IHT liabilty and spousal trust

[George22222]

My wife and I own our house as tenants in common. I own four fifths, she owns one fifth. The house is worth about £385,000. I have savings and other assets of about £220,000. We have no mortgage or other debts. We have no joint accounts. She is seriously ill and unlikely to survive me. However, just in case she did (she would then need to go into care), I'm considering leaving everything to my wife, but in a trust with my sister as trustee and executor. In those circumstances would my estate be liable for inheritance tax?

[maths]

Aggregate estate of you and wife 385k plus 220k i.e. 605k. No IHT should arise.

However, if you leave everything on discretionary trust then IHT of 40% x [528k - 325k] i.e. 81,200 arises on your death. No IHT on her death.


Your personal estate amounts to 308k (80% of home) plus 220k other assets.

Total 528k.

If you left everything to wife absolutely (i.e. no trust) then no IHT as inter-spouse exemption applies.On her death no IHT would arise.

You could leave 308k home plus 17k other assets on discretionary trust with 203k other assets to wife absolutely. No IHT arises. On her death her estate would be home 77k (home) plus 203k assets 280k total. No IHT on her death.

Leave wife your 308k in the house absolutely. Settle 220k assets on trust giving her right to the income. No IHT on your death. On her death her estate will be 385k home plus 220k cash i.e. 605k total. No IHT arises.

Difficult to avoid care home costs should wife need to go into a home post your death.

No mention of children/grandchildren?

[George22222]

Thanks for your reply. Care home fees are not a problem as I'd want her to have the best care available irrespective of cost. My wife has a dodgy son from her first marriage who I wouldn't trust if I were to leave everything to her directly. Hence my thought of establishing a trust. I was assuming (incorrectly, as you point out) that a trust with my wife as the sole beneficiary would be exempt from IHT. Pity.

[AGoodman]

You could protect it with an interest in possession (life interest) trust - i.e. your widow would have a right to the income/occupation and your trustee would have power to advance capital monies as needed.

That would benefit from the spouse exemption so no IHT. It would be amalgamated with your wife's estate if she died second but as maths mentions, your joint estates are unlikely to exceed £650k.

The trust would provide who should benefit following her life interest.

[George22222]

But a life interest trust, as I understand it, would not allow my sister (the trustee) to sell the house to pay for my wife's care home fees.

[maths]

Not quite. The trust would contain standard overriding powers which could override the life interest.

[George22222]

Thanks for that. I'll obviously be seeing a solicitor about setting up the will trust. Out of interest, how do you know what sort of trust you've got? Will it clearly say in the will whether the trust is discretionary or life interest?

[AGoodman]

No, a life interest trust (in this case, the requirement is an "immediate post-death interest" or IPDI) means that the beneficiary has a present right to present enjoyment - i.e. a right to use the property or a right to trust income as it arises. Anybody drafting wills should know the difference.

[George22222]

I spoke to a solicitor last week. She is going to draw up a discretionary will trust with my wife as beneficiary and my sister and her husband as joint trustees. I asked the solicitor about IHT liability and she told me that for a discretionary trust with my wife as beneficiary no IHT is due should I die first. IHT may be due when my wife dies (in which case my sister inherits what's left).

[AGoodman]

It may be an error in translation but if you died first and left £500k+ to a discretionary trust, it would be taxable. The trustees would have to grant her an interest in possession / IPDI as discussed below within 2 years (in practice within 6 months) of your death to claim spouse exemption and avoid an IHT liability.

This is achievable and the will could still make sense on the basis you consider this outcome unlikely. It basically leaves the options open.