Inheritance Tax

Iamthemrs

poppystar said:

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. 

Thank you. So if the property sells for 500,000 does she get 250,000 (50%) or do ALL taxes, costs and Iht come out first and she gets 50% of net figure

poseidon1

Iamthemrs said:

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?

Actually the position is somewhat worse than I originally thought. 

With no qualifying  spouse to transfer her nil rate band ( if any remained on her death)  it was either extinguished at that point,  alternatively it was entirely used up if she had assets on death other than the share of the house which taken together, used up her NRB.

Which ever the outcome, ( and contradicting my original view) it would seem only your father's NRB would be available to shelter any part of the house from the full impact of IHT going forward. 

On reflection it seems to me if both wills were entirely silent has to how the IHT burden should be shared on 2nd death of the parties, trust and tax law likely dictates that the 2nd estate bears the entire liabilty and possibly daughter gets hers free and clear.

Arguably there could be some justification for this, in that the mother's NRB was lost because she chose for your father to receive a lifetime benefit from it,  thereby either deliberately or inadvertently denying her daughter its benefit to shelter her eventual inheritance ( failing to marry was a very poor decision in this regard). I don't think you have fully appreciated the daughter's position in this respect.

Seems to me both wills need to be scrutinised to see what ( if anything ) had been said about the iht exposure in each death scenario.

As indicated by RAS, if the solicitor is not a STEP member, he/she may not be appropriately qualified to fathom this 'gordian knot'. Indeed if they were responsible for the original advice and the final wills, one could argue they are not really the appropriate person to advise in any event ( negligent advice?). 

This may therefore become a contentious matter for which external independent expertise may now be required. So would appear you will need a 2nd opinion from a STEP qualified solicitor to unpick the  respective wills and any contemporaneous advice given at the time of drafting.

 That excercise will hopefully help determine how much of the house proceeds the daughter will be entitled to after deducting direct costs of sale such as estate agent 's and legal fees. The IHT question is separate and distinct and may or may not impact on her eventual entitlement - insufficient data available for anyone to form a meaningful view here.

Given how common these blended family situations have become, one imagines this is not the first time this particular situation has arisen although in most cases ( seen here) the parties had the good sense to marry.

poppystar

Iamthemrs said:

poppystar said:

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. 

Thank you. So if the property sells for 500,000 does she get 250,000 (50%) or do ALL taxes, costs and Iht come out first and she gets 50% of net figure

Just the costs related to the sale not the IHT.

It might help to think of it as the daughter would have got half the value of the house free of IHT (assuming her mother’s estate was below her NRB) but less the costs of sale on the death of her mother IF there had been no life interest. At that point your father would have also got his half less the costs.

As there was a life interest your father got the benefit of the house for the time between the deaths. 

It may feel bad because it is you that will be impacted by the estate having to pay the IHT now but your father got the benefit of the life interest while alive and it is his estate that is paying now for that benefit added to his other assets. The life interest gave him the security of keeping the home without any additional costs of buying a new home or renting - which he would have had to have done on the death of his partner if there had been no life interest. 

The daughter has effectively not had the benefit of her inheritance for years because her mother chose to give your father a life interest. To reduce that inheritance now by IHT that wouldn’t have been applicable to her inheritance when her mother died would probably seem very unfair to her as indeed it would be. 

Iamthemrs

poseidon1 said:

Iamthemrs said:

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?

Actually the position is somewhat worse than I originally thought. 

With no qualifying  spouse to transfer her nil rate band ( if any remained on her death)  it was either extinguished at that point,  alternatively it was entirely used up if she had assets on death other than the share of the house which taken together, used up her NRB.

Which ever the outcome, ( and contradicting my original view) it would seem only your father's NRB would be available to shelter any part of the house from the full impact of IHT going forward. 

On reflection it seems to me if both wills were entirely silent has to how the IHT burden should be shared on 2nd death of the parties, trust and tax law likely dictates that the 2nd estate bears the entire liabilty and possibly daughter gets hers free and clear.

Arguably there could be some justification for this, in that the mother's NRB was lost because she chose for your father to receive a lifetime benefit from it,  thereby either deliberately or inadvertently denying her daughter its benefit to shelter her eventual inheritance ( failing to marry was a very poor decision in this regard). I don't think you have fully appreciated the daughter's position in this respect.

Seems to me both wills need to be scrutinised to see what ( if anything ) had been said about the iht exposure in each death scenario.

As indicated by RAS, if the solicitor is not a STEP member, he/she may not be appropriately qualified to fathom this 'gordian knot'. Indeed if they were responsible for the original advice and the final wills, one could argue they are not really the appropriate person to advise in any event ( negligent advice?). 

This may therefore become a contentious matter for which external independent expertise may now be required. So would appear you will need a 2nd opinion from a STEP qualified solicitor to unpick the  respective wills and any contemporaneous advice given at the time of drafting.

 That excercise will hopefully help determine how much of the house proceeds the daughter will be entitled to after deducting direct costs of sale such as estate agent 's and legal fees. The IHT question is separate and distinct and may or may not impact on her eventual entitlement - insufficient data available for anyone to form a meaningful view here.

Given how common these blended family situations have become, one imagines this is not the first time this particular situation has arisen although in most cases ( seen here) the parties had the good sense to marry.

He is a STEP qualified solicitor!  

Iamthemrs

It states in our fathers Will that debts and costs to be paid, any inheritance tax to be paid resulting from his death and any residue to his partner - this was stated in the Will when redone in 2014 with his partner when they added the life interest trust.

poppystar

Iamthemrs said:

It states in our fathers Will that debts and costs to be paid, any inheritance tax to be paid resulting from his death and any residue to his partner - this was stated in the Will when redone in 2014 with his partner when they added the life interest trust.

Yes, but his partner died first so that part is not applicable as it is what would happen if she was still alive. 

The daughter has already inherited albeit not been able yet to get any benefit from that inheritance. The estate therefore owes her that inheritance in full. Think of it more like a debt that has to be repaid before the estate can be distributed. You wouldn’t take any IHT cost off any other debts the estate may have but would pay the creditors in full.