Providing Home for Co-habiting Partner - Avoiding IHT Issues?

gwb2112

Hi, This is my first post so please forgive me if I'm asking something already answered and if so please feel free to point me to previous posts in that case (I couldn't see anything in the last couple of years). I appreciate any help you can give.

My mother is considering writing a will and wants to leave her house to my brother and I, but she wants to allow her co-habiting partner (unmarried) to live there until his death, or until he no longer wishes to live in the property, when it would pass to us. The house is currently worth about £375k and she has a few thousand in savings, which will be left to us. Her partner has no property, but savings of about £400k, and so does not want to have a life interest in her property, because he is sure that his estate will be liable for inheritance tax on the property when he passes, but does wish to continue living in the property. Before she goes to the expense of legal advice, she'd like some idea about what possible pitfalls to consider and how to approach the discussion with the solicitor who writes the will in order to swerve any avoidable tax liabilities on her death or on her partners death when the property will pass to us. Thanks in advance to anyone who can help.

Keep_pedalling

The only way to do this is via an immediate post death interest trust, but there are serious CGT and IHT downsides to this for unmarried couples.

If this is what she really wants then they should seriously look at getting married or becoming civil partners.

Is your mother a widow? Does her partner have any children of his own?

gwb2112

No mum isn't a widow, she and our father 'amicably' divorced years ago and he's remarried (no more children from that marriage). Her partner has no children.

Albermarle

https://forums.moneysavingexpert.com/discussion/6684807/providing-home-for-co-habiting-partner-avoiding-iht-issues

You need to see a STEP solicitor who will be able to give you the proper advice on how will (s) etc have to be set up to avoid complications in future and to minimise tax liabilities.

It may be wise for everyone to concentrate less on tax issues, and more on avoiding potential family conflicts /legal battles later. If for example your Mum's partner starts another relationship, after she dies.

What about the partners will/wishes, if he dies first ?

Keep_pedalling

https://forums.moneysavingexpert.com/discussion/comment/82151551#Comment_82151551

Thanks for the clarification. If your mother creates a will giving him the right to live there for life, then her estate will lose the ability to claim the residential NRB meaning her exemptions drop from £500k to £325k if she dies first resulting in an IHT liability of £20k plus.

The impact on his estate will be even worse (especially if he is also not a widow) where his estate would include the house. Around £100k in IHT could be payable in that situation.

There is a similar issue if he dies first and leaves his estate to your mother because of the lack of spousal exemptions. Marriage or civil partnership would avoid any of these tax liabilities.

gwb2112

Thank you for your replies. Mum is quite infirm now and is very unlikely to want to get married again. I'll look into recommending a local STEP solicitor to her, so that she gets the proper advice on how her will will have to be set up to avoid complications in future and to minimise tax liabilities. I had thought it would simply be a case of putting mum's property into a nil rate band discretionary trust (which I know disallows the residence nil rate band) with myself and my brother acting as trustees and allowing her partner to live in the property for as long as he wanted, until we eventually inherit it. Would that approach work to make mum's wishes happen and also prevent the property becoming part of her partner's estate and so minimise tax liabilities?

Keep_pedalling

No form of trust is going to help here. I not that your mother’s partner is not exactly financially decent on her and has sufficient savings to buy a place of his own if he needed to. She could simply put a condition in the will that he could stay for a limited time such as a couple of years in order to sort out alternative accomodation, or even buy their home from her estate.

gwb2112

Ok thanks, we all had a good chat last night and it turns out that our mum's partner is worried about being able to manage staying in their home long term (mainly gardening) and if on his own he would eventually want to downsize. He's not sure on the time scale of that move. Does it make a difference wrt what needs to be written in the will and for IHT liability if he stays for 1, 2, 3 or even 10 years?

Cubicsrube

AFAIU, if any legal right to reside is written into the will, even short term, it effectively creates a trust. I’m not a lawyer so someone qualified will hopefully confirm or correct that.

That said, from various threads here I believe it’s possible there may be some significance to the 2-yr mark when it comes to trust duration—certain types of trust wound up inside that time limit (where the property then goes straight to the children) can be treated as if the children had inherited directly. In theory this would save your mum’s RNRB which at least would wipe out the tax bill you will otherwise have on her death.

Don’t think this helps the partner’s IHT situation though...

Keep_pedalling

https://forums.moneysavingexpert.com/discussion/comment/82152225#Comment_82152225

If a civil partnership is really our of the question, the only way to avoid an impact on the RNRB would be for your mother to leave the property outright to her children with an informal arrangement in the form of a wish to allow him to continue living there for a period of time. This would not create a trust so would preserve the RNRB.

The problem here is that a potential CGT liability may be built up in the period from her death to when the house is eventually sold. There would also be tax implications for you or your sibling if either of you are not already home owners. You would also in effect become his landlord and take on all the responsibilities that comes with.

The simple solution is to form a civil partnership, it is a simple process that costs very little in terms of time and cost.

Keep_pedalling

Who does he plan to leave his estate to?