Bring a Settlors interest in a RPT to and end

Trusts Discussion
1

I have a very unusually drafted inter vivos RPT trust, created in 2012. It is Settlor interested and creates a life interest for the Settlor, then to Settlor’s father (now deceased) for life, then to Settlor’s daughter for life and finally to the grandchildren absolutely on the death of the daughter. My client had created the trust with the intention of IHT planning and is devastated that it remains within her estate. She is prepared to now give up the income but has until now, been receiving it. We have flexible powers and can appoint the capital of the Trust Fund to the Settlor under the trust deed.

As far as I can see, we have 2 options:

  1. My client surrenders her interest, thereby advancing her daughter’s life interest. The RPT remains and there is no disposal for CGT or IHT. This would amount to a release of benefit by my client and she would need to survive 7 years, although as she is 87, insurance will also be taken out; or
  2. We appoint the assets back to her and she then re-settles the asset into a new trust whereby she is excluded as a beneficiary. This would be a disposal for CGT purposes but the value is below the NRB so no IHT would arise. Again, we will take out insurance to cover the 7 years.

Hoping I’m on the right lines

2

Under 1, the trustees would still need to remove the settlor from the class of beneficiaries who can benefit under the overriding power.

How about 3. The trustees appoint the settlement onto new trusts by reference to the trusts in favour of the daughter and her children and subject to the same powers and provisions but with a small amendment to the dispositive powers to remove the settlor.

3

In Andrew’s elegant solution one must be mindful of avoiding a gain on a deemed disposal per Bond v Pickford. See CG37800C onwards. It is usual to cite that save as set out in the appointment of the new trusts where they differ the provisions of the head trust remain applicable to the new. If the appointment is irrevocable and exhaustive that will only be definitions and administrative provisions. But you need to check that there is nothing else requiring exclusion.

Jack Harper