Inheritance Tax - Residence Nil Rate Band

Residence Nil Rate Band & Life Interest Trust on 2nd Death

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2 clients – husband & wife, are both on their second marriages, with children from their previous marriages but none with each other.  Their first marriages both ended in divorce.

 

The marital home is owned as Tenants In Common, with the wife owning 75% & the husband 25%.  There is a Life Interest Trust for the property allowing the surviving spouse to continue to occupy the house for the rest of their life.

 

The wife’s Will leaves everything to her children (from her first marriage).  The husband’s Will leaves 60% of his estate to his children (from his first marriage) & 40% to his siblings.

 

The value of the property is approx. £650k, with the wife having other assets of approx. £200k & the husband having other assets of approx. £1m.

 

If the wife predeceases the husband, it is my understanding that 100% of the Residence Nil Rate Band will be transferrable to the husband’s estate, as the wife’s share of the property, which will be included in the husband’s estate due to the Life Interest Trust, will all be left to the wife’s children  (the wife’s children will qualify as Direct Descendants for the husband’s estate as they are his step-children).

 

If the husband predeceases the wife, it would appear that the RNRB will be reduced for the wife’s estate as 40% of the husband’s share of the property will be left to his siblings, who are not Direct Descendants of the wife (or indeed the husband for that matter).

 

Based on the above, would the RNRB for the wife’s estate be 2 x £125k (assuming current RNRB) minus £19.1k (Value of wife’s estate left to non-Direct Descendants = £65k (£650k x 25% x 40%) divided by wife’s total estate of £850k = 7.6% x (2 x £125k) = £19.1k)?

 

Also, in practice, how would the Inheritance Tax payable be apportioned if the wife dies second?  Would the share of IHT apportioned to the Life Interest Trustees regarding the property be taken as £650k (property value) / £850k (wife’s total estate) x total IHT, with this then being further apportioned between the husband’s & the wife’s beneficiaries?  Or would the IHT on the property be calculated separately with the wife’s Nil Rate Band being apportioned between the property & her other assets & the RNRB being utilised solely against the property?

 

Any assistance & comments will be greatly appreciated.

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