IHT tax-free gifts

Keep_pedalling

Does you mother’s estate have enough liquid assets to fund a big IHT bill without selling that second property?

With such a large estate, I don’t really see the point of the life interest trust. As already pointed out it is likely to cause that beneficiary an IHT issue and puts the final closure of your mother’s estate back years or decades. IHT planning where nearly all your assets are tied up in property is difficult.

bring_back_threepenny_bit

Her main residence will have to be sold to pay the IHT bill. I now also realise that it isn't explicitly a Life Interest trust, although it is a Trust Fund, and the intention (though not mentioned in the will) was always for my sibling to live in the second property, and 10% of the Trust is to be reserved for upkeep of the property.
As my sibling has no children and no other property, I'm not sure why there might be IHT issues when they pass away.  Obviously I need to check that the current Trust will be treated the same as a Life Interest Trust, as otherwise there would be an extra £300K in IHT when my Mother dies. (40% of £750k)

Keep_pedalling

bring_back_threepenny_bit said:

Her main residence will have to be sold to pay the IHT bill. I now also realise that it isn't explicitly a Life Interest trust, although it is a Trust Fund, and the intention (though not mentioned in the will) was always for my sibling to live in the second property, and 10% of the Trust is to be reserved for upkeep of the property.
As my sibling has no children and no other property, I'm not sure why there might be IHT issues when they pass away.  Obviously I need to check that the current Trust will be treated the same as a Life Interest Trust, as otherwise there would be an extra £300K in IHT when my Mother dies. (40% of £750k)

I would suggest she gets some paid for advice on this that sounds more like a discretionary  trust. Unless your sibling is a vulnerable adult and is incapable of paying the upkeep on a house, why does she just not leave him enough money to buy his own place?

bring_back_threepenny_bit

Thanks. I probably should have made clear that sibling A lives in the house now, has health issues, and also acts as my Mum's main carer! No-one is going to object to their having use of the house. Are there tax implications from the Trust not charging any rent?

Jeremy535897

What trust? I may be missing something here, but the only trust I recall being mentioned is the trust in your mother's will, and that does not exist until she dies. At present your mother owns the house, and can let your sibling live there rent free if she chooses to do so (although this in itself is a gift for inheritance tax purposes). Most people with property experience would say that an individual letting a relative live in a property rent free with no paperwork is not wise.

bring_back_threepenny_bit

Jeremy535897 said:

What trust? I may be missing something here, but the only trust I recall being mentioned is the trust in your mother's will, and that does not exist until she dies. At present your mother owns the house, and can let your sibling live there rent free if she chooses to do so (although this in itself is a gift for inheritance tax purposes). Most people with property experience would say that an individual letting a relative live in a property rent free with no paperwork is not wise.

That was the Trust I meant - I'm just trying to anticipate if there will be any tax implications from continuing to allow the sibling to live there rent-free?

Keep_pedalling

bring_back_threepenny_bit said:

Jeremy535897 said:

What trust? I may be missing something here, but the only trust I recall being mentioned is the trust in your mother's will, and that does not exist until she dies. At present your mother owns the house, and can let your sibling live there rent free if she chooses to do so (although this in itself is a gift for inheritance tax purposes). Most people with property experience would say that an individual letting a relative live in a property rent free with no paperwork is not wise.

That was the Trust I meant - I'm just trying to anticipate if there will be any tax implications from continuing to allow the sibling to live there rent-free?

Whatever sort of trust it is, as the beneficiary is not a spouse it will be subject to IHT. 

Jeremy535897

I think you need to take proper professional advice. Leaving tax aside for the moment, the trust does not exist until your mother dies, so as I said earlier, your mother may do what she wishes with property she owns. Letting a relative occupy it without paperwork may create problems if the relative gains some sort of right to occupy it, but the tax issue is probably confined to a question as to whether there is any gift. Possibly there is not, if the relative is your mother's carer.

When mother dies, the property is in her estate, chargeable to inheritance tax. Her will may provide for some sort of trust, but that changes nothing regarding inheritance tax on her death. That trust will dictate whether the relative may continue to occupy the property, and on what terms, although some rights may already have arisen.

bring_back_threepenny_bit

Thanks, and just to clarify, so that I have sufficient grasp of the options before getting to a solicitor:
Under her current will, which is probably a simple will Trust, there would be 40% IHT (=£300k) to pay on the 2nd house.
Under a lifetime interest trust, there would be no IHT on the property on Mother's death. On the death of the sibling with the lifetime interest, IHT would be paid, but at that point they have their own Nil Rate band allowance so another £325k would be free of IHT? 
What I'm also not clear about is whether the the sibling can leave the property to the proverbial Cat's Home, as it is part of their Estate, or it automatically goes to the other original beneficiaries of Mother's will.

Jeremy535897

Your mother's estate will be chargeable to inheritance tax to the extent it exceeds the available nil rate band and residential nil rate band, unless given to charity. Assuming the whole value of the second property is chargeable because of this, it doesn't affect the inheritance tax on her death on it, whether it is left in a discretionary trust, life interest trust or outright. That choice may impact on future inheritance tax, capital gains tax and stamp duty liabilities, but not the liability on mother's death.

If your sibling owns the property outright, or has a life interest in it, or a right to live there by some other means, it will be in their estate for inheritance tax, aggregated with their personal assets for working out the total size of the estate, against which can be set any nil rate bands or exemptions at the time of their death. If it is subject to a trust, the trust will state what happens on the sibling's death, and may be written so as not to allow the sibling any choice in where it goes after their death.