Pre 2006 Discretionary Trust

I have a pre 2006 Discretionary Trust (1987) where a life interest was granted to two beneficiaries upon reaching the age of 25. The trust holds shares in the Family Investment company. The beneficiaries are now looking into revoking their life interest for the benefit of their children (i.e. the other beneficiaries in the trust). Am I right in saying that as the appointment onto revocable life interest trusts was made after 21 March 2006, the termination will be a non-event for IHT purposes as the trust remains within the relevant property regime. The appointment out will give rise to an exit charge, regardless of whether the appointment creating absolute interests occurs immediately upon the termination of the IIPs, or some time thereafter.
What about CGT implications?

Sandra, could you clarify the facts and the chronology? I am not clear what has happened and when and what interests the beneficiaries now have and what do they wantto do with them? The 1987 DT granted contingent life interests.You say"appointment onto revocable life interest trusts WAS made after 21 March 2006". Is this something the trustees did or the beneficiaries? Or is it what is proposed?

Jack Harper

My mistake Jack the trust was set up for the trustees to grant two beneficiaries life interest when they turned 25. I incorrectly stated that this happened post 2006. This event happened pre 2006. Both these beneficiaries now wish to give up their life interest for the benefit of the other beneficiaries ( their children).

What are the interests of the other beneficiaries? Are they fixed vested or contingent remainders or still subject to discretionary trusts? Do the two life interests extend to the whole of the trust property? If so the trust would currently be a QIIP trust not RPT because those life interests existed before March 22 2006.

The termination of a life interest would be an IHT chargeable event on the value of the property in which it subsisted (?50%) but could be a PET if the property then vested absolutely in one or more children. Otherwise it will be a CLT with the tax charge dependent on the life tenant’s cumulation. All or part of an NRB and annual exemptions could be available (and CGT gift hold-over relief to boot).

A simple release of the life interest or an assignment of it will not create a PET. If vested remainders do not exist they will firstneed to be appointed which, if the trust is originally a DT, the trustees should have the requisite powers to do. Care is needed if appointing to minors: a vested remainder which falls in will be held on an RPT unless s31 TA is excluded.

Another way round is for the property to first be appointed to the life tenant (DT trustees should have the power but s32 TA is not available) and for the life tenant to make a personal PET or CLT. The distribution to the life tenant is an exception to the IHT charge on termination of a QIIP.

CGT must be borne in mind. If the property remains settled after the termination there is no disposal by the trustees. But if it vests absolutely in a beneficiary there will be and a PET is not eligible for gift hold-over relief. This would also be the case if the property was first distributed to the life tenant. If the termination caused a CLT which was also a CGT disposal such relief will be available but there will be an IHT charge. The actual depends on the life tenant’s cumulation.

Potential IHT cost and CGT cost, in the short and the long term, will often have to be balanced against each other in this type of exercise. Often in the equation should also be the loss of CGT tax-free revalorisation to market value on death in the light of the life tenant’s life expectancy weighed against the opportunity to make a lifetime disposition and avoid IHT by seven year survival.

Jack Harper

Hi Jack A much delayed thank you for this. It went quite for a while and the subject has resurrected again

So to recap
If the property remains in the trust and the 2 beneficiaries with a life interest releases/assigns the life interest to their children it is not a PET but will be a CLT. Is there a way around this?

You mentioned distributing the assets to the 2 beneficiaries with the life interest (winding up the trust), This should not create an IHT charge but CGT is in point.

So the trust own shares in a family investment company which in turn hold a portfolio of stocks and shares. They are in the process of winding up the company to make a distribution to the trust. In this case would it not be better for the trust to distribute the assets absolutely to the 2 beneficiaries with the life interest, creating a disposal for CGT purposes, then for the beneficiaries to wind up the company. The cash can then be used to make PET’s to their adult children.

You input is much appreciated