I am advising H in respect of his late wife’s Will. She left a legacy of the maximum sum payable without IHT, to a separate pilot trust created at the same time as the Will. H and son (S) are the executors of the Will, H is sole surviving trustee of the settlement.
H wishes the trust to be ended so that he can receive all assets and preserve W’s IHT allowances for his estate via writing back. H’s 3 children agree.
On close reading of the settlement, it appears to be a “flexible” trust rather than a full discretionary trust. There is a list of discretionary beneficiaries including H and H&W’s issue, and the usual powers of appointment. However, income and trust capital is payable to the 3 children in default of exercise of the power of appointment. I have only ever seen this with life policy trusts before but this appears to have been drafted by financial advisers and the only asset referred to in the deed itself is a nominal £50.
Am I right in thinking this is an interest in possession trust, rather than discretionary? If so, I assume if we appoint the trust fund to H and end the trust within 2 years of W’s death, this would not get s144 writing back, and instead the 3 children are making PETs to their father.
If the trust was in the Will and not a separate settlement I would be suggesting some form of Deed of Variation. Can I do this if the settlement is a separate pilot trust?
The trust surely acquired the right to the legacy on W’s death. The trust seems to be the interest in possession variety, so no s144.
Can the trustees and PRs not enter into a s142 variation of the legacy itself in favour of H? The trustees would need to clarify that they had power to do so but as they could appoint 100% to H it seems implausible that there would be a fraud on the power. For IHT there would seem not to be PETs as the variation would replace the trust altogether save for £50. Cash is outside CGT but it seems a s62(6) variation would be desirable to stop it becoming settled property and for consistent tax treatment. Arguably as cash is not a chargeable asset a variation will not give rise to a chargeable gain on any reasonable analysis, or even one by HMRC.
From the HMRC viewpoint it is essential that the contemplated action should not be void at law. If the 3 children are content with the plan a future challenge by them should be prevented by their specifically authorising it. Ideally they would first be advised formally about all the consequences, financial and tax.
Theoretically any discretionary object other than H and the children could challenge but they have a mere spes and the trustees should record that they regard H as being the primary beneficiary. (Is there a Letter of Wishes supporting/contradicting that?).
Close families in such situations can often be sanguine about the risk of members,present and future, reneging but optimum formalities designed to rule that out are usually desirable even so. HMRC can certainly object on the grounds that the law itself does not permit the arrangement but not that it is vitiated by undue influence or other factor rendering it liable to be overturned by the beneficiaries. Though if that happens the tax consequences of it can be themselves uncomfortable, another reason to head it off as far as may be.
As ever it is hard to say more without seeing the document(s).