We are dealing with an Estate where the deceased left his share of the property to his spouse on a life interest with the remainder interest falling into the residue.
The Residue is held on a Flexible Life Interest Trust with the spouse as the life tenant. The Estate is worth £2.5m including the property.
The spouse and her fellow Executor/Trustees are surprised at the complication of the Will and wish to vary the Will to the spouse absolutely.
To begin with the FLIT of the residue, there is a power of appointment contained within the clause which allows the Trustees to appoint the assets out, if they appointed out the assets within 2 years of the death, it is my understanding that they would benefit from the reading back rules for IHT and CGT (if I am not mistaken).
My concern is regarding the separate life interest of the property, as the remainder falls into the FLIT, I don’t think a Deed of Variation would work to end the life interest, as such, would a Deed of Surrender of the life interest be the most appropriate way to go, but if so, this surrender would be classed as a PET by the spouse?
I suggest that it would be appropriate to terminate the life interest over the property by deed of variation, otherwise there is a risk that when it falls into the FLIT it would be “resettled” for IHT purposes, and therefore not be an IPDI but subject to the relevant property regime. It would not then be a PET, but a lifetime chargeable transfer by the life tenant.
To the extent that the trustees appoint out any of the property subject to the FLIT, if an absolute appointment, this would be a PET by the life tenant – s.144 IHTA only provides for a read back for IHT purposes if there is no intervening life interest, such as a FLIT. If not an absolute appointment, an IHT relevant property trust will usually arise.
It may be possible for the trustees to dress up the exercise of their discretion in such a way that it is treated as a variation under s.142 IHTA 1984, although to the extent that any of the property subject to such an arrangement was initially subject to the separate life interest and that life interest was terminated by a deed of variation, there is a risk that the rule against double variations might apply, and I suggest that perhaps Chancery counsel might be employed to navigate that potential issue.
It may even be that if the trustees make an exhaustive appointment of the residuary estate and the life tenant then terminates their life interest in the property trust, s.142 IHTA 1984 will successfully apply to both variations.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Would a Deed of Variation over the property be possible due to the remainderman being the FLIT so there are no individual beneficiaries to consent to the variation?
Furthermore, if the appointment was to the spouse absolutely, mu understanding was 144 would apply for reading back purposes as the appointment overrode the life interest, if the appointment was to the children for instance, this would mean 144 would not apply, although i may have misunderstood this.
s.144 cannot apply if there has been an intervening IPDI, as will be the case where there is a FLIT, unless the IPDI is first removed by deed of variation effective under s.142.
It has occurred to me that the way forward might be for the interest in remainder to be appointed absolutely to the intended beneficiaries. s.48 IHTA 1984 should apply so that there is no transfer of value. Once that appointment has been made, the life intertest can be terminated, either using s.142 (in which case IHT will become payable on the testator’s death), or by the trustees’ exercise of their power to terminate, in which case the life tenant will be deemed to have made PETs to the remaindermen. The trustees will remain liable for any IHT should the life tenant die within 7 years of the termination of the IPDI, so will need to consider retention of funds or obtaining a life policy
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
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