I am dealing with a trust which was set up by Will. It leaves half of an estate on trust for a neice (N) for her life and thereafter to X and Y.
N has been receiving the income but would prefer a lump sum payment (£60,000) in favour of passing the balance of the trust to X and Y during her lifetime.
I have advised the clients that the gift of the balance in the trust from N to X and Y would be a PET. However, would the payment from X and Y to N in order for N to forgoe the income for the remainder of her life also be regarded as a PET, or would one simply offset the other?
At the back of my mind is an understanding that where a trust fund is partitioned between the life tenant and remaindermen on an actuarial basis it is a non-event for IHT as there is no element of bounty and so no transfer of value. However, I cannot locate any text that either confirms or contradicts that understanding.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Regarding Paul’s comment on partitioning, the life tenant’s interest in possession terminates and such tenant makes a transfer of value (ToV). The value of the ToV is simply the value of the amount of the trust fund which passers to the remainderman.
s3(2) IHTA directs excluded property to be ignored in determining whether a transfer of value has occurred, so as long as the remainder qualifies as excluded property the transaction is an acquisition only increasing the remainderman’s estate.
Apart from this it might be a transfer of value on general principles by the remainderman, as Paul indicates, if the value of the property received was less in value than the the actuarial value of the remainder. But s3(2) operates even where that is so.
The charge on the life tenant is fixed artificially, instead of s3 applying, by s52(1)-(3) and the actuarial value paid to the life tenant may not, almost certainly will not, prevent a transfer of value altogether as the settled property deemed to have been in the life tenant’s estate will be worth more than what is received by him or her in the partition.But it can be a PET under s3A(7) and s3(4). See IHTM16092. Malcolm puts this infinitely more succinctly than s52(4)(b) IHTA which emphasises that this Act should not have escaped the Tax Law Rewrite project.
In a post March 2006 trust the partition itself is a non-event but the distribution of the trust property to each party will be an RPT chargeable event for IHT.
s48 deals with what is and is not excluded property as regards settlements which covers a reversionary interest unless specifically excepted. s52 (3)-(6) contain reliefs for reverter to settlor/ spouse on a partition and specify some circumstances denying relief.
s3(2) IHTA directs excluded property to be ignored in determining whether a transfer of value has occurred, so as long as the remainder qualifies as excluded property the transaction is an acquisition only increasing the remainderman’s estate.
Apart from this it might be a transfer of value on general principles by the remainderman, as Paul indicates, if the value of the property received was less in value than the the actuarial value of the remainder. But s3(2) operates even where that is so.
The charge on the life tenant is fixed artificially, instead of s3 applying, by s52(1)-(3) and the actuarial value paid to the life tenant may not, almost certainly will not, prevent a transfer of value altogether as the settled property deemed to have been in the life tenant’s estate will be worth more than what is received by him or her in the partition.But it can be a PET under s3A(7) and s3(4). See IHTM16092.
In a post March 2006 trust the partition itself is a non-event but the distribution of the trust property to each party will be an RPT chargeable event for IHT.
s48 deals with what is and is not excluded property as regards settlements which covers a reversionary interest unless specifically excepted. s52 (3)-(6) contain reliefs for reverter to settlor/ spouse on a partition and specify some circumstances denying relief.