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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I hope that someone can help with an IHT query. My

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Hi – I hope that someone can help with an IHT query.
My step-mother died in 2003 and in her will left her house (approx value £400,000) in trust with my father as a life tenant.
My father has just now moved into a care home, and the trust has been broken with the consent of all parties. As consideration for breaking the trust, it has been agreed that my father will received 30% of the sale proceeds (the house is now worth approximately £800,000 – so his share will be c. £240,000).
I am unclear on how Inheritance Tax is assessed. I have read that the trust should have paid a 20% charge when the property was transferred in to the trust and a 10 year anniversary charge in 2013. Is my understanding correct or am I completely out of line?
What will be my father’s IHT position should he die in the near future – does the value of the property form part of the calculation for IHT purposes (even though he did not own it)? (NB His other assets total c. £200,000)
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.
Leave this with me while I take a look at it.
Expert:  TonyTax replied 1 year ago.
Hi again
There should be no 10 year or exit Inheritance Tax charges as the trust was created prior to 22 March 2006 and there was no change of life tenant or beneficiaries which may bring the new rules into play. Instead the trust came to an end with the life tenant renouncing their interest and the ultimate beneficiary(ies) or remainderman(men) of the trust inheriting.
Had the life tenant stayed in the house until their passing the value of the house at that time would have been included in their estate for IHT purposes. Instead the life tenant has given up their interest and that is a potentially exempt transfer for Inheritance Tax purposes. Should he pass away within seven years of making the gift its value will be included in his estate for IHT purposes.
The fact that the life tenant will be given £240,000 will effectively be a gift or potentially exempt transfer from the ultimate beneficiary(ies) unless the trust terms allowed for such an occurence.
Take a look here for information on interest in possession trusts:
http://www.tolleytaxtutor.co.uk/taxtutor/files/subscriber/personal-tax/uk-trusts-and-estates/lectures/1d12.pdf
There should be no Capital Gains Tax to pay on the sale of the property as it was the life tenant's man residence so long as it is sold within 36 months of their moving out. Take a look here for some notes on that:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/264601/13._Capital_gains_tax_private_residence_relief_final_period_relief.pdf
I hope this helps but let me know if you have any further questions.
Expert:  TonyTax replied 1 year ago.
The normal period of grace after a property ceases to be a main residence is 18 months for disposals after 5 April 2014 but is kept at 36 months for an individual who moves into a care home. It's not entirely clear whether the 18 month or 36 month grace period applies where the property is owned by a trust, the beneficiary of which has to move into a care home.
Customer: replied 1 year ago.
so... please confirm the following:
1. are you saying that should the life tenant die within 7 years, the whole value of the property (£800,000) will treated as a "gift" for IHT purposes and therefore assessed on his estate, even though he did not own it?
2. subject to you answer to 1 above, what is the total value fo the life tenant's estate? is it: 800,000 + 240,000 + 200,000 ?
3. The £240,000 he receives from the ultimate beneficiary will be treated as a gift from the ultimate beneficiary, and therefore potentially cause an IHT bill for that person (subject to their survival of less than 7 years)
Expert:  TonyTax replied 1 year ago.
1 Yes. That's how interest in possession trusts work.
2 It's not usual for an arrangement such as the £240,000 being given to the life tenant so that has to be a gift in my opinion. I would say that there is a gift of £800,000 but that £240,000 is being given back. In reality, there is a net gift of £560,000 but I fear that the £800,000 will be treated as a potentially exempt transfer. Therefore, his estate will be of the order of £1,240,000 unless a way can be found around the full £800,000 being treated as a gift.
3 Yes, unless a way around it can be found. As I said, it is not usual for the life tenant to get a share unless the trust allows for it.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15840
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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