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2023

Property inherited with income rights restricted

My client, husband and wife, recently inherited 4 let properties from the husbands late uncle

A deed of variation was exercised so the income from these let properties is paid to the widow for the reminder of her life, net of any taxes and expenses

My question is, who is assessable on the rental income?

I suspect what has happened is the property is now held in trust, being a type of Immediate Post Death Interest trust.  So for IHT the property will form part of the widows estate as Settled Property coming to my clients as remainder men on her death (and should have therefore been an exempt legacy to spouse in the deceased's estate - I do not know if this was the case).  The income will be assessed on the husband and wife as trustees at basic rate producing an R185.  On the widows death, the assets will receive an uplift to the then current market value for CGT.  Would anyone agree this view is correct?  

If this is the case, would you agree I could suggest the income continues to be paid directly to the widow to avoid the requirement to complete a trust Self Assessment Tax Return. Then as the income is not received by the trustees (i.e. my clients) they cannot then be assessed on it as trustees thus eliminating the requirement to complete a trustees tax return.

There is not a trust deed - unless the Will and DOV could be regarded as such?

Or ... am I overcomplicating the position and the income should simply be assessed on my clients personally who will then pay the rents after expenses and tax to the widow as well as them already owning the property for IHT and CGT.

Thanking you in advance for any responses

Ben

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By LyneT
15th Aug 2011 13:03

The will is the trust deed in this case, so do not worry about lack of trust deed. 

There is a trust however, so you should complete form 41G to inform HMRC of the existance of the trust.

There is also a box on the trust form which states that all income is being dealt with in the tax return of the life tenant and need not be included in the trust SA.  So it is simply a case of ticking the box and sending off the return.

For income tax you are right, it is the life tenant who is assessable on the income.  You cannot deduct expenses from the income of a life interest trust.

The IHT treatment is as you decribe. The value at the date of death will be included in the estate of the life tenant.

For CGT the trust gets its own annual exemption.

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By campbed
17th Aug 2011 18:46

Form 41G

From your description it does look like an IPDI trust was created by DoV, as LyneT suggests, with your clients as trustees (and remaindermen). 

But, as you do not seem to have been involved with estate, why guess? Surely it is better to ask the executor(s) or their solicitor who drew up DoV to submit 41G so as to be sure both of their intention and  that the asset values held on trust tie .both to their other sumissions to HMRC, such as IHT 400, and to estate accounts.

 LyneT writes "You cannot deduct expenses from the income of a life interest trust" . The meaning of that statement is not totally clear to me. The trustess must distribute  all the trust income to the life interest but the trust income in this situation would be after normal expenses of residential letting.

LyneT also writes "There is also a box on the trust form which states that all income is being dealt with in the tax return of the life tenant and need not be included in the trust SA.  So it is simply a case of ticking the box and sending off the return".      There     Th       As there is no such a box on form 41G the comment must relate to another form - probably the annual SA form

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17th Aug 2011 17:06

Life interest

The income appears to be the widow's: she returns it under self-assessment less any expenses she incurs on maintenance etc on her tax return.

On her death, it is transferred from her estate, IHT paid and goes to the remainderman unless there is any scope for planning otherwise.

The trustees are legal owners of the property and the widow beneficial owner during her lifetime. Funnily enough I was just writing a piece on this - see What's new on my site,

Virtual tax support for accountants: www.rossmartin.co.uk

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By LyneT
19th Aug 2011 11:12

Expenses of a life interest trust

What I was referring to when I said that you could not deduct expenses of a life interest trust is the professional expenses of administration eg accountancy fees.  Professional expenses of maintenance of the properties are of course allowable eg letting agents etc

These expenses are allowable for a relevant property trust and will reduce the tax liability.  However, for a life interest trust these expenses are not deductible.

And yes, the box is on the SA form, not on form 41G.

I should have been clearer.

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By bthiim
20th Apr 2012 10:51

Late thought on this for another client

I had not set notifications for responses on this

I have, however, had another thought on this for another client

Whilst a DOV is effective for IHT and potentially CGT, it is not effective for IT.  Therefore, the initial legatees are the settlors for IT of the IPDI.  

Is the reversionary interest not a beneficial interest to which will taint the settlement as settlor interested and result in the income being taxed on the initial legatees, being settlors?

Or would this only taint the trust as settlor interested if the initial legatees held an interest in the income?

S625(1) ITTOIA 2005 seems very wide to perhaps catch a reversionary interest?

Nichola, I looked on your website but was unable to find the article you mentioned you were writing

 

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