Two Deeds of Variation

Mother has died leaving a property to her two adult children, A and B, in equal shares. The two children both wish to vary their entitlements by creating a discretionary trust to hold their half share of the property. My intention is to create separate Deeds of Variation for each of them (I realise that they will be related settlements for IHT purposes and share the trust CGT alllowance).

A has two adult children
B has a child who is a minor.

Once the two years has elapsed since the date of death, A intends to create an interest in possession for her children so that the rental income from her half share of the property can be paid to them. As they are adults, the trust is not Settlor-interested for income tax purposes.

B would like to do the same for her child, but the trust would be Settlor-interested for income tax purposes as he is a minor.

Could A’s trust create an interest in possession for B’s child, and vice versa, B’s trust create interests-in-possession for A’s children, so as to avoid either trust being Settlor-interested for income tax purposes? Or would this be caught by the Ramsay principle? Or even be treated as consideration?

Many thanks

I should have said that A and B will be excluded from benefit in the trust they each create in their respective DoVs, so as to avoid the trusts being Settlor-interested for income tax purposes that way.

I suppose that raises a further related question; if A is excluded from benefit in A’s trust, can she be included as a potential beneficiary in B’s trust? Or do we fall foul of the Ramsay/consideration issues I mentioned above.

This would fall foul of s.268 IHTA 1984 – Associated Operations – and be taxable as though the beneficiaries had made the settlement purported to be made by the other.

Any adviser recommending such an arrangement would need to be aware that they could be tainted with an allegation that they were facilitating tax avoidance

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

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Thanks Paul. It was ‘too good to be true’ in my thoughts, and you have confirmed that.

I may be missing something here, but why not just leave the estate assets in the discretionary trust and come to a flexible arrangement tracking what we could call ‘the equitability of benefit’ that is acceptable to A, B, and A’s adult children? So attributing a nominal percentage entitlement to discretionary beneficiaries related to A and B respectively and adjusting these It would obviate the need for further fiddling, and in due course, assets could be advanced with the flexibility that applies to discretionary trusts. And the only additional costs would be the operation of the trust.