Life tenant buying out remainder beneficiaries

Couple owned property as tenants in common. Husband died last year leaving IIP trust of the property in favour of the wife and then to his adult children. The property has not yet been dealt with in the administration and is still registered in their joint names, with a form A Restriction.

The life tenant wishes to purchase the remainder interest from the beneficiaries, who are in agreement and a sum has been agreed.

I appreciate that there are potentially CGT implications they will need to consider. The consideration is only £100k so I do not believe SDLT would be applicable.

However, my query is how actually to achieve this with the minimum amount of fuss:-

A transfer of equity would presumably be between the trustees (vendor) and the life tenant (purchaser) but the property is not yet vested in them?

Would a Deed of Variation be more straightforward and then a simple application to HMLR to remove the deceased proprietor and Form A Restriction.

Struggling to see the woods for the trees with this one and any help gratefully received.

Victoria Armour
VP Legal Solicitors

I agree that this could be dealt with by use of a deed of variation (provided that the 2 year period has not expired).

This would avoid CGT if the deed includes the s.62(6) TCGA 1992 declaration.

If the widow owns any other property, a variation would also avoid SDLT on the transaction (the 3% zero rate only applies to the first £40,000).

Does the widow receive £100,000 or more absolutely from the estate? If not, rather than creating a separate cash gift of that sum by the deed, the gift of the property interest could be made subject to the gift to the children.

Paul Saunders

Surely the vendor(s) are those with the remainder interest?

If the intention is for the wife to purchase the remainder interest at market value I do not see how a DoV under s142 IHTA 1984 would be of help. Any DoV executed by the remainder interest beneficiaries effectively on the understanding that thereafter wife would pay over monies reflecting the value of that interest would be treated as consideration for effecting the DoV.

IHT : Note s55 IHTA 1984.
CGT: Note s71 TCGA 1992 and probably no h/o relief s165.

Even if the wife with the IIP already owns another property, the 3% SDLT charge which would in principle apply on purchase of the remainder interest would not arise due to Such 4ZA para 7A which would appear to protect the wife on the purchase of the remainder interest from such charge.

Malcolm Finney

With regard to Malcolm’s comments, provided that the variation includes the gift of £100,000 to the adult children, this should not engage s.142(3).

I have been involved in such arrangements a number of times and HMRC has at no time suggested that a variation of this nature invalidates the arrangement for IHT purposes.

The essential point is that the cash gift is an integral part of the variation. If the variation is silent, the cash transaction will be consideration and nullify the effect of the variation for IHT (and CGT) purposes.

The gift of the remainder interest, being an interest in expectancy, even outside of a variation would be a gift of excluded property and would have no IHT consequences. However, in the scenario under consideration if the variation was used only to create the cash gift to the adult children, the gift of the remainder interest would constitute consideration and negate the application of s.142 to the cash gift.

With regard to s.55 IHTA, surely this cannot apply as any variation to which s.142 applies is treated as having been made by the deceased for all IHT purposes (hence, for example, a variation does not give rise to any gifts with reservation).

I also note Malcolm’s comments re SDLT, thank you.

Paul Saunders

While I hestitate to introduce a complexity that isn’t mentioned, if the terms of the Will provide for the adult beneficiaries’ interests pass to grandchildren should they predecease the spouse (which must be common drafting), there is a very interesting issue as the trust wouldn’t cease on purchasing only the adult beneficiaries’ reversionary interests.

Of course, it will depend on the wording.

Stuart Maggs
Howes Percival LLP

I have a similar situation but property held in deceased husband’s sole name. IIP granted to wife (it is her principal residence) but if IIP surrendered and property sold during her lifetime proceeds divided 50/50 between her and Deceased’s children.

Wife wants to surrender her IIP and purchase 50% from the children. They have only just decided to go down this route and we are sadly just outside of the 2 year period.

Many thanks

Kathy Melkerts
Melkerts Solicitors

Many thanks for your thoughts which have been helpful.

Victoria Armour
VP Legal Solicitors

I wonder if, in Kathy’s situation, it might be preferable to partition the trust fund and for the children’s entitlement to be a charge against the property, which the widow can then satisfy out of her own resources.

The children’s 50% entitlement will be discounted as they will be receiving it “early”.

Actuarial advice will be required to value the respective interests.

Paul Saunders

All change again on this one!!

Life tenant has now decided to sell and receive half sale proceeds. She feels this would just be a tidier way of dealing with things.

I suppose a Deed of Surrender would cover it but are there any hidden tax concerns I should be wary of?

Property likely to sell for around £450k and net proceeds 50/50 between life tenant and Deceased’s adult children (in accordance with Will).

Many thanks

Kathy Melkerts
Melkerts Solicitors