Additional Residential NRB

se2020

Mother has passed,
Survived by partner (not married)
Executor (myself) named as trustee 

Property has been valued (Estate agent only at this stage) at £285-300k.

Approximately £100k in cash savings.

The will says
5. Life interest in (address of property)
5.1. In this clause:
  5.1.1 'the life tennant' shall be my partner (name)
  5.1.2 the 'property trustee' shall mean my trustee for the time being
5.1.3 'the trust period' shall be the period between my death and the death of the life tenant or until the life tenant has taken up permanent residence in a residential care home or nursing home.

5.1.4 'the trust fund' shall mean my property whether leasehold or freehold which - own at the date of my death and known as (address) together with the furniture, carpets, curtains and other articles of household use or ornament therein not otherwise specifically gifted by my Wll or any codicil.

5.2 I give the trust fund to the property trustee to hold upon the following trusts:

5.2.1 The property trustee shall pay the income of the trust fund to the life tenant for the trust period if the life tenant shall survive me by 30 days

5.2.2 the property trustee may at any time during the trust period as to the whole or any part of the trust fund in which the life tenant has for the time being an interest in possession 

i. lend money or assets comprised in the trust fund to the life tenant on such terms (whether including provision for the payment of interest) as the property trustee may think fit or

ii. pay out of any proceeds of sale of this property or any substituted property (purchased as a result of this subclause) to purchase a freehold or leasehold property which will be held for the benefit of the life tenant on the same trusts to which this clause refers

5.3 Subject as above the property trustee shall permit the life tenant to occupy or use rent free any property or assets which or the beneficial interest in which is for the time being comprised in the trust fund subject to the life tenant paying all rates, taxes and other outgoings of a recurring nature in respect of the trust fund including insurance premiums maintaining the property in the trust fund in a good and tenantable repair to the satisfaction of the property trustee not to substantially alter the property without the prior consent of the property trustee, allowing the property trustee to enter and inspect the property after being given reasonable notice.

5.4. Subject to the above, the property trustees shall hold the capital and income of the trust fund for (names of beneficiaries)

My question,
The beneficiaries are both children of the deceased, so can the additional NRB of £175k be claimed for inheritance tax?
Thanks!

Keep_pedalling

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

se2020

Keep_pedalling said:

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

No, not widowed,  divorced. Dad has since remarried. 

If mum's house is now owned by the trust then how does it form part of her partners estate for IHT?
That sounds like the same asset would be taxed twice?

My understanding of the will is that the mothers estate will pay IHT now then the children will receive the full value of the house, with no further tax, when her partner has finished with it.

This sounds very unfair on mums partners children as, if their dad dies 31 days after my mother, they (his estate) would have to pay IHT on the value of our inheritance?

Keep_pedalling

se2020 said:

Keep_pedalling said:

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

No, not widowed,  divorced. Dad has since remarried. 

If mum's house is now owned by the trust then how does it form part of her partners estate for IHT?
That sounds like the same asset would be taxed twice?

My understanding of the will is that the mothers estate will pay IHT now then the children will receive the full value of the house, with no further tax, when her partner has finished with it.

This sounds very unfair on mums partners children as, if their dad dies 31 days after my mother, they (his estate) would have to pay IHT on the value of our inheritance?

Although the trust is now the legal owner of the property, beneficial ownership resides with your mother’s partner and it is beneficial ownership that is subject to IHT,

Unfortunately many solicitors and will writers are not aware of the IHT consequences of trusts where unmarried partners are concerned so do not warn their clients about this or recommend they marry or form a civil partnership if they put this in there wills.

Does he have enough assets of his own that would allow him to fund a house of his own?

poseidon1

se2020 said:

Keep_pedalling said:

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

No, not widowed,  divorced. Dad has since remarried. 

If mum's house is now owned by the trust then how does it form part of her partners estate for IHT?
That sounds like the same asset would be taxed twice?

My understanding of the will is that the mothers estate will pay IHT now then the children will receive the full value of the house, with no further tax, when her partner has finished with it.

This sounds very unfair on mums partners children as, if their dad dies 31 days after my mother, they (his estate) would have to pay IHT on the value of our inheritance?

Regrettably that's how life interest trusts operate and have always operated.

In view of this it is always inappropriate ( in my view) for the parties to these 'blended' family arrangements not to marry, especially with children on each side.

By failing to marry the IHT consequences can be magnified.

Depending on the value of the house there can be IHT payable on the gift into life interest trust (if house value exceeds the NRB). 

With the house now in the partner's estate, this is  then added to their personal assets and if the two combined exceed his NRB on eventual death, both the trust and his personal estate pay IHT split proportionately.

Then the final insult added to injury, is the children entitled to the house on death are deprived access to the residence NRB of £175k because the surviving partner is not related to the children by marriage.

One has to ask oneself is if these consequences are properly explained to unmarried individuals, why on earth would they not marry? 

Difficult as it maybe to believe, the reason in some cases is some solicitors opt not to give tax advice when drafting wills ( they don't want responsibility for getting it wrong), so couples remain clueless as to adverse outcomes of failing to marry.

However, we have seen occasions on this forum, where these consequences are explained, the OP still insist they dont wish to marry.

OP in the case of your mother, no idea which camp she falls within, but either way the adverse consequences are the same.

se2020

Keep_pedalling said:

se2020 said:

Keep_pedalling said:

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

No, not widowed,  divorced. Dad has since remarried. 

If mum's house is now owned by the trust then how does it form part of her partners estate for IHT?
That sounds like the same asset would be taxed twice?

My understanding of the will is that the mothers estate will pay IHT now then the children will receive the full value of the house, with no further tax, when her partner has finished with it.

This sounds very unfair on mums partners children as, if their dad dies 31 days after my mother, they (his estate) would have to pay IHT on the value of our inheritance?

Although the trust is now the legal owner of the property, beneficial ownership resides with your mother’s partner and it is beneficial ownership that is subject to IHT,

Unfortunately many solicitors and will writers are not aware of the IHT consequences of trusts where unmarried partners are concerned so do not warn their clients about this or recommend they marry or form a civil partnership if they put this in there wills.

Does he have enough assets of his own that would allow him to fund a house of his own?

He already owns a property outright. 
I do not think the solicitors who did the will(s) were/are aware of this at all.

The will(s) were recently written after mother became terminally ill.
The family's understanding (which everyone agreed with when the will was done) was that the mothers children would inherit mothers 'cash' upon her passing.
The mothers property (rented out) would provide an income to her partner for life and then pass to her children.
His child would then inherit his house outright.

Mothers partner does not have any cash assets (but his house is worth more than mums) so the intention was to split the assets from both of them 50/50 between her and his children.

Ie, mums estate is worth £400k (300 house + 100 cash),
His estate is just a house worth £400k.

But it sounds like mums estate will have to pay IHT of £30k (on £75k)
And her partners estate will have to pay £80k (on £200k) as the value of that estate will be £700k.
That's presuming his child can use the full £500k allowance as they will be directly inheriting his house.
Or could that potentially be reduced they will only be inheriting his house that is only worth £400k?

I understand the part about him having beneficial ownership of a £300k asset but is that really what it is taxed on?
If the current rent for the house was £1000 a month he would have to live for another 25 years to receive £300k worth of 'benefit' from it!

Keep_pedalling

se2020 said:

Keep_pedalling said:

se2020 said:

Keep_pedalling said:

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

No, not widowed,  divorced. Dad has since remarried. 

If mum's house is now owned by the trust then how does it form part of her partners estate for IHT?
That sounds like the same asset would be taxed twice?

My understanding of the will is that the mothers estate will pay IHT now then the children will receive the full value of the house, with no further tax, when her partner has finished with it.

This sounds very unfair on mums partners children as, if their dad dies 31 days after my mother, they (his estate) would have to pay IHT on the value of our inheritance?

Although the trust is now the legal owner of the property, beneficial ownership resides with your mother’s partner and it is beneficial ownership that is subject to IHT,

Unfortunately many solicitors and will writers are not aware of the IHT consequences of trusts where unmarried partners are concerned so do not warn their clients about this or recommend they marry or form a civil partnership if they put this in there wills.

Does he have enough assets of his own that would allow him to fund a house of his own?

He already owns a property outright. 
I do not think the solicitors who did the will(s) were/are aware of this at all.

The will(s) were recently written after mother became terminally ill.
The family's understanding (which everyone agreed with when the will was done) was that the mothers children would inherit mothers 'cash' upon her passing.
The mothers property (rented out) would provide an income to her partner for life and then pass to her children.
His child would then inherit his house outright.

Mothers partner does not have any cash assets (but his house is worth more than mums) so the intention was to split the assets from both of them 50/50 between her and his children.

Ie, mums estate is worth £400k (300 house + 100 cash),
His estate is just a house worth £400k.

But it sounds like mums estate will have to pay IHT of £30k (on £75k)
And her partners estate will have to pay £80k (on £200k) as the value of that estate will be £700k.
That's presuming his child can use the full £500k allowance as they will be directly inheriting his house.
Or could that potentially be reduced they will only be inheriting his house that is only worth £400k?

I understand the part about him having beneficial ownership of a £300k asset but is that really what it is taxed on?
If the current rent for the house was £1000 a month he would have to live for another 25 years to receive £300k worth of 'benefit' from it!

His estate will now be £700K for IHT purposes and will be subject to IHT unless he was widowed before he met your mother. If he is a widower then it is likely that his estate will escape the IHT liability as his estate will be able to claim the RNRB and will have the transferable NRB from his wife.

If that is not the case then it may be possible to reduce or avoid IHT on both estates through making deeds of variation. It sounds like you are all on good terms so if for example he agrees to forgo the life interest in exchange for a cash lump sum from your mother’s estate there would be no IHT to pay on her estate and it would at least reduce the IHT on his. This would also overcome him being asset rich and cash poor, and would avoid the trustees having the burden of managing a rental property.

Time for a family meeting I think. 

poseidon1

se2020 said:

Keep_pedalling said:

se2020 said:

Keep_pedalling said:

The answer is no, as the property is not being left to directly to her children. This is a major problem with IPDI trusts where the beneficiary of the trust is not a spouse. Legal ownership of the house now lies with the trust, but beneficial ownership resides with her partner until his death. That beneficial ownership also means the house now forms part of his estate for IHT purposes. 

Was your mother widowed from your father? If she was then any of his unused NRB is transferable to her estate.

No, not widowed,  divorced. Dad has since remarried. 

If mum's house is now owned by the trust then how does it form part of her partners estate for IHT?
That sounds like the same asset would be taxed twice?

My understanding of the will is that the mothers estate will pay IHT now then the children will receive the full value of the house, with no further tax, when her partner has finished with it.

This sounds very unfair on mums partners children as, if their dad dies 31 days after my mother, they (his estate) would have to pay IHT on the value of our inheritance?

Although the trust is now the legal owner of the property, beneficial ownership resides with your mother’s partner and it is beneficial ownership that is subject to IHT,

Unfortunately many solicitors and will writers are not aware of the IHT consequences of trusts where unmarried partners are concerned so do not warn their clients about this or recommend they marry or form a civil partnership if they put this in there wills.

Does he have enough assets of his own that would allow him to fund a house of his own?

He already owns a property outright. 
I do not think the solicitors who did the will(s) were/are aware of this at all.

The will(s) were recently written after mother became terminally ill.
The family's understanding (which everyone agreed with when the will was done) was that the mothers children would inherit mothers 'cash' upon her passing.
The mothers property (rented out) would provide an income to her partner for life and then pass to her children.
His child would then inherit his house outright.

Mothers partner does not have any cash assets (but his house is worth more than mums) so the intention was to split the assets from both of them 50/50 between her and his children.

Ie, mums estate is worth £400k (300 house + 100 cash),
His estate is just a house worth £400k.

But it sounds like mums estate will have to pay IHT of £30k (on £75k)
And her partners estate will have to pay £80k (on £200k) as the value of that estate will be £700k.
That's presuming his child can use the full £500k allowance as they will be directly inheriting his house.
Or could that potentially be reduced they will only be inheriting his house that is only worth £400k?

I understand the part about him having beneficial ownership of a £300k asset but is that really what it is taxed on?
If the current rent for the house was £1000 a month he would have to live for another 25 years to receive £300k worth of 'benefit' from it!

OP, no point trying to fathom why the entire value of your mother's house is now in her partner's estate, the tax rules for trusts simply dictate this is the case regardless of what income can be generated by the underlying asset.  I repeat the  adverse  IHT outcome is purely  because they refused to marry.

As to IHT liabilty you identfied (£30k), how that will be split depends entirely on whether she expressed any of the bequests to be IHT free. 

  If ( which would be natural) she indicated your cash gifts to be IHT free, then the property trust for the partner bears the entire liabilty. The reverse is also the case. If the will is completely silent on the question, both bequests bear the liabilty proportionately.

Just to add some further complexity, it would not be a good idea to retain the property as an ongoing trust rental asset. The reason why, is the trustees have not been bequeathed an additional pot of capital cash to deal with future capital improvements/renovations to the property. Such capital costs cannot be taken from rents that belong to life tenant, and I would be surprised if you as trustee would be happy to do so from your own pocket.

Accordingly, and depending on the survivor's current age and future life expectancy , the  trustee will need to get their head around the prospect of the trust fund being invested in a stockmarket portfolio to produce capital growth as well as life tenant income.

There is of course also the annual HMRC trust self assessment tax reporting which goes with these trust arrangements.

A lot to take on and comprehend for those who have had no previous exposure to such matters. 

Regrettably, you have now been thrown into the deep end of a  complex estate/trust arrangement with no advance notice or chance to prepare for the onerous obligations you have been burdened with. I remain surprised that many parents set up wills incorporating complex trusts without ever warning or involving their children  in the advisory planning process from outset, so that this ( as in your case) now comes as an uncomfortable surprise.