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; doesn’t understand and i cannot convince them otherwise to ‘pay up’.
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 “muddied the waters”. 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 ‘loaned’ to the LT and will have to ‘repaid’ 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 LT’s 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 LT’s 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 LT’s 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.