Inheritance tax when the property value is half held in trust

BTL_Reading

This must be a common question, but I don't know the right terminology to google it...

My mother married a man (my stepfather) who had his own family, and the terms of their will was that if either die, the other could live in the house but on their death the value of the property would be split between the remaining families on both sides, 50/50. He died so she lives in the house but only really 'owns' half the house, the other half effectively being held in trust for his family (no legal 'trust' document in this case, it's just what the will said). I understand this is a common arrangement but don't know the term used for it.

My confusion is over how this works with inheritance tax, if she should die. The government will take 40% of the value of the estate over £325k (today's figure before budget!) I guess the house does not count as "inherited by children" where the threshold is £500k - or does it? It's inherited half in trust by the children of two families...

So is it the case that my stepfather's family is entitled to half of the house value, but then the inheritance tax has to come out of my mother's family's half? Let's say the house is £600k, does my stepfather's family get £300k then the tax man gets £110 (40% of the value of the estate after £325k threshold) leaving £190k for my mother's remaining family?

If my stepfather had never married, the value of his property on death would be subject to inheritance tax (after threshold) but the above scenario suggests his family would effectively have avoided the inheritance tax due to his getting married.

Or is it reasonable to say the £110k inheritance tax comes first then the remaining £490k is split between the families? I believe the will does not talk about "half the value of the estate" but "half the value of the property" with no mention of inheritance tax. Actually the wording of the will is "net proceeds of sale" - is that net of inheritance tax?

Alphatauri

Firstly if your Mum inherited everything, as the current rules state she would be able to use her IHT allowance of £325k, his allowance of £325k. Plus because their property is over £350k and they leave it to their children their RNRB of £175 each. This means unless your Mum’s estate exceeds £1m currently there is no IHT to pay.

The budget may change things. 

BTL_Reading

Alphatauri said:

Firstly if your Mum inherited everything, as the current rules state she would be able to use her IHT allowance of £325k, his allowance of £325k. 

Ah! I read something about that, I was going to check up on it... so she inherits his IHT allowance - that helps a lot!

Thanks, very helpful

Marcon

This might make useful further reading: https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band#direct-decs

RAS

Do keep an eye on the next few budgets for changes. 

The trust is set up in the will, which will include conditions. Mum can downsize using the full value of the house. But the will may specify that she is allowed the income from any capital not used to buy the house, or that any unused capital goes to his children etc.

Has anyone registered the trust with the HMRC, as that is now supposed to happen within two years of the first death?

BTL_Reading

RAS said:

The trust is set up in the will, which will include conditions. Mum can downsize using the full value of the house. But the will may specify that she is allowed the income from any capital not used to buy the house, or that any unused capital goes to his children etc.

Has anyone registered the trust with the HMRC, as that is now supposed to happen within two years of the first death?

It's not actually a formal trust, just a statement in the will that half of the value of the house should be given to my stepfather's family when it's eventually sold, so there's nothing more detailed there - except that it does refer to downsizing, which she's already done, and solicitors have done calculation about the percentage value that my stepfather's family hold in the new house, and I have a dispute with them about their (very simple but wrong) calculation of that percentage - but that's a story for another posting...

RAS

This sound very much like an Immediate Post Death Interest Trust which is set up purely by the terms of a will? If so, it does now need registering with the HMRC, as off about 2 or 3 years ago.

If the party has already downsized, what has happened to the money saved by the downsize? What did the will say and what advice has been taken? 

BTL_Reading

RAS said:

This sound very much like an Immediate Post Death Interest Trust which is set up purely by the terms of a will? If so, it does now need registering with the HMRC, as off about 2 or 3 years ago.

Ah thanks, I had never heard of an IPDI but yes it sounds exactly like what we have. So there is an implicit trust created by the will - useful to know.

This page:
https://www.gov.uk/trusts-taxes/registering-a-trust

says "You do not need to register your trust if it...is a will trust created by a person’s will".

There is a "only under 2 years" clause there, and it was about 2 years ago, so perhaps that needs registering now...

If the party has already downsized, what has happened to the money saved by the downsize? What did the will say and what advice has been taken? 

The solicitors (who managed both the will and the downsizing conveyancing) decided that the family of the bereaved should now own a larger percentage of the new property by way of maintaining their interest in the estate (I have a dispute about the calculation of the percentage.) The will was not specific, and we as members of the public just have to trust that the solicitors have taken the action which is standard in these cases (which does seem logical). It means as the downsized property value goes up, so does the inheritance of the bereaved's family, as would have been the case if the surviving partner had not downsized.