IHTM44121 | Pre-owned assets: unwinding of home loan or double trust scheme: joint settlor schemes unwound after first death

Where one joint settlor dies, before the scheme (IHTM44103) is unwound, Inheritance Tax (IHT) may already have been paid on their share of the property, as a gift with reservation (GWR) (IHTM14301), at the time of their death. When the surviving joint settlor dies the whole value of the property could be reflected in their estate where the outstanding loan is disallowed as a liability under IHTA84/s175A (IHTM28029). Where the scheme is unwound the whole property will be reflected in the surviving spouse’s estate on death. Unwinding the scheme would then result in more IHT becoming due than if the settlors had never entered into the scheme.

We have agreed that we will settle these cases, on the death of the surviving spouse, on the basis that half the value for the property held in the interest in possession (IIP) trust (IHTM16060), on the first spouse’s death, will not be brought into charge as part of the estate of the second spouse. The half share held by the surviving spouse will be brought into charge on their death without any allowance for a joint property discount (IHTM15072). This agreement applies only to schemes unwound between the deaths of the joint settlors.

If the whole property is subject to the loan, and is taxed on the first spouse’s death, because the first spouse was the sole settlor and it passes outright or on IIP trusts to the surviving spouse, the house is not brought into charge on the second death. As explained later, in relation to lifetime gifts or downsizing, it will be necessary (a) to unwind the scheme between the first and second death and (b) to demonstrate that the property passing to the surviving spouse has been kept ring-fenced where it is later sold during the surviving spouse’s lifetime.

Example

This example shows how the property should be returned on the IHT 400 account for each joint settlor who has entered into a home loan or double trust scheme.

First Settlor

The settlors each transferred one half of the value of Property A into a home loan or double trust scheme. On the death of the first settlor we would expect to see their half-share of the value for the property liable to Inheritance Tax on death as a GWR.

The IHT 400 account should still declare the first settlor’s interest in the IIP trust even if the net value is nil.

Settled Property:

One half share of Property A £300,000

Less one half of the outstanding loan - £300,000

Net value of settled property Nil

GWR:

One half share of Property A £300,000

Second Settlor and Second Death

As the scheme has been unwound the second settlor is now either the sole life tenant of the IIP trust (home loan settlement), or the property has been appointed to them absolutely. Where the property is no longer subject to the loan the entire value of Property A would now be reflected in the second settlor’s estate and it would be liable to IHT so half would be taxed a second time.

Settled Property / Solely Owned Property:

Entire value of Property A at date of second death £650,000

The open market value of the property has increased by £50,000 by the date of the second death.

Agreement with HMRC

If the scheme is unwound between the deaths of each settlor (so the loan is written off or appointed back to the second settlor) then HMRC agree that the charge on second death extends to one half of the value of the property. The IHT 400 account submitted for the second settlor should include the value of the property, but reflected as a half share with no joint ownership discount applied.

Assets – unwound home loan scheme:

One half share of Property A £325,000

It should be clear on the account that the second settlor unwound their home loan scheme, prior to death, and the value returned for the property represents the share of the property now subject to IHT. If the second settlor or surviving spouse did not unwind the home loan scheme prior to their death and the loan remains outstanding, the loan will be disallowed as a deduction (IHTA84/S175A). The whole property value will be subject to IHT on the second death.