The testator died in October 2013 having made a homemade Will, there are various legacies, the residue is as follows:
After testamentary expenses, the income of my residuary estate is to be used for the following:
a) medical expenses for my Beneficiaries; and
b) educational expenses for my Beneficiaries’ minor children.
Any income remaining, is to be paid annually to my siblings in equal shares.
Do you think that the siblings have qualifying IIPs or does their share fall under relevant property?
We have been having a discussion about it and would welcome any other views.
Does not look like a an IIP to me, because the the trustees have the power not to give the income (after it has actually arisen) to, or use it for the benefit of, any of those mentioned in clause 1. One does need to look at the whole of the Will, though, as there may be other provisions that affect how this operates. Ultimately, do the “siblings” have the “present right to the present enjoyment” of the trust fund or “the right to all the trust’s income, as it arises”? It doesn’t look like that to me.
I am not sure that I agree with Paul Davidoff, as it looks to me as an IIP with a discretion to pay the income elsewhere.
I was involved in a similar form of trust many years ago and recall that the income will be subject to the higher rate income tax as a result of the discretion, but that it was an IIP.
It is a rare type of trust provision and perhaps it would be appropriate to raise the issue with the will drafter or take a quick opinion from Chancery counsel.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
A few years ago I came across an “excluded property trust” arrangement whereby a UK res/dom individual could end up with an interest in an excluded property trust which held their money (which was then invested within the trust), so that the funds were outside the scope of IHT, whereas the funds would have been within the scope of IHT if held directly by the individual.
I understand that there were various changes in the IHT legislation around that time and, at the time of the arrangement, the IHT advantage could only be obtained if there was no IIP. In the trust in question, the individual had a right to the income arising in the trust, to the extent that that income was not accumulated by the trustees. So, although he was “entitled to the income of the trust fund”, it was subject to the trustees’ power to decide to accumulate: consequently, whilst one could say that he had “a right to the income”, it did not equate to an IIP: he did not have an absolute right to that income as it arose, because the trustees could do something to prevent him from receiving it. This is different from a defeasible interest where the beneficiary has a right to the income unless or until the trustees exercise some power of appointment: but even then, all income arising up to the date of that appointment would belong to the beneficiary (hence it is an IIP).
In the case described by Jan, it looks like the trustees can prevent the siblings from receiving income. To me, that does not look like an IIP. Having said that, given that it does not seem to be clear cut, Counsel’s opinion might be the appropriate course for those involved.
Reading and applying the decision in Pearson v IRC [1981] is indispensable. It is not always easy to apply the ratio of the majority in the House of Lords to the precise legal entitlement created by the actual words used in any specific case. The majority was 3:2 that there was no IIP but all 4 judges below had sided with that minority that there was an IIP.
Two aspects though seem settled:
1 A power or a trust to accumulate income (and there is no difference on this point) prevents altogether an IIP arising, whereas a power of advancement or appointment which, if exercised, would cause deprivation of or reduction in quantum of income does not do so; and
2 An administrative power which allows income to be used to meet trust expenses chargeable to income does prevent an IIP (though it may reduce, even to nil, the quantum of the income arising) but a dispositive power does because it operates as a distribution of income and if it is exercisable at the discretion of the trustees prevents an IIP by its very existence whether or not actually exercised.
Here in my view the possibility that income may at the trustees’ discretion be distributed to benefit certain Beneficiaries in defined circumstances prevents the siblings as default beneficiaries from each having an IIP in an equal part of the trust fund. So this is an RPT and the siblings do not have IPDIs. I of course presume that the siblings are not the only “Beneficiaries” as defined but in any event a trustee discretion to distribute income other than equally among a fixed class is a dispositive power preventing any one member from having an IIP in the absence of a stipulated minimum amount or proportion.
Also instructive is Inglewood v IRC [1983] STC 133. Although this is about a trust qualifying as an accumulation and maintenance trust, that issue turned on whether beneficiaries would definitely (not possibly) acquire an IIP in future which further turned on whether that could be prevented merely by the existence of trustee powers of revocation or appointment or other possibilities like a VTA 1958 order, an assignment by a beneficiary of their interest, or their bankruptcy. The Court of Appeal held unanimously that it did not; the beneficiary would become entitled to an IIP even if, after that vesting happened, he could be deprived of it by the actual exercise of those powers or the occurrence of such events. So the drafting needed to ensure that such powers could only be exercised after vesting (and other events could be ignored as too remote).
This decision then underpinned the confident drafting of such trusts, a good example of which are commonplace insurance policy trusts where the policy is held for A B and C, subject to a power of appointment in favour of X Y and Z and a power of appointment among A B and C, and so QIIPs if acquired before March 22 2006. Since then many will trusts have been drafted to provide a QIIP as an IPDI by giving a life interest subject to overriding powers of appointment and a power to advance capital to the life tenant (as s32 TA does not extend thereto).
2 should read “2 An administrative power which allows income to be used to meet trust expenses chargeable to income does NOT prevent an IIP”.
This is a homemade will but it is possibly worth remarking that medical and educational expenses are of such a nature that they would come within s32 or an express power of advancement/appointment as regards those defined as “Beneficiaries”.