Appointment of lump sum to life tenant

Are there tax implications to the appointment of a lump sum to the life tenant under an interest in possession trust? The lump sum will be loaned to the Trustees interest free. The object is to provide a fund on which the life tenant can draw if required.

I’m not sure I see the point of taking money out of a trust in order to provide a fund on which the life tenant can draw. He already has a fund on which he can draw, namely the trust fund itself. If the object is to circumvent the trustees’ supervision I still don’t see it.

Julian Cohen

Simons Rodkin

Are there tax implications to the appointment of a lump sum to the life tenant under an interest in possession trust? The lump sum will be loaned to the Trustees interest free. The object is to provide a fund on which the life tenant can draw if required.

The life tenant has not received income for many years by agreement. The “arrears” of income will be discharged and the lump sum is to provide an element of compensation for the life tenant for agreeing to defer receiving income. The sum of compensation is very modest compared to the trust fund the value of which has increased very significantly over the period during which income has not been paid to the life tenant. The trust fund is vested in property. Some of the increase in value can be attributed to the use of retained income and that directly related increase significantly exceeds the compensation. A change of trustee is planned and the life tenant does not wish to rely on the new trustees exercising a power of appointment at some later date if a need for funds arises but is willing to make an interest free loan of the compensation to the trustees so cash does not have to be found.
Richard Lloyd

Based upon the information provided, I suspect the life tenant is by now a settlor of the trust or, at best, a co-owner of the property held by the trustees.

This suspicion is reinforced by reference to the life tenant not wanting to rely upon the trustees exercising a power of appointment. If there was a balance of undistributed income due to the life tenant there is no need for the trustees to exercise any power of appointment.

In situations of this ilk, I suggest it would be prudent for the trustees to seek the advice of Chancery counsel to identify exactly what they now have – whether perhaps some form of common investment vehicle, a mixed settlor trust, or merely an accumulation of undistributed income. Whichever may also have unexpected tax consequences.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I agree with Paul. The full facts need ascertaining and proper competent professional advice obtained to correct matters.

I have seen too many similar situations where things have been done incorrectly or not done correctly by unknowledgeable trustees who think they know best, resulting in unfortunate tax liabilities and correction costs for trustees/beneficiaries…

Hopefully over time the life tenant has declared all their trust income [ irrespective of whether it has been paid to the life tenant or retained in the trust ] entitlement. as of right, to HMRC .

If not might I suggest the life tenant seeks professional advice on now disclosing the income to HMRC

Andrew

Thank you for your comments. I can now see that I should have provided more information and also that the situation is potentially more complex than I had appreciated.

The trust was created by father giving a life interest in one half of the trust fund to each of two children with remainder to grandchildren. Only one child has three children of their own and it is very unlikely that there will be more grandchildren. When the child without children dies the half share of the trust fund will accrue to the other share

The Trust owns two properties gifted to it by the settlor and 90% of the shares in a company owning a number of investment properties some of which were owned by the company before the shares were acquired by the trustees, some of which were gifted by the settlor post creation of the settlement and some of which were acquired.

No dividend was declared by the Company from 1990 when the shares were acquired by the trustees until 2015. Dividends of annual profits have been declared since 2015 and paid direct to the life interest beneficiaries. The retained earnings stand at circa £1m. The net value of the Company is circa £8m having increased in value by circa £4m in the last 9 years.

It is proposed that a dividend be declared of the retained earnings but it is not yet decided if it will be in one amount or declared over a number of years. At least a significant proportion will be declared initially as both life interest beneficiaries seek a lump sum.

No income was distributed by the Trustees from the assets of the Trusts before 2015 and undistributed income will be distributed. It is not a substantial sum and I am alert to the need for beneficiaries to have declared income even if not distributed. This issue is being addressed.

The childless child is not in good health, is unable to work and relies heavily of distributions from the Trust. That child wishes to have the compensation payment in order to have a fund on which to draw if at any time the Trustees cannot maintain the level of distributions currently being made. Anticipated expenditure on the properties to meet energy performance requirement and changes in demand for commercial properties are two of the potential issues that the trustees are alert to in terms of maintaining the current level of distributions.

There are two existing trustees namely the life interest beneficiary with children and another member of the wider family. It is proposed that the existing non-beneficiary trustee will retire partly as a result of increasing age and that the new trustee body will comprise both life interest beneficiaries and two remaindermen. For a number of reason relating to the history of the Trust and its assets a professional will not be willing to accept an appointment as trustee and nor would an independent non-professional trustee. It is the make up of the proposed trustee body which partly lies behind the desire of the childless life interest beneficiary to have a fund on which they can draw without requiring consent of the trustees. This is not because there is lack of trust that the new trustees would pay compensation at a later date if asked to do so but to have certainty about the availability of funds if required.

I would welcome your further comments in light of the fuller facts even if it is to repeat a recommendation to seek advice from Counsel.

Thank you.

Richard Lloyd

Based on the information now provided, it appears that income received within the trust has been distributed to the life tenants. It is therefore unclear why there should be considered any requirement for the trustees to “compensate” a life tenant.

The proposed distribution by way of dividend(s) of the retained earnings within the company would seem all that the life tenant in question might reasonably hope for.

If there is power for the trustees to distribute capital to a life tenant, the suggestion that any “compensation” granted will be lent back to the trust would seem to undermine the basis of the exercise of any such discretion.

Unless there is power under the trust for trustees to act to benefit themselves, the appointment of further beneficiaries as replacement trustees could impair the ability to appropriately manage the trust and the underlying assets.

The scenario now looks more complicated that I the original post and I would therefore strongly recommend that the trustees consult Chancery counsel as there may need to be some remedial activity before matters might move forward.

As Andrew mentioned, it will also be important to keep an eye on the trustees’ and life tenants’ reporting obligations to HMRC (both future and, perhaps, historic) to reduce the potential for more issues to catch them unaware.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thank you Paul, Andrew and Julian for your comments and advice. I much appreciate it. If you know of any brave soul who is prepared to take an appointment as trustee in very challenging circumstances do let me know?
Regards
Richard