Commitment to pay extra IHT due on 2nd death because of interest in possession of residence.

[kiloware43]

Married couple both previously widowed, no IHT allowances used on the deaths of their previous spouses.
Unequal liquid assets which are held separately. Mrs £200K, Mr £1.2M, plus property in his name alone (£500K)

On the marriage, her property was sold and assets distributed to her children. Her current will distributes her assets to her children.
His will similarly distributes to his children, and if he pre- deceases his wife then she has the right to stay in the property (with safeguards about re-marriage etc) with the property being sold on her death and reverting to his family, so Interest in Possession. Both families are aware of, and comfortable with this.

It had been assumed that if he pre deceases her, IHT on the value of the property would become part of HIS estate and payable upon HIS death by his children.

However, because of her Interest in Possession, it seems there is every likelihood there will be an IHT liability for HER estate purely because the value of the property will bring it into IHT territory (despite allowances and exemptions), whereas without the property, IHT would not have been payable. So her estate will be liable to some IHT upon HER death payable by HER children, although the property will be sold by HIS children IHT free.

It was always intended for HIS children to be liable for the IHT for the property (because they would enjoy the value of the asset upon its sale). HER family are entitled to certainty that they will not have to bear the IHT cost caused by the addition of the property's value being added to HER estate. It has been suggested that HIS will should have a condition that a specific sum should be but aside by HIS children for that liability. The sentiment is acceptable, but what figure should be shown? It could never be the actual figure, because we are dealing with future values (and tax rules). Regular codicils, but never the actual figure. Not ideal at all.

A wording along the lines of........"My estate is liable for any IHT liability upon HER estate purely due to the property value......." would seem to satisfy that intention completely. However, it is suggested that that is too loose, and subject to ambiguity/challenge. There is also the point that HER family's only assurance is in their step-father's will, held by HIS children who they may lose touch with over time.(Although they could get copies). Quite possibly the sale process of the property on HER death will work in concert with and mean that they can be assured that any IHT liability will be met by HIS estate.

Views please.

[maths]

Not sure I agree with all comments made if I understand them correctly.

On H's death his estate bears IHT but not on the property. On the basis that an interest in possession is created on H's death for W's benefit in the property then W takes an IPDI which would constitute an inter-spouse transfer on H's death and hence no IHT thereon.

On W's subsequent death the value of the property (which is in trust) will be treated as part of W's estate thus inflating her total estate and possibly resulting in an IHT charge on her estate (in addition to that on the property in trust) which might not otherwise have occurred. However, the IHT liability attaching to the property in trust is that of the trustees (in effect H's children bear the IHT).

It could be argued that whilst W's IHT charge on death is inflated she has on the other hand had the right to reside in H's (not her) property for life.

[AGoodman]

I may be wrong but I was under the impression that in these circumstances she would benefit from the RNRB (in fact two, one of them inherited from either first or second husband ) so her total nil rate bands would be a minimum of £850,000, growing to £1m. That would be more than her free estate and the property combined (£700k). I would not therefore envisage any IHT being payable at all on deaths in the short to medium term.

If the property were to grow in value to over £800k so that the combined transfer of value was greater than £1m - and bands had not increased - there would be a small amount of IHT to pay but the vast majority would be payable by his estate. e.g. If the property was £900k, the total would be £1.1m, the excess over NRBs would be £100k, the tax £40k and the wife's estate's share of the tax would be 200/1100 * 40 = £7,000. Not a huge price to pay for living in a £900k house.

Incidentally, "My estate is liable for any IHT liability upon HER estate purely due to the property value......." is just a statement and an incorrect statement at that. Any IHT would be a result of both her and the trust property. To do this properly, you first need to work out exactly what is intended. Any IHT would likely be the result of both the property and her free estate combined and in particular because the property has used up her nil rate band so what you are in effect saying is that "The trustees shall bear any inheritance tax otherwise payable by the estate of [ ] as a result of her death, subject to a maximum of £[x]. "x" could be a figure or a formula and is only really necessary in case she came into further money (which is possible due to say remarriage or lottery win etc). This should definitely be prepared by a lawyer as it has potential to go very wrong and cost everybody a lot of money to resolve (even if they were friendly).

[maths]

In my response I was concentrating on the principles, not the figures.

If husband pre-deceases wife and leaves the £1.2m to his children an IHT charges arises and father would utilise his NRB. But no entitlement to the RNRB as wife left an IPDI.

On wife's death her estate comprises her 200k plus the IPDI (circa 500K ). However, she is entitled to her own NRB plus NRB from first husband (assuming not used by him) plus two RNRBs.

[kiloware43]

The significant thrust of the enquiry is 'guaranteeing' that W's estate would not incur any IHT purely because of her interest in possession of the property since H's death. Probably possible to come up with a realistic figure for now, but difficult to come up with one for the future without reviewing it on a fairly regular basis, unless a really bullish figure was put in. Is it felt there could be a form of words alone (majorly preferred) that don't need periodic review, that would fit the bill of guaranteeing that W's family would not incur any IHT purely because of the value of property, and similarly H's family's liability is that same figure, and not any additional IHT liability because of possible burgeoning wealth of W since H's death - lottery win, rich third husband..... (however unlikely) ?