I have a client whose mother died in 2014. She is an additional rate taxpayer and does not need the legacy - conveniently around £324,000. She has two minor children (8 and 4) and her financial adviser has suggested that she do a deed of variation and vary the legacy into a discretionary trust. She and her partner would be trustees and beneficiaries, as would their two children. I have been trying to figure out the tax consequences. For IHT, it gets the legacy out of her estate, which is good. For income tax, the deed is ineffective and she will be taxed on all the income of the trust. It is also a settlor interested trust for CGT but I am unsure as to the implications of this. The adviser had two ideas - the trust could invest in investment bonds and take no more than the permitted 5% per annum, thus not triggering a tax charge. When the children achieve majority, the bonds could be assigned to them and they could surrender them using their own personal allowances and marginal tax rates. Would that work or would she still be assessed on the surrender as settlor? And what would happen if the bonds were assisgned to the children, although not necessarily encashed, while they were still minors? Would that even be possible legally?
The adviser's second idea was that the trust could use its cash to buy a property which one of the children might live in when they are adults - he thought that PPR would be available on sale under S225 provided that only the child and not the mother (settlor) had lived in the property. I did find a book where it was suggested that this would work but it was published in 2007 and there may have been changes since then. I do not usually get involved in trust work.
I would be grateful for any thoughts on this matter. Is there any point to varying a will to create a trust (other than the IHT one)? I can't see any huge advantages.
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