IHT and former life interest

IHT and former life interest

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An elderly lady had a 40% life interest in a will trust of a former husband.  She sold this interest and as such her diminution of estate is by reference to the underlying assets of that percentage of the trust less the proceeds she received.  This constitutes a lifetime gift.

She died in the fourth year following the sale of this life interest so her estate will include that lifetime gift .  The zero rate band (there were no other lifetime gifts) will be allocated to that lifetime gift and taper relief will apply to tax on the excess.

The question is whether or not the incidence of the taxation on this gift will be on the trustees of the will trust or on her free estate.

It is appreciated that if she had died as a life tenant, the incidence would fall on the trustees.  But she did not and it would seem that having been bought out of the lifetime interest, her liability is solely by reference to having made just a normal lifetime gift.

Does anyone know?

Gordy

Replies (11)

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By YellowSticky
06th Mar 2013 18:37

Sold?

You say the elderly lady 'sold' her interest in the trust? What exactly do you mean? I'm afraid there may be other issues here.

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By LyneT
07th Mar 2013 08:39

If the lady has sold her interest, she is still life tenant of the trust, she has simply sold the income stream.  The price she got for that income stream would reflect her age and general health.  The terms of the trust would remain the same.   Therefore, if she is still life tenant of the trust, the trust would still terminate on her death and the trustees would be liable for the share of IHT.

However, you then say in your penultimate paragraph that she did not die as life tenant.  So are you then saying that she gave up her life interest?  In this case it would be a PET.

Were the terms of the trust changed when she gave up her life interest?

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By Gordy1001
13th Mar 2013 19:00

Thank you YellowSticky & Lynne.

 

The potted history is as follows:

Mr X owned a valuable commercial property which he rented out.  The rent subsidised his lifestyle.  He divorced his wife and paid maintenance.  He died in 1978 and left the property to his sister (a life interest), nephew and niece.   His former wife contested the will successfully and the courts awarded her income for life as to 3/8 of the whole.

In 2007 the sister died and her share of the trust property which was the basis of her life interest passed to the nephew and nice as remaindermen. They wanted to maybe eventually sell the property which was impossible with the life interest still attached. An agreement was then reached with the former wife who was very elderly by then and a negotiated capital sum was paid by the trustees to the former wife in full settlement of any further claim on the life interest.  The disposal of the obligations of the life interest of the sole beneficiary (with the remainder of the property now being held outside the trust) resulted in the end of the trust as distributions of her former interest could now take place to the niece and nephew.

She died 4 years later.

I note your comments but the lawyers who dealt with the matter are adamant that the trust effectively ceased on sale/disposal by her of the life interest.

Any further comments would be warmly appreciated.

 

 

 

 

 

 

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By LyneT
14th Mar 2013 09:41

So what you are now saying is that she did not sell her life interest she gave up her life interest.

In which case the solicitors are right, the trust did cease of the disposal.

The disposal would be a PET.  The amount of the PET would be MV at date of transfer less amount she received.

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By Gordy1001
14th Mar 2013 10:31

Thanks LyneT.  Very helpful.

Thanks LyneT.  Very helpful. Yes, she gave up her life interest but for a consideration.

So now we are agreed on a PET, I have to establish the value of the PET.

But in your opinion is it by reference to 3/8 of the open market value of the underlying property at the date of the PET (less any non marketability discounts we can claim) or is it on the capitalised value of future rents as appropriate to a lady of her age?

You will appreciate that the two amounts are very different and as the capitalised value falls within the zero rate band and this was her first lifetime gift, then this will free the trustees from IHT liability.

Your help is much appreciated and hopefully I need bother you no more upon your reply.

 

 

 

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By LyneT
14th Mar 2013 14:48

The value of the PET would be her share of the underlying capital of the property.

Even though she is only entitled to a share of the income, on her death she would be treated for iHT as owning that share of the property.

So it would be her share of the value of the property less any amount she received for it.

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By YellowSticky
14th Mar 2013 19:29

I suspected it was a gift and a PET - I agree with LyneT's comments.

My understanding is that for settled life interest trusts age does not matter in finding the transfer of value and the calculation isn't orthodox and can be tricky

I would also stress that there may be more complications if the case and all it's facts were studied independently by someone who knows their head might be on the chopping block if things go wrong

Also as there is an exit of trust property CGT and IHT on exit has to be considered as LyneT has already mentioned

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By Gordy1001
15th Mar 2013 12:03

Thank you both most sincerely.

The CGT matter on exit from the trust has been dealt with incidentally.

The correspondence has served to confirm my fears that the IHT on death of the former life tenant would be by reference to the underlying capital though I was hoping for a different outcome.

 

Just one point is not understood by me from YellowSticky's comment. " My understanding is that for settled life interest trusts age does not matter in finding the transfer of value and the calculation isn't orthodox and can be tricky".  

Surely if the PET is solely by reference to the underlying trust capital then that is definitive so why is the calculation not orthodox and possibly tricky?

 

Sorry if I'm being thick.

 

 

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By Paul Soper
15th Mar 2013 12:46

PET

There is a Potentially Exempt Transfer arising on the 'disposal' (by whatever means) of the life interest measured by reference to the diminution, if any, of the estate of the donor, in this case the elderly lady.  Before the disposal she had 40% of whatever the value of the trust was at that point, assuming this was established before 2006, and she sold this interest for consideration, if there is a difference between those two values it is a transfer of value and the donee is the person or persons who benefit from this disposal being the persons who have the interest in remainder.

The liability on any lifetime transfer (which no-one has mentioned) is the donee or donees NOT the deceased.  Under Estate Duty lifetime gifts were aggregated with the estate.  Under CTT/IHT it is not subject to aggregation unless there was a retention of interest which is not the case here.  The tranbsfer of value, if there is one will be eligible to utilise some, or all of the available nil rate band of course and this may increase the liability of the estate of the deceased as there will be less exemption to offset against it.

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By YellowSticky
15th Mar 2013 13:50

I take Paulsoper point on the liability on the lifetime transfer but I must say I've not been actively involved in this post (LyneT beat me to it) but rather I've been flirting around with comments which have already been posted. More than happy to put my thoughts in Gordon if you'd like me to..

What I meant with 'age doesn't matter' is that when your trying to calculate the dimunition in value in establishing the value of the PET you've got to look at the rules for an IHT transfer of value which is unorthodox compared to a usual gain/loss calculation under CGT for example.

It's slightly tricky here in that the lady has a right to income but not that of the value of the property? Sorry if I am asking a question which has already been answered here... 

 

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By Paul Soper
15th Mar 2013 14:15

Nature of interest

If the lady has, as is suggested, an interest in possession then it is treated as an interest in the underlying property.  If she has an annuity, a sum certain in money, it would be valued by reference to to the income stream usiung maximum and minimum rates determined by the yield on the FT Actuaries All share and the yield on UK Government securities.  According to the details here that is not involved.  The courts gave her an interest in possession and the only reklevant factor is the value of the underlying property compared with the consideration she received for the disposal of the property.  CGT considerations are quite different as stated and would look to the value of the income stream.

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