Renovating a property within a discretionary will trust

Hi all - first post so hoping someone can help. However, in retrospect, it may be more of an accounting question…

Property is owned by a discretionary will trust. Tenanted by life tenant (wife of deceased)
Trustees are children of deceased and life tenant.
Remaindermen are grandkids/remoter issue.
The property is in a state of disrepair.

My queries are:

Can the rental income to the trust be distributed to the grandkids and used to pay for the renovations (given they ultimately benefit from the house not falling down). Is it anyone’s business what the grandkids do after receiving it?

Can the grandkids recoup any tax paid by the trust?

Or perhaps better still, could the renovation be classed as an expense of the trust (to protect its asset) and paid for directly?

Many TIA

I note that whilst the trust is said to be a discretionary trust, there is also reference to the life tenant. These situations appear contradictory. Is it a case where it is a flexible life interest trust, in which there is a life tenant, but the trustees have discretion to appoint income and/or capital away from her (or perhaps to her if she is also one of the objects of the discretion?).

Also, is the property wholly owned by then trust, or was it owned by the deceased and his wife as tenants in common?

Answers to the above should assist in identifying the beneficial interests and how the questions might be addressed.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thank you Paul for your answer and request for clarification.

I now have a copy of the Will which created the Discretionary Trust.

On reading, there is no reference to a life tenant so this appears to be an error on my part. I assumed the wife had been granted an IIP but it appears that all of the estate is simply held in the ‘Discretionary Fund’.

The estate comprised a farmhouse and his share (1/3) in the farm partnership (which owns 100 acres farmland).

The farmhouse was owned in the deceased name solely.

There are powers to appoint income and capital.

Rent is c25k pa and has accumulated for 2 years (so no where near enough to cover the c200k of renovations required).

Does this help to clarify?

Many Thanks

I suggest the trustees need to carefully consider the testator’s intentions when creating the trust and compare these to the reality of the situation.

The need for renovations costing in excess of £200,000 must raise the question whether it is an appropriate use of the trust resources to undertake those works. Are they all required, or are any “nice to have”?

Even if the trustees are able to borrow to fund the works (using the farmhouse as security), it may be another 8 to 10 years before the share of the profits generated by the partnership are sufficient to pay off the loans. Any lender would want to look to the value of the security and, perhaps, the impact the works would have on the value. If the farmhouse is worth £1 million +, it migt be seen as a better proposition than if it were currently worth, say, £300,000.

It may be that if the cost of the works are a valid deduction against the trust for income tax purposes (rather than being of a capital nature), and the trustees would need to take specific advice on that aspect.

If income is distributed, then the trustees would be undermining their ability to undertake any of the works – whoever it was distributed to would not be obliged to carry out the works. Even if they did, in a fully discretionary trust there can be no absolute certainty that they would receive the property at the end of the day. For trustees to purport to give a “promise” along such lines would be a “fetter” on their discretion and (I believe) void or voidable.

It seems the trustees may be in a tricky position and should consider discussing the options with the beneficiaries, perhaps earmarking the pssibility that the trust might not be able to “save” the farmhouse for the future generations.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thank you so much for the comprehensive answer. I really appreciate the time you have taken.

I agree - the trustees need to think hard about the reality of the situation.

thanks again.