Life Interest Trust queries

Trusts Discussion
1

I am currently looking at a Will to try and answer some queries raised by the Trustees.

It includes the following standard looking Life Interest Trust Clause:

I GIVE free of duty all my share and interest in equity as beneficial Tenant in Common in the proceeds of sale and in the net rents and profits until sale of the freehold property at Buckingham Palace (made up) aforesaid and all other (if any) my interest therein to my Trustees to hold the same upon and subject to the following trusts and provisions:
i) Whilst my wife BETTY BOO remains alive and desires to reside in the property and keep the same in good repair and insured comprehensively and to its full fall value with insurers approved by my Trustees at no cost to my Trustees and to pay or indemnify my trustees against all rates taxes and other outgoings in respect of the property my Trustees shall not make an objection to such residence and shall not disturb or restrict it in any way and shall not take any steps to enforce the Trust for Sale on which the property is held or to realise my share therein or to obtain any rents or profts from the property.
ii) Subject as aforesaid my Trustees shall hold the same as both capital and income UPON TRUST for my sons the said BOB BUILDER and SCOOBY DO as shall survive and if more than one in Tenants in Common in equals shares absolutely.

  1. Wife, Betty has recently gone into a care home. House is currently sitting emply and not being rented out (going to assume the correct exemption for Council Tax has been applied for by wife)

  2. Wife says she wants to sell the house now so she has monies in the bank for care home fees. Therefore not wishing to downsize the property. The Two Trustees who are also the 2 remainderman of the husband’s Will are quite happy to agree to a sale as I think they think they will be getting their inheritance at last (their dad died over 10 years ago).

  3. However does the Trust’s half share of the sale proceeds have to be invested so the wife can derive an income whilst she is alive based on the wording of the Life Interest Trust Clause?
    Or

  4. Can the Trustees and Life Tenant simply agree by selling the property they are both mutually agreeing that the wife’s Life Interest ends and the wife is then essentially doing a PET to the 2 remaindermen of the Trusts half share, so now has to survive 7 years?

  5. The wife also want her sister and husband to move into the house whilst the property is being got ready to be sold, partly so the house is not left empty and partly due to her sister and husband needing somewhere urgent to stay. This the Trustees are not particularly happy about (as the relationship between the Trustees and LT is frosty at the best of times) and they want to know as the wife/Life Tenant is no longer living in the property if they have to agree to this and if not what can they do to stop it. They are concerned that the sale of the property will end up being deliberately delayed by the wife’s family. Wife is well off in her own right so does not need the sale proceeds to her half share of the house at this time so I suspect will not be in a busting rush to sell.

My views is unless the trustees and the LT both agreed to mutually end the Trust - then the wife remains entitled to claim an income from the Trusts Half of the Property Sale Proceeds, so these will need to be invested/paid into a Trust Bank Account (IFA to advise on this).

Whilst there is nothing in the Will to say otherwise I also believe if the Trustees and LT are all in agreement then they can bring the Life Tenancy to an end, but a PET will be deemed ot have been made by wife which she will need to survive 7 years (not sure if this will happen) so if the property gets pulled back into her Estate, does the Trust and the Wife’s estate both need to hold money back to pay for potential IHT liability?

Finally, I am guessing there will also be a CGT liability to pay for the Trust’s Half of the Sale Proceeds, noting husband died over 10 years ago but wife’s will be CGT free as the property being sold is her PPR?

Am i thinking along the right lines here? My brain has started to boggle somewhat!

K

2

The drafting here confers only a right of residence, not a life interest in the deceased’s half share. For IHT practice IHTM16133-9 are compulsory reading. Yours is a case of joint owners as TICs with the deceased co-owner having left his share by will to his named sons subject to Betty’s right of residence(ROR). She owns the other share.

Clause 3(1) in the Lloyds case at IHTM16134 and your clause i) seem identical. It confers a right of residence for life or for such shorter period during which Betty desires to reside in the specific property (and no other) and does the things she is bound to do. The “desires to” phrase without any indication how to ascertain it as subsisting at any given time, and so when it ceases, is bad news. So would be a simple “resides” criterion without a definition of what that meant and so when it ceased.

Without the ROR the sons would take directly and she would be exposed to their rights under TOLATA 1996, to occupy with her, to demand an occupation rent in return for allowing her exclusive possession, or to seek a court order for sale (however unlikely to be granted, still conferring unwelcome leverage and jeopardy). With the ROR she can agree to any of these things but cannot be compelled to.

But she can only enjoy in her own right 50% of any rent if the house is let and 50% of any sale proceeds. The trustees would be entitled to the rest of the rent or sale money on behalf of the sons.

Her ROR terminates if she dies, or ceases to desire to reside, or perhaps (as constituting the extinguishment of that desire) if she actually ceases to reside, as she must if the whole house is let or occupied by someone else, unless such non-residence is objectively temporary or involuntary, and also if she defaults on her specific duties.

Here Betty is in a care home. Has her ROR ended? The actual clause wording strictly requires her to no longer desire to reside. Does her actually ceasing to reside, if she has, evince such a decision if not expressly stated, where her non-residence is incontrovertibly permanent? Or if only very likely to be so?

The curse of these ROR trust limitations is that the drafter often does not attempt to define, even non-exhaustively, what circumstances will constitute no longer desiring to reside, or ceasing to reside, or breach of duties. The first presumably can pop be satisfied by a positive notice to the trustees (they are not thought readers) and the third by a defensible objective assessment on their part. There would ideally be notice machinery on her part to avoid ambiguity and notice of default and time to remedy machinery on the trustees’ part. If none, there is no reason why the trustees should not insist on such a written notice procedure as being appropriate best practice.

What causes the most trouble in the absence of a definition is whether and when as a matter of fact the termination of the ROR has occurred. You may find that there is no dispute here but the trustees should try to engineer a written agreement of the position binding on all parties. HMRC should accept that unless it is not defensible. It could be as simple as all agreeing that this will be denoby Betty giving the trustees formal notice that she unequivocally no longer desires to reside. Her ROR must cease at the very latest on completion of a sale.

The timing matters for tax purposes. It also determines whether the trustees or the sons are the other proper contracting parties on a sale. And who is entitled to agree to let her 2 relatives into possession before sale or veto it. This will be academic if everyone all parties decide that this is just not on because of the risk of prejudicing delivery of VP just as you fear.

While her ROR is on foot it surely does not allow her to sublet or part with possession unilaterally; the trustees would have to agree, no doubt prudently after first consulting the sons. Indeed if she attempted this it might cause her ROR to end as furnishing evidence that she no longer desired to reside. She would face being held to account for not charging a proper rent at least one covering the trustees’ share and for any loss or damage. If the trustees have notice in time they can surely prevent it in principle. Once her ROR has ended all this is then for her and the sons to agree.

(In a Will of this type it should be made clear precisely what the ROR holder can and cannot do while it subsists and that any breach will cause a termination of it unless forgiven by the trustees).

For IHT the ROR is an IPDI and a termination of it is a PET by Betty. The TOV is the value of the sons’ half share with a 15% discount.

(If I were advising her I’d say she had a bargaining chip. She could offer to terminate her ROR for a sum reflecting its NPV based on her life expectancy, accelerating the remainder. This is a common deal on a partition where there is a full life interest. The sum would reduce the TOV. She may just be content to go for a sale without haggling, which may not even work.The sons may just call her bluff).

If she dies within 7 years the PET will fail, the sons will be liable for the tax subject to her NRB and taper, and any NRB used will increase tax on her free estate. Either risk could be insured in theory

For CGT there will be a gain to the trustees on the sons’ becoming absolutely entitled whenever the ROR ends but this gain and her own gain on the sale should both attract PPRR. To maximise the CGT relief it could be better for the entire property to be sold before the ROR ends if otherwise the sons would realise a gain on any increase in value between their acquisition and the later sale of their half share. Not material if the gap is small and outweighed by the certainty offixing the ROR termination date by a conclusive notice given by Betty.

Jack Harper

3

Thanks Jack for your detailed and extremelly helpful response.

Much appreciated.

K