NOTE: This article was published in December 2018 and reflects the law as it stands on the date of publication and not at any later date. 

The paper can be downloaded as a PDF here.

8A.1. IPDI trust of residue for surviving spouse

It is common practice for a testator to settle his or her residuary estate on IPDI trusts for the surviving spouse, rather than making an absolute gift, particularly where the testator has children by a previous marriage or relationship. The testator has a mea.sure of control over the ultimate destination of the trust assets.

The surviving spouse will be entitled to an IPDI. No IHT will be payable on the first death (as the spouse exemption will apply). On the surviving spouse’s death the TNRB can be claimed.

The use of an IPDI trust of residue, including a QRI, for the surviving spouse is entirely consistent with optimum use of the RNRB. The RNRB will not have been used on the first death. The brought-forward allowance should, therefore, be available in full on the second death, provided that the value of the surviving spouse’s estate (including property in which the survivor has an IPDI) is below the taper threshold. If necessary, in order to ensure that the value of the survivor’s estate is below the ta.per threshold, the Will trustees could partially terminate the survivor’s IPDI in residue in favour of the children absolutely. The termination would give rise to a PET. The value of a failed PET would not be taken into account, in determining the value of the survivor’s estate, for the purposes of tapering.

8A.2. Absolute interests in remainder

On the death of a life tenant (D), a QRI will only be inherited if the beneficiary entitled in remainder (B) becomes “beneficially entitled” to it (see 3.9.4 above). In general terms, this means that a direct descendant (including a step-child) of D must become absolutely entitled on D’s death.
James makes a Will settling his share in the matrimonial home upon trust for his wife, Joan, for life, remainder to their children.
The children must be absolutely entitled on Joan’s death if the RNRB is to be available in respect of the settled share. The children can be children of James and/or of Joan.

8A.3. Where no need for absolute remainder interests

There may, however, be no need to secure that the children are absolutely entitled in remainder if the surviving spouse has a share in the matrimonial home (or entitlement to the downsizing addition in respect of a share formerly owned by her) of a value which equals or exceeds the RNRB.
James and Joan own their matrimonial home in equal shares. Joan survives James. In that event, she has left her share, worth £500,000, upon IPDI trusts for her children. James had settled his share, also worth £500,000, upon trust for Joan for life, and subject thereto upon IPDI trusts for the children.

James’ share will not be closely inherited on Joan’s death, since the children will not be absolutely entitled to that share. However, Joan’s estate will be entitled to claim the full RNRB in respect of her half share worth £500,000, so that it will not matter whether the children become absolutely entitled to James’ share on Joan’s death.

8A.4. Absolute entitlement: points to watch

In order to ensure that direct descendants are absolutely entitled on the death of the life tenant, it is important that:

(a) on the death of the life tenant, the gift over to the children should be an absolute gift free of contingencies; and
(b) any overriding powers of appointment conferred on the trustees should not be exercisable after the death of the surviving spouse.

8A.5. Avoidance of age-contingencies

The interest of a direct descendant in remainder will not be absolute if it is subject to an age contingency, e.g. survival to the age of 25, and the direct descendant has not attained that age on the death of the surviving spouse/life tenant.

In most cases, it will be necessary to ensure that direct descendants are absolutely entitled on the death of the surviving spouse/life tenant. This is most likely to be a problem in the case of substitutionary gifts over to grandchildren on the death of their parent before the life tenant (see 8.4 above).

8A.6. Survivorship

The benefit of the RNRB may be lost if the interest of the direct descendant(s) in remainder is contingent upon surviving the testator, but not the surviving spouse/life tenant.

Robert settles a QRI on trust for his wife, Claire, for life, and on her death for his son, James absolutely, if he survives Robert. James survives Robert but not Claire. James has children.

On Claire’s death, Robert’s QRI would pass under his Will or intestacy, possibly to someone whom Robert and Claire would not wish to benefit. HMRC take the view that the RNRB will only apply in these circumstances if, on Claire’s death, a direct descendant of Claire becomes beneficially entitled to the QRI under James’ Will or intestacy (IHTM, para. 46034). That will be the case if James leaves his estate to his widow, but not, say, to his unmarried partner.

Robert could stipulate that, in the event that James predeceases Claire, James’ children should become absolutely entitled to James’ share, without having to satisfy any age contingency. The RNRB would then be available on Claire’s death. Claire could, however, be given a power to appoint, while she is a life tenant, that the remainder interests be subject to age restrictions, if that is desired, notwithstanding any potential loss of the RNRB.

8A.7. Overriding powers of appointment exercisable after second death

It is not uncommon to provide for a full discretionary trust of capital and income to arise on the death of the surviving spouse/life tenant, and/or that, notwithstanding any apparent gift over to the children absolutely after the death of the surviving spouse/life tenant, the trustees should during the Trust Period (80 or 125 years from death) have overriding powers of appointment. If so, the RNRB will not be available on the death of the surviving spouse in respect of the settled QRI.

It is, therefore, important (at least for the purposes of the RNRB) to provide that direct descendants are absolutely entitled on the death of the surviving spouse/life tenant, and that any overriding powers should not be exercisable after the death of the surviving spouse/life tenant, if this affects any entitlement to the RNRB on the second death.

8A.8. Maximum flexibility while preserving the RNRB on death of surviving spouse

One option is for the testator to provide that the whole residuary estate (including the testator’s QRI) be settled upon trust to pay the income to the surviving spouse for life and that:

(a) on the death of the surviving spouse/life tenant, there should be a gift of any QRI and any downsizing addition, sufficient to ensure that the maximum RNRB is available, to direct descendants absolutely, with no age contingencies, and subject to any overriding powers of appointment being restricted so as not to be exercisable after the death of the surviving spouse; and
(b) subject to the proviso that such overriding powers can be exercised during such longer period, not exceeding 125 years commencing on the date of the testator’s death, if the trustees, by deed executed before the surviving spouse’s death, specify such longer period (even if this means that the RNRB is not available on the death of the surviving spouse); and
(c) subject to the above, the residuary estate should be held upon trust for direct descendants subject to age contingencies and/or subject to the exercise of overriding powers and/or subject to wide discretionary trusts, as desired.

This will preserve flexibility with regard to the residuary estate, other than that part which is necessary to claim the RNRB, but at the same time will preserve any entitlement to the RNRB on the death of the surviving spouse. It is not necessary to provide that the whole residuary estate be settled on trusts which are RNRB-compliant.

8A.9. Position after first death

One spouse, but not both, may already have died, and a life interest trust already constituted, which is non-RNRB compliant because (a) the remainder interests of direct descendants are age-contingent and/or (b) the trustees retain overriding powers of appointment exercisable after the death of the surviving spouse/life tenant. It may not too late to rectify the situation between the two deaths.

8A.9.1 Appointment to surviving spouse absolutely

The trustees could appoint or advance the settled QRI, or a sufficient share therein to ensure the RNRB is available to the maximum extent, to the surviving spouse absolutely. Of course, they must have power to do so. There will be no IHT charge (IHTA 1984, s. 53(2)). Principal private residence relief may well apply.

The surviving spouse can then deal with the QRI under her Will. She could settle the QRI on flexible IPDI trusts for her children or grandchildren, or subject to age-contingencies up to a maximum age of 25 pursuant to a BMT or 18-25 trust. The brought-forward allowance should still be available on her death, if no part of the RNRB was used on her former spouse’s death. The TNRB should also be available, if no part of the standard NRB was used on the first death.

8A.9.2. Release of power of appointment

Teddy has died having settled his residuary estate, including his QRI, on trust for his widow, Helena, for life, remainder to two children, Fred and Frances, in equal shares, but subject to the exercise by the Trustees of an overriding power appointment during the Trust Period of 125 years from Teddy’s death.

The trustees could release their power of appointment to the extent that it is exercisable after Helena’s death, in respect of the QRI. Teddy’s Will must authorise the trustees to release the power, but such a power of release is commonly conferred on trustees (see para. 4.7 of the STEP Standard Provisions (2nd Ed)).

8A.9.3. Appointment on new remainder trusts

On Helena’s death (see 8A.9.2 above) the residuary estate, including any QRI or downsizing addition, is held upon trust to accumulate income during the Trust Period and, subject thereto, to pay or apply the income to or for the benefit of any Benefiiaries pursuant to the trustees’ discretion. The trustees have an overriding power to appoint the capital and income of the trust fund for the benefit of discretionary beneficiaries at their discretion which can be exercised in Helena’s lifetime.

The Trustees could exercise their power of appointment in Helena’s lifetime by revoking the existing remainder trusts in respect of the QRI and/or downsizing additions, and appointing that, subject to Helena’s life interest, those assets should be held upon trust for Helena’s children absolutely, and not subject to any overriding powers, if they survive Helena (with gifts over to their surviving children absolutely if they do not survive Helena).

8A.9.4. Tax consequences of release or appointment

An appointment (see 8A.9.3 above) and/or partial release (see 8A.9.2 above) should not have any adverse tax consequences.

Helena’s IPDI will not be terminated, so that there is no IHT charge in that respect. None of the beneficiaries will have made dispositions as a consequence of the trustees’ release or exercise of their powers of appointment. To the extent that their remainder interests are reversionary interests, they are in any event excluded property (IHTA 1984, s. 48(1)) and can generally be left out of account for IHT purposes.

No beneficiary will become absolutely entitled for CGT purposes giving rise to a deemed disposal by the trustees (TCGA 1992, s. 71). Nor should there be a resettlement whereby the trustees become absolutely entitled against themselves if the trustees remain the same, the administrative provisions are unchanged, Helena’s IPDI is preserve, and the ultimate default trust is unchanged. None of the beneficiaries will be disposing of any asset for CGT purposes. Even if they did, no chargeable gain arises on the disposal of an interest under a settlement (TCGA 1992, s. 76).

8A.10. Position after second death

It will be too late to do anything after the death of the surviving spouse/life tenant if a QRI is then held upon trust for a child who has not satisfied an age-contingency, or if the trustees retain an overriding power of appointment, or if there is then a full discretionary trust. Even though a relevant property trust may arise, it will not be possible to rely on IHTA 1984, s. 144 to make a retrospective appointment to the child absolutely. No doubt, more than 2 years will have expired since the death of the testator. In any event, s. 144 does not apply in a case where an interest in possession has subsisted in the settled property.