Who pays tax on an IPDI held in trust?

benjaminfabi · January 2019

Hi,

As simple as I can make it:

Client marries a divorced woman with existing house, that he lives in with her.
She has existing family to benefit from the house, worth £1.3m
He has around £600k in realisable assets
She dies, leaving him a life tenant of the residence, with the property passing to her family on his death. She used her NRB on death.

As I see it, when he dies, he's got his NRB and a big IHT liability, most of which is due to the house in the IPDI Trust. I suspect that his executors (his children) are going to be liable for this, which completely wipes out their inheritance.

Is this right, or are there circumstances in which the tax liability for the property in the IPDI is payable by the ultimate beneficiaries?

richardgough · January 2019

My understanding that everything (NRB/ IHT liability) is levied proportionally across IPDI and Personal so trust is liable for their part of the IHT.

In practical terms, however, HMRC does not care where the tax comes from as long as they get it!

From Lexis PSL:

Trust property, which is the subject of a qualifying interest in possession, may become chargeable to IHT when the qualifying interest in possession comes to an end:

• on the death of the beneficiary with the interest in possession
In this case, the value of the trust property will be aggregated with the rest of the beneficiary's estate (although the trustees will be liable for paying the tax).

•on the death of the life tenant within seven years after a transfer or lifetime termination of the life tenant's interest
A lifetime termination can occur where, for example, the trustees transfer some of the trust property to the remainderman (a transfer of trust property to the life tenant is not chargeable to IHT as the life tenant is already treated as beneficially entitled to the property).

•on the transfer or conversion of the interest to a non-qualifying or discretionary interest
Such a transfer or conversion may be treated as a chargeable lifetime transfer and immediately chargeable to IHT.

Property in which a qualifying interest in possession subsists is not relevant property so it is not subject to principal and exit charges during the life of the trust.