Calculating IHT when two life interest trusts are involved

alkynance

I am executor to my mother's will and currently have valued her free estate.

She had a life interest in her husband's house which is now left to his descendants. I understand the total IHT bill will be split between her free estate and the trust proportionately and the NRB/RNRB will also be shared.

Now I discover she had a life interest in another will trust set up in 1944 with three other people and the value of her quarter share can eventually be distributed to her daughter.

The trust confirms that my mother is "deemed to own the capital value of the trust for Inheritance Tax (IHT) purposes, and this is added to her estate on death.

 This is called AGGREGATION (S49(1) IHTA 1984). The trust value is merely added to calculate the IHT due on their death. If there is any IHT due, this will be divided, pro rata by value, between the trust and the deceased beneficiary's personal estate. The trust will pay its own share of tax. Aggregation has the effect of reducing the nil rate band in the deceased beneficiary's estate because the aggregable trust value shares a proportion of it with the deceased's own estate"

I have two questions.

Is the capital value of the trust which is added to her estate the value of the whole trust or just her part of it (a quarter share)?

How is the calculation of how much IHT each party pays made when two trusts are involved? Is each trust's percentage of IHT calculated in relation to the total chargeable value of the estate (which includes the other trust) or just in relation to the 'personal estate' as mentioned in the above statement which I take to mean her free estate?

Thanks in advance

poseidon1

Having regard to your previous post in April, are we to understand the 1944 trust has been newly discovered and is in addition to the 2nd husband house trust in your prior post?  Starting an entirely new thread without reference to what has forgone is not especially helpful.

Be that as it may,  to answer your new questions:

1) Just the value of  her quarter share.

2) Each trust will pay its proportional share of the overall IHT bill. The 1944 trust will 'eat ' a further proportion of your mother's NRB, as does the House trust.

If you are not assisted by a solicitor ( which I sense to be the case), you may wish to consult one in navigating IHT compliance issues with the 1944 life interest trust trustees, as well as the House trustees.

As previously reiterated all entities (your mums estate and the 2 trusts) are  subject to the same 6 month deadline to pay IHT. 

You have an increasingly complex scenario here which most forumites will not have encountered.

Keep_pedalling

Personally I would take professional advice, trust law has changed a hell of a lot since 1944

alkynance

poseidon1 said:

Having regard to your previous post in April, are we to understand the 1944 trust has been newly discovered and is in addition to the 2nd husband house trust in your prior post?  Starting an entirely new thread without reference to what has forgone is not especially helpful.

Be that as it may,  to answer your new questions:

1) Just the value of  her quarter share.

2) Each trust will pay its proportional share of the overall IHT bill. The 1944 trust will 'eat ' a further proportion of your mother's NRB, as does the House trust.

If you are not assisted by a solicitor ( which I sense to be the case), you may wish to consult one in navigating IHT compliance issues with the 1944 life interest trust trustees, as well as the House trustees.

As previously reiterated all entities (your mums estate and the 2 trusts) are  subject to the same 6 month deadline to pay IHT. 

You have an increasingly complex scenario here which most forumites will not have encountered.

Yes, apologies. I thought this being a new scenario it better to start afresh. Thank you for your clarifications which are very helpful.
We had taken advice from a specialist solicitor when we were only aware of the life interest in the house and have undertaken all work so far ourselves as it has been relatively straightforward.
However, the discovery of the second trust does make things more complicated and of course further dilutes my mother's NRB.
The 1944 trust trustees have sent me a form asking for information about the estate including its total value, NRB available etc, the sort of questions HMRC require on the IHT400 form. Is this normal and permitted practice?

poseidon1

alkynance said:

poseidon1 said:

Having regard to your previous post in April, are we to understand the 1944 trust has been newly discovered and is in addition to the 2nd husband house trust in your prior post?  Starting an entirely new thread without reference to what has forgone is not especially helpful.

Be that as it may,  to answer your new questions:

1) Just the value of  her quarter share.

2) Each trust will pay its proportional share of the overall IHT bill. The 1944 trust will 'eat ' a further proportion of your mother's NRB, as does the House trust.

If you are not assisted by a solicitor ( which I sense to be the case), you may wish to consult one in navigating IHT compliance issues with the 1944 life interest trust trustees, as well as the House trustees.

As previously reiterated all entities (your mums estate and the 2 trusts) are  subject to the same 6 month deadline to pay IHT. 

You have an increasingly complex scenario here which most forumites will not have encountered.

Yes, apologies. I thought this being a new scenario it better to start afresh. Thank you for your clarifications which are very helpful.
We had taken advice from a specialist solicitor when we were only aware of the life interest in the house and have undertaken all work so far ourselves as it has been relatively straightforward.
However, the discovery of the second trust does make things more complicated and of course further dilutes my mother's NRB.
The 1944 trust trustees have sent me a form asking for information about the estate including its total value, NRB available etc, the sort of questions HMRC require on the IHT400 form. Is this normal and permitted practice?

Absolutely normal and standard practice.

 The 1944 trustees have IHT liabilities of their own by reference to your mother's overall IHT position and they cannot establish and provide for their tax payments  ( within the proscribed deadline ) without asking the pertinent questions. Full transparency required here.

Also  bear in mind they may need to organise the sale of trust investments ( with associated trust  CGT liabilties) in computing the net payout due to your mother' s daughter. The sooner they  get the accurate information they need, the sooner they will be able to release what is ultimately due.

Bearing in mind you are now answerable to two separate sets of trustees, you may wish to revisit the solicitor for further assistance. As executor the buck stops with you if errors arise in the various  IHT commutations. At least with a solicitor handling that task, you would be protected by their professional Indemnity insurance if things went awry.

Hopefully this is the last surprise emerging from the woodwork in relation to your mother's IHT exposure.

alkynance

poseidon1 said:

alkynance said:

poseidon1 said:

Having regard to your previous post in April, are we to understand the 1944 trust has been newly discovered and is in addition to the 2nd husband house trust in your prior post?  Starting an entirely new thread without reference to what has forgone is not especially helpful.

Be that as it may,  to answer your new questions:

1) Just the value of  her quarter share.

2) Each trust will pay its proportional share of the overall IHT bill. The 1944 trust will 'eat ' a further proportion of your mother's NRB, as does the House trust.

If you are not assisted by a solicitor ( which I sense to be the case), you may wish to consult one in navigating IHT compliance issues with the 1944 life interest trust trustees, as well as the House trustees.

As previously reiterated all entities (your mums estate and the 2 trusts) are  subject to the same 6 month deadline to pay IHT. 

You have an increasingly complex scenario here which most forumites will not have encountered.

Yes, apologies. I thought this being a new scenario it better to start afresh. Thank you for your clarifications which are very helpful.
We had taken advice from a specialist solicitor when we were only aware of the life interest in the house and have undertaken all work so far ourselves as it has been relatively straightforward.
However, the discovery of the second trust does make things more complicated and of course further dilutes my mother's NRB.
The 1944 trust trustees have sent me a form asking for information about the estate including its total value, NRB available etc, the sort of questions HMRC require on the IHT400 form. Is this normal and permitted practice?

Absolutely normal and standard practice.

 The 1944 trustees have IHT liabilities of their own by reference to your mother's overall IHT position and they cannot establish and provide for their tax payments  ( within the proscribed deadline ) without asking the pertinent questions. Full transparency required here.

Also  bear in mind they may need to organise the sale of trust investments ( with associated trust  CGT liabilties) in computing the net payout due to your mother' s daughter. The sooner they  get the accurate information they need, the sooner they will be able to release what is ultimately due.

Bearing in mind you are now answerable to two separate sets of trustees, you may wish to revisit the solicitor for further assistance. As executor the buck stops with you if errors arise in the various  IHT commutations. At least with a solicitor handling that task, you would be protected by their professional Indemnity insurance if things went awry.

Hopefully this is the last surprise emerging from the woodwork in relation to your mother's IHT exposure.

Thank you for this. The explanation of the trust's obligations make complete sense. Thank you for your help once again

alkynance

Our IHT400 form was submitted and accepted and invoices received and part paid.

We have now discovered that the property we had assumed my mother owned was in fact split 50/50 between her and my father's discretionary trust set up in 1996. This came to light only because the accounts of the trust sent to us annually by the accountant made no mention of the 50% share of property so we had assumed the whole amount had passed to my mother on my father's death.

Question 1: Ordinarily such a trust would protect its contents and the 50% share from being considered part of the estate but as my mother continued to live in the house would its whole value be considered part of her estate for IHT purposes? The will trust makes no specific mention of interest in possession.

Question 2: I understand this will limit her RNRB to the value of her share in the property and she will be unable to claim transfer of unused RNRB above that amount?

Question 3: I'm assuming a letter explaining the error to HMRC is required as it involves not only corrective amounts (100% share of property 350K to 50% share 175K ) but also changes the allowable RNRB.

Question 4: One of the trusts has already paid its invoice. The new invoice will likely be higher. Should I inform them or are adjustments normal? The trust left a legacy to my mother which on her death passes to her daughter. We have not claimed the legacy yet or any other amounts from the estate  as we have obviously stalled probate application.

Thank you

poseidon1

alkynance said:

Our IHT400 form was submitted and accepted and invoices received and part paid.

We have now discovered that the property we had assumed my mother owned was in fact split 50/50 between her and my father's discretionary trust set up in 1996. This came to light only because the accounts of the trust sent to us annually by the accountant made no mention of the 50% share of property so we had assumed the whole amount had passed to my mother on my father's death.

Question 1: Ordinarily such a trust would protect its contents and the 50% share from being considered part of the estate but as my mother continued to live in the house would its whole value be considered part of her estate for IHT purposes? The will trust makes no specific mention of interest in possession.

Question 2: I understand this will limit her RNRB to the value of her share in the property and she will be unable to claim transfer of unused RNRB above that amount?

Question 3: I'm assuming a letter explaining the error to HMRC is required as it involves not only corrective amounts (100% share of property 350K to 50% share 175K ) but also changes the allowable RNRB.

Question 4: One of the trusts has already paid its invoice. The new invoice will likely be higher. Should I inform them or are adjustments normal? The trust left a legacy to my mother which on her death passes to her daughter. We have not claimed the legacy yet or any other amounts from the estate  as we have obviously stalled probate application.

Thank you

I am very concerned you are asking questions which infers you have taken on the primary role in providing relevant data and computations to what sounds like three different sets of trustees ( ie the 1944 tustees and the separate  trustees of houses 1 and 2 ) without professional assistance. 

My last post to this thread suggested you may wish to seek the assistance of a solicitor to navigate these issues on your behalf.

With this latest 'discovery' that the discretionary trust actually relates to house no 1 ( despite your previous assurance it did not), if you have not yet enlisted an experienced trust solicitor to assist you then you should do so immediately.

I am especially concerned that based on what sounds like  faulty information provided to one set of  trustees , they in reliance on this have received and paid an HMRC IHT assessment,  and maybe  habouring the mistaken belief that their IHT obligations have now been settled. Clearly from what you have now revealed, this is not the case and they should be warned promptly.

I have decided not to address any of your new questions, since responses thereto  are best left to a professional practitioner who you should properly brief and instruct in this matter. Frankly you do not want to find yourself negligent in the duty of care owed to the various trustees connected to your  deceased mother, and who need to have accruate computations of their IHT liabilties before winding up those trusts..

alkynance

poseidon1 said:

alkynance said:

Our IHT400 form was submitted and accepted and invoices received and part paid.

We have now discovered that the property we had assumed my mother owned was in fact split 50/50 between her and my father's discretionary trust set up in 1996. This came to light only because the accounts of the trust sent to us annually by the accountant made no mention of the 50% share of property so we had assumed the whole amount had passed to my mother on my father's death.

Question 1: Ordinarily such a trust would protect its contents and the 50% share from being considered part of the estate but as my mother continued to live in the house would its whole value be considered part of her estate for IHT purposes? The will trust makes no specific mention of interest in possession.

Question 2: I understand this will limit her RNRB to the value of her share in the property and she will be unable to claim transfer of unused RNRB above that amount?

Question 3: I'm assuming a letter explaining the error to HMRC is required as it involves not only corrective amounts (100% share of property 350K to 50% share 175K ) but also changes the allowable RNRB.

Question 4: One of the trusts has already paid its invoice. The new invoice will likely be higher. Should I inform them or are adjustments normal? The trust left a legacy to my mother which on her death passes to her daughter. We have not claimed the legacy yet or any other amounts from the estate  as we have obviously stalled probate application.

Thank you

I am very concerned you are asking questions which infers you have taken on the primary role in providing relevant data and computations to what sounds like three different sets of trustees ( ie the 1944 tustees and the separate  trustees of houses 1 and 2 ) without professional assistance. 

My last post to this thread suggested you may wish to seek the assistance of a solicitor to navigate these issues on your behalf.

With this latest 'discovery' that the discretionary trust actually relates to house no 1 ( despite your previous assurance it did not), if you have not yet enlisted an experienced trust solicitor to assist you then you should do so immediately.

I am especially concerned that based on what sounds like  faulty information provided to one set of  trustees , they in reliance on this have received and paid an HMRC IHT assessment,  and maybe  habouring the mistaken belief that their IHT obligations have now been settled. Clearly from what you have now revealed, this is not the case and they should be warned promptly.

I have decided not to address any of your new questions, since responses thereto  are best left to a professional practitioner who you should properly brief and instruct in this matter. Frankly you do not want to find yourself negligent in the duty of care owed to the various trustees connected to your  deceased mother, and who need to have accruate computations of their IHT liabilties before winding up those trusts..

Thank you for your reply. I am of course extremely concerned that one set of trustees may believe their IHT obligations have been fulfilled and we will of course be contacting both them and HMRC immediately. We did consult a specialist probate lawyer at the outset of this and have worked in very close collaboration with both sets of trustees to ensure their information was accurate and submitted correctly. Ironically our mistake regarding my mother's ownership of her house was based on the records of her own accountant and trust administrator of 20 years and I had not thought to challenge his records. The probate lawyer told us my father's discretionary trust sat outside my mother's estate for IHT purposes but discovery of a 50% share in my mother's property changes that. We will revisit the probate lawyer to ensure that any corrections are accurate and final. I only posted questions here to get some guidance before that meeting. Thank you again.