Tax consequences for giving up a life interest in Will

Trusts Discussion
1

Good Morning,
I’m trying to work out which tax regime my client might be caught by under the following scenarios:-

Client is left a life interest in deceased’s spouse half share of the property (half share worth £1.2 mill) in his Will. She decides to give up her life interest to the remaindermen (ie their children).

  1. Is this treated as a PET by wife, assuming it’s made more than two years post death of husband? If so, the fact that she continues to live in property, would it fall under the GWROB rules for IHT for her estate?
  2. If she gave up her life interest within two years of husband’s death would it be read back into husband’s Will and thus could it be subject to IHT on husband’s estate?
  3. Something else I’m not aware of?

Thanks for any comments.

Gill Collins
Warwick Barker LLP

2
  1. PET and GROB
  2. Not automatically. Only if she made a deed of variation
  3. CGT on beneficiaries becoming absolutely entitled
3

Thanks Andrew.

So if she opted for giving up her life interest within 2 years and it was not done by way of DOV, ie PET, would she still be caught by the GROB problem?

Can’t really see anyway round it, if she wants to carry on living at the property (unless she pays market rent etc etc).

4

Under the DoV on reading back it’s as if the interest in possession never existed in the half property interest with the testator treated as having left the interest to the remainder men/children. No PET.

In addition no GWR arises (nor POAT)…

Malcolm Finney

5

Thanks Malcolm, but then would there be IHT payable, as the half property is passing to non-exempt bens…?

6

Yes, that would follow.

Malcolm Finney

7

If you use a Deed of Variation within two years of DOD then it is read back into the Will, so there is no PET if it never forms part of her estate (or GROB). Things to be aware of: loss of TNRB and tax if over NRB to non exempt beneficiaries. Also, she is somewhat vulnerable if children are on title and they die before her (nobody ever believes this might happen!), they are married then subsequently divorce, they run into financial difficulties, etc. Is there a real reason/benefit to doing this now? Also, will it impact the children and their position to buy their own properties in the future - stamp duty? It all depends on their individual circumstances.

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