Inheritance Tax

Iamthemrs

Our father recently passed leaving a £500,000 house which was 50-50 with his partner through a life interest fund. His partner had died previously leaving her 50% in trust to her daughter. (Previous marriage)I believe she is classed as a remainder man.  As our father had other properties (nothing to do with his partner) Inheritance tax has to be paid on his estate and we believe his partners 50% still has to go forward for inheritance tax purposes. Our question is does the daughter of our dad‘s partner receive the full 50% property on its sale or is it after all debts INCLUDING THE INHERITANCE TAX that is payable on our father‘s estate as her 50% was included in the inheritance tax calculations?

JGB1955

I have asked for this to be moved to 'Deaths, funerals and probate'.

Keep_pedalling

Were they married? How long ago did his partner die?

Iamthemrs

No they weren’t married.  She passed in 2018/19.  Trust was set up when they redone wills in 2014.

Iamthemrs

Keep_pedalling said:

Were they married? How long ago did his partner die?

No they were not married.  She passed in 2018/19. Trust was set up when they redid their Wills in 2014.

poseidon1

Iamthemrs said:

Our father recently passed leaving a £500,000 house which was 50-50 with his partner through a life interest fund. His partner had died previously leaving her 50% in trust to her daughter. (Previous marriage)I believe she is classed as a remainder man.  As our father had other properties (nothing to do with his partner) Inheritance tax has to be paid on his estate and we believe his partners 50% still has to go forward for inheritance tax purposes. Our question is does the daughter of our dad‘s partner receive the full 50% property on its sale or is it after all debts INCLUDING THE INHERITANCE TAX that is payable on our father‘s estate as her 50% was included in the inheritance tax calculations?

Since for some inexplicable reason they chose not to marry, your father and his partner' s estates were fully exposed to IHT ( without intervening spouse exemptions ) with only £325k nil rate bands and partial RNRBs to shelter their estates for ultimate benefit of respective children.

Commencing with partners death, her gift of half share of house into life interest trust for your father would have used a substantial part of her nil rate band depending on the value of the house on her death in 2018/19. To illustrate, assume at this stage the house was worth less on her death compared to its current value now.

Therefore for this purpose assume a £450k value on her death, so £225k of her NRB erased at that point.

Your father has now died, trust at an end and mother's half share now vests in favour of daughter, what nil rate bands are available to shelter the £250k value? Firstly only £100k of mother's original NRB initially avaliable ( on the assumptions above) so notionally £150k now exposed to IHT.

 What about the additional residential nil rate band of  £175k? It did not exsist in 2014 when the parties redid their wills so could not be part of their planning at that time.

 Be that as it may,  does this exemption survive the original life interest gift to your father (who would not have qualified - since not a direct descendant), but maybe revived on his death in favour of the daughter ? If so, there is no IHT on the property share inherited by the daughter on the above figures.

However  (sadly) the article below suggests that since the daughter is not a lineal descendent of your father the RNRB is disallowed for her half share, because the 'lineal descendent ' condition was broken by the interim life interest trust for your father, an unfortunate outcome for the daughter especially since your father's personally owned half share does accrue to you and your siblings with his RNRB

https://lifetimelawyers.org.uk/Public/Members/Non-menu-posts/Members-News-Content/Gill-Steel-on---Settlements-and-the-Residence-Nil-Rate-Band--RNRB-.aspx#:~:text=If the qualifying life interest,in favour of lineal descendants.

In all fairness, had your father died first and his will had also provided a life interest trust for the partner, there would have been a similar outcome to the detriment of you and your siblings. In any event, and in answer to your question there does appear to be an IHT liabilty on daughter's half share, to be met from that share. 

Blended family scenarios do pose a challenge where the RNRB is concerned ( and iht planning generally), but had your father and partner married, this would have at least preserved her £325k nil rate band intact in favour of her daughter.

I do have to wonder what tax advice ( if any) was provided to the parties when they settled their wills. Squandering the gifts exemption that could have been applied via the  simple expedient of entering into a  civil partnership, seems to me a very significant oversight assuming the wills were drafted by a solicitor.

However I do understand that some solicitors do not provide tax advice when drafting wills, and even when they do, some couples can be intransigent on the issue of marriage even where the tax benefits can be significant.

Keep_pedalling

If they were advised to do this it was terrible advice as his partner’s estate has been dragged into IHT territory  needlessly. It seems your father had no need of a life interest as he had sufficient assets of his own to support himself without it. 

You are now lumbered with the difficulty of how to allocate the NRB and split IHT fairly among the beneficiaries. 

Was he previously widowed so he still has transferable NRBs available?

Iamthemrs

poseidon1 said:

Iamthemrs said:

Our father recently passed leaving a £500,000 house which was 50-50 with his partner through a life interest fund. His partner had died previously leaving her 50% in trust to her daughter. (Previous marriage)I believe she is classed as a remainder man.  As our father had other properties (nothing to do with his partner) Inheritance tax has to be paid on his estate and we believe his partners 50% still has to go forward for inheritance tax purposes. Our question is does the daughter of our dad‘s partner receive the full 50% property on its sale or is it after all debts INCLUDING THE INHERITANCE TAX that is payable on our father‘s estate as her 50% was included in the inheritance tax calculations?

Since for some inexplicable reason they chose not to marry, your father and his partner' s estates were fully exposed to IHT ( without intervening spouse exemptions ) with only £325k nil rate bands and partial RNRBs to shelter their estates for ultimate benefit of respective children.

Commencing with partners death, her gift of half share of house into life interest trust for your father would have used a substantial part of her nil rate band depending on the value of the house on her death in 2018/19. To illustrate, assume at this stage the house was worth less on her death compared to its current value now.

Therefore for this purpose assume a £450k value on her death, so £225k of her NRB erased at that point.

Your father has now died, trust at an end and mother's half share now vests in favour of daughter, what nil rate bands are available to shelter the £250k value? Firstly only £100k of mother's original NRB initially avaliable ( on the assumptions above) so notionally £150k now exposed to IHT.

 What about the additional residential nil rate band of  £175k? It did not exsist in 2014 when the parties redid their wills so could not be part of their planning at that time.

 Be that as it may,  does this exemption survive the original life interest gift to your father (who would not have qualified - since not a direct descendant), but maybe revived on his death in favour of the daughter ? If so, there is no IHT on the property share inherited by the daughter on the above figures.

However  (sadly) the article below suggests that since the daughter is not a lineal descendent of your father the RNRB is disallowed for her half share, because the 'lineal descendent ' condition was broken by the interim life interest trust for your father, an unfortunate outcome for the daughter especially since your father's personally owned half share does accrue to you and your siblings with his RNRB



In all fairness, had your father died first and his will had also provided a life interest trust for the partner, there would have been a similar outcome to the detriment of you and your siblings. In any event, and in answer to your question there does appear to be an IHT liabilty on daughter's half share, to be met from that share. 

Blended family scenarios do pose a challenge where the RNRB is concerned ( and iht planning generally), but had your father and partner married, this would have at least preserved her £325k nil rate band intact in favour of her daughter.

I do have to wonder what tax advice ( if any) was provided to the parties when they settled their wills. Squandering the gifts exemption that could have been applied via the  simple expedient of entering into a  civil partnership, seems to me a very significant oversight assuming the wills were drafted by a solicitor.

However I do understand that some solicitors do not provide tax advice when drafting wills, and even when they do, some couples can be intransigent on the issue of marriage even where the tax benefits can be significant.

Thank you for the response. It was very helpful and I understand it a bit more. Are you also suggesting that  Yes there is inheritance to be paid on the daughter’s 50% share and that also all debts, costs including all the inheritance tax must come off our father’s estate before she gets her 50% share?

Iamthemrs

It has been said by our solicitor that she does not pay any of the IHT and that she receives her full 50% of the sale of the property only minus costs of solicitor and estate agents fees…….surely if there is IHT  calculated on her half, this must be paid for out of our fathers estate and she receives her 50% AFTER all IHT and costs?. 

RAS

Is your solicitor a STEP member? As most other aren't necessarily qualified regarding tax issues.

poppystar

Iamthemrs said:

It has been said by our solicitor that she does not pay any of the IHT and that she receives her full 50% of the sale of the property only minus costs of solicitor and estate agents fees…….surely if there is IHT  calculated on her half, this must be paid for out of our fathers estate and she receives her 50% AFTER all IHT and costs?. 

But her half was already assessed when her mother died and would therefore have been set against her mother’s NRB with no IHT payable due to the value of that estate. The reason the IHT is now payable is because of your father’s assets. Although she could not liquidate her inheritance before because of the life interest it was hers from that point on and did not attract IHT.