Giving up Life Interest to Pay Other Beneficaries

ratty48

Hi all

I was a life interest beneficary in a property which I shared ownership with my wife as tenants in common. She died in 2022. This has now been sold, and I have bought a new home using my own funds and I did not require the trustees to help me with buying my new property.

A solicitor has provided the following advice regarding my desire to pay the beneficaries as outlined in my wife's will now, rather than them having to wait until my death:

‘If there is no replacement property being purchased, then the life interest beneficiary just needs to confirm (ideally in writing) to the trustees that he no longer wishes to benefit from his right to occupy the property, and does not wish for them to purchase a replacement home for him to occupy from the proceeds of sale. He is happy for his interest in the trust to end with immediate effect.

This will end the trust and the benefit to the remaindermen (the res bens) will be escalated, so they’ll receive it now. This will be classified as a lifetime gift (a PET) from xxx to those beneficiaries (some of whom are charities so exempt). There could be some consequences to xxx's own Estate as any gifts made within the last 7 years are to be declared for IHT purposes. If 7 years passes, then there is no need to worry about this point.

Essentially, nothing required for us to draft, but I would recommend xxx seeks independent advice on this for any consequences to his own estate as above.’

Could someone please advise what tax implications (if any) there may be, if the payments to all the beneficaries do not exceed £325,000 in total. 

Also, I am currently holding the proceeds from the sale of my wife's 50% share of the property in a sepearate bank account in my name. How do I avoid HMRC seeing the payments to the beneficaries as coming from my own estate?

Keep_pedalling

As you are the beneficial owner of the trust, it already forms part of your estate. The trust used none of your wife’s NRB as it was covered by spousal exemption. There are no negative IHT consequences in winding up the trust and distributing the money now. The gifts to the charities will be the exempt, and the other gifts will be PETs and you just need to keep breathing for 7 years for them to fall out of your estate. If that happen your estate will pay approximately the same amount of tax as if you never wound up the trust. 

poseidon1

ratty48 said:

Hi all

I was a life interest beneficary in a property which I shared ownership with my wife as tenants in common. She died in 2022. This has now been sold, and I have bought a new home using my own funds and I did not require the trustees to help me with buying my new property.

A solicitor has provided the following advice regarding my desire to pay the beneficaries as outlined in my wife's will now, rather than them having to wait until my death:

‘If there is no replacement property being purchased, then the life interest beneficiary just needs to confirm (ideally in writing) to the trustees that he no longer wishes to benefit from his right to occupy the property, and does not wish for them to purchase a replacement home for him to occupy from the proceeds of sale. He is happy for his interest in the trust to end with immediate effect.

This will end the trust and the benefit to the remaindermen (the res bens) will be escalated, so they’ll receive it now. This will be classified as a lifetime gift (a PET) from xxx to those beneficiaries (some of whom are charities so exempt). There could be some consequences to xxx's own Estate as any gifts made within the last 7 years are to be declared for IHT purposes. If 7 years passes, then there is no need to worry about this point.

Essentially, nothing required for us to draft, but I would recommend xxx seeks independent advice on this for any consequences to his own estate as above.’

Could someone please advise what tax implications (if any) there may be, if the payments to all the beneficaries do not exceed £325,000 in total. 

Also, I am currently holding the proceeds from the sale of my wife's 50% share of the property in a sepearate bank account in my name. How do I avoid HMRC seeing the payments to the beneficaries as coming from my own estate?

You should formally relinquish your life interest in the trust by deed in favour of the relevant beneficiaries. Do not treat this as an optional requirement as suggested  by the solicitor. The trust was created by a deed ( your wife's will ) so must be terminated in a similar fashion.

Your PET will take effect from date of that deed, and is a useful document to hold with your will for reference by executors,  in case of death within the following 7 years

As for tax compliance, the trust should have been registered on HMRC' s trust register throughout its exsistence. I get the impression this never happened. Since you are about to terminate it by way of a deed drafted by a solicitor, suggest you check with them whether there is much point you registering the trust only to de-register immediately. Only point to note however there were penalties for failing to register.

 Do not enlist the services of the solicitor who advised you intially, I do not agree there is no document drafting required here.

With regard to deposit interest earned on the trust funds, you declare this as your taxable income right up until the point you terminate the trust and distribute the capital. Its  up to you whether you wish to gift the accumulated interest, you are taxable on it regardless.

As for IHT consequences, I agree KP's summary of the position over the ensuing 7 years.

ratty48

Thank you both for your help.