IPDI created by Cash Gift in DOV

X died leaving Will with residue to be split between adult children. One child entered into a DOV to redirect £100,000 of her share of the residue to her own minor children upon them each attaining 25 (i.e. £50,000 for each minor child). The legacies in the DOV did not carry income or capital growth and so an IPDI has inadvertently been created in favour of adult beneficiary.

The effect is:
(a) the child receives £50,000 at 25;
(b) income due to residuary beneficiary (creating IPDI therefore a life tenant);
© capital growth due to adult beneficiary when child turns 25;
(d) adult beneficiaries deemed to be making at PET of £50,000 on each 25th birthday; and
(e) the trust will be making a disposal for CGT.

The children are minors and cannot rely on SvV to end the Trust.

My queries:

  1. Is the IPDI only in favour of the one adult residuary beneficiary who entered into the DOV, or to all of the residuary beneficiaries?
  2. What is the correct route for the life tenant(s) giving consent to the trustees to end the trust now in favour of the minor children?
  3. Is there another option to change the position so that all capital/income goes to the minor children without ending the trust in such a way that would result in PET and CGT implications for the life tenants (i.e. to correct the DOV to carry out what was intended)?

Any thoughts are welcomed.

Laura Willis

Usually, I would expect the original beneficiary’s share of residue to be charged with payment of the future sums, rather than a trust created over the full £100,000 which, potentially, creates a wide range of issues as identified in the posting.

In the circumstances, it sounds as though the drafter has misunderstood their instructions.

An application to rectify the deed under the “mistake” principle might be the best option, thus eliminating the various side issues that complicate what should have been a relatively simple arrangement.

Paul Saunders

I understand a legacy for a child of the testator would normally be considered to carry the intermediate income but this does not apply to a grandchild and I think that is the basis for your question. I wonder if the same rule necessarily applies to a variation. If it does then my views for what they are worth are:

  1. The IPDI must relate to the adult residuary beneficiary who entered into the DOV since the property is property to which he would (apart from the DOV) have been entitled. Essentially he has failed to divest himself of all his interest in the property given.
  2. This depends on what would happen if the minor child did not attain 25. If the legacy would revert to the adult, then the adult can assign (absolutely to the child) both their IPDI and their reversionary interest. All beneficial interests should then merge, making it a bare trust for the child.
  3. Rectification will be expensive. If the adult assigns their IPDI to the child (without the trust ending as a result) that would ordinarily be a CLT, but within the NRB presumably and will fall out of account after 7 years. On the child attaining 25 the CGT could be held over. Note, however, there is a ‘funny rule’ for DOVs that create an IPDI that comes to an end within 2 years of the death of the deceased (see s. 142 (4) IHTA) - that could potentially ‘rescue’ the situation here but take care to read HMRC’s guidance in their manual about this because HMRC’s view about how this provision works is perhaps not what you might expect.

Paul Davies
Clarke Willmott LLP

With regard to Paul Davies’ posting (12 June), a variation is a personal gift by a beneficiary dressed up as a disposition by the deceased for IHT and CGT purposes. Accordingly, unless specifically stated to be the case I do not believe the rules relating to testamentary gifts apply to gifts made under a variation. This would include a right to interest – would it not be perverse if, say, a cash gift by variation made immediately before the 2 year anniversary carried a right to interest from the end of the “executor’s year”.

Paul Saunders