Partition of trust and tax implications

BlackCoffee1sugar

My father passed in 2019, leaving his 50% share in his estate to me; currently held in trust as his wife has a life interest where she may may live in the property until she passes away or no longer wants to live there. She has asked through a solicitor (we do not have a relationship) if I would be interested in a partition of trust where I sell my interest in the estate to her at a reduced rate, as defined within an actuary's report. This report is now in (and I'm in the process of asking for clarifications on the calculations and assumptions within it) however the offer is quite low. I'm unclear on tax implications however, such as capital gains tax, inheritance tax or something else. I don't have loads of savings for legal fees so would benefit from a really simple guide as to what to be aware of and thresholds etc. to work out whether to pursue this or walk away - given that I may be paying a huge tax bill and also legal expenses, so have very little left at the end of it to pass to my kids. Any general advice at this stage would be so helpful. Thank you   

 

Keep_pedalling

Do you need the money now? If not I would hang until the trust finishes on her death. 

poseidon1

BlackCoffee1sugar said:

My father passed in 2019, leaving his 50% share in his estate to me; currently held in trust as his wife has a life interest where she may may live in the property until she passes away or no longer wants to live there. She has asked through a solicitor (we do not have a relationship) if I would be interested in a partition of trust where I sell my interest in the estate to her at a reduced rate, as defined within an actuary's report. This report is now in (and I'm in the process of asking for clarifications on the calculations and assumptions within it) however the offer is quite low. I'm unclear on tax implications however, such as capital gains tax, inheritance tax or something else. I don't have loads of savings for legal fees so would benefit from a really simple guide as to what to be aware of and thresholds etc. to work out whether to pursue this or walk away - given that I may be paying a huge tax bill and also legal expenses, so have very little left at the end of it to pass to my kids. Any general advice at this stage would be so helpful. Thank you   

 

A couple of decades ago it was not unusual for transfers and transactions in remainderman interests to occur. Not that common now.

However in the situation presented to you, worth noting that the purchase from you of your interest in remainder is entirely capital gains tax free and there are no IHT implications affecting  you since this is a transaction for value  - see link below

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg37600#:~:text=of absolute entitlement.-,Life interest released in favour of remainderman,released by the life tenant.

You indicate the offer is low compared to the value of the property but I am guessing this may be due to the relative youth of the life tenant, and the trustees understanding that you face no tax liabilties thereon.

Nothing stops you trying to negotiate a higher figure, but  in doing so I would especially want to see any medical report on the life tenant's current state of health to ensure this is not a 'low ball' offer from her to  get you to release your interest early,  to the advantage of her own beneficiaries in the relative short term.

Another aspect for you to take into account is the possibility of IHT chargeable on the 50% share of the property on her death. This may or may not be covered in the actuary's report, but if her personal estate together with the trust is large enough to attract IHT, a proportion of such charge is payable out of the trust prior to eventual  distribution to you, so you may not be in line for 50% of the face value of the property in any event. All in all therefore, a fair number of 'moving parts' in ascertaining a  fair sale value.

I guess you are not being independently professionally advised?  A STEP qualified Chartered Accountant might be a cheaper advice option compared to a lawyer, but preferably someone with past experience of such matters.

NorthYorkie

My guess is that the widow is making the same offer to the other 50% remainderman and on achieving absolute ownership would then sell the property at its market value. You and the other remainderman would only be offered a heavily discounted price based upon the widow's life expectancy, so, if I am right, she stands make a significant profit. Unless you are desperate for cash, I would say refuse the offer.
As Poseidon says your disposal of your 50% reversionary interest would not attract CGT or IHT

poseidon1

NorthYorkie said:

My guess is that the widow is making the same offer to the other 50% remainderman and on achieving absolute ownership would then sell the property at its market value. You and the other remainderman would only be offered a heavily discounted price based upon the widow's life expectancy, so, if I am right, she stands make a significant profit. Unless you are desperate for cash, I would say refuse the offer.
As Poseidon says your disposal of your 50% reversionary interest would not attract CGT or IHT

You are making the assumption that the widow did not already own  50% of the property prior to husband's death (which would tend to be the norm with these type of arrangements) so only the husband's half share is subject to trust, so just the one remainderman.

Would be useful if the OP after perusing the Actuary report, comes back and indicates whether some or all of the factors mentioned, contributed to what they considered to be a low offer.

If the widow already owns her 50%, acquiring the other half at as low a figure as she can get away with, will be her objective, but as I say these things are negotiable. Ultimately, OP can opt to do nothing and just sit and wait.

Useful point for the OP and others in a similar position to note  as Remaindermen of life interest trusts, is gifting those interests  ( before they materialise) say to their own children, constitutes an immediate exempt IHT free transfer due to interests in remainder generally being 'excluded property' for IHT purposes. A useful planning point, if one's own assets fall well within IHT territory and the interest in remainder would eventually aggravate the position.

BlackCoffee1sugar

Thank you for you replies, they were really helpful. For clarity, I am the only remainderman. My share is my late father’s 50%, due upon sale of the property or death of my step mother. 

I have had a response to my latest letter indicating they are not prepared to share any further information (actuary’s calculations, valuation report etc) and she has not had a medical examination but is in good health. I’d be happy to sell my interest and be done with it, but my suspicion is that the property is undervalued and she wants to sell, so is going for a low-ball offer.

They have put the ball back in my court, however, and asked me to propose a figure I’d be prepared to sell my interest for. This is all quite stressful, I’m no negotiator but I guess I need to bite the bullet now and instruct a solicitor. 

Thank you. I appreciate your advice 

Notepad_Phil

BlackCoffee1sugar said:

...

They have put the ball back in my court, however, and asked me to propose a figure I’d be prepared to sell my interest for. This is all quite stressful, I’m no negotiator but I guess I need to bite the bullet now and instruct a solicitor. 

... 

You really only need to do something if you think you'll have good use for the money now rather than later. If you don't then you could just reply that you're not interested and save you all the stress and money that you'll otherwise will need to spend on what you think is in all likelihood a low ball offer - and the fact they won't give you any further information does make that sound as though that may well be true.

GDB2222

BlackCoffee1sugar said:

Thank you for you replies, they were really helpful. For clarity, I am the only remainderman. My share is my late father’s 50%, due upon sale of the property or death of my step mother. 

I have had a response to my latest letter indicating they are not prepared to share any further information (actuary’s calculations, valuation report etc) and she has not had a medical examination but is in good health. I’d be happy to sell my interest and be done with it, but my suspicion is that the property is undervalued and she wants to sell, so is going for a low-ball offer.

They have put the ball back in my court, however, and asked me to propose a figure I’d be prepared to sell my interest for. This is all quite stressful, I’m no negotiator but I guess I need to bite the bullet now and instruct a solicitor. 

Thank you. I appreciate your advice 

Can I clarify what you mean, please. It would be absolutely normal for all the parties to see the actuarial report. Are you saying that you are being denied sight of the report? 

It would be quite unusual for the actuary to share his detailed calculations with the trust beneficiaries, but it would be absolutely normal for him to explain the methodology and the underlying assumptions. Those assumptions ought to include things like the life tenant’s state of health, and what allowance he has made for tax, etc. 

Equally, if there’s been a valuation of the trust property, I’d expect that to be shared also. 

And, step-mum seems to be being rather coy about her state of health.

These partitions are done with mutual consent, and they are usually done cooperatively, for the benefit of all the beneficiaries. I think that I would write back politely, saying that, and asking them to put all their cards on the table, so to speak.

GDB2222

By the way, in the past when I was interested in the state of health of a beneficiary, I have hired a private investigator to knock on the door and speak to them! That was mainly because it was cheaper to hire the detective than to go there myself. 

BlackCoffee1sugar

GDB2222 said:

BlackCoffee1sugar said:

Thank you for you replies, they were really helpful. For clarity, I am the only remainderman. My share is my late father’s 50%, due upon sale of the property or death of my step mother. 

I have had a response to my latest letter indicating they are not prepared to share any further information (actuary’s calculations, valuation report etc) and she has not had a medical examination but is in good health. I’d be happy to sell my interest and be done with it, but my suspicion is that the property is undervalued and she wants to sell, so is going for a low-ball offer.

They have put the ball back in my court, however, and asked me to propose a figure I’d be prepared to sell my interest for. This is all quite stressful, I’m no negotiator but I guess I need to bite the bullet now and instruct a solicitor. 

Thank you. I appreciate your advice 

Can I clarify what you mean, please. It would be absolutely normal for all the parties to see the actuarial report. Are you saying that you are being denied sight of the report? 

It would be quite unusual for the actuary to share his detailed calculations with the trust beneficiaries, but it would be absolutely normal for him to explain the methodology and the underlying assumptions. Those assumptions ought to include things like the life tenant’s state of health, and what allowance he has made for tax, etc. 

Equally, if there’s been a valuation of the trust property, I’d expect that to be shared also. 

And, step-mum seems to be being rather coy about her state of health.

These partitions are done with mutual consent, and they are usually done cooperatively, for the benefit of all the beneficiaries. I think that I would write back politely, saying that, and asking them to put all their cards on the table, so to speak.

I’ve seen the actuary’s report but neither myself or a solicitor could work out how he came to the figure. The actuary said he had based his report on two things - a copy of the will and her age (72). No mention of medical or valuation reports. Her solicitor says they aren’t prepared to share the valuation or even tell me which estate agent did it. 

The tone of this latest email has changed since I asked them to share further info upon which to base my decision, and they clearly want me to stop wasting their time - it ended with ‘give us a figure you will sell for or wait until she dies’ (I’ve paraphrased there) so yes, it all feels rather disingenuous. I could do with the money now and draw a line under it tbh but settling for less than a quarter of the property value kinda hurts. 

Thank you again 

poseidon1

BlackCoffee1sugar said:

Thank you for you replies, they were really helpful. For clarity, I am the only remainderman. My share is my late father’s 50%, due upon sale of the property or death of my step mother. 

I have had a response to my latest letter indicating they are not prepared to share any further information (actuary’s calculations, valuation report etc) and she has not had a medical examination but is in good health. I’d be happy to sell my interest and be done with it, but my suspicion is that the property is undervalued and she wants to sell, so is going for a low-ball offer.

They have put the ball back in my court, however, and asked me to propose a figure I’d be prepared to sell my interest for. This is all quite stressful, I’m no negotiator but I guess I need to bite the bullet now and instruct a solicitor. 

Thank you. I appreciate your advice 

If they won't confirm current house value, that is a very important foundation to any offer they make.

You could of course, look up recent sold prices on the road on rightmove to ascertain your own approximate value, but their refusal to provide chapter and verse on how their figure was calculated shows bad faith.

In your shoes I  would respond there is no basis for you to make any kind of counter offer without further data, and walk away ( ie call their bluff).  If the life tenant really wants to get shot of you, that should prompt them to be more reasonable and provide you with more information to make a considered decision.

No point you spending on legal  ( or specialist accountancy ) advice at this stage, unless you can provide an adviser with more 'meat' to get their teeth into.