Help with IHT following death of already deceased father's widow.

miguelmoya

NorthYorkie, thank you too. Is it just me or would you agree that it us unfair to charge a person IHT when their estate does not reach the £325k sum.......... Interestingly the same lawyer drew up my dad's will so I would love to know if this could have been avoided?

miguelmoya

NorthYorkie, thank you too. Is it just me or would you agree that it us unfair to charge a person IHT when their estate does not reach the £325k sum.......... Interestingly the same lawyer drew up my dad's will so I would love to know if this could have been avoided?

Keep_pedalling

NorthYorkie said:

As second wife had a life interest in the trust assets (1/3 share of house + anything else), she is regarded as the beneficial owner of those assets and therefore their value is treated as part of her estate for IHT purposes. If this and her 'free estate' exceeds the available nil rate bands then IHT will be due on the total value. That liability is to be shared between the trustee of your father's will trust and the second wife's executors and will be apportioned pro rata to the respective values. So the solicitors are right.

If the trust has no other assets out of which its liability can be paid then it looks like the property (or at least its share thereof) will need to be sold, either jointly with the executors or maybe on its own to whoever inherits the remaining 2/3rds under the second wife's will. The tax may be paid by instalments.

I am not sure the trust has a liability for IHT as it is well below the transferable exemptions and should be covered by them and the IHT should be met by the residual estate. If he had left his children his share outright his estate would have had no liability at all (although CGT might be payable instead) and her estate would be unaffected as although some of the TNRB would be lost the estate would be lowered by the same amount.

If you are correct there is then the question of how the IHT would be apportioned and there is room for error there so I think it would be wise for the OP to seek professional advice to protect her interests, she should certainly not rely on a solicitor who is employed by a 3rd party. 

poseidon1

miguelmoya said:

NorthYorkie, thank you too. Is it just me or would you agree that it us unfair to charge a person IHT when their estate does not reach the £325k sum.......... Interestingly the same lawyer drew up my dad's will so I would love to know if this could have been avoided?

As advised  the widow's total estate ( including full value of the house ) would ordinarily need to be well north of  £1 million to be in IHT territory but that  assumed your father gifted his entire estate on death to his partner. However, you have stated he made bequests to his children and grandchildren which impacted his £325k available to his widow. 

However, for simplicity of the following example  let's assume £1 million of NRBs is fully available. Let's also assume ( for this exercise) widow's other assets total £650k giving her a total taxable estate of say £1.2 million including the £550k house.

Let's say, for purposes of  the transferable resident nil rate bands the house attracts the full £350k residence NRBs based on you and your siblings being treated as a step children in relation to the widow. So £200k of property value now exposed to IHT. Add this to the £650k of widow's personal assets total of £850k exposed to tax with £650k NRB to shelter, netting the taxable estate down to £200k. House represents 23.53% of tax exposed assets, so pays 23.53% of IHT

Drilling down to the trust you benefit from, at 1/3rd of value of the property, it will therefore be liable to 1/3rd of tax attributable to the property.

What you need to understand ( as indeed all blended families in this situation), the trust does not get to enjoy direct benefit of the NRBs derived from the 1st deceased spouse. The transferable NRBs shelter the entire asset base of the surviving spouse, and the trust only indirectly  benefits from those NRBs. 

I think you seem to be of the view your father's £175k RNRB should be specifically allocated  to your trust in isolation. I suspect that would have needed to be spelled out in his will in express terms, but depending on when your father's will was prepared did the RNRB even exist? You say he passed 10 years ago. RNRB introduced 2017.

As such, your father having married a much wealthier woman, his modest estate actually benefited hers disproportionately.

Based on the above numbers:

1) IHT on £200k = £80k
2) House share of IHT = 23.53% = £18,824
3) Trust share of tax above = 1/3rd = £6,274

 Also worth noting that if widow had made any lifetime gifts that failed the 7 year survival  test, this would eat into her own nil rate band, again with adverse consequences on the trust.

However as indicated earlier we know from what you stated , your father did not have full £325k to give to widow, so the above numbers  would change ( for the worse ) in any event.

These kinds of outcomes only tend to apply to blended family situations where trust remainderman differ from the heirs of the last deceased spouse,  so not a situation most people will have encountered, but of course becoming more common.

Whether your father's Will could have been drafted to achieve a more favourable outcome to his children maybe questionable  ( given no RNRB  exsisted when he passed). The wealth disparity between them during their joint lifetime  may also  be a factor.

Has suggested by Keep_pedalling, you should certainly retain your own advice to double check the methodology used by the solicitors in allocating the IHT liabilities between trust and deceased estate, having regard to the terms of both wills.

Keep_pedalling

I doubt whether this is a very common situation. The point of IPDIT in blended families is to protect both the children of the deceased and the security of the surviving spouse. Where a surviving spouse is considerably wealthier that the deceased spouse the surviving spouse already has financial security and therefore an IPDIT may no longer be the most appropriate option.

mybestattempt

poseidon1 said:

miguelmoya said:

NorthYorkie, thank you too. Is it just me or would you agree that it us unfair to charge a person IHT when their estate does not reach the £325k sum.......... Interestingly the same lawyer drew up my dad's will so I would love to know if this could have been avoided?

As advised  the widow's total estate ( including full value of the house ) would ordinarily need to be well north of  £1 million to be in IHT territory but that  assumed your father gifted his entire estate on death to his partner. However, you have stated he made bequests to his children and grandchildren which impacted his £325k available to his widow. 

However, for simplicity of the following example  let's assume £1 million of NRBs is fully available. Let's also assume ( for this exercise) widow's other assets total £650k giving her a total taxable estate of say £1.2 million including the £550k house.

Let's say, for purposes of  the transferable resident nil rate bands the house attracts the full £350k residence NRBs based on you and your siblings being treated as a step children in relation to the widow. So £200k of property value now exposed to IHT. Add this to the £650k of widow's personal assets total of £850k exposed to tax with £650k NRB to shelter, netting the taxable estate down to £200k. House represents 23.53% of tax exposed assets, so pays 23.53% of IHT

Drilling down to the trust you benefit from, at 1/3rd of value of the property, it will therefore be liable to 1/3rd of tax attributable to the property.

What you need to understand ( as indeed all blended families in this situation), the trust does not get to enjoy direct benefit of the NRBs derived from the 1st deceased spouse. The transferable NRBs shelter the entire asset base of the surviving spouse, and the trust only indirectly  benefits from those NRBs. 

I think you seem to be of the view your father's £175k RNRB should be specifically allocated  to your trust in isolation. I suspect that would have needed to be spelled out in his will in express terms, but depending on when your father's will was prepared did the RNRB even exist? You say he passed 10 years ago. RNRB introduced 2017.

As such, your father having married a much wealthier woman, his modest estate actually benefited hers disproportionately.

Based on the above numbers:

1) IHT on £200k = £80k
2) House share of IHT = 23.53% = £18,824
3) Trust share of tax above = 1/3rd = £6,274

 Also worth noting that if widow had made any lifetime gifts that failed the 7 year survival  test, this would eat into her own nil rate band, again with adverse consequences on the trust.

However as indicated earlier we know from what you stated , your father did not have full £325k to give to widow, so the above numbers  would change ( for the worse ) in any event.

These kinds of outcomes only tend to apply to blended family situations where trust remainderman differ from the heirs of the last deceased spouse,  so not a situation most people will have encountered, but of course becoming more common.

Whether your father's Will could have been drafted to achieve a more favourable outcome to his children maybe questionable  ( given no RNRB  exsisted when he passed). The wealth disparity between them during their joint lifetime  may also  be a factor.

Has suggested by Keep_pedalling, you should certainly retain your own advice to double check the methodology used by the solicitors in allocating the IHT liabilities between trust and deceased estate, having regard to the terms of both wills.

I'm afraid I don't agree with your method for calculating the attribution of IHT.

RNRB isn't an exemption or relief for the property it's applied to the entire estate on death and attribution of the IHT liability would be based on the value of the trust property and the value of the other estate assets.

Using the values from your example but based upon my understanding the position would be:

Trust property     £550000
Other assets       £650000

Total                   £1200000
Nil rate bands    £1000000
                     
Charged @ 40% £200000

IHT                      £80000

IHT attributable to the trust property:

£80000 x £550000/£1200000 = £36667 (and one third of the trust property liability is £12222)

poseidon1

mybestattempt said:

poseidon1 said:

miguelmoya said:

NorthYorkie, thank you too. Is it just me or would you agree that it us unfair to charge a person IHT when their estate does not reach the £325k sum.......... Interestingly the same lawyer drew up my dad's will so I would love to know if this could have been avoided?

As advised  the widow's total estate ( including full value of the house ) would ordinarily need to be well north of  £1 million to be in IHT territory but that  assumed your father gifted his entire estate on death to his partner. However, you have stated he made bequests to his children and grandchildren which impacted his £325k available to his widow. 

However, for simplicity of the following example  let's assume £1 million of NRBs is fully available. Let's also assume ( for this exercise) widow's other assets total £650k giving her a total taxable estate of say £1.2 million including the £550k house.

Let's say, for purposes of  the transferable resident nil rate bands the house attracts the full £350k residence NRBs based on you and your siblings being treated as a step children in relation to the widow. So £200k of property value now exposed to IHT. Add this to the £650k of widow's personal assets total of £850k exposed to tax with £650k NRB to shelter, netting the taxable estate down to £200k. House represents 23.53% of tax exposed assets, so pays 23.53% of IHT

Drilling down to the trust you benefit from, at 1/3rd of value of the property, it will therefore be liable to 1/3rd of tax attributable to the property.

What you need to understand ( as indeed all blended families in this situation), the trust does not get to enjoy direct benefit of the NRBs derived from the 1st deceased spouse. The transferable NRBs shelter the entire asset base of the surviving spouse, and the trust only indirectly  benefits from those NRBs. 

I think you seem to be of the view your father's £175k RNRB should be specifically allocated  to your trust in isolation. I suspect that would have needed to be spelled out in his will in express terms, but depending on when your father's will was prepared did the RNRB even exist? You say he passed 10 years ago. RNRB introduced 2017.

As such, your father having married a much wealthier woman, his modest estate actually benefited hers disproportionately.

Based on the above numbers:

1) IHT on £200k = £80k
2) House share of IHT = 23.53% = £18,824
3) Trust share of tax above = 1/3rd = £6,274

 Also worth noting that if widow had made any lifetime gifts that failed the 7 year survival  test, this would eat into her own nil rate band, again with adverse consequences on the trust.

However as indicated earlier we know from what you stated , your father did not have full £325k to give to widow, so the above numbers  would change ( for the worse ) in any event.

These kinds of outcomes only tend to apply to blended family situations where trust remainderman differ from the heirs of the last deceased spouse,  so not a situation most people will have encountered, but of course becoming more common.

Whether your father's Will could have been drafted to achieve a more favourable outcome to his children maybe questionable  ( given no RNRB  exsisted when he passed). The wealth disparity between them during their joint lifetime  may also  be a factor.

Has suggested by Keep_pedalling, you should certainly retain your own advice to double check the methodology used by the solicitors in allocating the IHT liabilities between trust and deceased estate, having regard to the terms of both wills.

I'm afraid I don't agree with your method for calculating the attribution of IHT.

RNRB isn't an exemption or relief for the property it's applied to the entire estate on death and attribution of the IHT liability would be based on the value of the trust property and the value of the other estate assets.

Using the values from your example but based upon my understanding the position would be:

Trust property     £550000
Other assets       £650000

Total                   £1200000
Nil rate bands    £1000000
                     
Charged @ 40% £200000

IHT                      £80000

IHT attributable to the trust property:

£80000 x £550000/£1200000 = £36667 (and one third of the trust property liability is £12222)

I unreservedly agree your revision to my 'what if' calculation.

Ironically, when intially constructing the scenario that was the original outcome, consistent with my statement the NRBs are applied wholly to deceased's estate. However, inexplicably  I departed from that principle and reworked the calculation ( incorrectly) to produce the lower tax attributable to the property and then to the trust.

Hopefully, the scenario ( as corrected by you) , satisfactorily explains to the  OP the reason behind the relatively small trust fund attracting an IHT liabilty.