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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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When my husband died eight years ago a Trust was set up for

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When my husband died eight years ago a Trust was set up for the three children to inherit when I die. One of my stepsons is brain damaged following an operation in Canada where he lives. Is it possible for me by selling my house (buying another smaller) to release the funds in the Trust and pay to the three children without their incurring tax while I am still alive?
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.

Can you tell me exactly when the trust was set up please. Can you confirm what assets you have had a life interest in since your husband died and which will pass to your children on your death.
Customer: replied 1 year ago.

Hi

The trust was set up to take effect when my husband died in 2007. The property I live in is the only asset. The Trustees are my two stepsons, my daughter, myself and our Solicitor. My daughter and her husband live in part of the house as I do myself and it couldn't be sold unless I could pass her share of the Trust to her and at the same time the two boys would receive theirs, but if these amounts (maybe £100,000 each) attract tax then it can't be done. Hence my question can I pass this on before I die without taxation? I suspect not.

Expert:  TonyTax replied 1 year ago.
Thanks.

Leave this with me while I draft my answer. It will take a while so please bear with me.
Expert:  TonyTax replied 1 year ago.
Hi again.

You should refer to the notes here, paragraphs 12.1 to 12.11 inclusive.

It seems to me that you are the life tenant of an interest in possession trust, the asset
being a property which will pass to the ultimate beneficiaries when you die. The tax
rules for trusts changed in 2006 for the worse as far as settlors and beneficiaries are concerned but as you were the wife of the deceased, if this is an IIP trust, exit and 10 year Inheritance Tax charges will not apply Instead, when you die the value of the property will be included in your estate for Inheritance Tax purposes. This is no different to what would have happened had the property been left to you absolutely and you owned it for the rest of your life.

If you renounce your life interest in favour of the ultimate beneficiaries, the children, such that the trust is wound up and the house is passed to the beneficiaries or sold and the cash passed to them, there should be no immediate IHT charge as you will be treated as having made a potentially exempt transfer to them which will fall out of your estate so long as you live for at least seven years after making the gift. See page 39 here. A reducing term life assurance policy might be considered to cover the potential IHT liability should you die within seven years of making the gift.

If the house is sold within the trust, there should be no Capital Gains Tax to pay as the gain will be covered by main residence relief due to your occupation of it as the life tenant of the trust.

You should have the trust document reviewed by a solicitor with tax knowledge or a trust tax expert to ensure that the trust is an IIP trust and that on the termination of your interest, it comes to an end as opposed to the ultimate beneficiaries becoming life tenants (very doubtful) in which case the tax implications could be very different

I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.

Hi

Thank you for your info. I don't want to renounce my life interest in favour of the beneficiaries, I would like to be able to sell the house, buy another and pass them the money from the trust (which is £265,000 which was the amount allowed in 2007) The remainder of the money would buy me another house and I would leave that to them on my death.

There would be no point in doing this if the £265,000 was taxed and to add to the complication one of the boys lives in Canada and the other in France. Then there is my daughter who cannot afford to buy a house so would need the finance for that, which is why I thought £100,000 each if the house fetched enough. This would be more than the amount mentioned in the Trust so I imagine this adds to the complication?

Mike is in a bad way in Canada and it would be good if I could help his finances in some way. Can't do for one and not the others.

Expert:  TonyTax replied 1 year ago.

As the trust was set up by your late husband's will, the value transferred into the trust won't have eaten into his nil-rate IHT band as you are the life tenant and transfers between spouses on death as well as in life are IHT exempt. See paragraph 12.9 here.

There can be no CGT on the house sale as it is your main home, albeit that it is owned by a trust. As far as I can see, you will be renouncing part of your life interest by making a potentially exempt transfer to your children. They won't become life tenants of the trust themselves. There can only be exit IHT charges on money leaving the trust if the nature of the trust changes (the children become life tenants) which it is not doing. All it is doing is downsizing and you are making a gift which may be charged to IHT if you die within seven years of making it. See page 39 here.

I cannot help with the Canadian and French tax positions I'm afraid.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15839
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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