Life Interest Trust and IHT

Could you advise on this scenario - this applies to our mother and we cannot believe that we are liable for IHT under these circumstances. Thanks for your help: Mr. X died in February, 2004. In his will he left his property to his relations. At the time he died, he had a carer/companion, Mrs Y, who lived with him in his house. He made provision for her in his will, allowing her to remain in his house for the duration of her lifetime. She was to be responsible for all bills including house insurance. She was also responsible for the maintenance of the property. Mrs Y died in January, 2011. Her assets, at the time of her death, did not exceed the £325,000 IHT threshold. Her will left her assets equally divided between her three children with bequests made to her grandchildren. Her children were surprised to learn, from their mother’s solicitor, that their mother, Mrs Y, for IHT purposes, was deemed to have had a life-long interest (i.e. she was a life-long tenant) in Mr. X’s property, even though she had lived in the property only just under seven years since Mr X’s death. This meant that the value of Mr. X’s property would be added to the value of her assets putting Mrs Y well above the IHT threshold. The children were informed that Mrs Y’s estate would have to pay 2/5ths of the ‘excess’ and Mr. X’s estate would have to pay 3/5ths. This seemed an extraordinary situation to the children of Mrs Y as they were not benefiting by inheriting any part of Mr X’s property yet they appear to be liable for paying IHT on a property they have no interest in. They would now like clarification as to whether this scenario is correct and also whether, if it is correct, anything can be done to lessen the tax burden. At the time of Mr. X’s death in 2004, his assets together with the estimated value of his property, put him above the tax threshold so his estate had to pay IHT at that time.

Posted by: sarah davis