Inherited half a house

[HalfasleepChrisintheMorning]

My Dad died recently and left me his half of the house. The other half is owned by Kim who also has a life interest in his half.
She’s finding the property very large and high maintenance and is considering moving somewhere smaller.
What happens to his half/ her life interest if she sells?
There will be IHT to pay once probate granted as as well as his half of the house there was a failed gift of some money. This IHT will be around £16k and the estate can afford to pay it.

This happened to me.
Once dad sold the house me and the siblings got our share - after estate agents , solicitors fees.
But it had been stipulated in the will.

After it sells (by mutual consent) she gets half of whatever is left over after costs.
Will she agree to move do you think?
My elderly Sdad (with dementia) has a life interest in my deceased Mums house, its not suitable for his needs and both he and the house are deteriorating but he won't move

A properly set up life interest trust should include a provision to allow sale and purchase of another if the home is no longer suited to the life tenant's needs.

Tax is a different question.

"What happens to his half/ her life interest if she sells?"

It is common in wills written like this for there to be provision for the person with a life interest to sell the property and buy another one. Here is an example of how it may have been worded in his will:

The Property Trustees may at any time during the Trust Period as to the whole or any part of the Trust Fund in which the Life Tenant has for the time being an interest in possession pay out any proceeds of sale of this property or any substituted property (purchased as a result of this clause) to purchase a freehold or leasehold property which will be held for the benefit of the Life Tenant on the same trusts to which this clause refers.

So, if there is a clause like this in your dad's will then the Trustees can choose to use some or all of his share of the property to buy a new place for Kim and the Trust will still own whatever the relevant percentage of that new home is.

If she is downsizing then there will likely be money left over. You don't get to keep that money. It needs to be still held on trust until Kim dies.

It's probably easier to understand with an example:

Let's say that the house is worth £200k so Kim's 50% share is £100k and your dad's share which is now in trust is also £100k (round numbers to keep things simple).

Whatever happens she cannot touch your dad's £100k that is in trust.

Suppose she wants to downsize to a property worth £100k. This would release £100k as cash.

Now you (the Trustees) may choose to go along with this and agree for the Trust to purchase a 50% share of the new house.

This will mean that both Kim and the Trust each own 50% of the new house and also each has £50k in cash as well.

Or, as Trustees, you may say to Kim that you do not want to contribute at all to the purchase of the new house. In this case, Kim will own the new house 100% but have no cash and the Trust will have £100k in cash but no share of the new house.

Or you could do any percentage that you like. Maybe you only want to put in 25%?

In that case Kim would own 75% of the new house and have £25k in cash and the Trust would own 25% of the new house and have £75k in cash.

It's totally up to you as Trustees as to what you do.

So, let's say that you have decided to go in 50/50 with Kim. So the Trust now has a 50% share of the new house and £50k cash.

Great, we can just divvy up the cash between the children (if you have any siblings) or just have it for yourself, right?

No!

That money is still an asset of the Trust - you don't get your hands on it until Kim passes away or if there is some other condition in the will that is met (eg sometimes remarriage or cohabiting can be written into a will as a condition to end the Trust).

Up until then it is normally written that Kim would be entitled to any income from the Trust but, of course, she can't touch the capital.

So, with the £50k cash you now have in the Trust it would probably be best to invest it; whether this is in unit trusts, investment trusts, individual shares, government bonds etc.

I suggest that you should speak to a qualified advisor about this.

Any capital growth is retained by the Trust, but any income (such as interest or dividends) is paid to Kim.

For example, you put the £50k in a savings account. According to Moneysavingexpert, the top rates at the moment are around 5%. So £50k in a savings account could earn £2,500 per year in interest and that must all be paid to Kim.

That's great for Kim but not so great for you.

Alternatively you could invest in things that go for capital growth and don't provide any dividends at all. Great for you, not so great for Kim.

However, as Trustees, you are required to take the interests of both parties into account (unless the will says otherwise) when deciding what to invest in.

This would normally be done by selecting a mix of investments, some of which concentrate on capital growth (good for you) and some which concentrate on providing income (good for Kim).

I really would recommend that you speak to a qualified advisor about this.

Then when Kim finally passes away the assets of the Trust can then be passed out according to the will.
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"...there was a failed gift of some money. This IHT will be around £16k and the estate can afford to pay it."

If the failed gift (or total value of all gifts if there was more than one) was more than £325k then the person who received the gift is primarily responsible for paying the IHT. (assuming that your dad divorced and was not a widower)

This is due to Section 204(8), Inheritance Tax Act 1984.The estate also becomes responsible if the tax is unpaid after 12 months.

In this situation, the executors of your dad's will should seek to recover any IHT due from the person who received the gift.

But if the total value of failed gifts is less than £325k then there is no IHT for the person who received the gift to pay. It simply means that there is less of the tax free threshold available to the estate.

OMG due to a typo this sounds like it is a lot more complicated than it actually is.
No idea who Kim is 🤣 supposed to say my Mum! I am an only child.
My mum and I are exceptionally close and I just want whatever is best for her, not bothered about the money. I’m relatively comfortable, thanks to a great education and gifts throughout the years from my parents.
We’d like to sell the house and buy her a nice low maintenance 2/3 bed bungalow or semi locally. She already lives in the same village as us and we both want her to stay in the village. The downsize is prompted because the garden is too much for her and she spends a lot of time stressing about gardeners who don’t show up! But actually I think it would be a sensible move. Eventually when she can no longer live there I would rent it out. She has enough income and capital to pay for care if necessary.
The failed gift was to me, thankfully from them both but his share plus his half of the house pushes him over his £325k. I do have £16k to pay the IHT. We wondered whether to vary the will to leave his half back to my mum or not but were advised not as house prices are increasing.
I wanted to be sure that she has enough to buy her new property- it is a downsize and will release capital but not 50% of the value of the house.
I was also confused if there would be capital gains tax to pay as well as the IHT?
We have an excellent tax advisor who is an executor of my Dad’s will but don’t want to bother him all the time!

Worth noting that if you leave your home to your child(ren) or grandchild(ren), the IHT threshold is increased to £500k. You will probably need advice on this, but it would allow you to keep the £16k at least!

"We’d like to sell the house and buy her a nice low maintenance 2/3 bed bungalow or semi locally."

Yes, you can certainly do that no problem at all

"I wanted to be sure that she has enough to buy her new property- it is a downsize and will release capital but not 50% of the value of the house."

As I mentioned above, you are free to use as much of your dad's estate that is in trust as you wish to.

To go back to my example, if the current house is worth £200k and your mum is looking to buy a house worth £150k then you can go in 50/50 with her, each putting in £75k. So your mum owns 50% of the new house and has £25k in cash and the Trust owns 50% of the house and has £25k in cash.

Or your mum could put in her full £100k share and the Trust puts in £50k so that your mum owns 66.6% of the new house and has no cash and the Trust owns 33.3% of the new house and has £50k in cash.

You can split it however you want.

"I was also confused if there would be capital gains tax to pay as well as the IHT?"

As long as the property you sell at the time is the main residence of somebody (in your case, your mum) that the trust says can live there then there is no CGT to pay.

This from the gov.uk website:

Private Residence Relief
Trustees pay no Capital Gains Tax when they sell a property the trust owns. It must be the main residence for someone the trust says can live there.

https://www.gov.uk/guidance/trusts-and-capital-gains-tax

"The failed gift was to me, thankfully from them both but his share plus his half of the house pushes him over his £325k."

The amount of £325k for IHT only applies to gifts made before death. The situation is different after a person has died.

Anything that he left to your mum is excluded from IHT - there is no IHT to pay at all (IHT will then become payable on whatever your mum leaves).

So, you ignore anything left to your mum.

Since you are his daughter then there is up to an extra £175k tax free available called the Main Residence Nil Rate Band.

This applies where a person leaves their main residence to a direct descendant (eg children or grandchildren) then they get up to an extra £175k tax free.

So, for example, if you dad's share of the house is worth £300k then the entire £175k tax free amount can be claimed and £500k (£325k + £175k) is free of IHT.

So you can inherit up to £500k from your dad without having to pay any IHT.

But if your dad's share of the house is worth less than £175k then you can only use what the actual value of the house is worth.

For example, the house is worth £200k and your dad's share is £100k. In this situation the estate cannot claim the extra £175k ( because his share of the house is not worth that much) but can only claim an extra £100k.

So, in that situation, you would get £425k (£325k + £100k) free of IHT.
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"Eventually when she can no longer live there I would rent it out."

If your mum goes into long term care then her home is still treated as her main residence for three years after she goes into care. If she is in care for more than three years then the care home becomes her primary residence and CGT will apply to her former home from then on.
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"We wondered whether to vary the will to leave his half back to my mum or not but were advised not as house prices are increasing."

Yes this, but also it protects half the value of the house if your mum should end up going into care for a very long period of time which may use up all of her capital.

The house has been valued for probate at £450k so his share is £225k.
They gifted me £290k in 2019 so his share of that is £145k, this was in the form of a property going into trust if that makes a difference. DS and I are beneficiaries of the trust and the trustees are me and my mum.
So £370k altogether. I wonder why we were told there’s IHT to pay then? We were told that by tax advisor- the probate form has not been submitted yet.
My main worry was can my mum move- it seems she can no problem- so all good.
I miss my Dad so much 💔 but he would be happy he left us so well provided for.

Sorry about the loss of your Dad, OP.

You can £500k IHT free since he has left you his share of their house.

And any tax on the gift in 2019 would be reduced in a sliding scale https://www.gov.uk/inheritance-tax/gifts#:~:text=The%207%20year%20rule&text=Gifts%20given%20in%20the%203,known%20as%20'taper%20relief'.

(look at the ‘taper relief’ paragraph)

"So £370k altogether. I wonder why we were told there’s IHT to pay then? We were told that by tax advisor"

Something isn't adding up here.

Unless there are other large assets, that you are unaware of, that he has left to people other than your mum (btw, I'm assuming that they were married) then there is no IHT to pay.

It may be worth questioning the executor as to what basis they believe that IHT is due on the estate.

It may also be worth getting independent advice yourself.

There are solicitors that specialise in all this sort of stuff and they are registered by a body called STEP (the Society of Trust and Estate Practitioners).

If you google something like "STEP solicitor [name of your town]" then you will get a list of local firms who have STEP solicitors.

I would suggest that you get in contact with a STEP solicitor to get independent advice. What you have been told by the advisor does not sound at all right.

I am one of the executors and have seen the will. He’s left everything to my mum except half the house to me. I’m the executor who doesn’t really understand the process but the other two are a solicitor and an accountant! My mum leaves everything to me in her will- I know that. We are an extremely close family, but there’s just the 3 of us.
There are quite a lot of assets- investment portfolio goes to my mum. Pension we have been advised isn’t in his estate (and to sort asap before The budget!). That has been split between us - already done as probate wasn’t necessary for that. He wasn’t drawing down on it and neither of us need to for now.
There’s shares in a limited company (family business) that will end up split between me and my mum but they go into a trust I think once we have probate. 90% of the shares were owned by the 3 of us. Before he died but when he was terminally ill we were advised to do a deed of gift back to him so he owned all 90% when he died. Something to do with CGT!
Think that’s everything, other gifts were before 7 years or within annual allowance or from my mum alone. He had no jewellery and his watch was broken.
Would be great if IHT isn’t payable- I know there will be when my Mum dies but we have planned for that. IHT on first death was a bit of a surprise.

I can't help but just want to say how kind it is of @Another2Cats to write such detailed replies. Sorry for your loss OP, I hope you get it sorted.

"So £370k altogether. I wonder why we were told there’s IHT to pay then? We were told that by tax advisor-"

and then you say:

"...the other two are a solicitor and an accountant"

I would have a word with the solicitor (assuming that the accountant is the tax advisor?), especially if they are STEP registered.

From everything you have said above, there is no obvious reason why IHT should be payable on your dad's estate (assuming that your parents were married - it's a different story if they weren't married at the time of his death).

I agree with this, thank you so much.

They had been married for 53 years.💔