Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query involving a father’s property that may be subject to inheritance tax (IHT) twice before reaching his sons.
The tax query
‘Mr P (a widower), is in a relationship with Ms B. They do not intend to marry, but wish to live together. Mr P has two adult sons who are married with young children.
Mr P is now looking to purchase a new main residence, for him and Ms B to live in. He wishes to ensure that, on his death, Ms B has the right to remain in the property for the rest of her life. He wants the property ultimately to pass to his two sons.
Our current understanding is that, if Mr P were to achieve this (giving Ms B a right to occupy for life), it would constitute an immediate post-death interest (IPDI). As such, the value of the property would form part of Mr P’s estate for IHT purposes on his death, and then again as part of Ms B’s estate upon her death – so the property could be subject to IHT twice before reaching the sons. Given that both Mr P and Ms B have substantial estates and will not qualify for the residence nil rate band [NRB], we are looking for views on:
- whether our understanding of the double IHT exposure under the current plan (via an IPDI) is correct; and
- whether there are alternative planning options to preserve Ms B’s right to live in the property for life without triggering a second IHT charge on her death.’
Query 20,553 – Life tenant.
Terry Jordan’s reply: Mr P and Ms B could buy property jointly.
‘From the query, I infer that the value of each estate exceeds £2.35m. If his late wife did not use all her ordinary NRB the unused proportion would have transferred to Mr P.
I agree that if Mr P leaves Ms B a life interest in the new property under his will, it will constitute an IPDI trust with the result that the value will form part of Ms B’s estate under IHTA 1984, s 49A. As they are not married, if the gift is expressed to be ‘free of tax’ the IHT attributable to the value of the property will fall on the residue of Mr P’s estate.
On Ms B’s subsequent death, the value of the property in which her IPDI subsists will be aggregated with her free estate (and any other property liable to tax) and her NRB will be divided between all the heads of charge to the detriment of her family. If she survives Mr P for fewer than five years, quick succession relief will be available under s 141.
Life tenant seeks alternative solutions. Mr P could leave the property on discretionary trusts for a class of beneficiaries including Ms B as well as his children and grandchildren. On the face of it, such a trust would be within the relevant property regime (with ten-year and proportionate or ‘exit’ charges) but the value would not form part of Ms P’s estate. However, if she had sole occupation after Mr B’s death, it might be hard to argue that she didn’t have an IPDI.
As they are both independently wealthy, the best solution may be for them to purchase the new property jointly (as tenants in common so that the shares would pass by will). Tenants in common have ‘promiscuous’ rights of occupation and if Mr P had concerns about his family in relation to Ms B after his death he could leave his share on trust. A further benefit would be that, as they are not married, the value of a share on death would be discounted by 10-15% to reflect joint ownership.’
The full article was published in Taxation magazine (issue 4994) and is available to subscribers here on the Taxation website.
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