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

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82151721#Comment_82151721

A nil rate discretionary trust would be a very awkward but possible device to achieve your mother's objectives, whilst simultaneously avoiding the percentage of the property entering the trust from forming part of her surviving partners' estate on his eventually death.

However it is cumbersome and complicated, in that at a current house value of £375,000, 86.66% would pass into the trust IHT free, but the remaining 13.34% ( ie £ 50,025) passing to you and your brother outright will be liable to 40% IHT together with any cash assets she leaves to you in addition.

That tax will likely exceed the remaining cash in her estate, so both of you have to find the remaining balance personally. You both end up paying IHT to facilitate your mother's partner's discretionary occupation of the trust property.

However the IHT story does not end there. Each 10 years, the 86.66% house trust has to be revalued, and if at that point it exceeds the nil rate band at that time, the trust is liable to a 6% IHT bill on the excess.

To illustrate say house value in 10 years time is £420k. 86,66% = £363,972 - 6% of the excess over £325k ( if nil rate band unchanged) = £2,338.32 in tax.

Not an excessive tax charge but remember the trust has no cash of its own, so who pays the tax charge, and who helps you as trustees navigate all theses tax compliance issues?

There are also practical admin issues. Presumeably there will be a condition that the partner maintain the house in good repair and insure . However difficulties arise with regard to insurable interest where discretionary trustees own the property and the occupying beneficiary has no formal interest in possession.

With regard to the 13.34% of the property jointly owned by you and your sibling, you open yourselves to 2nd property SDLT if you don't already have residences of your own.

All of the above issues melt away if the mother/ partner marry or civil partnership, and a straightforward IPDI trust is invoked for the property rather than NRB discretionary trust. So the above explanation was an attempt to hopefully get you all to abandon NRB discretionary trusts from further consideration.

As for the IPDI trust, the benefits for all are considerable.

No IHT on your mother's death and her partner ( now your step father ) gets access to both residence nil rate bands ( £350k), his own NRB( £325k) and what is left of mother's transferable NRB after deducting the few thousand left to you both.

In short just under £1 million in NRB's become available on his death via the simple expedient of a marriage or civil partnership of convenience, coupled with an IPDI trust. Parliament has deliberately created an excellent IHT mitigation structure for married couples so why on earth not use it?

gwb2112

We talked about his wishes, if he died first. Turns out that he has already signed a form for his private work DC pension to leave his pension to my mum and so, with mum's agreement, he would like to leave the rest of his money split equally between his two nieces and to my and my brother's children (all beneficiaries over 18). He is missing us out because we are already both home owners. Thanks again for your reply.

Keep_pedalling

Sorry to sound like a broken record, but a civil partnership will help here as well especially with pension pots falling into estates for IHT purposes soon.

Maybe time to show both of them this thread?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82152837#Comment_82152837

Indeed have to agree.

This new information on the exsistence of the partner's DC pension pot, makes it now almost an act of extreme stupidity not to marry.

Are they unaware of the 2027 IHT changes to DC pensions which could potentially hammer unmarrieds in the OPs mother's position ?

Clearly if the male partner's £400k asset base does not include the DC scheme, the joint IHT exposure worsens considerably.

Reed_Richards

Hold on a minute; it's all very well to recommend a civil partnership for IHT purposes but the OP's mother wants to split her inheritance between her two children whilst her partner wants his inheritance to go to his nieces and the OP's brother's children. If they become civil partners they need to find a compromise position about who gets what. And at the very least they would need to make wills in contemplation of a civil partnership prior to the actual ceremony.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82152958#Comment_82152958

Marriage does not in anyway interfere with their testamentary thoughts to benefit whomever they wish without in anyway having to compromise where they want their retrospective estates to end up, not clear why you believe this would be an issue but maybe you could clarify your view?

As of now neither of them appear to have settled their Wills ( the reason for the OPs post), so marrying before putting those wills in place would be a win win along the lines stated. Get the quick and simple civil partnership out of the way, then move on to the important business of marital Wills, perhaps have drafts standing by ready to execute the following day.

What I would say is if the male partner died first ( after the marriage) , most if not all his NRB disappears and a potental IHT bill on his estate if the £400k mentioned does not include the DC pension. However, his widow still gets his transferable residence nil rate band which occurs eventhough he never had any ownership of the property ( the relief is generous in that respect).

So at risk sounding like @Keep_pedalling's 'broken record' whichever way this is viewed, not marrying makes no sense, especially if the mother ultimately dies first.

Reed_Richards

Okay @poseidon1 suppose they follow your advice and marry before putting wills in place but an unfortunate accident on the honeymoon leads to the death of the OP's mother, followed a little later by the death of her now husband. Both of them die intestate, the husband inherits his wife's entire estate and that passes to his nieces as his closest living relatives. The OP and his brother inherit nothing. I know this is an unlikely scenario but it could happen.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82153176#Comment_82153176

I did add the rider of having the wills ready to execute straight after the nuptials, to avoid exactly that possibility.

However premature death can happen anytime.

Right now we know for a fact mother does not have any Will in place, so her dying intestate at the current time leaves a bit of a mess. Her sons face an automatic IHT bill, and the problem of what to do about the surviving partner's desire to remain in the property for life presumeably rent free.

If the sons were to decide not to honor mother's wishes in this circumstance by varying the intestacy, the surviving partner could try and make a claim for reasonable financial provision against the intestate estate under the ( Provision for family and dependants ) Act 1975 , but then we are entering contentious estate issues where only the lawyers win - explained below

https://www.premiersolicitors.co.uk/blog/cohabiting-partners-and-inheritance-claims

If instead they honor mother's wishes, then yes they can implement an IPDI trust on partner's behalf, but only after paying IHT upfront. When the partner eventually dies, the sons pay another whack of IHT because the property is in the partner's estate with only a paltry £325k NRB to share between the sons and the partner's chosen beneficiaries, the worse of all IHT outcomes.

In any event this is purely a marriage of convenience for tax planning purposes. Since neither party seem bothered about marrying at the moment, I hardly suppose either of them will be advocating a romantic honeymoon to celebrate their IHT avoiding nuptials.

The preponderance of good sense here points to a whirlwind marriage, followed closely by duly executed wills.

I am hoping the sons can bang this message home with their mother ie gain a step father and a whole raft of useful nil rate bands.

Savvy_Sue

There is of course the option of wills written in contemplation of marriage or civil partnership,already mentioned, but which avoids the dangers of an all too brief honeymoon…

gwb2112

It does seem as if a civil partnership is still the best way to resolve the serious CGT and IHT downsides for unmarried couples. Especially with the 2027 IHT changes to DC pensions, so I'll mention these comments to them.

However, it seems to me the most pressing issue is for them to get wills written. They can be rewritten/updated after any civil ceremony/wedding.

Just wondering whether if mum includes a clause in her will bequeathing a nominal, say 10%, share of her house to her partner and leaves the remainder in equal proportion to my brother and I, would this 'minimise' the IHT eventually due on his estate to only 40% of the 10% of the property which he might inherit, and avoid him inhertiing a 'full' IPDI and the full inheritance tax liability of 40% of ~£375k and also maintain his right to live in the property for as long as he wants? Until either gifting (when he no longer wishes to live in the property) to us or bequeathing his 10% share of the property back to us in his will.

If this approach works, then it seems to avoid the tricky Trust accounting issues previously mentioned.

Thanks again for all of your very interesting and informative replies.