Life Interest treatment on death

TheGreenFrog

A relative has died recently and they had a life interest in the assets of a trust. Those assets comprised a bank deposit. At the date of death interest (which was payable on the deposit annually) had been recently paid on the deposit and added to the account but the trustees had not yet calculated the tax they would have to pay on the interest and so had not paid any of that income to the relative. The question is whether the estate of the relative is entitled to the income accrued up to the date of death. I understand that professional advice may need to be sought but the amount of money involved is quite small (and may all be spent on getting the professional advice!) so any pointers gratefully received.

Keep_pedalling

What sort of trust is this? If the interest had been paid prior to the death of the beneficiary then yes the income is part of their estate.

TheGreenFrog

https://forums.moneysavingexpert.com/discussion/comment/82062970#Comment_82062970

Its a discretionary trust in which the deceased had a life interest. The interest had been credited to the bank account in the name of the trustees. But trustees will only pay out income net of tax, and tax not yet calculated or paid.

poseidon1

You say the interest due on the account had matured prior to relatives death but not yet paid out due to income tax having to be accounted for by the trustees.

If so, the deceased relative will be entitled to the entirety of interest paid, less trustee's basic rate tax at 20% assessable thereon. It is that net of tax interest amount that should be included in the relative's estate for IHT/probate reporting purposes, and ultimately claimed from the trustees on the estate's behalf.

If the facts are exactly as stated, and the trust is the same entity as discussed in your thread back in April 2025, then I can see no need for professional advice concerning this narrow issue.

However, with the Life interest aspect of the trust now terminated, the trustees may need professional advice on compliance for the ongoing discretionary trust aspect, or on what they now need to do to wind up the trust in its entirety.

DRS1

a discretionary trust in which the deceased had a life interest

sounds "interesting". I assume a deed of appointment was made by the trustees of the discretionary trust to give the deceased a life interest?

If it was a plain discretionary trust then the income would stay in the trust until the trustees exercised some power to pay it out. In that case the income would not form part of the deceased's estate until the power had been exercised (which presumably wouldn't happen)

If the deceased has a life interest under the trust then they are entitled to the income as it arises. So any income arising to the trust before their death is part of their estate.

I am not sure how the trustees working out of tax would impact on that. Maybe there is something in the deed of appointment which says you aren't entitled to the income until we have worked out the tax? Unlikely but presumably there are some professional advisers who could say if that is the case?

Just as an aside on the death of a life tenant there is an IHT charge on the capital in the trust which means the trustees and the PRs of the deceased are going to need to get together.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82063134#Comment_82063134

Fair comment about the IHT effect on cessation of the life interest, but only if the discretionary trust was created prior to 22 March 2006.

For discretionary trusts created after that date, the entire trust ( inclusive of the carved out life interest) remains ' relevant property' for IHT purposes so subject to 10 year IHT charges if trust fund value exceeds the nil rate band on each decennial anniversary. In this scenario death of the life tenant does not trigger an IHT reporting event either at trust level or as regards the life tenant's estate since the carve out is not a 'qualifying' interest in possession.

Perhaps the OP could confirm the date the NRB discretionary trust was created to clarify whether ongoing IHT compliance cooperation between the deceased estate and the trustees is necessary.

TheGreenFrog

https://forums.moneysavingexpert.com/discussion/comment/82063127#Comment_82063127

Thanks. yes same trust! I think trustees will now wind up the trust.

Trust is not an NRB discretionary trust - it was created in 2007 by variation of a will of someone who died in 2005. The amount in the trust is and always has been less than the NRB in 2005 (in case that is relevant)

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82064877#Comment_82064877

This feels like an exam question. Was the discretionary trust set up before March 2006? The variation was in 2007 so you could say No but the death was in 2005 so you could say yes. For certain purposes (including IHT) Deeds of Variation are treated as if they had applied from the date of death. So I would go for yes but I am sure @poseidon1 will set me straight.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82065955#Comment_82065955

Is a bit of an exam question.

However by the date of variation in 2007, legislation was already on the books that creation of non qualifying life interest trusts ( as therein defined) would become relevant property trusts for IHT purposes.

In the case of this specific trust therefore, it has a start date of 2005 purely for the purposes of setting the 10 year anniversary. As regards the interest in possession trust carve out created by the 2007 DOV that remains caught by post 2006 relevant property rules, so with the death of the life tenant the discretionary trust now needs to be wound up by an appropriate deed of appointment in favour of discretionary beneficiaries ASAP.

Fortunately, according to OP at no time did the trust fund value exceed the rolling nil rate band so no IHT exit charges in point.

However, following the death of the life tenant, all future trust interest liable to 45٪ income tax although some or all of that tax charge potentially recoverable if distributed to basic or zero rate tax payers.