A reader writes:

I would be very interested in the views of your experts on the situation where a married couple own their home on a Tenants in Common basis and have protected their individual IHT allowances via Discretionary Trust Wills.

These wills allow the surviving partner to draw any amount from the estate of the first partner to die up to the value of the IHT allowance in force at that time (i.e. any balance, including 50% of the value of the house, going into the Trust).

What heppens when the surviving partner continues to live in the home following the first death?

I have been warned that in these circumstances the Inland Revenue in some instances, perhaps all now, is claiming that the family home has remained in the family estate because of continued occupancy by the surviving partner and that the total value must be declared by the Trustees for IHT assessment purposes.

If this is true then a great many families will be in distress when the final death occurs. They may feel that the Trust arrangements have excluded the family from paying a lot of tax and once this was true - but it is worrying to think that although we have tried to do things properly all we have done is to leave a big problem behind us.

I have tried to obtain opinions on this question but nobody seems to be willing to give a definite answer - you can't even obtain a clear answer from the Inland Revenue!

IHT expert Darren Nathan responds:

From the Revenue's perspective, over the last decade there has been a shift towards enforcing the law as it stands. There has been a general improvement in the quality of understanding and knowledge of their officers and this has been reflected in their approach. 

The outcome is where details in the past may have been accepted at face value, it is expected that these are now and will be scrutinised far closer. The point being HMRC will look at how a trust arrangement behaves in addition to the actual wording.

The issue on this subject is that if the surviving spouse benefits from the asset owned by the deceased spouse then does it not follow that the surviving spouse has an "interest in possession" in the trust asset. If this is the case then the asset is part of the second spouse's estate for the purposes of Inheritance Tax.

The outcome of this is that it will undermine the planned Inheritance Tax saving nature of the Discretionary Will Trust Arrangement. I have to say that personally I agree with the logic provided on this subject matter by the Revenue.

There is a simple solution to this issue. It is to remove the potential beneficial interest of the surviving spouse upon the half share of the property previously owned by the deceased spouse.

The conceptual approach to this problem is to NOT place a half share of the marital home into trust but instead to replace the half share of the property with a debt option exercised on first death to protect the legacy of the beneficiary(ies) of the Nil Rate Band Discretionary Trust of the deceased's spouse i.e. in effect replace the bricks and mortar with a debt of value up to the Nil Rate Band and the surviving spouse to take ownership of the encumbered share of the property.

The surviving spouse now owns the whole property but with an associated debt, to fulfil the first spouse's Nil Rate Band through their Discretionary Will Trust Arrangement. This has now removed the contentious factor of beneficial interest in a share of the property they do not own. Instead they now own the whole property, but have a debt that is to be settled on their death so utilising both Nil Rate Bands.

I hope this helps to clarify. Obviously, each situation is unique and the above is just a general overview rather than a stipulated answer to all situations.

If you have a query, let us put it to one of our financial experts by emailing us on finance@maturetimes.co.uk.

All answers published in the enews are general rather than specific, and we would always advise reader to take individual advice from an expert before making an investment or making / changing their will.