Life Interest Trust - life tenant did not receive any benefit

Trusts Discussion
1

Hello

I am dealing with an estate where B has passed away owning a 50% share of a property (50% share is worth £250,000) and other assets of £400,00. B is divorced so NRB is limited to £325,000 plus RNRB of £175,000.

When B’s unmarried partner A died 4 years ago her will set up a Life Interest for her share of the property to give B the right to continue living at the property but also a right to income should the property be sold during B’s lifetime.

By the time A died B was already in residential care so did not occupy the property after A’s death. The property remained unsold and B has now died. The property was not rented between the two deaths so B has not received any benefit since A died.

Does A’s share of the property still form part of B’s estate for IHT purposes due to the Life Interest? or is there an argument that it does not because B did not receive any benefit after A’s death?

Thank you

Jon C

2

It is too late. The deceased might well in the precise circumstances have been able to disclaim during lifetime (subject to careful consideration of the relevant tax, property law and deprivation of assets consequences). His PRs have nothing to disclaim.

The remaindermen, given all have capacity, could disclaim now but that would cause a resulting trust to the estate of the settlor and pass under their will or on intestacy without automatically undoing the tax consequences of any of the original gift, which looks like possible economic rather than legal double IHT—unless HMRC are sympathetic to the argument that all part of the value has already been taxed in effect.

It seems likely that during the LT’s lifetime the share of the house in the trust never attracted CGT PPRR but at least any pregnant gain will have been extinguished on death as the LT had an IPDI.

There may be IHT QSR at 20% if the 2 deaths were more than 4 but less than 5 years apart: s.141 IHTA.

Jack Harper

3

I have advised the use of s.93 IHTA 1984 following the death of a life tenant and HMRC has accepted a disclaimer, made even a couple of years after the LT’s death.

To disclaim, the intended beneficiary must not have accepted the “inheritance”, whether or not they have benefitted from it is (in my opinion) a red herring.

If the property had been in the sole name of the deceased, and the life tenant whilst not occupying the property had, say, paid an insurance premium this could be sufficient “acceptance” to rule out any disclaimer. In the present instance, the life tenant was the surviving co-owner and, therefore, may have paid any property expenses in that capacity. In which case they would be entitled to re-imbursement of the deceased’s share of such expenses, which claim might help support a disclaimer of the life interest.

On the basis of the above, the fundamental question I would raise is whether the life tenant had accepted the interest, not whether they had benefitted from it.

N.B. This is my last post on the Forum, as I am now retired and looking forwad to enjoying new and different challenges that life has to offer outside of wills and trusts :blush:

Paul Saunders FCIB TEP

Independent Trust Consultant (Retired)

4

You will be much missed Paul. Enjoy your retirement.

Simon Northcott

5

Best wishes, Paul, we will miss your invariably authoritative contributions.

I find it extraordinary that HMRC
would permit PRs to disclaim a life interest. As a simple matter of property law nothing devolves on the PRs which could be disclaimed by them. For them to purport to do so is nonsense (“Nunsints” per Mr Roy Keane, who might tell HMRC to “Do yer Jarb!”)

It is tantamount to my solemnly disclaiming my mere spes as a discretionary trust object (nothing to disclaim: Gartside v IRC, Schmidt v Rosewood) or more facetiously my interest in Tower Bridge.

I agree with Paul that acceptance is also relevant as well as benefit. Agreeing to disclaim for consideration would be an example.

I suggest that reliance on PRs disclaiming should not be taken for granted without HMRC’s written confirmation of the desired tax outcome. They will not (apparently and incredibly) be interested in the property law outcome: which is that the life interest remains alive and kicking while the life tenant is too. So HMRC clearance needs to be backed up by a compromise agreement with any beneficiary who might sue the PRs for devastavit.

Any person can disclaim a power by deed but, if it is joint, survivors not disclaiming may exercise it if the instrument conferring it permits: s.156 LPA 1925

Trustees cannot properly release a power vested in them without authorisation in the trust instrument and they would need that to disclaim any property right that did devolve on them e.g. interest receivable on a loan or indexation of the principal. A trustee can disclaim the office itself but once accepted not any power conferred on its holder as such.

Trustees are of course in a different position to PRs because they are third parties entrusted with the settlor’s property whereas PRs stand in the shoes of the deceased charged with the administration of his or her own property. A key aspect of that is to identify what rights (and obligations) of the deceased become comprised in the estate.

There are some substantive rights, fully enforceable in lifetime by the deceased that do not devolve, like certain rights of action. A subsisting action for defamation may devolve but cannot be initiated by the PRs. Stalin died in 1953 and his grandsons were not allowed to complain to the ECHR when in 2009 he was described as a “bloodthirsty cannibal” and they could not have sued for defamation in England (though in Scotland—I could not possibly comment).

Another area of law where it often is necessary to determine what property devolves on another is personal insolvency and a trustee in bankruptcy can by law disclaim onerous property which does in law devolve.

A life interest of an individual terminates automatically on his or her death, so cannot devolve. Similar reasoning applies to a purported lifetime assignment of an interest in expectancy: it can only operate as a contract to assign it if and when the interest comes into being and consideration is essential. You cannot assign a future contingent right under the will of a living person and a contract to disclaim it for consideration after the relevant death is likely to be regarded as acceptance. While a deed normally sidesteps a requirement for consideration it cannot take immediate effect if the property interest it purports to deal with does not then exist and a disclaimer of it by deed though eventually enforceable would constitute acceptance when it did take effect.

These comments are to some extent speculative as there are, not surprisingly, few reported cases on disclaimer.

Jack Harper

6

IHTM35042: HMRC says a disclaimer of a life interest can be made “if it is possible… as a matter of general law”. Inscrutably they suggest a referral to Technical “if the taxpayers will not accept this view”.

This is rather through the looking glass with Alice. As HMRC are not apparently sure the operation is lawful why would Technical have a different or indeed any opinion at all but one which cannot be published. It invites the suspicion that the VAR is being secretly conducted by someone with an over-elastic application of the offside rule.

Jack Harper

7

I have just discovered the case of Smith v Michelmores [2021] EWHC 1425 (Ch). This is a decision of HHJ Paul Matthews, a co-author of Underhill and Hayton, so not some mere acquaintance with relevant onions but a veritable connoisseur thereof, as his judgments frequently demonstrate. His remarks at paragraphs 62-74 are strictly obiter but carefully and lucidly expounded.

The case concerned an individual who had just recently and while declared bankrupt purported to disclaim by deed his interest as an eligible object of a discretionary trust, an appointment from which after declaration of bankruptcy could have been claimed by his trustee in bankruptcy as after-acquired property (but not if made after his discharge) to pay his creditors.

Judge Matthews acknowledged the cogency of the case law that decides that there is no proprietary interest but opined that there are other rights e.g. in essence to compel due administration, including to be properly considered for benefit by the trustees and to challenge a fraud on a power. What my director of studies in law (back in my 18th century days in statu pupillari) would have described as a “congeries” of rights.

So arguably such an object has something he can validly disclaim.

However I stand by my comments on disclaiming a life interest which is a substantive equitable proprietary right during the LT’s lifetime but self-destructs at the moment of death. So does a contractual right to a pension or annuity payable only during lifetime.

Jack Harper
.

8

My last on this—honestly, promise!

I know that no one cares about such trivial matters these days but is it not a criminal bankruptcy offence to gratuitously dispose, during or within the previous 5 years, of “property”?

Ss.357,436 IA 1986

Jack Harper

9

I would like to wish Paul Saunders well on his retirement. Paul, I have enjoyed reading your learned and helpful posts over the years and shall miss seeing your name pop up on the Forum.

Cliona O’Tuama