How is IHT bill calculated when an estate includes right to reside property?

alkynance

My mother died last month and as executor to her will I am currently valuing her estate and trying to work out her IHT liability.

Her total estate includes her free estate which includes a house (house 1) which she has left to direct descendants.

There is another house (house 2) which belonged to her second husband where she was given the right to reside in his will when he died 7 years ago. House 2 will now pass to her husband’s indirect descendants. 

I understand that although my mother never owned house 2 it forms part of her total estate for IHT purposes and the beneficiaries of house 2 will pay their share of the IHT total based on the value of the house relative to the estate total (approx 45%).

I understand they are also entitled to that proportion (45%) of any nil rate bands available.

My mother’s husband used almost all his NRB when he died leaving money to his indirect descendants and so there was none to pass to my mother.

She has her personal NRB and a RNRB as she is leaving house 1 to direct descendants. I believe she can also use her husband’s unused RNRB. Does she share the RNRB with the house 2 beneficiaries even though they would ordinarily not have been able to use it as they are not direct descendants?

Do HMRC simply total the value of the whole estate, subtract the total amount of relief available uniformly and then create an IHT bill for each side based on their respective slice of the whole estate?

Apologies, I could have just started with that question… Any clarifications or advice very welcome. Thank you

Keep_pedalling

Which of those houses did she live in? What is the value of those houses?

As executor you are responsable for paying the IHT bill not the beneficiaries.

poseidon1

Although this is a fairly typical 'blended family' situation, unusually there are two houses involved rather that the usual one.

Looking first at your mother's estate it benefits from her full RNRB plus potential to access the RNRB of her first husband on a transferable basis - see thread below -

https://forums.moneysavingexpert.com/discussion/6601920/transferable-nil-rate-band-query#latest

So if she lived in the trust property at death, but at some point the other property had been her main residence then RNRBs  for her and 1st husband mentioned  above maybe  available on that property ( house 1).
  
As for her nil rate band, this unfortunately is  proportionately shared with the house trust to the benefit of the 2nd husband's beneficiaries.

No RNRB at all for the trust property since those beneficiaries are not descendents of your mother, and no 2nd husband NRB for the reason you stated. However it is possible that 1st husband's NRB if unused at his death could be transferable for use by your mother's estate - see the trust discussion forum below which was cited in the above thread.

https://trustsdiscussionforum.co.uk/t/claiming-more-than-one-iht-threshold-if-double-widowed/19277

On a more practical note, HMRC will create  2 seperate IHT bills for your mums estate and the house trust, based on the final allocation of nil rate bands as indicated above, with the house trustees wholly responsible for paying their own IHT.

As you are aware, IHT is due 6 months after death. However, in this regard the house trustees are at an  advantage and can market the house  for immediate sale since they do not require probate of your mother's will ( they are already legal owners of the property).

Agreeing an early sale price for the trust property also means agreeing an early IHT valuation for that property, leaving the house trustees in a good position to wind up all aspects of the trust  sooner rather than later. So no doubt if your mother had been occupying that property, there will be pressure for it to be made available for an early sale.

The complexities of claiming multiple transferable NRBs in your mother's circumstance would probably justify your seeking professional advice from a STEP qualify solicitor, in view of the possible IHT savings that could be achieved for your immediate family. The position of the first husband on death might involve a degree of investigation depending on when death occurred.
 

alkynance

Thank you for the detailed points you mention, much appreciated. My mother's first husband died in 1996 so he was not able to pass forward his nil rate band but instead set up a nil rate band discretionary trust. Is it possible that my mother's estate could use the unused RNRB from her second husband. I know he could not have used it himself but I had read that it could be passed on even if the husband had not owned property or been able to pass onto direct descendants.

Keep_pedalling

alkynance said:

Thank you for the detailed points you mention, much appreciated. My mother's first husband died in 1996 so he was not able to pass forward his nil rate band but instead set up a nil rate band discretionary trust. Is it possible that my mother's estate could use the unused RNRB from her second husband. I know he could not have used it himself but I had read that it could be passed on even if the husband had not owned property or been able to pass onto direct descendants.

Really need some more info. Can you answer the questions I asked in my last post please. 

alkynance

Keep_pedalling said:

alkynance said:

Thank you for the detailed points you mention, much appreciated. My mother's first husband died in 1996 so he was not able to pass forward his nil rate band but instead set up a nil rate band discretionary trust. Is it possible that my mother's estate could use the unused RNRB from her second husband. I know he could not have used it himself but I had read that it could be passed on even if the husband had not owned property or been able to pass onto direct descendants.

Really need some more info. Can you answer the questions I asked in my last post please. 

She lived in house 1 for a number of years with her first husband and the property passed to her on his death in 1996. She lived with her second husband in house 2 and was given the right to live in it after he died in 2018. She was living there when she died this year. House 1 is being left to her direct descendants. House 2 passes to her second husband's indirect descendants. House 1 is valued at 350K house 2 at 400K

Keep_pedalling

alkynance said:

Keep_pedalling said:

alkynance said:

Thank you for the detailed points you mention, much appreciated. My mother's first husband died in 1996 so he was not able to pass forward his nil rate band but instead set up a nil rate band discretionary trust. Is it possible that my mother's estate could use the unused RNRB from her second husband. I know he could not have used it himself but I had read that it could be passed on even if the husband had not owned property or been able to pass onto direct descendants.

Really need some more info. Can you answer the questions I asked in my last post please. 

She lived in house 1 for a number of years with her first husband and the property passed to her on his death in 1996. She lived with her second husband in house 2 and was given the right to live in it after he died in 2018. She was living there when she died this year. House 1 is being left to her direct descendants. House 2 passes to her second husband's indirect descendants. House 1 is valued at 350K house 2 at 400K

I think you may need to take professional advice here as I am not sure house 1 qualifies for the RNRB as it was not her primary residence. If it does you will be relying on the downsizing rule but if she moved out prior to 7th July 2015 then that does not apply. 

House 2 definitely does not qualify as the beneficiaries are not direct descendants. 

poseidon1

alkynance said:

Thank you for the detailed points you mention, much appreciated. My mother's first husband died in 1996 so he was not able to pass forward his nil rate band but instead set up a nil rate band discretionary trust. Is it possible that my mother's estate could use the unused RNRB from her second husband. I know he could not have used it himself but I had read that it could be passed on even if the husband had not owned property or been able to pass onto direct descendants.

 Theoretically husband 2' s RNRB may be available for your mother's  personal estate passing to you and your siblings ( assuming you qualify as his step children) as indicated by the guidance note below (although on my intial reading it seems a tad over generous in its reach and scope )  

https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold

Claiming the RNRB from 1st husband ( albeit at a maximum level of £100k) is specifically provided for in the  legislation, so a much easier claim since I assume he was your biological father. 

Legislation caps  overall maximum transferable RNRBs at £175k irrespective of the number of pre deceased spouses. 

Husband 2's small percentage of unused NRB may similarly be transferable to enhance your mother's NRB.

However, on a point of clarification just need to ask whether house no 1 was partly or wholly an asset of the 1996 nil rate band trus . I note your stating the house passed to your mother so what other assets were available for the 1996  trust and was it still in exsistence on your mother's death? 

 There are a fair number of moving parts here, so as suggested by Keep_pedalling specialist advice and assistance particularly with regard to completing the relevant transferable nil rate bands iht forms would seem to make sense.

alkynance

Thank you for your insights. As I understand it you can claim RNRB for any house you own which has been a primary residence even if it is not currently so RNRB can be claimed for house 1 as it's being left to direct descendants. Any remainder of personal nil rate bands could not be passed forward in 1996 when my father died (yes he was my biological father) so any unused band was commonly placed in trusts. The house was passed to my mother not in trust. I don't think Residence Nil Rate Bands existed when he died so I assume there was nothing to pass forward. 

poseidon1

alkynance said:

Thank you for your insights. As I understand it you can claim RNRB for any house you own which has been a primary residence even if it is not currently so RNRB can be claimed for house 1 as it's being left to direct descendants. Any remainder of personal nil rate bands could not be passed forward in 1996 when my father died (yes he was my biological father) so any unused band was commonly placed in trusts. The house was passed to my mother not in trust. I don't think Residence Nil Rate Bands existed when he died so I assume there was nothing to pass forward. 

It does not matter that RNRB did not exsist when your father died in 1996, it is transferable nonetheless albeit at the reduce rate of £100k when the  relief first came into exsistence  (section 8(g)(4) Inheritance Tax Act 1984) - and also see the Fred example in the link below

https://techzone.aberdeenadviser.com/public/iht-est-plan/residence-nil-rate-band-guide#:~:text=Any unused RNRB can be,occurred prior to its introduction.


https://www.legislation.gov.uk/ukpga/1984/51/section/8G#:~:text=[F18GMeaning of “brought,or after 6 April 2017.&text=(b)immediately before the other,person's spouse or civil partner.

Generally for those who had a parent that died prior to the introduction of the RNRB, the above point well worth keeping in mind (a £40k potential IHT saving for very little effort!).

alkynance

Very interesting thank you. I was not aware you could transfer any RNRB from that time. I believe we can claim the unused 175K RNRB from her second husband though which together with her own RNRB would cover the probate valuation of her property. As it states in that very useful case study you refer to "there's no requirement for the first spouse to have owned a share in a qualifying property or to have passed it to a direct descendant"