Wife owns a property and leaves this in a Life Interest Trust for husband (second marriage). Husband now intends to release his life interest and accelerate the terms of the Trust. This will be a PET for IHT purposes.
I understand that IHT attributable to failed PETs are assessed on the recipients but am not clear as to how to protect the Trustees in this situation; there are many reversionary beneficiaries who will share in this PET.
A claim for spouse exemption was made on the value of the property passing into the estate. CGT will not be an issue as Husband has remained in occupation [until likely sale].
How would practitioners deal with this in case husband were to die within 7 years?
Brewer Harding & Rowe
My understanding is that it is the trustees who are primarily liable for any IHT charge that may arise if the life tenant fails to survive 7 years from the date of the release/acceleration.
If the husband remains in the property after the release/acceleration, the arrangement could fall within the gifts with reservation scenario, and the 7 year period start from the date on which he actually ceases occupation.
Consideration might be given to the trustees retaining a cash balance to satisfy any potential IHT liability, or for the husband to take out appropriate insurance and assign it to the trustees.
The trustees will not get iht clearance until after H’s death. It could be longer than 7 years if the survival period is extended retrospectively, and the rate of tax is the rate at the date of death. Therefore the trustees’ only protection is to retain the trust asset/proceeds until after H’s death. In the meantime the reversioners will have a right to income.
Thank you for your responses Simon and Paul. This confirms what I had (unfortunately) suspected. Section 204(6) IHTA also confirms.
If the Trustees retain 40% of the proceeds “released”, then presumably they hold this as bare trustees for the remainder beneficiaries who are otherwise absolutely entitled?
Brewer Harding & Rowe
As I said, you do not know what the rate of tax may be-it will be the rate at the date of death. The trustees are liable for all tax up to the value of the assets which comprised the trust fund. If the rate goes up to the previous estate duty top rate of 80%, the trustees will be out of pocket by a considerable amount if they have only kept 40%, and will be personally liable for any shortfall.
I would not consider insurance adequate. What happens if someone forget to pay a premium? It would also need to cover the period to the date of death of the life tenant, for the reasons I gave below, not just 7 years.