Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the inheritance tax (IHT) consequences of a property sale involving a life interest trust and a client account.
The tax query
‘My late client and her partner, who were not married, purchased a house in which they lived as their permanent residence as ‘tenants in common’.
My client passed away in July 2023 leaving her surviving partner living in the property. He then decided to sell the property in December 2023 and moved to another property using his own finances and not the proceeds from the sale of the jointly owned property.
On completion of the sale of the jointly owned property, the proceeds of the sale was £440,000. Fifty per cent of the proceeds passed to her surviving partner and the remaining 50% was deposited into a ‘client account’ with the solicitors dealing with my late client’s will for the benefit of her four children – where the money still remains.
There are three named trustees on the ‘life interest trust’. The surviving partner is considering terminating the ‘life interest trust’ but he is concerned that he may incur inheritance tax on the 50% of the proceeds of the sale held in the ‘client account’.
Can readers advise me as to whether he would or would not incur inheritance tax on the £216,000 held in the ‘client account’?’ Query 20,471 – Loom.
Terry Jordan’s reply: If the IPDI is terminated, the surviving partner is deemed to make a PET.
‘I infer from the query that Loom’s late client left her unmarried partner an immediate post-death interest (IPDI) trust under IHTA 1984, s 49A in her share as tenant in common in the property they occupied. The surviving partner accordingly had an ‘estate’ interest in possession that had the effect of putting the underlying capital value into his inheritance tax estate. As they were not married that would not have made any difference to the IHT liability on the deceased’s estate.
We are told that he decided to sell the property, and I presume that he sold his share, and the trustees of the late partner’s will trust (of whom he may be one) sold theirs.
If the property had increased in value between July and December 2023 the trustees would have needed to claim relief under TCGA 1992, s 225. It is implicit in the query that the IPDI did not come to an end on him ceasing to occupy the property or on the sale but apparently continued over the proceeds of sale in the solicitors’ client account.
If the IPDI is now terminated, the surviving partner will be deemed to make a potentially exempt transfer (a PET) if one or more people become absolutely entitled and an immediately chargeable transfer if the trust continues. As settled property the primary liability for any inheritance tax due would be that of the trustees of the will trust and the value would be on the partner’s IHT clock of transfers for the usual seven years. The partner’s annual exemption(s) could be available to set against the value transferred (see IHTM16083).’
The full article was published in Taxation magazine (issue 4974) and is available to subscribers here on the Taxation website.
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