Inheritance tax (IHT) when you live in a property half owned by wife's children

Duncndive

When my wife and I got wills made out, we arranged it so when either of us died, ownership of that person's half share of our house went to their own adult children, though whichever of us remained could live there (or subsequent property) for as long as required.

After that second death, on sale of the house, half its value would go to my kids, half to hers.

Now she has died, and a trust set up for her kids, so they now 'own' half the house. (Which in itself is fine). She had to pay IHT on her asset of the value of her half-share of the house.

But I have been advised that when I die, regarding any IHT my kids will have to sort out, HMRC will assume I owned the entire house, not half of it. This is not and never has or will be the case.

So it seems a bit of a money spinner by HMRC. And means my kids will lose a fair amount of their own inheritance, my estate being calculated as including the value of the whole property.

Is this right, and if so, can anyone suggest what could be done about it?

Thanks.

RAS

Who were the executors of your wife's will? And in which country was she domiciled (Scottish law can be very different)?

Can we confirm that the house was held as tenants in common rather than a single joint tenancy?

What was the value of your wife's estate, including the house and other assets and savings? Was any of this transferred directly to her children?

The usual way of dealing with complex/blended families is to create an Immediate Post Death Interest Trust which allows the spouse to remain in residence and specifies what happens if they downsize or move into care. The children can't access any of the money until the second death. It doesn't create additional IHT liabilities and avoids creating future CGT liabilities or issues around divorce, benefits and insolvency.

It could help if you could copy out the section that covers the house (minus names) as people can help you better. Your post count means you are unlikely to be able to scan and insert a file.

Albermarle

is to create an Immediate Post Death Interest Trust which allows the spouse to remain in residence and specifies what happens if they downsize or move into care. The children can't access any of the money until the second death.

OP - As above, A Post Death Interest Trust is the usual way of dealing with this situation. I suspect from what you say, some different arrangement was in the will?

Keep_pedalling

There should be no IHT to pay on the first death (unless she she left over £325k in other assets to her children) Legal ownership of her share is in trust but beneficial ownership passes to the surviving spouse so is covered by spousal exemption and on your death the whole house forms part of your estate but your estate can claim any unused transferable NRB and the transferable RNRB is also available.

If your estate falls in IHT territory then it will not fall entirely on your children’s share of the estate some will come from your wife’s children’s share.

poseidon1

https://forums.moneysavingexpert.com/discussion/6663247/inheritance-tax-iht-when-you-live-in-a-property-half-owned-by-wifes-children

Assuming @Keep_pedalling is correct and your wife gifted other assets in excess of the NRB to children ( or anyone else), then as indicated the half share of house in trust for you should have been wholly IHT free. Perhaps you could explain how it came about IHT was levied on the half share of the house.

Assuming your wife's children are co trustees of the house trust going forward, it is not correct that your children alone are lumbered with dealing with any IHT that might arise on your eventual death.

Any IHT is shared proportionally between your personal estate and the trust, after both have benefited from a proportionate share of any NRBs then available at that time.

This may be a problem for your wife's children since they ( like your children) are required to pay the trust's IHT 6 months after death, despite the house remaining unsold at that time. Yes, they can elect to pay 10% of the tax due on the trust share and defer the rest, but they still have to find that 10%.

Your children by contrast may have access to liquidity from other cash/investments assets you might leave and therefore in a much better postion to settle all IHT due on your personal estate without have to resort to the 10% instalment option on your share of the property. Your children are in no way obliged to deal with IHT on the house trust and HMRC will not be looking to them to settle that separate liabilty.

Your wife's children should be made aware of this fact (assuming they don't already know) and perhaps should plan to have sufficient personal monies of their own available to at least cover 10% of the IHT due on the trust when the time comes.

If you are amenable a permanent life policy on your life in favour of your wife's children to cover the 10% IHT instalment could assist them, with them being responsible for paying the premiums.

As well to note, HMRC makes no special provision for any logistical difficulties where IHT is due from two separate parties on the same asset, so your wife's children cannot expect any leniency in this regard.