Life interest trust - assets paid to life tenant during her lifetime

Dear Forum

Does anyone have any thoughts about the best way of dealing with the following situation please as I am going round in circles? Or has anyone else dealt with a similar situation previously?

Mr died in 1998 leaving his share of the family home on an IIP and also the residue of his estate on an IIP. His surviving spouse was the life tenant of both trusts and his (their) issue were the remaindermen.

House was sold after his death and the proceeds of sale together with all the residue of his estate were passed by his professional trustee to a lay trustee to deal with. The lay trustee utilised the monies for her mother’s benefit during mother’s lifetime. As far as we are aware none of the remaindermen (all children of both Mr and his surviving spouse) have any objection to the funds having been used for their mother’s benefit and believe that was their father’s intention…

Mrs has now died and we need to terminate the trust, notify HMRC and distribute the remaining assets. My concern is that the trust funds have been depleted and IHT should have been due on the value of the deceased’s share of the property and the residue monies but the figures have been vastly reduced by the “gifts” to mother during her lifetime.

If the actual funds remaining in the trust are declared, are HMRC being defrauded of tax? Could it be formally agreed between the remaindermen that they have made a “gift” of the monies to their mother during her lifetime therefore they made PETs? If so, is the effective date the date of their mother’s death (albeit that wasn’t the date the monies were spent) as they weren’t entitled to any of the trust assets until their mother died. What figures should be included in the IHT100? Is there an appropriate Deed for dealing with the “gifts”?

Any thoughts/suggestions welcome!

Carole Hewett
Locum

If the remaindermen made gifts to their mother (which is a reasonable analysis on an undocumented Saunders v Vautier basis) then it would not be a PET. Mother had an IIP (so the funds were in her estate for IHT at the time) and the funds passed to her so I don’t see it as reducing her estate. The reduction happened when she used the funds, which is not a transfer of value.

Children didn’t make a PET as they gave away their reversionary interest which is excluded (I think).

Also, on the formality side, was there no express power to advance capital to the widow? It isn’t always there but I would expect to see one in most cases. It doesn’t require a deed unless the requirement is stated and would also not be a PET (for the same reason as above).

Andrew Goodman
Osborne Clarke LLP

Thank you, Andrew - that’s really helpful

Carole Hewett
Locum