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My husband died a year ago in his sixties. He had two children but I have none.

Before he became unwell, we took advice from a solicitor regarding inheritance tax.

The solicitor advised us to sever joint ownership of our house and when the first person died their half of the house would go into trust for the children to benefit from upon the second person's death.

We did this not realising my husband would die relatively soon after. Under the trust terms, I can live in the house and move house, but I can't cohabit.

My solicitor has suggested I may like to buy my stepchildren out of the trust, and that the easiest way to do this is with a deed of variation to the will within two years of my husband passing.

I would struggle to afford this right now, until I sell a separate property I own, but my solicitor has said that if I don't do the deed of variation I may have to pay tax when I do decide to buy my half of my house back.

Can you clarify what tax I may need to pay if I buy my stepchildren out later in life?

House ownership: Widow is considering whether to buy out her stepchildren (stock image)

Heather Rogers replies: I am sorry to hear about your husband's death.

I will outline important general matters relating to your question, then deal with your particular circumstances below.

What is the trust that owns half of your house?

The trust in your late husband's will is what is known as a 'property life interest trust'.

This is a common way for people to protect the interests of both their spouse and their children, as I have previously discussed here: My wife fears if I die first my children will sell our property against her wishes.

The idea is that each spouse (or civil partner) owns a share of the house each, meaning that each spouse can leave their share to whomever they wish in their will.

The remaining spouse is then given a life interest, meaning that the house is theirs to use in full during their lifetime, and the part in trust only passes to the ultimate beneficiaries on death of the second spouse.

It is common where, perhaps, someone has children from an earlier marriage and wishes to protect their inheritance, and also to ensure that their surviving spouse is not forced to sell the home.

A trust like this has another benefit, in that the share of the house in trust cannot be used for care fees.

Normally downsizing is permitted, with any monies unused from the sale of the original property to buy a smaller property from the share in trust transferred into the trust.

Any income arising on this money goes to the life tenant, who will usually pay tax on it.

However, there are times when a property life interest trust is not so practical.

This can be in circumstances where, for example, the terms of the will are a little restrictive, or where perhaps work is required on the property, but the surviving spouse's share is not of sufficient value to obtain a mortgage to carry out the work.

Because there is a restriction noted on the title at the land registry this can cause issues, especially if there is a mortgage on the property and the surviving spouse does not earn sufficient for the mortgage to be in their sole name.

If you have a property life interest trust which is causing problems, and you are the surviving spouse, there are two ways to deal with this – a 'deed of variation', or a 'trustee resolution and appointment'.

Scroll down to find out how to ask Heather Rogers your tax question

What is a deed of variation?

A deed of variation allows beneficiaries to make changes to the distribution of an estate, as explained in a previous column: My mum disinherited my sister but I plan to give her a fair share.

All affected beneficiaries have to agree to a deed of variation, which can be done after two years but is best carried out within two years of death.

If done within two years, then the treatment of any agreed changes will be the same as if they had occurred in the deceased's will.

This can be beneficial if you wish to make a gift to someone else out of your inheritance, but then the gift from you to them would be subject to the seven year rule.

If you just made the gift yourself it would be deemed a 'partially exempt transfer', so inheritance tax could be levied on a sliding scale if you died during the seven years after making the gift.

A deed of variation could mean that your gift is taken directly from the inheritance before you receive it and go directly to the person you wish to make the gift to, avoiding you making the gift yourself.

It would be as though the will had originally left the monies you wish to gift directly to your desired recipient.

A deed of variation can be done outside the two-year period, but any benefits tax-wise will be negated.

What is a trustee resolution and appointment?

The second way to deal with an unwanted property life interest trust is for the trust to be terminated in the normal manner via a trustee resolution and appointment.

All the trustees have to agree, and the terms of the will would usually have to support the change.

In other words, the will must not prohibit the surviving spouse's needs being put above the residual beneficiaries, or anyone else who may have an interest.

It would also need to state that capital can be appointed to the life tenant. This means the trustees have the power to transfer the house to the life tenant.

What are your options regarding the trust?

In your case, it may be that your stepchildren will not inherit the property as residual beneficiaries for some years.

If the terms of the trust are restrictive regarding your use of the property, then terminating the trust if all parties agree would give you a release from such clauses. You would be free to move on with your life when you are ready.

You can use the deed of variation route as you are still within the two-year period and this would be a straightforward option.

The property would then revert in full to you as though your husband's share had been left to you in his will.

Any money paid to buy out your stepchildren's interest in the trust at that point would form part of the deed of variation.

If the deed of variation is not completed within the two-year period, the trust becomes permanent.

To terminate it, you could use the second method, that of trustee resolution and appointment, depending on the terms of the will as explained above.

This would terminate the trust and the property would transfer to you.

Although a disposal from the trust would be liable for capital gains tax, if the property is your main residence and has been since your husband's death, then the trustees would be able to claim relief from CGT under s225 Taxation of Capital Gains Act 1992.

The disposal would need to be declared to HMRC within 60 days under the residential property disposal scheme as the claim for relief under s225 is not automatic.

With regard to buying out your stepchildren then in theory, providing that you were to leave an equivalent value in your will to them, there would be no loss directly to them as they will only inherit on your death.

However, lives can change and you may in time remarry and your estate may be entailed elsewhere.

They may also not agree to the necessary deed of variation, which requires their approval, without some form of guaranteed inheritance to replace that which was in their father's will and his wishes.

If there are no other assets in your husband's will which you can use to buy them out, then you could make a deed of gift once the other property you mention is sold for the equivalent amount of their share of the property.

This gift will be subject to the seven-year rule from your own estate and would be deemed a partially exempt transfer.

However, this may mean that you have to wait until your other property is sold depending on your stepchildren's willingness to proceed.

You may also have capital gains implications on the sale of your other property.

The only other option would be for you to sell the property in which you have a life interest but that is unlikely to happen within the two-year period either.

If the two-year period is exceeded, then when you buy out the ultimate beneficiaries, stamp duty land tax (SDLT) may be payable on whatever sum you give them for their interest in the property.

From what you say regarding the sale of your other property, the most likely scenario here seems to be that the trust will have to be terminated via the trustee resolution route.

In summary then, that would mean:

• CGT will be chargeable on the disposal of half the house to you, but the trustees will be able to claim relief from it if the property is and has been your main residence.

• SDLT may be payable on the sum you pay to buy out the ultimate beneficiaries of the trust, your stepchildren.

• From an inheritance tax point of view, as the trust created in your husband's will is what is known as an 'immediate post death interest', his residence nil rate band could still be transferred to you.

• The house and the part currently in trust would be in your estate for inheritance tax purposes anyway, so there would be no change if the house reverts to you directly.

• The trust will need to be registered on the Trust Registration Service if the two-year deed of variation period is exceeded.