The Testator made his Will in 2018 and died March 2024. He left his share of the matrimonial home for his Wife on Life interest trust. The residue passes to Wife and if she did not survive him, on discretionary trust for his two adult children and their remoter issue
LT now wishes to downsize (permitted by Will) but also release the share owned by the trust and surrender her entitlement to the interest for an immediate advance to the two adult children.
My question is whether the act of surrender will be considered a CLT and subject to tax as a gift to the trust rather than a PET directly to the children? If a CLT is there another mechanism to achieve the same end without incurring the tax burden?
I cannot seem to find a clear answer by trawling the HMRC’s less than helpful manual so would appreciate forum members views from personal experience and knowledge. Thanks.
Heather Jackson
Miss (she/her)
Wills & Probate Executive
For and on behalf of Macmillans Solicitors LLP
Tel: 01208 812415
Email: hj@macmillans-solicitors.co.uk
Manor House, Wadebridge, Cornwall PL27 6BS
It would seem that there is no power to appoint the trust capital to the LT nor is she an object of the DT. That would have offered a route to appointing the settled interest in the house to her outright so she could then make a PET.
I presume the children are objects of the DT, so that this objective could be achieved in a roundabout way. The first step would be for the trustees to exercise their powers under the reversionary DT by appointing fixed remainders to the children. The LT could then surrender her interest to them which would be a PET. (If she did not wish to give up all the value in the trust she could split it and make a smaller PET). Alternatively the children could assign their remainders to her (no TOV as excluded property within s.48) followed by her PET.
The fact that a termination of the settlement has a non-tax objective is a bonus because it neatly swerves several potential complications of this type of trust:
1 If the LT were to die RNRB would not be due on the settled share, though remediable if the children were appointed fixed remainders during her lifetime;
2 ss. 80 and s.102ZA FA 1986 are largely defanged when the trust is short lived.
There must be careful consideration of the timing of the trust busting operations in conjunction with the sale of the existing house and purchase of a new one, together with the funding issue. Presumably the current house will not be sold until a new one has been lined up but if the purchase of that can be conveniently funded other than from the sale proceeds possibly the purchase may come first.
1 CGT
At present each part interest of the house is accruing PPRR. If the trust is terminated before a sale the settled share will start to clock up a non-resident period if there is a surrender because it will pass to the children who I imagine cannot claim relief. If the termination is by assignment of the remainders it will pass to the LT who can claim relief until sale.
There is no problem if the sale precedes the trust bust.
2 IHT and GROB
A termination by surrender before sale will mean that the LT will continue in residence and so make a GROB until she moves out when there will be a s.102(4) FA 1986 PET (and no PET on the termination as no TOV then). A short interval is neither here nor there. No such problem if the surrender is made post sale nor if the children assign remainders , whether before or after sale.
It may be prudent for the fixed remainders to be appointed ASAP to remove the immediate loss of RNRB risk of LT dying. Once that is done the mechanics of the trust bust and its timing in relation to the sale should not imperil a future downsizing allowance: the settled share will be a QRFI whether it is sold out of the trust or extinguished by termination (however achieved) of the LT’s IPDI: s.8HA. Her own share will also be a QRFI. Other conditions will need to be met at LT’s death.
3 SDLT
The LT owns a part interest outright and another through her IPDI. It seems likely that Condition D will be met (replacement of main residence) —no doubt the 3 year period will not be a concern—but there may be the pay and refund issue if the purchase precedes the sale and before the SDLT1 has to be filed: SDLTM09800.
If the trustees can appoint the interest in remainder to the children now, the release of the life interest will be a PET, although could be caught by s.102ZA Finance Act 1986 if the life tenant dies within 7 years of ceasing to occupy the property (if later than the date of the PET).
Any IHT liability arising as a result of the release will be that of the trustees.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
