Life interest will trust

Trusts Discussion
1

We have a situation where the life tenant of a Will Trust wishes to buy the remainder interest. Property held as tenants in common with his deceased partner under who’s Will a life interest trust over her share of the property was created for him for his lifetime.

The life tenant’s lawyers have suggested a Transfer of Equity. Is that correct and if so how is the remainder interest valued.

Any guidance will be gratefully received.

D Vohora
Rowberrys

2

To my mind, this is not dissimilar to the partition of a trust fund, where the life tenant and remaindermen split the trust fund on an actuarial basis. In this instance, though, the remaindermen are receiving cash in place of a proportion of the trust assets.

I have a notion that the CGT consequences might not be straight forward, so tax advice should probably be obtained by the beneficiaries, both life tenant and remaindermen.

As the underlying asset is an interest in land, the SDLT position should also be considered (even if the legal title remained in the sole name of the life tenant following their late partner’s death).

Paul Saunders

3

There will need to be an assignment of the reversionary interest and an actuarial valuation.

The seller will need to take advice on cgt, as I believe it has a nil base cost.

Make sure the reversionary interest is vested.

Simon Northcott

4

You will need an actuary to value the remainder interest (Google it). The actuary will tell you what information he needs for such a valuation. Both sides’ solicitors will need to agree beforehand who is to pay the actuary’s fees, or how they will be split.

A Transfer of Equity will work perfectly well. You must consider what the SDLT position will be.

Julian Cohen, Solicitor

5

An actuarial calculation would be needed and obviously implied is the remainder men (being able to) and agreeing to splitting the trust.

Oliver Sloam
Nigel Sloam & Co.

6

Is an actuarial calculation always essential? If the life tenant and remainder beneficiaries, all sui juris, agree on a split of the fund without requiring expert evidence (which can be quite expensive) surely they are free to do so.

Tim Gibbons

7

As far as I know there is no need for actuarial advice on a trust apportionment, if all beneficiaries are agreed on a split of the fund.

However, having one does protect their advisors if it subsequently becomes clear that one of the beneficiaries got less than their interest was worth.

Problems may arise if the life tenant dies soon after the apportionment. It may happen purely by chance. There are medical conditions that are completely symptomless which might cause an apparently healthy person to suddenly just drop dead. An aneurysm is almost always symptomless until it bursts and someone who might be apparently perfectly happy and healthy one minute is dead five minutes later. There might well be warning signs with strokes but they still frequently come as a nasty surprise.

The problem might have been unknown or even unknowable but the remaindermen are likely to feel aggrieved if they would have got substantially more, if the trust had continued. This might lead them to investigate whether the apportionment was in fact fair. Hindsight is wonderful, but human nature is what it is.

As regards cost, administering a trust costs money one way or another, and I would not expect the actuarial fees to be that large in comparison the annual costs being saved or indeed in comparison with the cost of the legal work involved in winding up the trust.

Ian McKeever

Ian McKeever & Co Consulting Actuaries

8

Beware s55 IHTA. The money which the life tenant pays will be a PET. Although it looks like an arm’s length arrangement (for full consideration and not intended to confer any gratuitous benefit - s10 IHTA), that is not what happens for IHT purposes.

Suppose the life tenant’s (L) estate is £500,000 and the trust fund (an IPDI) is worth £250,000. Suppose L has NRB of £650,000 available to him (by virtue of the TNRB - let’s ignore RNRB) and that he proposes to pay the remainderman ® £100k for the remainder interest.

  1. To begin with, L’s estate for IHT purposes is £750k, on which there will be £40k (IHT) on his death (40% of £100k excess over the NRBs).
  2. R assigns the remainder interest to L. This results in no change to L’s estate for IHT purposes - he still has his own £500k plus the £250k trust fund (now his too) - the reversionary interest is not treated as an additional chargeable asset in L’s hands.
  3. But, in return for the assignment, L pays R £100k. As a result, L’s own estate in fact reduces from £500k to £400k. That £400k plus the £250k trust fund means that his IHT estate is now only £650k - within his NRBs and so no IHT to pay on his death.

But… because of s55 and the disapplication in it of s10 IHTA, the payment of the £100k by L to R is treated as a PET, because the transaction causes L’s IHT estate to be reduced.

Also, the transaction causes the trust to come to an end, so there could be CGT implications (although PPR may apply).

As others have mentioned, SDLT may also be relevant.

Paul Davidoff
Moon Beever

9

Following purchase of the remainder interest (ie the acquisition of a beneficial interest) then a CGT disposal arises on its disposal which occurs on the vesting of the settled property in the purchaser (TCGA 1992 s76(2)). Unfortunately, at the same time there is also a disposal by the trustees precipitating a CGT charge (TCGA 1992 s71(1)).

I am unaware of any relief for this double charge.

Malcolm Finney