We have a life interest trust for two beneficiaries, but the drafting is not perfect, in that the drafter appears to have simply adapted a precedent for one life tenant by using the term “Beneficiaries” rather than Beneficiary, and defining the Beneficiaries as X and Y.
The Trustees would like to end the trust and transfer the whole of the trust fund to just one of the life tenants, and I am trying to decide whether this is permitted under the trust document.
The Trustees are directed to pay the income from the Trust Fund to the Beneficiaries during the Trust Period. There are no words of separation, such as “in equal shares”, or even “jointly or to the survivor”, so I interpret this as a gift of income to the Beneficiaries as joint tenants, which would in fact pass to the survivor if one dies.
The Trustees are also given a relatively standard power of advancement, as follows:
“at any time during the Trust Period as to the whole or any part of the Trust Fund to the income of which the Beneficiaries are for the time being entitled transfer or raise and pay the same to or for the absolute benefit of the Beneficiaries in such manner as my Trustees shall in their absolute discretion think fit.”
It seems to me that as the Beneficiaries are jointly entitled to the income of the whole of the Trust Fund, the Trustees could properly exercise this power by transferring the whole of the Trust Fund to just one of them. Do others agree?
Failing that, then we would need to advance the Trust Fund to both and then encourage one Beneficiary to give his share to the other (it is a friendly family situation), but we would prefer not to have to do that if possible.
Following your analysis of joint life tenants, which seems eminently reasonable. caution would surely dictate that while both were living you could only advance to each their presumptive share. But one of them could assign their rights to the other and 100% then be advanced to the latter.
The IHT consequences of the assignment are likely to be no different in a pre 2006 or IPDI trust to a 100% advance to one of them and nil in an RPT save for the advancement itself. There are no consequences for CGT in a resident trust, only a s71 chargeable event on the advancement. If there is a theoretical TOV on an individual’s assigning a life interest gratuitously it must be calculated as the NPV of the income stream over the life expectancy. s51 IHTA prevents a TOV except in an RPT situation. The interest in the underlying capital is excluded property: ss47 and 48 IHTA.
The original scheme of the Act was to make the disposal of any life interest a termination of it with a charge on the property in which it subsisted, with a reduction for actual consideration received. If the life interest is in an RPT the possibility of a TOV on general principles was either overlooked in 2006 or deemed not to require specific treatment. It does seem to create such a TOV but a PET if assigned to the other life tenant.
As you say, an advance to both of the Beneficiaries is perhaps the sensible and less risky approach.
This is an IPDI. I hadn’t considered an assignment of his life interest by one Beneficiary to the other, but believe it would then create an RPT over that one-half share. Is that correct? If so then the simpler option would probably still be to advance to both and for one to then simply give his share to other. Either option requires an active gift by one of the life tenants to the other and a two-step process, which is what we were hoping to avoid.
If the assignment is followed by an immediate distribution of capital there would surely be no additional RPT charge. A surrender of the life interest would not create an RPT. Each involves a termination charge under s52. As you say it may be easier todistribute first without that charge and for the former LT to make a PET.
It is hard to be dogmatic without sight of the document. It may be that the life tenants here are not in fact the remaindermen. It certainly seems unlikely that they could be the only ones or S v V could be made to operate…The assignment of a life interest to Tom Dick or Harry or the other LT would give the transferee a life interest pur autre vie if the transferee was not also the sole remainderman. The apparently distinct separation of equitable interests here, and the absence of a wide power of appointment, emphasises the need for the trustees to do things with precise care in exercising their express power of advancement as it will deprive the remaindermen, whoever they are, entirely of their interest(s) which may engender chagrin. Ok-ish if not actionable!
If an RPT in half of the trust fund is created by the assignment of one LT to the other an immediate distribution to the other under the express power may attract a low rate of charge, even 0%. This depends on the stage at which the trust currently is in the period from its commencement i.e. is it still before the first 10 year anniversary or after such an anniversary?.
The fund’s becoming relevant property may not prevent a charge in principle, because of s68(5)(d) or s69(2)-(3), but the rate may be low, especially if the settlor had made no chargeable transfers in the 7 years before making the settlement so the trust has a full nil rate band and the quarterly reduction rule may also be favourable. Plus only 50% of the fund is chargeable; the QIIP fund is not a related settlement and does not hold relevant property. Any available NRB will go further because applicable in full to just half the fund’s value. The charge on termination under s52 will also be on only half of the fund. The final distribution of the other half will not be chargeable: s53(2).
It could even be favourable for CGT as hold-over relief would be due on the RPT distribution, provided the 3 month trap was avoided; the prior assignment is neutral for CGT.
My assumption is that if the LT is content to make a PET of their half of the fund they might not mind making a CLT of it on the termination of their interest in that half. But of course they would not if it exceeded their NRB plus annual exemptions.
Jack Harper
It is hard to be dogmatic without sight of the document. It may be that the life tenants here are not in fact the remaindermen. It certainly seems unlikely that they could be the only ones or S v V could be made to operate…The assignment of a life interest to Tom Dick or Harry or the other LT would give the transferee a life interest pur autre vie if the transferee was not also the sole remainderman. The apparently distinct separation of equitable interests here, and the absence of a wide power of appointment, emphasises the need for the trustees to do things with precise care in exercising their express power of advancement as it will deprive the remaindermen, whoever they are, entirely of their interest(s) which may engender chagrin. Ok-ish if not actionable!
If an RPT in half of the trust fund is created by the assignment of one LT to the other an immediate distribution to the other under the express power may attract a low rate of charge, even 0%. This depends on the stage at which the trust currently is in the period from its commencement i.e. is it still before the first 10 year anniversary or after such an anniversary?.
The fund’s becoming relevant property may not prevent a charge in principle, because of s68(5)(d) or s69(2)-(3), but the rate may be low, especially if the settlor had made no chargeable transfers in the 7 years before making the settlement so the trust has a full nil rate band and the quarterly reduction rule may also be favourable. Plus only 50% of the fund is chargeable; the QIIP fund is not a related settlement and does not hold relevant property. Any available NRB will go further because applicable in full to just half the fund’s value. The charge on termination under s52 will also be on only half of the fund. The final distribution of the other half will not be chargeable: s53(2).
It could even be favourable for CGT as hold-over relief would be due on the RPT distribution, provided the 3 month trap was avoided; the prior assignment is neutral for CGT.
Jack Harper
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diana.smart:
I hadn’t considered an assignment of his life interest by one Beneficiary to the other, but believe it would then create an RPT over that one-half share.
diana.smart: