In the real world the trust property is now vested absolutely in the remainderman (R). It is no longer excluded property as a reversionary interest. So a gift of it would be a TOV.
s142 operates in a fictional world. I assume the 2 year period is still on foot. It can be utilised by R but he must use a document which specifically varies the will of the deceased by leaving the the trust fund to his intended beneficiaries as a specific absolute gift or on trusts for them (in the same or a separate document). He will obviously elect for reading back for IHT.
He alone, apparently, can and should execute the document. This seems strange as the effect of reading back is to nullify the IHT effect of a termination of the IPDI. This seems only to benefit the LT 's estate.
But hold on! This will also negate the spouse exemption if it would apply apart from the variation! This is not stated. In that case it seems that the deceased’s PRs or estate beneficiaries would have to agree to the variation. The example in IHTM35047 is helpful save that the LT is alive and a party to the variation. I suggest that whatever the tax law may direct, there must be at least a risk that equity will not allow as a matter of property law a variation which causes a detriment for any beneficiaries of the estate being varied. This could happen if any part of the tax caused by the loss of the spouse exemption did not fall exclusively upon R. The variation could also ensure that this did not happen by careful drafting.
It is conceivable too that the IPDI termination charge when the LT dies could be cheaper in terms of IHT payable than if a variation was effected with reading back. The calculation of IHT payable on each route may need to take into account available NRB RNRB and their transferables.
The foregoing may be academic in face of the formidable obstacle that HMRC may not accept that the IPDI termination can be negated.
IHTM35025 warns against a simple assignment by R as this does not work and also, with 35042, that a life interest of a dead LT cannot be redirected (though that is arguably wrong in law as the whole of s142 is an unreal never never land through the looking glass).
IHTM35042 is also helpful as it suggests a warning: that as in the OP HMRC might argue that because the IPDI holder has already died R would be varying the life interest, which they refuse to allow. But surely that death leaves R in the real world with an absolute interest.The issue is whether R would be varying the estate (OK) or the will trust (not OK).
IHTM35044 does seem to suggest that R can vary his own remainder interest but must accept that there will have to be a charge on the death of the deceased, subject to spouse exemption, and also a further charge on the termination of the IPDI; but a variation with reading back will allow R to substitute others as remaindermen.
Fortunately HMRC offer another solution, namely that a disclaimer by the LT’s executors could be made.
Now the general law they allude to prevents a disclaimer if the LT has received a benefit and it must be ascertained that on such a disclaimer the trust fund will vest in the remaindermen and that, in the real world which is the on inhabitated by disclaimers, no intermediate right to income would arise. See IHTM16180.There is no time limit for a disclaimer but the variation that operates in consequence must be within 2 years.
For CGT there is no need to elect for reading back if R can only vary who becomes entitled to the remainder. On the IPDI termination there will be a market value CGT-free adjustment whoever becomes absolutely entitled to the trust fund. If the variation creates trusts I still think this is so but the drafting matters as in all Bond v Pickford situations. An effective disclaimer would however make base cost the date of death market value instead.
Jack Harper
Someone replied to a topic you are Watching.
| KylieCox1 Kylie Cox
21 April |
I would be very grateful for views on a point arising in practice regarding the application of s.142 IHTA 1984 following the termination of a life interest trust.
Scenario:
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A Will trust (1960s) created a life interest.
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The life tenant has recently died.
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On death, the trust fund has fallen into possession and the remainderman is now absolutely entitled.
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The remainderman wishes to redirect the fund to another beneficiary.
My initial view was that, as a matter of trust law, the life interest has now come to an end and the remainderman is dealing with a vested entitlement. On that basis, any onward transfer would be by way of assignment/gift, rather than a Deed of Variation.
However, the point has been raised as to whether s.142 could apply within two years of the life tenant’s death, on the basis that the settled property is treated as part of the life tenant’s estate under s.49.
Having revisited the legislation, it seems that s.142(5) excludes property treated as comprised in the estate by virtue of s.49, which would suggest that the trust fund is not capable of variation by reference to the life tenant’s death.
That would leave the position as:
I have seen some conflicting commentary on this (including suggestions that a variation may be arguable in these circumstances), and would be interested to hear others’ views — particularly whether anyone has successfully applied s.142 in this context or had HMRC accept such treatment.
Many thanks in advance.