I am dealing with the administration of a deceased estate which contains a life interest trust. This trust states that the deceased’s half share of the house is held in a life interest trust for the benefit of the surviving spouse. The other half share of the house is owned by the surviving spouse.
The trustees (one of which is the life tenant) want to sell the house and then transfer the sale proceeds of the half share absolutely to the remaindermen in accordance with the percentage splits set out in the Will. The life tenant consents to this and is happy for the life interest trust to be terminated and for the sale proceeds of the half share in the house to be split between the remaindermen.
The issue that I have is that one of the remaindermen is a minor aged 7. The rest of the remaindermen are all over the age of 18 and all agree to the termination of the life interest trust. I have considered the options:
The life tenant / surviving spouse cannot sign a Deed in which he disclaims his life interest because he has already received a benefit from the property as he is currently living there.
The trustees cannot advance the half share in the house to the life tenant under section 32 of the Trustee Act 1925 (for him to then subsequently gift to the remaindermen by making PETs) because they do not have an interest in the capital and there is no power in the administrative provisions to pay the capital of the trust to the life tenant.
We cannot apply Saunders v Vautier because one of the remaindermen is under the age of 18 (and it will be years before they reach this age).
My question is whether we could do a Deed of Variation without having to obtain approval from the Court under the Variation of Trusts Act 1958? The variation would affect the interest of a minor beneficiary and therefore I understand that consent from the Court may need to be obtained.
However, HMRC’s guidance is that only variations which adversely affect the interest of the minor beneficiary must be approved by the Court IHTM35045 - HMRC internal manualhttps://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm35045
I do not think that the Deed of Variation would adversely affect the minor beneficiary’s interest as they are due to receive 10% as one of the remaindermen in the future in any case. The only issue that I can think of is if the value of the house were to increase in the future, then it would be better for the house to remain unsold and for the minor beneficiary to receive their interest on reaching the age of 18.
The half share in the house and the deceased’s remaining assets are well within the nil rate band and the deceased did not make any gifts in the 7 years prior to her death. There should therefore be no inheritance tax payable if the half share in the house is redirected so that it passes to non-exempt beneficiaries.
I don’t read IHTM35045 as carte blanche for HMRC or anyone else to decide that a minor’s interest is not “adversely affected” by a variation. s142(1) does not use these words. It says “by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions” and subs (2);“Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation”. The relevant persons are the person or persons making the instrument:subs(2A).
So the point is that a minor has no capacity to make such instrument at all. HMRC say clearly and correctly “A parent’s signature on behalf of a minor is not sufficient.” However, as they also indicate, they will accept a variation by all the adults which leaves the minor’s remainder in place. It seems that there is no overriding power of appointment but you could use s32 TA to advance the minor’s share on trust absolutely excluding s31TA with the life tenant then disclaiming. That would be a PET and it may be cost-effective to insure (even if the NRB would cover it, the LT will have to accept cumulation for 7 years).
Otherwise, there being no apparent general impediment to a sale, 10% of the sale proceeds of will have to be retained in trust until either LT dies or at least until the minor attains 18 and can then come to an arrangement with the LT e.g. an actuarial split which would avoid IHT altogether (s52(2) as LT has an IPDI) or be a full or partial PET. If the latter is intended it might be better to make that PET earlier rather than later: the trustees can retain the fund until the minor becomes 18 or release it in whole or part if there is a parent’s receipt provision.
Another point (possibly somewhat academic in your case) is that HMRC must be wrong if their guidance is as set out above since the 1958 act says in so many words “the court shall not approve an arrangement on behalf of any person unless the carrying out thereof would be for the benefit of that person”. If it were true that only arrangements which adversely affected minor beneficiaries needed the court’s approval and it were also true that the court wouldn’t be permitted to give such approval, the 1958 Act would have no purpose. So HMRC must be wrong in including the word “adversely” at IHTM35045.
But of course I agree with Jack that there are often ways of handling these situations that don’t involve varying the minor’s entitlement.
The surviving spouse may execute a variation by which they effectively exclude their life intertest, without the need for any of the other beneficiaries to be a party.
However, what would be the effect of such a variation? Unless the interests of the remaindermen are already vested, or vest upon the termination of the life intertest, the proceeds of the half share may become held on trust “pur autre vie”, with a distribution of capital only occurring on the death of the surviving spouse (e.g. if the remaindermen are required to survive the life tenant).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Hi all - appreciate it’s been a while since last post on this topic, but this scenario is along similar theme - please if someone can opine:
Deceased died 5-6 years ago. Left 80% of his properties on life interest trust – partner life tenant – remainder to his children and grandchildren. Life tenant has been receiving income.
Wording used in Will:
‘to pay the income thereof to [life tenant] during her lifetime and subject thereto to be divided between such of [children] and my grandchildren as shall be living at the date of my death and attain the age of 25 and if more than one in equal shares absolutely.’
There is an overriding power of advancement and appointment and a further clause which says that the Trustees ‘have the power to approve on behalf of minor or unborn or unascertained beneficiary any variation of my Will (and my Codicil thereto) made in conformity with the provisions in s142(2) IHTA 1984 or s62(6) or the Taxation of Chargeable Gains Act 1992 as if such beneficiary had been of full age and ascertained and had joined in such variation as a party and been bound accordingly.’
None of the parties get on, very toxic situation and they all want to bring the life interest to an end which we believe is in the best interests of all parties. However, 2 of the remaindermen are under 25 and one of them is a minor.
Going round in circles with this one as to whether or not we can terminate the life interest / best way if any to achieve it…?
