IHT/CGT effects re: Terminating Surviving Spouse Life Interest within 2 years of death

A Will has left the residue (shares) into a life interest trust for the surviving spouse. The spouse has been receiving the income since the date of death. Spouse exemption has been claimed for IHT purposes.

If the Trustees terminate the life interest by a Deed of Appointment of Capital in favour of the children absolutely, within 2 years of the date of death, I understand that this will be deemed a PET by the surviving spouse for IHT purposes and presumably will not, therefore, affect the claim which was made for spouse exemption?

No assets have yet been transferred to the Trustees. Can the Executors sell some of the shares utilising their annual allowance (and over two tax periods so as to claim 2 annual allowances) and then sell the remaining shares as bare trustees for the children? If so, can the children each utilise their respective CGT annual allowances?

Many thanks

Geraldine Craig
Tanners Solicitors LLP

If the IPDI is terminated this will be a PET and will not affect the spouse exemption claim, but it will be a CGT disposal unless the appointment occurs before the residue has been ascertained for CGT purposes. If it has not, hmrc will not consider the trust ever came into existence for CGT purposes and the assets will vest in the children at the death cost for CGT. The children could then direct the shares to be sold, and this would use their allowances.

If the residue has not been ascertained, the executors could sell some of the shares using their allowance, but if this is at the direction of the trustees, and not for the purpose of paying testamentary expenses, hmrc could take the view that it is a disposal by the trustees for cgt following an implied appropriation by asking for directions as to whether or not to sell.

Simon Northcott

When will HMRC consider that the ‘residue been ascertained for CGT purposes’? Does this mean when all assets have been realised and all liabilities and administration expenses paid?

Geraldine Craig
Tanners Solicitors LLP

A complicated area with many shades of grey! The answer will be different for each estate, depending on the particular circumstances. A good start point will be the hmrc cgt manual on this subject CG30700

Simon Northcott