I have been asked to advise in relation to a protective trust created by client’s grandmother’s will.
Residue clause reads as follows;
(b) To hold the income of the Trust Fund on protective trusts as defined by section 33 of the Trustee Act 1925 for the benefit jointly of my son and his wife and the survivor of them during their respective lives;
© To utilize the capital from the Trust Fund for the benefit of my said son and/or his wife if at any time my Trustees in their absolute discretion are satisfied that it is necessary to raise capital for them or either of them to meet any necessary commitments;
(d) From and after the death of the survivor of my said son and daughter-in-law to pay and divide the Trust Fund or so of it as shall then be left (as to both capital and income) unto and equally between my three grandchildren absolutely
Grandmother died in 1971.
Client is one of the grandchildren named in clause (d) and also present trustee of the trust along with her ex - husband.
At the date of death the estate consisted of a property and some shares. Most of the shares have now been sold and there is approx. £15,000 in bank accounts from sale. Client’s father died approx. 20 years ago; her mother is now in her 90s and still living in the property. Mother is thinking of downsizing, but trustees are concerned about possible CGT.
As I understand it
i. S 33 Trustee Act states that if a divesting act occurs, the property in the ‘protective trust’ passes into a discretionary trust (and, therefore, if mother downsizes, the protective trust ceases and the assets in the protective trust from that point onwards belong to a discretionary Trust as described in that section).
ii. However, for tax purposes, the assets in the discretionary trust will be treated as belonging to mother (s88 IHTA 1984) and so on her death whatever is in the trust will be considered as part of her estate for IHT purposes.
What I am not clear about is what exactly would fall into the discretionary trust if the property is sold (assuming that sale would be a ‘divesting’ act that would trigger the protective trust ending, and the discretionary trust being formed?) Would it be just the income and use of it, or would it also include the capital?
I assume that as the beneficiary has used the property as her principal residence, Principal Residence Relief would be available to the trustees and so there would not be any capital gains tax payable. Is this correct?
I also assume that whether or not the ‘divesting act’ occurs, the value of this interest will be taken into account for the purposes of mother’s IHT liability on death and so, if there is no CGT payable, there is no tax advantage to keeping the protective trust anyway?
I want to be able to advise client of any ramifications if property is downsized, if there are any.
Hanne & Co