I just want to check my own understanding regarding tax implications of the use of overriding powers by Trustees for a Life Interest created by a Will on death.
The life interest allows the life tenant, in this case the testators civil partner, to reside in the testator’s property until death.
Overriding powers are included in the Will to allow the trustees to appoint the sole trust asset (in this case a property) out of the trust to the remainderman (testator’s children) of the trust without the need to obtain the life tenants consent (who is the civil partner of the testator but not a named trustee and also not a parent of the children).
If the trustees use this overriding power to immediately pass the property to themselves as soon as the testator has passed away would this effectively achieve the following result:
a) the property passing to the civil partner exempt from IHT
b) an uplift in the property value to remove any previous capital gain up to the testators death meaning it is appointed out of the trust with zero capital gain
c) the life tenant having made a PET which if they then survive 7 years (and its not treated as a GROB) will mean there is no IHT payable on their own estate
Whilst I agree with the tax analysis, without the agreement of the surviving civil partner I suggest it is a risky strategy.
The civil partner may refuse to vacate, so that the appointees are forced to initiate an action for possession (which could attract negative publicity)
Or
The civil partner could challenge the exercise of the overriding power on the basis that the testator intended they should have a home for the rest of their life and the trustees seeking to terminate the trust and put them out on the street before the testator was “cold” was, at its most benign, unreasonable. It would be interesting to see how a court might view the question.
One further point the trustees would need to consider and that is that if the civil partner did not survive 7 years, and IHT was payable in respect of the termination of the trust, it is the trustees who are primarily liable for the IHT, not the civil partner’s estate.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
If I understand correctly, on the testator’s death both the testator’s real and personal property devolves on the PRs (not trustees).
Under the testator’s will the PRs assent the property to trustees to hold the assented property on an IPDI (a qualifying interest in possession) for the civil partner. No IHT arises as an inter-spouse transfer occurs.
On the testator’s death there is a CGT uplift wrt the property to MV thus wiping out any inherent gain in the property. The property passes to the trustees at probate value ie MV.
On the death of the surviving civil partner the trust property in which they possess an IPDI forms part of their estate for IHT purposes.
The life tenant has not made any PET.
If, whilst the civil partner possess the IPDI, the trustees appoint the trust property out to the remaindermen the IPDI is terminated. As a consequence, the trustees are deemed to dispose of, and re-acquire, the trust property at MV precipitating a capital gain on their (ie trustees) part. For IHT, the civil partner makes a PET.