I have a client that has a large estate, but has also no inherited more from his late father. 50/50 Residue with his brother. Main asset is the property that is in the process of being sold, but keeps falling through.
But the 2 years is approaching and their IFA has advised that he prepares a DOV to transfer his half share to a Discretionary Trust. All good in principle, but is the DOV enough on its own, or would the property need to actually be transferred to the Trustees before sale (ie, at the time of signing the DOV).
Can it be a paper exercise for now and the trust receives the proceeds of sale when the property is actually sold?
Client is just conscious of time as 2 year limit is up in April.
Certainly a DOV should be considered before time runs out. A DT is not essential as the transferee under the DOV and may be what the parties want; but as the RPT rules will apply to subsequent distributions out of the property, or its sale proceeds, it may well may be liable in future to IHT. I would advise two DTs be considered, one for each of the sons, to avoid the complexity of managing a single trust which each might prefer to run and invested separately as would be the position if each had received 50% outright. The other son’s family can be Secondary Beneficiaries in each son’s trust and his own Primary Beneficiaries unless he has several children of his own already.
As the father will be the IHT settlor if reading back is elected for IHT, a single trust would start with the initial trust fund value factoring into the IHT rate on later distributions because that seems likely to exceed the single NRB. Two DTs will not avoid this because they will be related settlements. They would not be related if one was an IPDI trust but distributions would then be a PET or CLT by the IPDI owner and CGT hold over relief is only available for disposals out of a DT.
There may be a reduced or non-existent NRB if father had a lifetime cumulation from prior lifetime gifts.
A simpler DOV would be a 50:50 outright legacy but a DT has advantages for the sons’ own estate planning: the assets can skip one or more generations (with 10 year anniversary IHT charges) and the sons can be eligible beneficiaries without a GROB as father is the IHT settlor.
If the DOV is read back for CGT also, father’s PRs will pass the property to the DOV beneficiary (DT or whoever else) with a base cost of market value at death and no disposal for CGT. This is so even if the property has been sold before the DOV is executed. Any CGT disposal on sale will then be made by the DOV transferee, the trustees if the DOV so provides.
I should add that a DOV which is to be read back must be “made by the persons or any of the persons who benefit or would benefit” :s142 (1) IHTA 1984, s62(6) TCGA 1992.
The objects of the power would have to be parties to the DOV and at least they seem ascertained here and hopefully are adults. The trustees/PRs need not be parties. If not, and/or unless they co-operate, the DOV may only have limited effect in trust law and for tax:see IHTM35047https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm35047.
While the trustees could assist by resolving not to exercise their power of appointment, entirely consonant with their intent to distribute in full to the 4 default beneficiaries,no one can make them and there may be no time left to attempt to force them by threatening action. If they cause loss to the 4 by unreasonably refusing that may be actionable after the event.
My question was really more about the requirement for the trustees to receive the asset. The intention is that it will be £250k from the proceeds of sale. But the sale hasn’t gone ahead and may not do before the 2 yr. runs out. So if we prepare the DOV now for £250k, the actual asset to pass to the trustees may not exist until later.
So the question is, can the DOV just be the necessary paper exercise for now and the trustees receive the £250k when it materialises (I doubt it, but maybe some doctrine exists which allows this – hence my question) or do the trustees need to be added to the title to extent of their entitlement? Would an appropriation by the executors suffice?