IHT or no IHT ?

It sounds as if half went to your stepmother for life then the capital to the children on her death. This could mean that this is still counted as hers for IHT. Before going into the IHT too much however I would suggest you clarify if she can do this - the asset is in trust and it would depend on the trust deed in the first instance whether or not the trustees (and she may be a trustee) actually have the power to do what she is suggesting.
On the second point you are correct but do bear in mind that if they are under 18 you are taxable on the income if it exceeds £100.

Hi robnye,

A couple of points ...

From what you have said your step MIL has an Interest in Possession trust - this allows her to use the trust property - i.e. the half share of the home - but she cannot dispose of the trust fund (as it belongs to the beneficiaries stipulated in your late FIL's will).

If she terminates the trust e.g. by not living in the property, or not paying the insurance, or not keeping the property in good state of repair (see your FIL's will for the conditions of the trust; the example conditions quoted are the standard terms seen in most IIP trust clauses) then the property will be sold in accordance with your FIL's will; period.

The sale proceeds will be distributed in accordance with the trust terms. Half will be distributed as per your FIL's will; half will goto your MIL absolutely. If she is still alive she will probably want to buy a smaller property. I suspect this is not the outcome your MIL wants though at this stage in life.

Assuming Step-MIL remains in the present house the IHT position is that the whole house, including both decd FIL and step-MIL's shares are assessable for IHT purposes on Step MIL's death. If Step-MIL gives away her own share (rather than that of your decd FIL) in an attempt to reduce the size of the estate she will still be caught by the gifts with reservation rules. Please read the numerous posts on this site re this topic.

A will can be changed by Deed of Variation. But this has to be completed within 2 years of the death of the testator (i.e. your FIL) - so this is no longer an option. Even if it were, you have to obtain the approval for the change from all beneficiaries - and this would be impossible because a number of beneficiaries are grandchildren who will be under the age of 18 (I guess) and cannot therefore give consent.

on the much more minor point of the children's income they can earn up to £100 of income a year on money which came from their parents in whatever way otherwise it is all taxable on you under law relating to parental settlements.

It sounds a bit as if your step mil is proposing to buy out the interest in the trust, which is a bit different. I think you all need good legal and tax advice as it could be horribly complicated - remember anything you do on behalf of your minor children must demonstrably put their interests (not yours - they may not be the same) first otherwise they might one day bring an action for breach of trust against you.

Hi robnye,

Your further post clarifies a number of points, and raises additional points in so doing.

Point 1: You wrote ....
the property was jointly owned by FIL and step MIL,

So, bringing that statement up-to-date the property now is owned by the trustees of the interest in possession trust created in your FIL's will, and your step MIL.


Point 2: You also wrote ...
step MIL now wants to pay off my wife/kids and BIL, so that the property becomes solely hers.

Another words, she wants to 1. terminate the existing Interest in Possession trust, and 2.Have 1st option to buy the share of the property owned by the trustees from the trustees.


Point 3: You wrote:
from what you are saying this is not now possible as FIL has been deceased for 4.5 years so the dead of variation timelimit has now expired......

This is correct; you cannot complete a deed of variation on your FIL's will. However, this comment relates to your FIL's will, not to the trust that was created from your FIL's will. The terms of the trust can be amended within the terms of the original trust document


Point4 : You wrote:
with regards to the grandchildren being beneficiaries and needing to give their consent, i thought as parents we would cover that if they where below the age of 21/18.

Slight misunderstanding here; sorry. Wills, and trusts, can be varied. Wills are amended by deed of variation. Adult beneficiaries under a will can arrange for such amendments as they think fit, providing all beneficiaries consent. Children however cannot give there consent to the changes. Their guardians have to apply on their behalf, and only the courts can decide. One criteria the Courts apply is that the child/children must be no worse off by the variation.

This can be a problem. First, you have the cost of the court application, and secondly, they take all sorts of points into consideration. So what appears to be no major change, can in fact be a major change. In your case one change is the switch of underlying investment from the bricks and mortar of your FIL & StepMIL's home to cash. Is cash as good as bricks and mortar as an investment? Secondly, there is the price that your step MIL will pay the trustees for the beneficial interest in the property. Is she going to pay full market share? No doubt the courts will take other aspects into consideration.


Point 5: You wrote:
as yet we are waiting to hear from step MIL solicitors - so cannot guess at what will be stated. although i had already guessed it may be a little complicated

I think that is a pretty good summary, but it's not my area of expertise so I could (and hope I am) wrong.


Point 6: You wrote:
so if she does pay out FIL's half of the property she would still have to live for a further 7 years (she should as she is 60 this year, but you never know)

This is an unusual situation. I have thought about this and not come to any satisfactory, clear conclusion. The 7 year rule to which you refer relates to 'potentially exempt transfers (or PETS for short.) But I cannot see that there is a PET; your MIL is buying the 1/2 share of the property - not gifting it away. I have spoken to an accountant to test his knowledge and it took them some time to respond. There reply was ...

As far as we can see here, the trust would have to pay capital gains tax on any profit on the sale, and inheritance tax would possibly have to be paid on the estate when Step MIL dies (depending on value of estate).

This level of tax planning is however outside my area of expertise and so the above is only a possible answer.

As Murdina says - seek professional advise from a tax specialist.

Incidentally, one reason why your Step MIL may be considering this course of action is that she wants to own her own house absolutely. If you read the various posts on this site (Some of mine, some of MargaretClaire's for example, and its a fairly common theme in the Silver savers Section) you will come across the risks that exist when you have an Interest in Possession trust. Perhaps, just perhaps, your step MIL does not want those risks.