Mineral Royatlies

A life interest trust has been in receipt of mineral royalties for gravel extraction from farmland owned by the trustees. 25% of the royalties have been paid to the life tenant who agreed to release the remaining 75% (that would otherwise have been added to trust capital) to the remaindermen. Trust law dictates this 25%/75% apportionment of the royalty income between income and capital.

This arrangement continued for the six years preceding the life tenants death. All of the royalties were charged to income tax on the trustees - TSEM3196 sets out HMRC’s instructions…

Can these capital appointments qualify for IHT exemption as gifts from surplus income? Otherwise, they will have suffered income tax at 20% and now IHT at 40%, which does not seem right.

In short, does the deeming provision that treats the capital element as income apply for all tax purposes?

Barbara Nicholas
Whiting & Partners


If the royalty money was physically paid out by way of capital distribution, albeit that it had suffered 20% income tax, until the death of the life-tenant, I’m struggling to see why any of it would attract IHT at 40%? Surely these payments to the capital beneficiaries by the trustees would be an addition and immediate reduction in capital of the trust and nothing to do with the Estate? Assuming it was an old-style qualifying IIP there would have been no IHT exit charges and the remaining value of the trust capital on the death of the life-tenant would have been aggregated with his own. Thus if the ‘capital’ element has been paid out, it does not form part of the trust for valuation purposes. Also, whilst I am not a solicitor so am unable to comment on any legal interpretation, however from a purely practical view point, I do not see that is the life-tenant providing these gifts, rather it is the trustees. If he had been in receipt of 100% of the royalties and had then redirected some of it to the remainder men that might perhaps qualify, but that would have been outside the trust structure and the 25:75 split would have been irrelevant.
As a separate exercise what happens to the trust following the death of the life-tenant? Is there another life interest with the trust now being within the relevant property regime or is it wound up and distributed among the remainder men?

Maxine Higgins
Citroen Wells

Dear Maxine

Thank-you very much for your response.

The Trust was an old style (pre 2006) life interest trust so not within the relevant property regime.

The capital element of the royalties was paid out to the remaindermen over a period of 6 years preceding the death of the life tenant. The remaindermen became absolutely entitled to the trust assets on her death and the capital payments they received have been treated as failed PETs by her and reported as such on the IHT400.

It is of course correct that when a life tenant gives up an interest in capital from this type of trust, that is treated as a deemed PET by the life tenant for IHT purposes. The anomaly here is the income tax already borne.

Barbara Nicholas
Whiting & Partners