute absolute remainders.
Re-arranging interests in reversion should be tax-free.
G. A s.142 variation with reading back can be made (in time after D’s death) to create absolute remainders to the IPDI or more flexible remainder trusts which will facilitate their creation before the IPDI owner dies by a future exercise of a trustee power as per C D E or F above. These could be framed as exercisable in that lifetime with suitable absolute interests in default.
Of course all this pyrotechnical nonsense must be worth the candle (fees and hassle) to secure full RNRB plus TRNRB, a maximum saving of £70k or £140k. The IPDI trust may in the event only contain a part interest in the property, may be worth less than the maximum, taper may apply, or the relief may be Reeved away altogether (as any farmer or small business owner knows).
Jack Harper
Very grateful for the comprehensive response Jack although I am not sure I follow the reasoning or interpretation of the legislative provisions.
s8J as you rightly say states that the residence must be “directly inherited” and s8J(3)(b) states that it will not be “inherited” where immediately before D’s death, the property was settled property in which D had an IIP.
But surely section 8J(5) together with section 49(1A) means that when the spouse who has benefit of IIP dies, and the remainder is a disabled person trust, that will fall within section 49(1) and (1A)?
Apologies if I have not seen or followed your whole explanation - I cannot see there is a section 49(c) (d), nor can I find the IHTM you cite: IHTM04025? So cannot identify where this effect (s8J(5) plus s49(1A) would be excluded?
S.8J works as follows:
1 If the deceased only had a beneficial interest in possession in the QRI the property itself must be inherited: subs(5).Such a QIIP is as defined in s.49(1) or s.49(1A), apparently without restriction as to category. (In fact it is not easy to create a successive QIIP but one way is if the QIIP holder has a general power in.47A exercisable by Will only which HMRC accept can be an IPDI). So if the deceased had a QIIP of any type it is not sufficient to “inherit” if the successor has a deemed QIIP within s.89(2).
The other references were cited to confirm that other QIIPs defined in s.49(1A) are excluded from s.8J(4)(a).
Three are TSIs in ss.49C, D, and E and the other is in s.5(1B), which arises from a s.10 transfer. I should have added to IHTM04205 a direct reference which is in that paragraph to 01451 where a s.10 transfer is dealt with in detail.
Jack Harper
Once again, very grateful for your time, but there does not appear to be an IHTM 04205…?
Based on your reasoning above on s8 etc., = if there is a disabled person interest with an actual (i.e. not a deemed) IIP, then the position (based on your explanation) seems to suggest that following the interest QIIP i.e. the life interest trust for husband, the remainder disabled person trust would qualify for RNRB?
If a person B has an IPDI, or a deemed QIIP in a disabled person’s trust, or an interest in a s.71A or s.71D trust, created by Will of D then RNRB can be claimed on D’s death:s.8J(4)(a).
If B is the surviving spouse of D the spouse exemption will apply anyway to the QRI left by D to B. So RNRB is only relevant if B is a non-exempt beneficiary e.g. a child.
On the subsequent death of B the QRI in the trust will only attract RNRB if, under the terms of the trust, C becomes absolutely entitled to the QRI itself: s.8J(5). If on the death of B the property remains settled RNRB cannot be claimed in respect of the charge under s.52(1) and (2A) as regards the QRI of B. It does not matter that that a QIIP of C follows that of B. So a deemed QIIP under s.89(2) for C prevents entitlement to RNRB on B’s death.
If C had taken an absolute interest in the former trust QRI on B’s death C could have self-settled it without any TOV. That is why I find it strange that s.8J(5) does not permit as an alternative a succeeding disabled person’s deemed QIIP.
The reference should be to IHTM04025.
Jack Harper