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seanferguson13
seanferguson13, Solicitor
Category: Law
Satisfied Customers: 31
Experience:  3 year qualified solicitor with expertise in UK taxation.
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I am executor of my brother-in-laws will. He died on 18.7.14

Resolved Question:

I am executor of my brother-in-law's will. He died on 18.7.14 and left a life interest in his half of the matrimonial home to his widow, my sister. The half share is worth £500,000. She wishes to break the life interest by paying a lump sum to the sole remainderman of £400000. Is this possible? What are her IHT implications?
She is loathe to vary her late husband's will as this would cause an immediate IHT liability and lose her estate the "double" nil rate band on her death.
Submitted: 2 years ago.
Category: Law
Expert:  seanferguson13 replied 2 years ago.
seanferguson13 :

Hi there

seanferguson13 :

There are a number of points to consider here and I would strongly suggest seeking full legal advice on the options available to you. As my disclaimer states, I can only give you legal information and not legal advice.

seanferguson13 :

In a situation like this you are right to that the an amendment would result in IHT and a loss of the double nil rate band.

seanferguson13 :

The options open therefore could include:

seanferguson13 :

1. Spouse purchasing the interest in the estate from the remainderman for full market value. There would be no IHT but potential CGT depending on the applicability of usual reliefs.

seanferguson13 :

2. Depending on the terms of your powers, you may have the power to appoint capital to her but you must balance the interests of the life tenant and the remainderman.

seanferguson13 :

3. Depending on the position of the remainderman - he could make a lifetime transfer as a gift (which would be potentially exempt from IHT if he survived 7 years) - if not then there's a graded charge.

seanferguson13 :

These ideas will depend on the minutiae of the fact pattern. Remember too that your sister's life interest will e aggregated with her free estate on death so IHT will likely be payable on her life interest in any event.

seanferguson13 :

Hope this helps

seanferguson13 :

Sean

Customer:

Thank you for your response, but your points 2 and 3 seem to assume funds moving from the remainderman to my sister, whereas the opposite would be the case if she "bought out" the life interest from him.

Customer:

Thank you for your response. However points 2 and 3 of your reply seem to assume that the remainderman is to transfer funds to my sister whereas the opposite is the case which is that she wishes to "buy out" the remainderman. . In point 1, you refer to market value. In view of her age, I estimate that the market value of her life interest to her may be £100,000, whereas the market value to the remainderman may be £400,000, as he may have only a relatively short period to wait until his interest crystalizes on her death. She would pay the £400,000 for the peace of mind to put an end to the life interest. Would you reconsider your opinion on her IHT if the transaction takes place and she dies a) within 7 years, or b) after 7 years of this event. I do not consider CGT a problem for either party. I did not consider your earlier reply too helpful as I had asked/paid for a detailed response.

Customer:

Awaiting a reply to the above. On the face of it, if the transaction takes place, the life interest assets will fall into my sister's Estate, which would be depleted by the payment of £400,000 and there will be no life interest assets to declare on her IHT. Is that right?

seanferguson13 :

Hi, no points 2 and 3 assumes "an interest" is passing from the remainderman to your sister, which does occur on your example. Point 2 is highlighting that it possible for the Trustee to simply appoint the whole title to your sister subject to the balancing of the interest of the remainderman

seanferguson13 :

Point 3 considers the undervalue at which you sell - though I see you are valuing your sister's life interest at £100k so that does not seem to be in point.

seanferguson13 :

This is a very detailed question, I will need to consult some case law and come back to you. Though I will take this opportunity to remind you that I provide legal information as opposed to advice. You are not protected by any solicitor/client relationship and should seek full independent legal advice before proceeding with this transaction.

seanferguson13 :

OK, having looked at the law again together with some case law, I think that you should consider using an actuary to calculate the value of the relevant interests for certainty. From and IHT perspective if your sister simply purchases the property from the remainderman then there is no IHT consequences provided it is done for the correct market value. This is because your sister would simply be swapping one asset (cash) for another (the house), so there is no decrease in her estate. If your sister is paying too much for the property then the remainderman should bear in mind there is a chance HMRC would consider it a gift to him to the value of the excess she is paying. You would then have the seven year rule to contend with. Too little and the notional gift goes the other way (i.e. to your sister) and the same issues would apply.

seanferguson13, Solicitor
Category: Law
Satisfied Customers: 31
Experience: 3 year qualified solicitor with expertise in UK taxation.
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