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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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.
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?
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.
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.
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
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.
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...
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.