H leaves all to an IPDI to W for life where upon it passes to a discretionary trust for the issue.
Perhaps not straightforwardly. Both actions could theoretically prejudice the objects of the remainder DT, making the trustees a necessary party to the variation and forced to determine whether it is in their beneficiaries’ interest to agree to it.
But this can be possibly finessed more certainly under 1 or 2 below or plausibly argued away if the children have IPDIs under 3. If on the death of the LT there either arises the original DT or a different NRBT DT on identical terms the trustees might well safely agree to the proposed variation: the beneficiaries would then not be necessary parties because the trustees are arguably not exceeding their powers if those discretionary objects have the same substantive rights under the variation as under the single original trust of the original trust fund.
1 If the trustees have the requisite power they could first appoint to the LT the part of the trust fund necessary for her to then effect the desired variation.
2 Or the trustees could exercise their discretion under the DT to appoint such part to her outright if she is a beneficiary or can be added.
The actions of the trustees in 1 and 2 are IHT-free under s.53(2): no need to invoke s.142 which arguably does not apply because the actions do not vary the Will. For this same reason s. 62(6) will not apply if the actions trigger an absolute entitlement deemed disposal to which hold-over relief will also not apply if it relates to chargeable assets that are non-business.
3 The trustees must in any event exercise their powers or discretions properly under 1 and 2 but if the gift to the children is a joint IPDI or discrete IPDIs with a DT remainder identical to the original DT remainder and if the NRB DT is the same, no object of the original DT would seem to have a cause of action.
HMRC, again theoretically, can object to a variation which is invalid under trust law but not one which is merely voidable. This is a murky area but excessive execution, exercising a power not actually possessed by trustees, is void.
Likewise the LT can, and HMRC will accept it, unilaterally and lawfully make a variation which affects only her own interest such that she is then the only necessary party to the variation for s.142IHTA/s.62(6) TCGA.
In my view she must do that by a means recognised by property law. These are either a surrender of her life interest (not suitable) or an assignment of it, in each case in whole or part. The mechanics appropriate here are for her to assign her interest in two parts of the trust fund, one on a DT and the other absolutely to the children jointly.The latter interests are pur autre vie: they will terminate on the death of the LT.
In trust law these assignments are technically rather different from the original trust and from each other. The DT assignment creates a new trust of the life interest itself, whereas the other is an absolute assignment of the original interest subsisting under the original trust. (It would be possible for her to settle her interest on the children but that would be gilding the lily).
These mechanics might wreak minor havoc if there were no reading back but the unreal world of the above-cited statutory provisions for both the 2 taxes will have the salutary fiscal outcome that on the death of the LT there will be a termination for IHT of the QIIPs of the children in part, another such of her own QIIP in part, and a termination of the DT of her life interest in part without RPT exit charge as it will be then valueless.
As the DT remainder will then be unitary its RPT IHT exposures will be as per usual but the commencement date will be the date of death under s.83 IHTA. For CGT there will be a tax-free revalorisation on death for two parts of the trust’s chargeable assets: that would normally not be so with an interest pur autre vie but s.62(6) must be taken to treat a deceased child as entitled to the life interest under s.72 TCGA.
Whether or not it might be preferable the LT has no legal power to vest the underlying trust fund or part in the children absolutely. To purport to do that risks HMRC, admittedly rarely, objecting that the method of variation is a legal nonsense. But giving them interests pur autre vie will, with reading back, give them QIIPs and so RNRB to the estate under s.8HA IHTA. As a DT follows, a lifetime termination will cause a CLT unless the trustees first appoint a fixed remainder to an individual to cause a PET instead.
There is also a choice to be made whether each child should have a separate IPDI in a distinct part of the trust fund or the IPDI should be a joint interest in a single part. The IHT treatment of the latter is doubtful in law and not covered in IHTM whereas the former is terra cognita.
Jack Harper
Thank you Jack, for such a comprehensive and detailed response. There has been much debate internally here and our two darling subscribed bots (neither open AI) gave opposing answers. Much appreciated Aidan Adams