I would be grateful for any views on the following scenario please.
The deceased owned two rental properties in the joint names of her and her husband.
When she died, she made specific gifts of her share in the first property to adult child A, and her share in the second property to adult child B.
The deceased’s husband wanted to continue receiving the rental income from the whole of both properties so, to allow for this and also secure favourable IHT benefits, the adult children signed a Deed of Variation within two years of the date of death, to give their father a life interest in the two half shares of the properties and named themselves as remainder beneficiaries, effectively deferring their entitlement until their father dies.
I am now considering the reporting requirements for the income tax payable on the rental income. Deeds of Variation are not retrospective for income tax so, on the face of it, the adult children need to declare the rental income received up to the date of the Deed of Variation on their own tax return, whilst the trustees (or their father if the rent is mandated to him) will need to declare the rental income received after the Deed of Variation was dated.
However, I am mindful that the adult children created a Settlement by the Deed of Variation so may be treated as the Settlors for income tax purposes. I therefore suspect that the rental income will still need to be declared by the adult children on their own tax returns, for them to pay the tax on, but I am struggling to find any commentary on whether or not this is correct.
If it is correct, it may therefore be easier for the trustees to open a bank account to receive the rent, use the funds to pay the adult children’s income tax bill and then pay the remainder to the father. Any advice on whether that would be sensible would be much appreciated.