Tax consequences of revoking a living trust


(jcalvert) #1

I have been consulted by a very elderly couple who in 2013 set up wills and a revocable lifetime trust of their home which was held in the husband’s name only. They both still live in the property. They do not understand the trust document which contains inconsistencies and ambiguities. I believe it may have been promoted as a means of saving probate fees but as the husband is the sole trustee my view is that a grant will still be required to pass on the legal title on his death. The wife is appointed as a co trustee but that appointment is only effective on the husbands death. If husband needs residential care there may be a suggestion that there has been intentional deprivation.
For IHT purposes the property will still form part of the husbands estate because of the reservation of benefit rule. I believe because the trust is revocable it is in effect a bare trust for settlor and any income generated would be taxable in his hands.
If the settlor decides to revoke the trust and if the property is over £325k will there be an exit charge and also a possible CGT payable by the trustee/settlor, or no possibility of this because of the revocable trust being treated as a bare trust? If the latter, I would suggest revocation and a transfer of property into joint names as tenants in common and then wills in which they each left their respective share to issue with a right of occupation for the survivor thus avoiding arguments about intentional deprivation.
Presumably HMRC would take the view that the RNRB could not apply to the trust property.
Any comments would be appreciated.

Janet Calvert.
Dootsons LLP


(malcfinney1) #2

If the trust is a bare trust for the settlor (i.e. current owner of the property) only then such a trust is not a relevant property settlement for IHT and thus no exit charges (etc) arise should the trust be collapsed. Equally, no CGT charge arises.

There is no reservation of benefit as such as the beneficial interest in the property continues to reside with the settlor/beneficiary and hence forms part of his estate on death.

Income of the bare trust is that of the beneficiary (ie the settlor).

There has been no deprivation of the settlor’s estate as the bare trust property still belongs to him.

If the settlor of the bare trust under his will leaves the trust property to his spouse then, of course, the RNRB would not apply.

I must be missing something?

Malcolm Finney