I have a life interest trust set up on will which is a QIIP (a trust more than 15 years old)
The trust owned various properties let out and the income is mandated to the beneficiary.
Recently some land has been sold and after CGT the trust has a decent amount in the bank. It still owns one property. All land/property is held jointly with the life tenants brother.
The rental is received gross and 50% paid over to the life tenant. It has recently been discovered that the brother has been paying the insurance, etc himself and obviously wants 50% repaid to him.
In an ideal world the LT would pay this as received the income, but the LT is refusing; doesnât understand and i cannot convince them otherwise to âpay upâ.
The trustees will have an IHT liability on the death of the LT and so are careful to retain the capital in the bank to cover this, as well as ongoing fees, etc.
I have suggested the trust pays the other joint owner from the funds still held from the sale. There will be plenty left for the potential IHT.
However the expenses are revenue in nature (repairs, insurance, etc) so can the trust pay these from the capital on the land sale?
My research suggests yes (as preserving the trust property) but the fact the property is let has âmuddied the watersâ. That would more point revenue. I am happy to accept the trustees can pay as capital and the LT will go no rental deduction for the expenses.
Alternatively treat the expenses paid as âloanedâ to the LT and will have to ârepaidâ on death?
The trust deed (i.e. the will) is very short as so old. It contains very little other than creates the trust and states what happens on LT death. Nothing about paying capital/advances, etc.
The trustees are the joint legal owners of the property with the LTâs brother(B). They are in the absence of contrary agreement jointly liable for these income-type expenses, even if only one has accepted contractual liability to pay them to a third party.
The trustees should not charge their share to capital without the agreement of the remainderman (R), whom you do not identify.
The income tax position is that the entire costs are deductible from the gross rent, regardless of which joint owner pays them, so B is fully entitled to regard himself as owed by the trustees the excess amount he has disbursed.
If the LT has accepted liability to income tax on the gross rents I wonder what B has done. If I were he I would have deducted all the relevant expenses from the total rent and returned the net as the total taxable income, as per the statutory notional GAAP accounts basis, and entered half of that net as my taxable income. The legal consequence of that is the LT has de facto received via the mandate too much of the net income and could not resist a claim by B for payment of the excess without credit for the fact, if true, that LT has paid too much tax on her inflated rental income as returned. Tough.
The problem here is one of family dynamics and this probably extends to R. LT has no legal (or divine) right to the mandate arrangement and the trustees could stop it tomorrow. This arrangement does not affect the tenants who cannot obtain a good discharge for the rent by paying a person who is not their landlord unless they have notice of an assignment. You do not say who the landlord is but clearly it should be the trustees and B and the tenant should be paying rent to a bank account in their joint names or to 2 separate accounts but in neither case direct to the LT.
So the hardball strategy is to terminate the mandate and any rent payment arrangements that are currently permitting direct payment by the tenants to the LT. That is the clear duty of the trustees unless R is content to authorise payment to B of what is owed to him now and in future or B is content to forget it. If so he should do that formally by deed
to bind his successors. A loan by B is the current factual and legal position now and will not be deductible for IHT on the trust when LT dies because the trustees will have a corresponding receivable from LTâs free estate where it will be deductible.
If I were the trustees I would devise a strategy with the agreement of B and R. If agreed the trustees would then serve a formal notice on the LT either to pay up or to warn that there is a debt payable on demand which will grow over time and payment will be demanded at the latest from LTâs executors. This is a receivable of the trustees alone so B need not be involved in the notice. He may not be immune from the consequent histrionics which may colour his agreement to such a course of action. This and any change in the mandate or the (undisclosed) rent payment arrangements are also best made subject to agreement with B but the mandate is legally the purview of the trustees alone.
If the life tenant is not prepared to reimburse the other co-owner what they are owed and what has been incorrectly taken by the LT then I agree with Jack that their mandate should be terminated immediately with no further remittances until the co-owner has been completely reimbursed. Going forward, unless they are prepared to be reasonable and pay for their share, the trustees should hold the rent and only remit funds to the LT once they are satisfied that nothing further is due to the co-owner. The co-owner should be encouraged to send copies of any relevant expenditure to the trustees/LT promptly so that timely reimbursement can be arranged.
So it comes down to this. Are the trustees prepared to do their duty and take on the LT or back down until she pops her clogs and go for the estate and risk a limitation defence? If the latter they need to write to her annually reminding her what she owes, obtaining proof of delivery. If she uses the letter as toilet paper, so be it.
My understanding is that the statutory limitation period will not be extended where the creditor reminds the debtor of their liability UNLESS the debtor acknowledges their liability in writing.
I believe that proof of delivery of itself does not constitute âacknowledgementâ.
Clearly, unless the debtor, or her personal representatives, are appropriately advised, an annual reminder might assist in recovery of the sums due.
As matters stand, I suggest the trustees/life tenant are liable for the appropriate share of the future insurance premiums/premia. As regards historic premiums, I suspect a claim may be limited to the last 6 years only (unless there has been an acknowledgement within the last 6 years, in which case the liability could extend to premiums paid with the period of 6 years before that date).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Point taken. Trustees in this kind of situation should do their best to obtain the consent of every relevant beneficiary of full age and capacity to minimise the risk of being sued.
This is an object lesson and why I always advised if possible to have non-professional executors and trustees. They do not need to run off to Court for directions on the significance of a semi-colon in the trust instrument and they can apply in their robust decision-making the conscience of a well-trained hippopotamus.
I recall in the 80s clients exporting a family trust to Jersey, before the CGT exit charge, a few months ahead of an IPO of a company in which it owned a controlling shareholding. The trustees were three brothers and were prepared to retire and risk breach of trust and judicial disapprobation on the grounds that England is still âagainst the envy of less happier lands, this precious stone set in a silver seaâ: John of Gaunt aka Lord Denning. If HMRC or anyone challenged the validity of the appointment of Jersey trustees they would at least have a war chest to fight them. âI couldnât possibly commentâ: Francis Urquhart.
Thank you all for your comments. I cannot disagree with what is said. But I have to be practical.
As it is we are only looking at one years exps of insurance and a roof repair (maybe 2 years max). Sorry i was not clear on this. The tenants pay most exps.
You are right that the trustees with B own the land. One trustee is a professional and one is the LT.
We need to have a meeting and I will explain the position and what âshouldâ happen as to stopping the mandate so exps can be deducted/paid properly. I have no issue in stopping the mandate, and I can relatively easily get the rent paid to the trust account. It may upset the LT but I can recommend a distribution each month so still income received. And the LT personal tax will go down as there will be a 20% tax credit on the rents. So overall no difference, just a âtimingâ issue.
I will look into the tax deduction side, which I was conscious of.
As it is, fortunately there is an arrears of rent following a review. I am going to request this is paid to the trust bank account, and then advise that a majority of this is retained in the trust (post BR tax) to cover revenue exps going forward. Strictly this is taxable on accruals basis (trust) but the amounts, etc have only just been agreed so I will tax in year of receipt. Again being practical, adn to avoid all the professional fees of reopening years, etc.
That may be a âgoodâ solution here to allow the mandate to continue in the short term as the trust will have a ârevenueâ balance owed to the beneficiary.
I am a great supporter of the pragmatic and practical. I might have suspected the LT would be a trustee, as this is so common where they are the spouse of the settlor and especially the surviving spouse of the testator. This must add to the difficulty of explaining that the law may be contrary to the LTâs entrenched views.
The LT was rather confused that the value of the trust is in their estate, which creates an IHT issue. As they donât actually âownâ the property why are they taxed on it, was the phraseâŚ.
As you say the clients just do not understand how it all works and interacts. I continue to preserveâŚ.