Declaration of Trust or a Restriction?

houndtang

My father passed a few years ago and his share in his house passed to my stepmother. She has left the share in the property to me in her will. However, I have some concerns that for various reasons the house might be sold/transferred before I can inherit.

I have received some conflicting advice about how best to protect my interest. Either a declaration of trust agreed by my stepmother, or a restriction - again agreed by my stepmother - placed on the Land Registry preventing a disposition without my consent.

Does anyone have a view on this? Thank you.

Keep_pedalling

Did your father’s will leave her the right to continue to live there?

In general it is a bad idea to leave a specific property to anyone without clauses covering the possibility it will be no longer owned by the time of death. 

Linton

I assume from your second paragraph that your stepmother is still alive and hopefully compos mentis.

If stepmother does actually own part of the house she is at liberty to do what she wants with it.  If she no longer owns the house at death your inheritance from her fails.  You have no interest in it until she dies. 

A clear answer to Keep_pedaling's question is vital to understanding the situation, in particular who precisely owns the house.  If step mother merely has the right to continue living there and does not actually own it whether it can be sold should be clear from Father's will. 

houndtang

There were issues with my father’s will but to cut the long story short, yes she owns it. They were joint tenants and his share passed to her upon his death.

I understand she is at liberty to do what she wants with it but my concern is that third parties may influence the situation down the line hence I am keen to get a more formal arrangement in place - obviously with her agreement.

Keep_pedalling

Unfortunately there is little you can do, your father really should have given her a life interest rather than leave it to her absolutely. 

poseidon1

houndtang said:

There were issues with my father’s will but to cut the long story short, yes she owns it. They were joint tenants and his share passed to her upon his death.

I understand she is at liberty to do what she wants with it but my concern is that third parties may influence the situation down the line hence I am keen to get a more formal arrangement in place - obviously with her agreement.

Short answer, since your father failed to protect his half share of the property on your behalf by way of a trust established under his will ( as intimated by Keep_pedalling), she is free to pass the entire property to whomever she pleases under her own will.

I cannot see you have any basis for an enforceable restriction on title ( by itself ) since you have neither an equitable or legal interest in the property,  merely a hope.

Seems to me only a voluntary and irrevocable declaration of trust by step mother can achieve the security you require but that comes with its own complications.

The trust would state that the property ( or income derived from it ) would be held on life interest trust for herself, and on death the property ( or investments representing the same ) pass to you as sole beneficiary. You could be appointed co trustee with an appropriate form A restriction on title forbidding a sale ( or other dispostion) without both trustees acting in concert.

The complications:

1 ) If the property is valued in excess of your stepmother's NRB ( £325k), the excess is taxable at lifetime rate of 20%. For obvious reasons the residence nil rate band ( £175k) is not available. If Stepmother dies within 7 years, the 20% IHT charge is topped up by a further 20% - see HMRC link

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42252

2) The trust has to be registered on HMRC's trust register within 90 days of creation. Not especially onerous but just the start of HMRC compliance.

3) Where the value of the trust property exceeds 80% of NRB, a form IHT 100 has to be submitted  to HMRC, to agree the valuation basis used.

4) Every 10th anniversary of the trust creation, the trust is revalued. If the value exceeds the NRB at that time an IHT charge of 6% of the excess arises. A problem if the trust has no cash at that time.

6) On termination of the trust ( on death) the property ( or investments) are amalgamated with the deceased's personal assets in determining the overall IHT liability at that time.

7) Obviously professional costs arise, which would only be fair for you to bear in their entirety since the whole arrangement is for your benefit.

The sad thing here, is the trust I mentioned could have been setup from your father's defacto half share within 2 years of his death by way of a voluntary deed of variation by your stepmother.  Such a variation would have created an IPDI trust, thereby side stepping some of the IHT complications mentioned above.

I suspect the solicitor involved at that time had neither the knowledge or competency to explore that possibility, so now water under the bridge.

houndtang

Thanks very much for the detailed response. Nothing is simple ! 

The property currently valued at over 400k so sounds like IHT issues would be in play. How would that work if the trust was only for a half share in the property ? Or is that not feasible?

Keep_pedalling

houndtang said:

Thanks very much for the detailed response. Nothing is simple ! 

The property currently valued at over 400k so sounds like IHT issues would be in play. How would that work if the trust was only for a half share in the property ? Or is that not feasible?

If your step mother inhered everything from your father, then her estate will be able to use his NRB as well doubling up her exemption to £650k and if her estate is inherited by children and step children there are also two lots of residential NRB that can be claimed taking the exemptions to £1M. 

poseidon1

houndtang said:

Thanks very much for the detailed response. Nothing is simple ! 

The property currently valued at over 400k so sounds like IHT issues would be in play. How would that work if the trust was only for a half share in the property ? Or is that not feasible?

For your purposes and if she is willing, then certainly placing 50% of the property in a life time trust for her own benefit ( and then onto you), would avoid IHT going in and no need for the form IHT 100 (£200k being markedly less than 80% of her nil rate band). As indicated, you become co trustee with her with a form A restriction in place so you are able to block any disposal that harms your 50% expectant trust interest.

The property value would have to appreciate considerably above the rate of inflation, for the trust's half share to get anywhere near £325k in 10 years time, so a 10 year charge unlikely.

The other 50% is of course at risk from her changing her will in favour of someone else, so that part remains at risk from the potential influences you mention. 

Therefore if you stepmother is willing, this could be an option but it is definitely not a DIY excercise, you will need to engage a STEP qualified lawyer to prepare the relevant deed, after having advised the relevant parties appropriately.

houndtang

Thanks again, very helpful