Successive life interests

Trusts Discussion
#1

I have a trust created by a will where the deceased died in 1999 creating a life interest for his widow, followed by life interests for his 2 children and then the capital to the grandchildren.

The widow has now died and we are not instructed in the estate but only the trust matter. The trust fund is substantial and there are significant gains within the portfolio. Some of the investment companies have confirmed that they can direct that the interest moving forward be split equally between Fund No 1 and Fund No 2, one for each child. Others cannot and require a trustee account as the income from those current investments cannot be paid to more than one account. Up until the death of the widow all income was mandated to the widow and her own tax returns completed accordingly. The trustees did not get involved in handling any income nd would prefer not to have to moving forward to minimise costs and complications.

My concern is that if we change investments now we risk crystallising a gain and there are substantial gains on the fund in excess of £250,000. The trustees annual exemption has been used year on year. Am I right in that if we retain the current investments but simply redirect the income into a trustee account then there is no issue with capital gains? Further if it comes to the trustees’ account, do the trustees then need to do tax returns for the trust and account for the income and tax to the beneficiaries or can we be a simple conduit? If this is the case what income expenses can we deduct?

One further point relates to what IHT form I need to complete as the trust continues with albeit different beneficiaries? There is an ending of the widow’s IIP so would it be IHT100b? This seems to be when the trust terminates but the trust continues? However, I am sure the fud still needs to be aggregated with the death estate to calculate the overall tax or maybe not? Assuming I do need to aggregate the value of the trust fund with the widow’s estate when I am not getting any information from the executor regarding those values, how can I do this without compromising the position of the trustees? It is likely there will be the NRB, some if not all of the TNRB and the RNRB and the TNRB. However, I haven’t got enough information to categorically say this for certain. Any IHT becoming due on the trust on death this could be quite significant as we have a large portfolio of investments and also a significant property to sell in which the widow lived.

Any help gratefully received.

Many thanks

Lis

Lis Whybrow

WhatleyRecordon

Solicitors

12 Worcester Road

Malvern

Worcestershire WR14 4QU

Tel: 01684 892939

Fax: 01684 892327

#2

Dealing with your questions about IHT, it is form IHT100b which you prepare for the ending of a life interest. The transferees will be the new life tenants. At the top of that page it states that if the interest in possession came to an end on death then HMRC will calculate the tax due. This is because, as you say, the trust fund is aggregated with the deceased’s estate of which you do not have details.

#3

What exactly do you mean by investment company? Do you mean an investment manager or a fund of some kind?
Have you taken into account the CGT uplift on the death of the widow or have the gains accumulated since then?
Removing the mandate would not ordinarily amount to a disposal of the investment, you are just asking them to pay the income somewhere else.
Yes the trustees would have to file a tax return (there’s a useful HMRC document on deductions somewhere).
Yes, IHT 100 and 100b. Yes, you need to aggregate the trust with the widow’s estate (and the executors need to do the same).

I would chase the executors and point out that you will be filing a return anyway so if they do not co-operate with you, they could file erroneously and suffer penalties (presumably the trust could absorb a lot of her nil rate band(s)). If they absolutely refuse then you can only estimate and inform HMRC what you have done and why. They will/may get the full estate information from the executors at some point.

Andrew Goodman
Osborne Clarke LLP

#4

Does not s72 TCGA 1992 help by stepping up base cost to the date of the LT’s death without taxable gain?

Jack Harper

#5

I was getting myself tied up in knots last week. Thank you for your response. It helps to have someone confirm the position.

#6

I’m sorry - i should always check before pressing send. I do mean investment manager and I think it is him who has thrown me. Of course there is a CGT uplift on death and so any gains will have been wiped out up to her death.

I think the problem is not the removal of the mandate per se but the issue that the various investments will not permit income to be mandated to more than one person sue to “money laundering” restrictions. Not that I fully understand why that would be if full ID is provided and source of funds are clear as nothing would be changing in terms of the investment.

I will chase the executors again as you have suggested and see if I get anywhere further - can I claim all the exemptions for the BRB, the TNRB and the RNRB and the TRNRB if I don’t get any information from the executors?

#7

One further point - if there any losses in the value of the shares should they need to be sold give rise to a loss am I right in thinking I can claim loss relief too or is that simply if there is a sale within the free estate?

#8

You don’t need to have this information to complete the form. HMRC calculate the tax by amalgamating the information you supply with that for the estate. You may though want the details so you can check their workings.

#9

Until you know the position in the life tenant’s estate, I would work o the basis that IHT is payable at 40% on the entire trust fund.

The life tenant might have fully used their nil rate band during their lifetime. Whilst it may be expected that a transferable nil rate band and/or the residence nil rate band would be available to reduce the IHT, they have to be claimed. However, they a claim can be submitted by the trustees and not just by the personal representatives. However, until the PRs have disclosed details of the estate, you cannot be certain as to the extent to which any available reliefs will apply to the trust fund.

Turning to the loss on sale question, s.179 IHTA applies to all titles subject to IHT and not just to the estate, so the trustees may also claim tis relief.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

#10

Thanks Paul - that’s very helpful

#11

One further question if I may please?
Do the trustees get the full annual exemption for the CGT for the tax year of death and two subsequent tax years or do they continue to have the trustees’ exemption of one half of the personal allowance?

#12

The trustees continue with the usual trustees’ annual CGT allowance. The year of death plus the following 2 years relates only to the deceased’s estate.

Should either of the new life tenants qualify as a disabled person for the purposes of Schedule 1C TCGA 1992, it may be that the full annual CGT allowance is available in relation to their share of the trust fund, although it would be necessary to consider the current trusts in detail to ascertain if their interest would qualify.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals