Winding up process for an IIP trust following death of life interest

[rjhfandclf]

I would like to implement the conclusions from the very helpful responses to a couple of earlier posts. Background: The lifetime beneficiary (2nd widow of the testator) of our IIP will trust has died (18/08/17). The trust assets comprised a house for her to live in and some investments to produce income. We now need to wind up the trust and distribute the proceeds to the ultimate beneficiaries (testator’s grandchildren/ lifetime beneficiary’s step-grandchildren). The house is currently being sold STC for £215k (also its proposed probate value) and investments valued at £130.5k (for probate). Since date of death (DoD) the investments have been sold at a small increase in value of ca £1,800, and some post death income is still due to come in – perhaps £2-300. Grant of probate for the lifetime beneficiary is still awaited.

May I please check to see if we have understood everything correctly?

1. There is no CGT payable on the probate value of the house (the deceased’s only residence), but IHT could be payable subject to her other assets and nil rate allowances etc. (no IHT presently thought likely due to the values concerned)

2. At DoD of the life interest, the IIP trust ceased to exist as such and thus defaulted automatically to become a bare trust for the benefit of the ultimate beneficiaries.

3. The ‘new’ bare trust ‘acquired’ all the IIP trust’s assets at their probate values with no taxes to pay at that point by the trustees.

4. When all assets have been sold, leaving cash only for distribution, any increase in value from probate may be subject to CGT if gains are above trustees’ annual exemption of £5,650 for 2017-18.

5. The trustees have not been submitting annual tax returns since 2010 (at the written request of HMRC) due to mandating of income to life beneficiary and no other relevant 'events' or criteria changing in the meantime. We were not anticipating completing a return for 2016-17 either, as nothing changed during that tax year.

6. I assume a final (2017-18) tax return will need to be completed for the period between DoD to point of distribution – to account for any post death income and possible CGs – but should this be completed as an IIP or a bare trust – presumably the latter, if 2. above is correct?

7. Would this return still be on form SA900, and where can I find a 2017-18 version (or can I use a 2016-17 form)?

8. Following submission, and settlement of any tax due, will HMRC normally then provide a ‘clearance’ notification/certificate to permit risk-free distribution of the trust funds (following clearance of probate also, of course)?

Is there anything else I have missed or failed to do, before I contact HMRC to apprise them of the life beneficiary’s death and the current trust position? Any advice will be very much appreciated, as the HMRC web pages are not always easy to follow through.

Thanks!

[AGoodman]

Correct except:

3. For CGT/IT, the reversionary beneficiaries become the owners from the DoD. Income and gains arising after this are attributed to them.

4. No, gains are attributed to beneficiaries in their respective shares so tax is only payable (by them and via their personal returns) if their share of the gain (with other personal gains) is greater than their personal allowance. Yes, gains are measured against probate value on death of life tenant.

5. Don't know. You would need to check with HMRC.

6. No - see 3.

7. See 6.

8. Don't believe so - should do for IHT.

[rjhfandclf]

Thank you AGoodman - that is most helpful and now far better comprehended.

I think we should be able to work well from that to a useful conclusion

Thanks again

[rjhfandclf]

Sorry - one further query, please ...

In a 'simple' probate situation where the house is owned in some way by the deceased, it is not possible to sell the house (and other assets) until probate has been granted. However, where the house (and other trust assets) is only being included in the deceased's estate because of the will trust IIP and IHT relevance, presumably there is no problem with selling the house immediately and before probate is granted?

The will clearly instructs the trustees, upon the death or remarriage of the life interest, to sell the house and all investments and to distribute the proceeds to the ultimate beneficiaries. As the latter are now the de facto owners of all the trust assets post death of the life interest, presumably the only hold-up needs be the practical one of ensuring that the tax position is 'finite' and cleared for risk-free distribution (i.e. the distribution itself may well have to wait for grant of probate and other tax considerations).

Have I got this right, please?

Thanks

[AGoodman]

Correct. The only need for probate is to prove title. That isn't an issue if the property is owned by trustees.

[rjhfandclf]

Many thanks for the reassurance - yet again.