Take a look under the heading "Trusts in being at 22 March 2006" here
for information on the termination of an interest in possession trust which is what you are a trustee of.
If the life tenant of the trust had not renounced her interest in possession and had died as the life tenant, the value of the property at that time would have been included in her estate for Inheritance Tax purposes. The property would have been sold, the IHT paid and the cash distributed to the ultimate beneficiaries, the daughter and step children.
Assuming that the life tenant has renounced her interest, she has effectively brought the trust to an end by making a potentially exempt transfer to the beneficiaries which will form part of the life tenant's estate should she die within seven years of making the gift.
Normally, if a property is sold within a trust, the first £5,550 of the gain would be exempt from CGT and the balance taxed at 28%. However, as the property was the main residence of the life tenant, the main residence exemption will apply for the period she lived in the property and for up to 18 months after she moved into the home. It can, therefore, be sold CGT free and the funds distributed to the ultimate beneficiaries.
A problem arises if the former life tenant dies within seven years of making the gift. It will then become part of her estate for IHT purposes and, if the estate does not have sufficient cash to pay the IHT, then any liability on the property value will be payable by the ultimate trust beneficiaries.
There is a form of taper relief on gifts made within seven years of death as you can see here
. The nil-rate band of the deceased is always used against gifts made in the seven years before death in chronological order with any balance being used against assets held at death. A term assurance life policy could be taken out to cover any liability but it could be expensive if the former life tenant is elderly.
I hope this helps but let me know if you have any further questions.