IHT And Tenants In Common

drlabman

My wife and I made wills and LPoAs recently (finally!) and as part of that effort our solicitor convinced us to change the ownership of our house to tenants in common from joint tenants.  I'd known about this option for years but hadn't done anything about it.  The main argument - avoiding care home fees - is compelling, so while we didn't understand every little detail it seemed like the right thing to do.  So, on the death of the first spouse, our sons now inherit 50% of the house between them.  They will never live in the house because they live and work in different parts of the country.

Now I have questions.  These have come about largely due to the budget and the fact that, when you now include the value of unspent pensions, we are likely to be over the £1m IHT threshold.

I suppose the first question is: is it still the case that on the death of the surviving spouse, the threshold for IHT is still £1m?

Secondly, given that our sons inherit 50% on the death of the first spouse, could there (theoretically) be IHT to pay at that point?  The value of the house is less that £500K so it might be a moot point but could it ever happen?  I'm only curious because, in general, everything passes to the surviving spouse IHT free - but what about this case?

Thirdly, on the death of the surviving spouse, and our sons come to sell the house, will there be tax to pay (CGT?) because it's not been their primary residence?

I may have other questions but that'll do for starters.

Sarahspangles

Does the will create an Immediate Post Death Interest Trust for the survivor? They’re generally written that way. It gives the survivor a right to live out their days in the house. There’s no need to transfer ownership to your sons on the first death, which would eventually (potentially) lead to a CGT bill but the Trust does have to be registered with HMRC within a defined timescale. That’s extra business for the solicitor.

Keep_pedalling

On the first death your will creates an immediate post death interest trust. The trust becomes the legal owner of half the house but the surviving spouse is the beneficial owner. Spousal exemption still applies so no NRB is used up and the whole house firms part of the surviving spouses estate. 

This also avoids a CGT  liability for your children when the house is eventually sold. 

drlabman

Thanks both.

I didn't pay much attention to what it was called, other than I remember the word "trust", but yes, it allows the surviving spouse to live out their days in the house.

DRS1

You should ask the solicitor who drafted the will these questions.

In particular is there a trust?

When I read your first post I thought 50% of the house would be inherited by your sons on the first death and that they were adults.  So assuming there are two of them after the first death the house will be held 50% to the surviving spouse and 25% for each son.  The surviving spouse has the right to live there because of their 50% share not because they have a life interest over the sons' shares.

The first to die will have used up some or all of their nil rate band and residential nil rate band so on the second death there will be less than £1million left to use.  Maybe the survivor will be down to just their own nil rate band and residential nil rate band.

But I have not read the will so I know nothing.  Best to double check with the solicitor as I said.

drlabman

DRS1 said:

In particular is there a trust?

There is definitely wording around trust but wouldn't that only come into force on the first death?  I shall dig it out and report back.

DRS1 said:

When I read your first post I thought 50% of the house would be inherited by your sons on the first death and that they were adults.  So assuming there are two of them after the first death the house will be held 50% to the surviving spouse and 25% for each son.  The surviving spouse has the right to live there because of their 50% share not because they have a life interest over the sons' shares.

Your reading is exactly the intention.  But my recollection of the conversation was that the right of occupancy would be because of a life interest.

DRS1 said:

The first to die will have used up some or all of their nil rate band and residential nil rate band so on the second death there will be less than £1million left to use.  Maybe the survivor will be down to just their own nil rate band and residential nil rate band.

So does this comment contradict the previous two responders?

Albermarle

So does this comment contradict the previous two responders?

If 50% of the property passes to the sons, then the IHT nil rate band that can be passed on to the surviving spouse will be reduce by 50% of the value of the house.

If the will says the 50% of the house goes into  an immediate post death interest trust, then the full nil rate band will pass to the surviving spouse.

You need to get some clarity from the solicitor about what has been agreed, as you do not seem very sure. 

DRS1

drlabman said:

DRS1 said:

In particular is there a trust?

There is definitely wording around trust but wouldn't that only come into force on the first death?  I shall dig it out and report back. OK.  Sometimes there is wording about a "trust for sale" which is not quite the sort of trust that is meant by a life interest trust.

DRS1 said:

When I read your first post I thought 50% of the house would be inherited by your sons on the first death and that they were adults.  So assuming there are two of them after the first death the house will be held 50% to the surviving spouse and 25% for each son.  The surviving spouse has the right to live there because of their 50% share not because they have a life interest over the sons' shares.

Your reading is exactly the intention.  But my recollection of the conversation was that the right of occupancy would be because of a life interest. If that is the case then you can ignore me.  But I thought the whole point of the tenants in common move was to get the 50% into the children's hands earlier than the death of the surviving spouse.

DRS1 said:

The first to die will have used up some or all of their nil rate band and residential nil rate band so on the second death there will be less than £1million left to use.  Maybe the survivor will be down to just their own nil rate band and residential nil rate band.

So does this comment contradict the previous two responders?  It does but only because I did not see a life interest trust on the death of the first spouse to die.  If there is such a trust then I have been leading you up the garden path and I apologise.

See bold above

drlabman

OK.  I've extracted some wording from the will - this is actually my wife's will but mine will be the same except for husband/wife names.  I've tried to extract the salient points.  Does this look right?  I'm confused by the first para under Right of Occupation - partly because it seems a little garbled, but also because her "beneficial share" goes to the Trustees, of which I'll be one if still alive, surely.  However, not being a solicitor I may be misunderstanding the terminology.

Appointment of Executors and Trustees

I appoint my husband X and my children Y and Z as my Executors and Trustees of this my Will

In this Will  the expression “my Trustees” means my Executors and the trustees of this Will and of any trusts arising under it.

Gift of Chattels

Ignoring

Right of Occupation

I give to my Trustees my beneficial share of <<home address>>  (or in the future proceeds of sale of) any property (“the property”) which I own with my husband X as my principal residence at the date of my death and I declare that this gift …..

My Trustees shall hold my share on trust for my husband X for his life.

Some other paras not important (keeping house in good order, insurance, etc and not children not selling house from under me, or something)

On the death of my husband my Trustees shall hold any property then subject of this clause for my children Y and Z equally.

Residuary Estate … and other stuff.

Jeremy535897

The purpose of this will is, as you said at the start, to ensure that half the house cannot be counted as part of the survivor's assets for "deprivation of assets" purposes. The ownership of the house was as tenants in common or otherwise the survivor would have owned the house on the first death, whatever the will said.
The will changed nothing for inheritance tax, as the survivor is treated for inheritance tax as owning the whole of the house. The main residence exemption for capital gains tax will apply to all the house (if the survivor continues to live there), and there will be a capital gains tax free uplift on the whole of the house if they and the trustees still own it at the second death anyway.

RAS

The other advantage of an IPDI trust is that it ensures that the children still inherit half the value of the house if the surviving spouse remarries. Marriage nullifies prior wills unless written in anticipation of marriage.