I don’t entirely follow. S.144 and s.142 can operate in relation to the same estate. The objective of using s.144 is to get over the problem that DT trustees cannot properly use s.142 to vary the estate dispositions because it is outwith their powers as a dealing with the trust fund otherwise than in accordance with the trust deed.
I do not say I would not be prepared to argue, faced with a done deal, that a variation by way of creating absolute interests in the estate in favour of eligible discretionary beneficiaries was in substance if not in form a lawful distribution to them. I would not with a blank page recommend that course of action because there is no clear authority that Equity would reach that conclusion.
Each section imposes a fiction for tax purposes alone. As usual the drafter of the law leaves taxpayers, their advisers, and judges, to determine the unstated limits of any application of the fiction to particular facts. A cowardly and callous dereliction of duty.
In particular, as I have pointed out, the fiction ignores a myriad of possible real world occurrences which flatly contradict the fiction. Just one example: A is given a specific gift of a property by Will and varies it by substituting a gift by that Will to B. In fact A has already sold or given away the asset or it has ceased to exist as where a leasehold was given and it has merged with A’s freehold.
I do not see why A, discretionary trustees, cannot distribute a property to B, an eligible beneficiary, by Fiction 144, and why B cannot then vary the gift in the Will to C by Fiction 142. There might be a distinct pong of fraud on a power if C is not also a beneficiary and A knows in advance of B’s intention. But apart from that DT trustees have no obligation to police what an absolute owner distributee does with the distributed asset.
But those are not the facts of the OP. The DT is the remainder to the IPDI of the widow who in the real world is dead. S.144 was never in point as there was a prior IPDI for however short a time. A distribution from the DT of the asset (the QRI) which in the real world vested in the trustees in possession on the LT’s death is a chargeable RPT event, not one within s.144 at all. The distributees, the children, can then vary the Will so that the QRI is deemed to have been a specific gift to them.
They are not “re-directing” the life interest of a dead LT which HMRC regard, wholly arbitrarily, as not permitted: IHTM35O42. It is not plain to me why this is seen by them as A Fiction Too Far, when they do not care that a variation redirects an asset that has been sold, given away or has even ceased to exist. But that is not what is planned here: the IPDI to the widow in the QRI is not re-directed but expunged altogether and the children substituted ab initio as if the Will had been originally so drafted.
In my opinion in property law the appointee children already own the QRI. The widow is dead and her PRs have no claim over the asset as her interest in it terminated. Arguably the children are the only necessary parties to the variation but the DT trustees can have no scruples or run any risk of challenge by being party also as they are doing no more thereby than giving further assurance to the precise distribution they have already made.
What objection can HMRC make? The widow is dead, her PRs have no standing, the DT trustees were not given a gift by the Will. For property law none of these is a proper party, only the children are. If they are not, the outcome is that no one can make a variation whereas if the widow had still been alive the trustees could have first appointed remainders to the children and then they and their mother could certainly have effected a variation. The simple legal question is who is the person or persons in s.142(1) “who benefit or would benefit under the dispositions”. That person, the widow, is dead. If she had been given an absolute interest her PRs could clearly have made a variation in favour of the children. If HMRC argue that there is now no such person within in s.142(1) so no variation is possible at all it is casuistry of the first order. But then, have you met HMRC?
This is a tax only fiction. There is no reason at all why the variation should not be made because as a matter of property law it is a nonsense: the children already own the asset and the purported variation with reading back is purely their humouring the performative lunacy of the s142 fiscal fiction. There is no downside except an RPT charge on the trust distribution, with CGT holdover unless the asset is going to be sold pronto and subject to the resultant tax cost being better than a disposal by the PRs. And on the assumption that there is no non-tax preference for retaining the asset in the DT if HMRC were refuse s142 treatment.
The clock of course is ticking and there may not be time to explore the official view either by NSC application or informally. HMRC as far as I know have no publicised settled position on the point, although they are devious enough to po-facedly argue it is a “re-direction”.
Jack Harper