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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15940
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My father died in 1993 after a long illness. It appears that

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My father died in 1993 after a long illness. It appears that he passed most of his assets to my mother before he died and his estate was valued at £44,000. Some eight years later my mother remarried. Sadly my step-father died in 2012. My step-father left most of his assets in trust - a nil rate band trust and a life interest trust. Upon my mother's death all assets in the two trusts will go to my step-father's son. It turns out my mother's net worth is around £475,000. I understand that the life interest trust (about £125,000) will also be regarded as part of her estate even though none of the assets in the trust will go to her beneficiaries. From what I understand this will leave the beneficiaries of my mother's estate with a £50,000 tax bill, even though they will not benefit from my step-father's estate. The life interest trust pays in the region of £4,000 a year and, sadly, my mother is not expected to life for much longer. I am told that she can relinquish her interest in the life interest trust to overcome this problem, but am seeking advice on the best way of overcoming this problem.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Leave this with me while I take a look at it. I've dealt with similar questions in the past and just need to refer to them.
Expert:  TonyTax replied 2 years ago.

Hi again.

It is correct that the value of the life interest trust or interest in possession trust will be included in your mother's estate for IHT purposes when she dies. If she renounced her interest and the assets were distributed to the ultimate beneficiaries, that would be a potentially exempt transfer by your mother which would not fall out of her estate unless she lived for seven years after making it. Take a look at the notes on interest in possession trusts here.

Is is possible to split the nil rate band between the life tenant's estate outside of the trust and the trust itself in proportion in circumstances such as those you have described.

Your mother's second husband used his nil-rate band to make a transfer into the nil-rate band trust so that will not be available to be claimed by your mother's executors when she dies. However, the unused percentage of her first husband's nil-rate band as applied to the nil-rate band in place when your mother dies (not the one in place in 1993) will be able to be claimed by her executors. That could potentially double her nil-rate band to £650,000 and negate the IHT problem you referred to. Take a look here, here, here and here for more information.

You ought to engage the services of a lawyer with tax knowledge or access to it to make sure you have matters arranged as effectively as possible.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Thanks for your reply - I will arrange for payment to be made. A couple of quick questions for clarification - the chances of my mother being around in seven years is slim - she is 83 and in ill health - can you clarify that if distributing the proceeds of the life interest trust to the beneficiaries reduces the liability of her estate if she passes away before seven years, or like life time gifts they become IHT exempt, if she lives more than seven years. Also just to clarify, the current nil-rate band is applicable to my father's estate not the rate set in 1993 (which was £150,000). Thank you for that.

Regards

Andrew

Expert:  TonyTax replied 2 years ago.
If your mother renounced her interest, that would be a potentially exempt transfer and if she lived for seven years after making it then it would escape IHT. If she didn't live for seven, years, then the value of the gift would remain in her esate for IHT purposes. However, after three years, the IHT charge on gifts made in the seven years before death starts to taper away as you can see here. Taking out a term assurance policy with reducing cover to pay any IHT on the gift would probably be too expensive given your mother's age.

If your father'e estate used none of his nil-rate band in 1993, then 100% of the current nil-rate band will be available to your mother's estate, ie £325,000, not £150,000. If his estate used half of it, then half of the current nil-rate band will be available to your mother's estate.
Customer: replied 2 years ago.

Thanks for that - so 29 per cent of my father's nil-rate band was used up in 1993. From what I understand you are saying 71 per cent of the current nil-rate band will be available to use - that is to say 71 per cent of £325,000 which is £223,000

Thanks

Expert:  TonyTax replied 2 years ago.
That's correct. However, if all your late father's estate was left to your mother, then he won't have used any of his nil-rate band as intra-spouse transfers are exempt from IHT.
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