H and W held their home as tenants in common in equal shares. There are no other assets. The house has a value of about £200,000 (arithmetically £100,000 each). H dies and leaves his half to W for life. Remainder on discretionary trusts. On H’s death W leaves the house and goes into care. The house is then rented out. During her life W receives rent on her half share plus rent on deceased’s H’s half share. W dies and by her will leaves her half on discretionary trusts. The trustees wish to continue to run both trusts and appoint the income out to various infants and some adults in the family who have unused income tax personal allowances. The beneficiaries selected will vary from time to time necessitating a regular flow of revocable deeds of appointment. I guess that the income cannot simply be paid out to different beneficiaries using the power of advancement in the trusts and that deeds of appointment are required for each trust each time a change is desired.
My concern is that the costs of administering both trusts may extinguish any income tax efficiency that is hoped for. For example, I see that NatWest Bank charge a % of the value of the trust assets (0.35% plus VAT. I have an idea that it used to be 1.35% plus VAT.) In addition there will be accountancy fees and compliance costs (initial registration with HM Trust Registration Service and no doubt continuing compliance issues). There will be trust accounts and trust tax returns as well as tax returns for each beneficiary. There will be property management fees - regular chartered surveyors inspections and a maintenance programme; annual insurance in the names of the trustees etc. I wonder whether the value is below the threshold where it is cost effective to continue the trusts.
Whilst I don’t know the particular terms of these trusts, in my experience discretionary income distributions are simply made to beneficiaries at the trustees discretion and all that is needed is a trustee resolution and to provide said beneficiary with a form R185. Deeds of Appointment are only required where actual assets are being advanced or for other structural changes e.g changing the accumulation period.
There are other posts on this forum about the best banks for trustees to use.
I think that these trusts should have already been registered on the trust register. Annual tax returns will be required but you can shop around to find a reasonable quote, unless the trustees feel comfortable doing this themselves and for less cost. Whilst I would normally be the very last person to recommend not producing trust financial statements since they have their own intrinsic value and can be crucial for assistance with fiduciary stewardship and distinguishing between the income and capital elements of the trust property, especially the cash; where there is only one asset and it has not been felt necessary to produce accounts up to now, then the trustees may decide to dispense with this on an annual basis. Are the trustees professional, lay or a mixture?
Maxine
It would save some costs to merge the Trusts if the power of appointment allows. However 10 year anniversaries would be different. The trusts will be related for iht purposes.
If beneficiaries are appointed revocable life interests and income mandated the trustees need not return the income.
Even then costs may outweigh benefits. It all depends on the reason for keeping the trusts going rather than winding them up.
I wonder about the viability of retaining the property in trust in any event.
With the increasing level of regulation affecting let residential property (see the property holding by trustees guidance on the STEP website) any benefits may be lost by even a relatively short period of vacancy. Mindful that some of the regulations may carry criminal sanctions if breached (and the trustees will usually have the ultimate responsibility for compliance) the trustees need to ensure that they properly understand the risks, etc.
Added to this is the need for any let property to meet a specific energy performance target (band C?). Whilst I believe there are grants available to assist in meeting the cost of upgrading a property to band C, that only covers part of the cost.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals