Deed of Variation time limits with a trust

WillowLeaf

My dad owned the house which he and my mum lived in. 

He passed away and left the house to a trust, stating my mum can live in it until... she no longer needs to live it. When that time comes me and my siblings will inherit the house.

I was thinking about a Deed of Variation to pass my share to my son, to keep that amount outside of my estate, as it would likely push my estate in to IHT.

It's been 4 years since he passed though, and it seems DoVs have to be...enacted, created, whatever the word is within 2 years. That would not have been possible as we had no right nor wish to try and sell the house until it's no longer needed.

Do I have that right and are there are exemptions for the type of scenario? Perhaps I should have done it within 2 years regardless of when I would actually inherit part of the house, in which case so be it.

Grateful for any help or suggestions...

Keep_pedalling

The time for making a DoV is long past, so forget that. It might be possible to vary the terms of the trust to achieve what you want but you will need professional advice from a STEP solicitor on that one.

This is an unfortunate consequence of you father’s will, I really don’t understand why someone would do this with a marital home, rather than leave it to the spouse. For IHT purposes the house forms part of your mother’s estate but because she has never been a home owner her estate will not be able to claim the residential NRB e of doing this could be a hefty IHT bill on her death.

WillowLeaf

Keep_pedalling said:

The time for making a DoV is long past, so forget that. It might be possible to vary the terms of the trust to achieve what you want but you will need professional advice from a STEP solicitor on that one.

This is an unfortunate consequence of you father’s will, I really don’t understand why someone would do this with a marital home, rather than leave it to the spouse. For IHT purposes the house forms part of your mother’s estate but because she has never been a home owner her estate will not be able to claim the residential NRB e of doing this could be a hefty IHT bill on her death.

Thank you for the prompt and clear reply.

Regarding why someone would have a will like this, possibly it's to ensure that the house finds its way to his children and doesn't end up with children getting disinherited, or if she were to remarry etc. Perhaps also to ensure it's clear she doesn't have any assets for care home evaluations? Not sure.

The house is worth around £300k and she doesn't own much, she's the opposite of a hoarder, so there shouldn't be any IHT to pay in this case, but certainly it's a consideration for others.

Keep_pedalling

WillowLeaf said:

Keep_pedalling said:

The time for making a DoV is long past, so forget that. It might be possible to vary the terms of the trust to achieve what you want but you will need professional advice from a STEP solicitor on that one.

This is an unfortunate consequence of you father’s will, I really don’t understand why someone would do this with a marital home, rather than leave it to the spouse. For IHT purposes the house forms part of your mother’s estate but because she has never been a home owner her estate will not be able to claim the residential NRB e of doing this could be a hefty IHT bill on her death.

Thank you for the prompt and clear reply.

Regarding why someone would have a will like this, possibly it's to ensure that the house finds its way to his children and doesn't end up with children getting disinherited, or if she were to remarry etc. Perhaps also to ensure it's clear she doesn't have any assets for care home evaluations? Not sure.

The house is worth around £300k and she doesn't own much, she's the opposite of a hoarder, so there shouldn't be any IHT to pay in this case, but certainly it's a consideration for others.

Immediate post death interest trust are quite common (especially in blended families) to protect children’s inheritances against a second marriage of the surviving spouse, but it is less common these days for the marital home to be in solely the husband’s name so these trusts usually only apply to a share of the home not the whole thing.

It is certainly not in her best interested to have no assets and have to rely on a cash strapped LA to provide residential care if she ever needs it. 

NorthYorkie

Just to clarify a few points;

1. The 2 year time limit is only relevant for tax purposes. A valid Deed of Variation plus the appropriate claim will treat the 'gift' made by virtue of the Deed is to be treated as having been made by the deceased for the purposes of Capital Gains Tax and Inheritance Tax. Where a Deed is effected outside of the two year timescale, it will still have legal effect but the gifts will be treated, for these taxes, as having been made by the persons who are giving up their inheritance.

2. However WillowLeaf only has a reversionary interest in the property (i.e. he does not own any share of the property as yet) and as such he would be gifting nothing. As such a reversionary interest is 'excluded' property and no Inheritance Tax would be chargeable as a result of the Deed.

3. Keep_Pedalling has said " For IHT purposes the house forms part of your mother’s estate but because she has never been a home owner her estate will not be able to claim the residential NRB e of doing this could be a hefty IHT bill on her death." I disagree. Because of her life interest, mother is treated as the beneficial owner of the house and it therefore forms part of her estate. This is a 'qualifying residential interest' which is required to claim the benefit of the residential nil rate band (and that of the late father).

poseidon1

WillowLeaf said:

My dad owned the house which he and my mum lived in. 

He passed away and left the house to a trust, stating my mum can live in it until... she no longer needs to live it. When that time comes me and my siblings will inherit the house.

I was thinking about a Deed of Variation to pass my share to my son, to keep that amount outside of my estate, as it would likely push my estate in to IHT.

It's been 4 years since he passed though, and it seems DoVs have to be...enacted, created, whatever the word is within 2 years. That would not have been possible as we had no right nor wish to try and sell the house until it's no longer needed.

Do I have that right and are there are exemptions for the type of scenario? Perhaps I should have done it within 2 years regardless of when I would actually inherit part of the house, in which case so be it.

Grateful for any help or suggestions...

Notwithstanding the 2 year period for DOV having passed, as a remainderman of the trust it is perfectly possible for you to assign your expectant interest direct to your children by way of a trust deed of assignment.

Such  reversionary interests are excluded  property under  IHT codes ( Section 48(1) IHTA 1984 link below) so assignments thereof for nil considerstion are exempt transfers for IHT purposes , and also CGT neutral.

https://www.legislation.gov.uk/ukpga/1984/51/section/48

https://www.gov.uk/government/publications/trusts-and-capital-gains-tax-hs294-self-assessment-helpsheet/hs294-trusts-and-capital-gains-tax-2023#beneficiary-disposing-an-interest-under-a-settlement

https://trustsdiscussionforum.co.uk/t/deed-of-assignment-by-remainderman-of-life-interest-trust/20887

The drafting of the relevant assignment will require the services of  STEP qualified trust solicitor, since this knowledge base is outside the competency of the average high street solicitor.

By the way has the trust been registered on HMRC's trust register ( link below )? This requirement is often overlooked by trustees in these circumstances.

https://www.gov.uk/guidance/register-a-trust-as-a-trustee

WillowLeaf

NorthYorkie said:

Just to clarify a few points;

1. The 2 year time limit is only relevant for tax purposes. A valid Deed of Variation plus the appropriate claim will treat the 'gift' made by virtue of the Deed is to be treated as having been made by the deceased for the purposes of Capital Gains Tax and Inheritance Tax. Where a Deed is effected outside of the two year timescale, it will still have legal effect but the gifts will be treated, for these taxes, as having been made by the persons who are giving up their inheritance.

2. However WillowLeaf only has a reversionary interest in the property (i.e. he does not own any share of the property as yet) and as such he would be gifting nothing. As such a reversionary interest is 'excluded' property and no Inheritance Tax would be chargeable as a result of the Deed.

3. Keep_Pedalling has said " For IHT purposes the house forms part of your mother’s estate but because she has never been a home owner her estate will not be able to claim the residential NRB e of doing this could be a hefty IHT bill on her death." I disagree. Because of her life interest, mother is treated as the beneficial owner of the house and it therefore forms part of her estate. This is a 'qualifying residential interest' which is required to claim the benefit of the residential nil rate band (and that of the late father).

Thank you for this, and for letting me know it's still an option, that's a great help.

WillowLeaf

@Poseidon1 thank you those links, I'll have a look. If these things are outside the competency of the average solicitor, it's nigh on impossible for the layman to even know what they don't know.

poseidon1

WillowLeaf said:

@Poseidon1 thank you those links, I'll have a look. If these things are outside the competency of the average solicitor, it's nigh on impossible for the layman to even know what they don't know.

Given that  trusts are  a construct whose roots go back to medieval England and concerned the possessions and affairs of the very wealthy, it is pretty much a racing certainty that the ordinary  layman will not know what they don't know in this regard.

It is really only the latter half of the 20th century that the use of trusts have  radically expanded to the affairs of the ordinary  man in the street, but the law, practice and complex tax overlay remains unchanged and presupposes individuals will be professionally advised when it comes to navigating the highways and byways of this complex regime.

Problem here is one requires specially qualified  lawyers/Accountants ( STEP) to handle these matters, and they constitute a small minority of each of those professions, a fact the general public will again be unaware.