Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a fellow professional’s query about drafting a client’s will to provide for his son, his son’s partner P and their four children while mitigating inheritance tax (IHT).
The tax query
‘My widowed client (C) is considering his will. He lives on a smallholding of 30 acres including a large old farmhouse owned by the family for the last century. The farmhouse value is £700,000; and surrounding land and substantial agricultural buildings are valued at £970,000. The estate (including machinery collections, loans made and cash, together with a house occupied by the son’s partner, is approximately £2.9m). It is unlikely that agricultural property relief will be available as the income from hay and straw sales is small.
C has a strained relationship with his son (S, 45), who is in and out of self-employment (and the pub) and barely self-sufficient. S is unmarried and has four children. S occasionally lives with his partner (P) who has custody of their children (ages 12–20). P lives with the children in a house bought by the client of a value of £250,000. P pays the client market rent funded by DSS while there are children living with her. C wants to provide in his will that this house will pass to the grandchildren but that P will have the right to live there (or another property for her lifetime if the house is sold).
C wants to provide for S to occupy the farmhouse for life and then to pass to the grandchildren. He would also like to provide for any of the grandchildren to live at the farmhouse and to use some of the farm buildings for business purposes. Would a discretionary trust for S and grandchildren achieve this? My client intends that the residual estate apart from the two houses should go 40% to S and 60% to his grandchildren in trust to meet the cost of maintenance of the farmhouse or to provide for the grandchildren’s education or support a business start up.
How can C achieve his objectives? It is anticipated that the IHT on C’s death will be met from the sale of collections, barns and land. How should the will be drafted to mitigate IHT on the death of P (if any)? Is there an interest in her possession if there is a discretionary will trust for the benefit of P and C’s grandchildren? And what would be the answer to this question if the son dies first?’ Query 20,403 – Hayseeds.
Terry Jordan’s reply: The circumstances of the family rule out outright gifts.
‘Hayseeds’ widowed client C wishes to provide by will for his son S, his son’s partner P and their four children at least one of whom is still a minor. We are told that IHT agricultural property relief will not be available, and I infer that business property relief (BPR) would not be available either. The value of the total estate is approximately £2.9m so the client’s estate will not benefit from the IHT residence nil-rate band(s) (NRB) because of the taper. Accordingly, it is not necessary for the residence to be closely inherited by direct descendants.
The circumstances of the family rule out outright gifts and the choice boils down to a fully discretionary trust (DT) or a discretionary trust combined with one or more immediate post-death interest (IPDI) trusts. A DT would afford the most flexibility. Under the current rules, appointments within the first two years of death would be read back as if they had been in the will itself: IHTA 1984, s 144. If the trust continued past the second anniversary of C’s death it would fall into the relevant property regime with ten-year and proportionate or ‘exit’ IHT charges. At present, the maximum rate on ten-year anniversaries is 6% as compared with 40% on a person’s death.
An IPDI trust would put the value into the life tenant’s IHT estate with the potential for a charge on the life tenant’s death. The house P occupies is worth less than the IHT NRB and, as she receives benefits from the DSS, I presume she does not have much in the way of capital. If she is left an IPDI in that property with outright remainders to her children it would benefit from the RNRB on her death as well, at least under current rules, from a CGT-free uplift to market value: TCGA 1992, s 72.
The farmhouse is worth £700,000 so if S is granted an IPDI there would be IHT to pay on his death as a maximum of £500,000 would be free of IHT with a CGT-free uplift as above. If S is merely a discretionary beneficiary his death would not occasion a tax charge and S dying first would not affect the planning.
We are told that part of the estate comprises loans made. If C does not want the money back, he could gift them as potentially exempt transfers to start the seven-year IHT clock running. Waiving the indebtedness would require the execution of a deed. See HMRC’s IHT Manual at IHTM 19100 which refers to the Pinnel case ((1602) 5 Co Rep 117a).’
The full article was published in Taxation magazine (issue 4957) and is available to subscribers here on the Taxation website.
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