Tax Implications on the winding up of a Life Interest Trust

[julesebel]

Hi - just wondered if anyone could help shed any light on whether we have a tax liability to be paid?

My brother and I have just inherited a property from a trust set up by our grandfather. The trust gave a life interest on a property to my uncle, leaving my brother and I as sole beneficiaries of the property (which is the only asset of the trust) on my uncle's death. My uncle died last year after living in the property for the entire time between its purchase and his death, and we have subsequently inherited the property and are now looking to sort out the tax position.

The property was originally purchased in 1987 for £85k and has been transferred to us in early 2009 at the open market value of £185k. I am not aware of any tax payments or trust accounts having been made at any point in the past, but assume that there must be some tax to pay on the distribution of the trust assets to us, especially in light of the £100k gain in value of the property.

We are selling the property at the moment and before splitting the proceeds need to make sure that all of the relevant taxes (and penalties if applicable) have been paid - does anyone have any idea of what this might be, or how we should proceed?

Any thoughts would be appreciated.

Many thanks.

[Lee Young]

If any inheritance tax were due on your uncle's death on the value of the trust assets I should have thought you would have heard by now, but it would be worth checking with the solicitors involved that the combined value of his free estate and the trust do not exceed the available nil rate band(s).

There will only be CGT on the difference between the date of death value and the value you see it for. The increase that occured whilst your unlce lived in it has been wiped away on his death.

[julesebel]

Thanks for that, the help is greatly appreciated.

[lesley58]

I feel we may be in a similar situation but one that seems to have been dealt with differently by the solicitors/executors involved and is causing some confusion.

My Uncle died Jan 2008 his will deemed his 6 neices were the beneficiaries of his estate that included money and a property. His elderly disabled sister ( our Aunt) had been living with him for years but had no financial interest in said property. The will stated that our Aunt be allowed to live in the property for as long as she wished. Inheritance tax was paid on the full estate value in June 2008. The cash portion of the estate was distributed in February 2009 and it appears at that time the property was put into a trust with the property being registered at Land Registry with our Aunt and the executors as owners.

4 months later (June 2009) our Aunt was admitted to hospital for a potential 2nd below knee amputation. This thankfully wasnt required but with her dementia worsening a social service assessment was made and advised she would be safer in a care home. ( self paying ) She entered the care home in August and was very happy. It was at this point it was discovered that there was no legal authority for (another of ) her brothers who had dealt with her finances to continue doing so without an application for deputyship. The same group of solicitors set about doing this at a proposed cost of of £3000. We felt the solicitors caused delays with this as the submission to the courts was not made until mid December 2009. deputyship was granted Feb 12th 2010 but sadly our Aunt died 3 weeks later.

Two of the nieces wished to purchase the property but we had been advised nothing was possible until deputyship had been gained. With our Aunt dying we are now being told that the property forms part of her estate for inheritance tax purposes, if that is deemed payable, but that in any case the property cannot be sold until her probate has been granted (same firm of solicitors dealing with this)

We find it odd that as our Uncles estate paid inheritance tax, the same property could now incur charges for our Aunts estate only just over 2 years later, even moreso as the value of the property has decreased by about £30,000. The executors class themselves as professional executors and dont really know what is happening as the day to day administration has been done by the probate solicitor in the firm. The solicitor from the firm who drafted the will seems equally confused about the trust implications and has directed us back to the probate solicitor, she is reluctant to speak to us. I apologise for this being a long post but if anybody could clarify the trust/inheritance tax confusion we neices would be very grateful.

[dingaling]

Wow. Sorry I won't be able to help you with advice, but I sympathise deeply with the situation. Its such a shame that we all (at some point) have to sort these legal/financial issues out, and are beholden to the systems (legal, tax and justice) whose sole aims seem to be to get their 'cut' first. Family just want a simple execution of the will, matching the stated wishes, and it all gets so mixed up.
It seems to be a nightmare to do it simply - only those with the financial clout to do so come out with the tax efficient solutions, and the lawyers get their cut regardless
I am so frustrated by the systems.

[Lee Young]

Lesley58

What you are being told by the solicitors would appear not to be totally correct.

It will not be for your aunt's executors to dispose of the property because it was not in her estate. It will be for your uncle's executors to do so, they having become automatically the trustees of the trust that arose under his will.

If IHT was paid in your uncle's estate and IHT will also be paid on your aunt's estate (that being what she has plus the value of the property which is deemed to be in her estate under s49IHTA 1984 by virtue of her life interest in it) then quick succession relief willapply to reduce the impact of the IHT on the same assets in such a short space of time. The executors should be advising on this and be claiming it where appropriate. If not they are not up to the job and they should be replaced.

I would be happy to look at the actual papers to give you a definitive answer, if you wanted a second opinion that is.

[lesley58]

Thankyou both for your replies. I havn't been on the site for a while so missed your postings.

We have moved a little further on but not much as the house has now been empty for well over a year and still not on the market. Sorry I didnt make myself clear, the executors are the same for both my Aunt and Uncle. Shortly after my posting the original probate solicitor was replaced by another member of the firm and he has really tried to be helpful just answering our questions has been a help. Despite what the original solicitor said my Aunts Estate fell just short of the IHT level so no tax was payable. I did some research and the solicitors confirmed that should we sell within 4 years of the date of the original death and make a loss on the probate valuation we can reclaim a proportion of the IHT.

What is puzzling is whether in their role as trustees the executors could have made a decision to sell the property when my Aunt went into longterm care in September 2009. Unfortunately the original solicitor had registered my aunt as an owner jointly with the executors which is why, we were told, the property could not be sold without an application to the court of protection to have a deputy appointed for her. Surely that is the power that professional executors have. The new solicitor implied as much but as the executors are effectively his seniors I couldnt get him to fully commit himself. Had they been able to exercise that right the property would have gone on the market nearly a year ago. As I said it is still not being marketed but I wont bore you with that one suffice to say I am despairing.