Inheritance tax after lifetime interest in house

[George4567]

Does anyone have any knowledge about the inheritance tax my children will have to pay in the following situation?

I live in my husband’s house. I rent mine out. In his will he has left me a lifetime interest in the house and on my death it goes to his children.
My house is left to my children. His house is worth 1 million. Mine is worth 400,000.
My solicitor mentioned that if he dies first the value of his house will be added to my house and my children will pay inheritance tax on that (meaning they get nothing) and not his children (who will get the house plus a great deal more).
However, his solicitor says mine is wrong and it won’t count at all. Google seems to say various different things!

So far we have both spent money on asking for legal advice on this but no one seems to really know!

Many thanks for your help!

As I understand it. As a result of the will he’s made.. If he dies first you get to live in his house until you die or choose to move out. When you die or move out, his children get the house. It’s not related to your house at all.

Your house will go to your husband if you die first, unless you make a will to say otherwise. Which, if you want your children to inherit it, you should definitely do.

Thank you - yes we have both made wills. It’s what will happen if he dies first and I live in his house with a life interest and then I die that concerns me! And no one seems to know!

I told you - his house goes to his kids when you die. That’s what his will says.

Why are you asking a solicitor for tax advice - you need to consult an accountant/tax specialist who knows about IHT, or ask if the solicitor's firm include a member of STEP which is a specialist on tax for estates. A general accountant or general solicitor isn't a specialist on trusts/estates so highly unlikely to give you definitive advice.

You will never own his house so why would your dc have to pay inheritance tax on it?

I know I will never own his house - nor do I want to - it is the value of it (as I will have enjoyed the benefits of it) that my solicitor says will be added to my estate - despite not accessing the actual money!
We both want me to have the lifetime interest as his young adult children live with us and they will need support/a home.
I will look at speaking to an accountant not a solicitor - thank you for that

Ok looking here I think it is confusing….

https://wards.uk.com/wp-content/uploads/life-interests-and-rights-of-occupation-2-july-2022.pdf

what I think it means is his £1million house pous your £400k house are added together, minus any allowances (probably 500k each of nil rate band plus family home going to direct descendants)…then the remainder is subject to inheritance tax which is split proportionally between the trust assets (his million) and your estate (your 400k). So if I’ve got this right and you do have £1million of allowances then 40% tax is due on 1m house plus 400k house minus 1m allowances gives 40% on 400k which is 160k. That’s then split 5:2 (1m house to 400k house) which is about 115k from the trust assets to 45 from your estate.

how that gets paid I have no idea if all assets are in property …houses have to be sold I guess. But I don’t think it means that your estate is liable for the tax on his estate. It does look like your estate doesn’t get the full benefit of your nil rate band tho which seems weird…

ETA: I’d run this past a specialist tax accountant then if I’m right that your estate doesn’t get the full benefit of your nil rate band see if there’s any way to write into his will that his estate is liable for more of the inheritance tax so that each of your estates only pays the part of tax that would be due if you didn’t move in! So if you didn’t move in and left your 400k house to your kids you wouldn’t pay any tax. And his estate would pay 40% on £500k above his nil rate band…

DorotheaDiamond - we have asked a lot of people and that’s the clearest answer we have had so far - thank you!

Read my post again I’ve edited - I think your kids do lose out this way - not as much as you think but definitely more than if you don’t have the life interest. You need a shit hot tax lawyer at this point I think to confirm exactly what allowances will be applicable when you die (at least at this point in tax law), and then a shit hot will lawyer to get his will written to say that your kids should not end up worse off by you dying second than they would if you died first!

Ooh you can’t edit twice…you need to know allowances and tax liabilities when you die in the case you die first or second so you know what your kids would get in either case…his kids will never be worse off if you die second I don’t think.

Thanks again! It really is a confusing subject

Are you talking about the residence nil band? I don’t think that’s available on your home because it’s not actually your residence. It is also unlikely to be available on his home because he’s leaving it to you until your death. Disclaimer: chartered tax adviser but not an inheritance tax specialist.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46001

My solicitor seemed to think it would count as my residence as I have owned it for 27 years and only moved out last year to get married (without sorting all this out which was a mistake!) However, I can see that this might not be the case after all

A life I treat us not ownership. It is therefore subject to IHT for the amount above £500K at 40%. This means the IHT bill is likely to be c.£200K. He would be wise to get advice on who pays this and when. Ordinarily the executor raises a loan from a bank that is interest free for a year, pays the IHT bill, then sells the house, repays the loan and distributes the remaining estate.

When someone has a life interest in a property that is not theirs the asset can’t be sold to pay the tax, so it’s worth finding out when and how IHT is paid.

In a high trust situation he could leave the house to you. Inheritance tax free snd you would give it to them. However, if you continue to live in it, you would need to pay commercial rent for the gift to be deemed valid.

Would you consider moving back to your house if you are widowed?

That isn’t what she is asking. She is asking if her kids will be liable for inheritance tax for both houses as that is what her solicitor says

Not a specialist by any stretch, but from limited personal experience the advice from your solicitor is my understanding. I was executor for a relative who had left a life interest and there was no IHT to be paid by her estate because of the life interest. We were told that IHT would be payable by his estate if/when he died.

Will there be capital gains tax implications?

Sorry I thought the answer was obvious. if he dies and the OP stays in the house due to lifetime interest (and nothing changes until she dies), when she dies His kids inherit his house. Therefore they pay the IHT. Nothing to do with her kids.

That isn’t what her solicitor has said though (I assume as they are married) but it is what his solicitor has said. So she is trying to clarify

[EDIT]

TL:DR both sets of children have to pay a proportionate share of the IHT after the death of the second spouse.

[/EDIT]

First off, I will say that there is an organisation called the Society of Trust and Estate Practitioners (STEP) which solicitors can apply to join. These people are generally very knowledgeable in this area. If you search "STEP solicitor [name of your town]" then that should provide you with a list of local STEP registered solicitors.

I would strongly urge you to approach a STEP registered solicitor.

(It may be that one or other of the solicitors you have approached is STEP registered?)
.

Just so that I understand this correctly. You have previously lived in your house but you now live in your husband's house.

Your husband's will leaves everything in trust to his children (your step-children) but gives you a lifetime interest in his property.

If your husband dies first then his house passes to the trust and you are the life tenant. His IHT allowances are also passed on to you (unless he separately gives gifts to other people in his will, in that case you will need to deduct those eg he leaves money directly to his children on his death).

At this point, HMRC will now consider that the trust fund (your husband's house) is now part of your estate for any IHT purposes.

As long as you are leaving your residence to a direct descendant (eg children or step-children) then you can make use of the RNRB (residential nil rate band).

Assuming that your husband did not make any gifts on his death then you have the full amount of his allowances (£500k) to add to your allowances (£500k) so that you have a total allowance of £1 million of which £350k is the RNRB.

If you have two residences then your executors can choose which property to nominate to use the RNRB. So, as long as one of the houses has a net value of at least £350k then you're fine.

Since both houses are counted as part of your estate that is going to be £1.4 million (ignoring any other assets you've got). If you have your husband's allowances of £1 million then that means that there is £400k subject to IHT so that would mean paying £160k.

This liability is then apportioned between what you leave in your own name in your will, your "free estate" and what is left in trust from your husband's will.

So that would mean that your stepchildren would have to pay about £114k IHT from the £1 million and your children would have to pay about £46k IHT from the £400k

When it comes to the RNRB, as long as you have lived there at some point in your life and you still own it when you die then, yes, it does count.

That’s very useful Another2cats - thank you. He will leave gifts (money and shares) to his children so I think all his IHT will be used at that point.
Good news re my house counting as residence. I now live in the house that is owned by him
We are extremely mismatched in financial terms - so I think you - and others - are right re a STEP solicitor. Thanks again - I am really grateful and I had no idea it was so complicated.

I think you’d be best to speak to a Tax Accountant not a solicitor.

What was the outcome of this @George4567 as we have a similar situation in my family.