Inheritance tax and life interest.

flora135

Hello all,

My father in law passed away nearly 4 years ago and the solicitor dealing with his estate has made the process so complicated and upsetting with mistake after mistake. Probate was finally passed in February, the solicitor then admits they have overpaid the inheritance tax by £90,000 and 7 months later we are still waiting for the refund.

So my husbands step mum was given the life interest on the house which means she can live there free of charge but must pay for the general upkeep of the property, upon her death it would then pass to my husband who is the main beneficiary.

We understand that as she is his spouse there is no inheritance tax payable on the property due to spousal exemption. But we cannot get a straight answer from the solicitor as to whether or not inheritance tax on the property will be payable after her death.

An email today says all inheritance tax is paid but previously the solicitor has suggested that upon step mums death the property will form part of her estate and we will be liable to pay the portion of inheritance tax due on the property. Another time they said step mums estate would have to pay half of the inheritance tax on the property.

We are so confused and solicitor just talks solicitor speak and us minions don’t understand what it means! 

Thank you, any advice is gratefully received.

RAS

In order to help you we need some figures.  And probably you need to download copy of the will from the Probate Registry. Costs about £1.50.

What was the value of FIL's estate? The house? Did they own this a joint tenants, tenants in common or was he the sole owner?

Who are the executors?

To whom did he leave assets?

Sounds like there is an Immediate Post Death Interest Trust since Step-MIL can reside there? What conditions were attached. Has this been registered with HMRC? If not maybe co-operate with step-MIL to do this rather than use the solicitor?

tacpot12

Just bear in mind that solicitors aren't tax experts. They may be reluctant to provide any tax advice, especially when they can't foresee what might happen in the future. 

Keep_pedalling

As she is the beneficial owner his share of the house it was covered by spousal exemption, and it forms part of her estate so may involve IHT on her death but that will be be based on the total value entire estate and may be subject to some changes in the forthcoming budget (I predict the end of the RNRB) so no one can say if her estate will pay IHT or not.

flora135

RAS said:

In order to help you we need some figures.  And probably you need to download copy of the will from the Probate Registry. Costs about £1.50.

What was the value of FIL's estate? The house? Did they own this a joint tenants, tenants in common or was he the sole owner?

Who are the executors?

To whom did he leave assets?

Sounds like there is an Immediate Post Death Interest Trust since Step-MIL can reside there? What conditions were attached. Has this been registered with HMRC? If not maybe co-operate with step-MIL to do this rather than use the solicitor?

There was £400,000 in money and the house was valued at £450,000.

The executors are the partners of the solicitors firm.

The house was solely owned by my FIL.

He left his assets to my husband and £50,000 in trust to my eldest son when he turns 21.

The will simply states that the house with furniture, curtains, etc are to be held in trust and my wife may live in the house and have the use of the effects for as long as she wishes and without charge or until she remarried or cohabits for a period in excess of 3 months. She shall pay all rates and outgoings and keep it in good repair and insured to the satisfaction of my trustees. When this trust ends, upon the death of my wife or she remarries or cohabits, whichever will be sooner, the house and the effects will from part of my residuary estate.

The solicitor have been in contact again and basically said they don’t know if or how much inheritance tax will be due because they don’t know the value of my step MILs estate would be.

My FIL and Step MIL married later in life, he obviously wanted to ensure upon his death that she had somewhere to live but also that when she died his property went to his children not hers. We all knew this was the case, after all it’s been her home for 20 years.

I guess I’m worried that we need to ensure we have the funds to pay any inheritance tax in the future on the house.

Thank you for all responses so far, much appreciated.

Newly_retired

Wait and see how IHT is affected by the Budget.

Savvy_Sue

flora135 said:

There was £400,000 in money and the house was valued at £450,000.

The executors are the partners of the solicitors firm.

The house was solely owned by my FIL.

He left his assets to my husband and £50,000 in trust to my eldest son when he turns 21.

The will simply states that the house with furniture, curtains, etc are to be held in trust and my wife may live in the house and have the use of the effects for as long as she wishes and without charge or until she remarried or cohabits for a period in excess of 3 months. She shall pay all rates and outgoings and keep it in good repair and insured to the satisfaction of my trustees. When this trust ends, upon the death of my wife or she remarries or cohabits, whichever will be sooner, the house and the effects will from part of my residuary estate.

The solicitor have been in contact again and basically said they don’t know if or how much inheritance tax will be due because they don’t know the value of my step MILs estate would be.

My FIL and Step MIL married later in life, he obviously wanted to ensure upon his death that she had somewhere to live but also that when she died his property went to his children not hers. We all knew this was the case, after all it’s been her home for 20 years.

I guess I’m worried that we need to ensure we have the funds to pay any inheritance tax in the future on the house.

Thank you for all responses so far, much appreciated.

The bit in bold: I am perhaps being a complete numpty, because this is not something I've ever had to deal with, but ... what's that got to do with the price of fish?

FiL's estate is valued at the time of his death (I thought), and that's the basis on which IHT is calculated. So that, I would have thought, is now done and dusted, albeit incorrectly and awaiting a refund.

Step MiL's estate is completely separate - do you even know where it's going? It does NOT include the house, which was solely owned by FiL. It's not yet owned by your husband, it sits in a trust. It only passes to your husband when she leaves it / cohabits / remarries. That's good, because if he decides to sell promptly there will be a minimal (if any) Capital Gain, which is calculated on the difference between the value at acquisition, and the value at disposal. There's no CGT on your main residence, but he hasn't lived there. 

Is the current solicitor a STEP member? https://www.step.org/about-step/public If not, I think I'd want to consult one, just on this matter, and see if you can get more clarity. It sounds as if a complaint might be in order, but I'd want to be very clear about the grounds for that complaint. 

If I am being a complete numpty, someone will be long soon to tell me!

Keep_pedalling

Savvy_Sue said:

flora135 said:

There was £400,000 in money and the house was valued at £450,000.

The executors are the partners of the solicitors firm.

The house was solely owned by my FIL.

He left his assets to my husband and £50,000 in trust to my eldest son when he turns 21.

The will simply states that the house with furniture, curtains, etc are to be held in trust and my wife may live in the house and have the use of the effects for as long as she wishes and without charge or until she remarried or cohabits for a period in excess of 3 months. She shall pay all rates and outgoings and keep it in good repair and insured to the satisfaction of my trustees. When this trust ends, upon the death of my wife or she remarries or cohabits, whichever will be sooner, the house and the effects will from part of my residuary estate.

The solicitor have been in contact again and basically said they don’t know if or how much inheritance tax will be due because they don’t know the value of my step MILs estate would be.

My FIL and Step MIL married later in life, he obviously wanted to ensure upon his death that she had somewhere to live but also that when she died his property went to his children not hers. We all knew this was the case, after all it’s been her home for 20 years.

I guess I’m worried that we need to ensure we have the funds to pay any inheritance tax in the future on the house.

Thank you for all responses so far, much appreciated.

The bit in bold: I am perhaps being a complete numpty, because this is not something I've ever had to deal with, but ... what's that got to do with the price of fish?

FiL's estate is valued at the time of his death (I thought), and that's the basis on which IHT is calculated. So that, I would have thought, is now done and dusted, albeit incorrectly and awaiting a refund.

Step MiL's estate is completely separate - do you even know where it's going? It does NOT include the house, which was solely owned by FiL. It's not yet owned by your husband, it sits in a trust. It only passes to your husband when she leaves it / cohabits / remarries. That's good, because if he decides to sell promptly there will be a minimal (if any) Capital Gain, which is calculated on the difference between the value at acquisition, and the value at disposal. There's no CGT on your main residence, but he hasn't lived there. 

Is the current solicitor a STEP member? https://www.step.org/about-step/public If not, I think I'd want to consult one, just on this matter, and see if you can get more clarity. It sounds as if a complaint might be in order, but I'd want to be very clear about the grounds for that complaint. 

If I am being a complete numpty, someone will be long soon to tell me!

It more complicated than that, the house is now legally owned by the thrust, but beneficial ownership is with the surviving spouse and it does indeed form part of her estate for IHT purposes. There would have been no IHT payable on the house as it is covered be spousal exemption and none of his NRB or RNRB will have been used on this part of his estate so is transferable to be transferred to his wife’s estate. 

Savvy_Sue

Keep_pedalling said:

Savvy_Sue said:

flora135 said:

There was £400,000 in money and the house was valued at £450,000.

The executors are the partners of the solicitors firm.

The house was solely owned by my FIL.

He left his assets to my husband and £50,000 in trust to my eldest son when he turns 21.

The will simply states that the house with furniture, curtains, etc are to be held in trust and my wife may live in the house and have the use of the effects for as long as she wishes and without charge or until she remarried or cohabits for a period in excess of 3 months. She shall pay all rates and outgoings and keep it in good repair and insured to the satisfaction of my trustees. When this trust ends, upon the death of my wife or she remarries or cohabits, whichever will be sooner, the house and the effects will from part of my residuary estate.

The solicitor have been in contact again and basically said they don’t know if or how much inheritance tax will be due because they don’t know the value of my step MILs estate would be.

My FIL and Step MIL married later in life, he obviously wanted to ensure upon his death that she had somewhere to live but also that when she died his property went to his children not hers. We all knew this was the case, after all it’s been her home for 20 years.

I guess I’m worried that we need to ensure we have the funds to pay any inheritance tax in the future on the house.

Thank you for all responses so far, much appreciated.

The bit in bold: I am perhaps being a complete numpty, because this is not something I've ever had to deal with, but ... what's that got to do with the price of fish?

FiL's estate is valued at the time of his death (I thought), and that's the basis on which IHT is calculated. So that, I would have thought, is now done and dusted, albeit incorrectly and awaiting a refund.

Step MiL's estate is completely separate - do you even know where it's going? It does NOT include the house, which was solely owned by FiL. It's not yet owned by your husband, it sits in a trust. It only passes to your husband when she leaves it / cohabits / remarries. That's good, because if he decides to sell promptly there will be a minimal (if any) Capital Gain, which is calculated on the difference between the value at acquisition, and the value at disposal. There's no CGT on your main residence, but he hasn't lived there. 

Is the current solicitor a STEP member? https://www.step.org/about-step/public If not, I think I'd want to consult one, just on this matter, and see if you can get more clarity. It sounds as if a complaint might be in order, but I'd want to be very clear about the grounds for that complaint. 

If I am being a complete numpty, someone will be long soon to tell me!

It more complicated than that, the house is now legally owned by the thrust, but beneficial ownership is with the surviving spouse and it does indeed form part of her estate for IHT purposes. There would have been no IHT payable on the house as it is covered be spousal exemption and none of his NRB or RNRB will have been used on this part of his estate so is transferable to be transferred to his wife’s estate. 

Thank you, I am glad you have cleared that up. However ... 

Am I wrong to think that the OP need not concern themselves over any outstanding IHT, because that will be for the Stepmother's estate / executors to pay? 

OR, am I wrong to think that, because the house will pass to the son on the death of the stepmother, regardless of what her will says? 

Whether I'm right or wrong, my gut feeling is that this isn't something which needs to be worried about now, because if there IS an outstanding IHT liability which needs to be settled before stepmother's probate can be granted, this can be paid by instalments until such time as the house is sold. AND it would still be an issue for stepmother's executors rather than her beneficiaries. 

flora135

Savvy_sue that is what I am not understanding. If the property forms part of step mother’s estate are we then liable to pay her inheritance tax or just the amount attributed to the property? How do they even work that out?

Im guessing the solicitors say they don’t know because if step mum has little money then no IHT would be payable because I think the threshold increases to £500,000 if property is left to direct descendants. If she has money, we always understood she was financially independent, then IHT would be due. I don’t know, it’s very confusing and as others have said we should wait and see what happens in the budget.

As for making a complaint we have already been in contact with Financial ombudsman who have said we would be well within our rights to make an official complaint. The solicitors ‘lost’ the will which caused 3 years of stress as it enabled my SIL who had been estranged from her dad to enter a caveat and claim her dad had the Will in his possession and destroyed it in front of her. This was all proven to be false but goodness it’s been hard! They gave us every excuse under the sun from Covid backlog to paperwork going missing or going to the wrong department before 18 months after FILs death they admitted the Will had been ‘misplaced’ during a move of office. 

Anyway thank you for all your help, I think we will seek advice from another solicitor.

RAS

People will struggle to advise you at the moment because there are rumours that IHT rules will change when the Budget takes place.

But since step-mum is widowed, under the current rules when she dies the executors can use both the basic non-residential and the residential allowances, for both spouses, so a total of £1m if the house is worth £350k or more.