Trusts created on death Q&A

Last Updated: 19 Jul 24 10 min read

Deed of Variation Matters

Q. DOV- Government give a checklist for wording on their website- solicitor wanted £800- given how simple they are surely it would be reasonable for Executors to do this themselves?

A. It would depend on the circumstances. For example, if the son of the deceased inherits £100k from the estate and wants to vary their inheritance so that £10,000 goes to their own adult daughter absolutely then that might be satisfactory.

However, sometimes a variation can have tax implications so tax advice needs to be obtained where appropriate and if the beneficiary wants to vary their inheritance to create a trust then legal advice should be obtained. While it’s possible for an individual to draft a trust deed themselves, drafting errors could result in unintended tax and legal consequences. A financial adviser cannot draft a trust deed for an individual as it’s a ‘reserved activity’ under the Legal Services Act 2007.

Q. If a will has beneficiaries is under the age of 18, can the other adult beneficiaries choose to vary their own benefits?

A. The adult beneficiaries can vary their own inheritance. If you are asking if the minor child’s inheritance can be varied, it is possible but legal advice would be required as it would require Court approval.

Q. DoV: Original beneficiary varies their inheritance to pass on to grandchildren who are minors - is this always a trust, and if so, what type?

A. Yes but the type of trust created will depend on what the original beneficiary wants to achieve. The solicitor drafting the deed of variation will advise accordingly on the type of trust the original beneficiaries objectives for the gift to grandchildren will create e.g. it might be a simple bare trust or if they are looking for control over when the grandchildren benefit, then it’s going to be a discretionary trust.

Q. DoV: consent required from "those affected". Does "those affected" mean only those who are original beneficiaries who vary their inheritance? I.e. Not other original beneficiaries that are unaffected?

A. Correct
See section 35041 of HMRCs IHT manual for further guidance.

Q. Is a DoV (where no tax is due) always a trust? And if so, always needs to be registered?

A. No, a DoV doesn’t always create a trust. If a trust is created by the DoV then it will need to be registered. See section 23020 of HMRCs TRS manual for further guidance.

Q. What type of trust would a deed of variation make? Mother inherited from her mothers estate but made DoV to give to her daughter. Daughter is named but cannot inherit until age 21.

A. It depends on the terms of the deed of variation. It could be a bare trust but may not depend on when the beneficiary’s interests vests.

Q. Deed of Variation created a Disc Trust, its value c.£580k. Estate in excess £2m and the Will distributed assets accordingly. For periodic charges/10yr anniversary, is the trust via DoV deemed the last event and therefore has no NRB for such calcs?

A. No. For periodic charges, the trust’s NRB is effectively reduced by any chargeable transfers in the 7 years before death. This is cover in HMRC’s IHT manual here.

Bare Trust Matters

Q. If an existing bond being written into a Bare Trust for a minor but the bond automatically ends due to death of the last assured prior to the beneficiary reaching age 18, what could the trustee do to ensure the trust fund remain in the trust, considering the trust deed is from the bond provider?

A. The bond coming to an end doesn’t mean money leaves the trust. The trustees will claim the bond proceeds and the funds remain in trust. The trustees may need to place the bond proceeds in a trust bank account while they consider if it’s appropriate to reinvest the funds. For example, they may consider reinvesting in another medium to long-term investment such as a bond. If the beneficiary will reach age 18 in the short-term then keeping the funds in the trust bank account is likely to be more appropriate.

Standard insurance company trusts from bond providers are normally generic trust deeds with wide investment powers which will allow the trustees to reinvest the proceeds as they see fit. It’s highly unlikely the trustees would be restricted to investing the trust fund in the sponsoring trust providers investment product. However, as with any trust, it’s important to read the trust provisions to make sure the trustees understand their investment powers.

Q. Bond on sole life but then later put into bare trust , upon death chargeable event created it’s the beneficiary who is liable to the chargeable gain?

A. Yes, the bare beneficiary will be liable assuming the parental settlement rules don’t apply. You should find our Bare Trust Taxation article on our Tech Matters site helpful.

Q. Are trustees legally obliged to pay out the trust funds to the beneficiary under an absolute trust at age 18?

A. The trustees have a duty to inform the beneficiary when their interest vests at 18 (or 16 in Scotland). At this point the trustees are at the order of the beneficiary and must seek direction from the beneficiary about what to do with the trust fund. Generally, you would expect the beneficiary to request the trust fund (or legal ownership of trust assets) to be transferred to them.

It would be possible for the beneficiary to agree for the trustee to remain the legal owner of the investments and act on their behalf but ultimately it’s the beneficiary (not the trustees) who will require financial advice on investing the money in line with their own objectives, capacity for loss, ATR and making use of tax favoured products where appropriate.

Q. For Bare trusts, do the trustees have a duty to tell beneficiaries that there is a trust in force and they will benefit. What is the duty of disclosure.

A. We don’t have an article on our Tech Matters site which covers this specific question but Barbara Gardener from Technical Connection Ltd wrote a Personal Finance Society article which you should find helpful.

Q. Presumably if a bare trust exists beyond age 18 for the beneficiary they will have a say in how it is invested. Could they insist on being paid despite the wishes of the testator.

A. Correct

Q. In the example you gave that wasn't a bare trust (Billy and Luke), what type of trust was it?

A. Until Billy and Luke’s interests vest it would be taxed under the relevant property regime so would be a relevant property trust.

Q. My client has Fixed Protection/Individual Protection, will their protected LTA amount increase by CPI from 2018 onwards?

A. No, the increase by CPI from 6 April 2018 onwards only applies to the Standard LTA. Where someone holds these forms of protection, their protected LTA amount will not increase, however, if at any point the Standard LTA increases to an amount that is greater than an individual’s protected amount they will then revert to the higher standard LTA amount. For example, someone who has IP16 and a protected LTA of £1,025,000 reverted to the standard LTA when this increased to £1,030,000 from 6 April 2018.

It's important to remember that the LTA increased by CPI up to the 2020/21 tax year, from the 2021/22 to 2025/26 tax years the chancellor has frozen the increases.

Interest In Possession Matters

Q. What impact does the life tenant having a potential right to capital at the discretion of the trustees have on the general treatment and taxation of the trust?

A. It doesn’t change the taxation of the trust or how investments are taxed. However, a clause allowing the trustees to apply some or all of the trust capital for the benefit of the life tenant might impact how the trust is administered in respect of trust income and trust capital. In turn this will impact what investment vehicles will be suitable to achieve their objectives regarding trust income and trust capital.

For example, the trustees would not be able to invest in a bond to generate trust income for the life tenant but it’s established the life tenant only requires ad-hoc payments, they might decide to invest in a non-income producing bond and make ad-hoc payments of trust capital to the life tenant by taking capital withdrawals from the bond.

Q. Is there any way to manage IHT problems with life tenants with large IIP trusts who don't need extra income?

A. There is no one size fits all solution but one option would be to consider terminating their interest. However, whether this would be appropriate would depend on the tax implications. For example, if their interest terminates and the trust fund goes to an individual beneficiary directly the IIP beneficiary would be making a PET. If terminated and the trust fund remains in trust they would be making a chargeable lifetime transfer.

In these circumstances we would suggest seeking tax and legal advice.

Q. A Will trust creates income for a family member >18 for their lifetime and if need to go into care for them but on death remainderman is a UK charity. If remainderman is a Charity how best to advise on investment as Investment bond not suitable for Charity?

A. If the interest in possession (IIP) beneficiary is entitled to trust income only (not trust capital) then a bond will not be a suitable option to generate trust income for the beneficiary as it’s a non-income producing investment.

If the trustees can also apply some or all of the trust capital for the benefit of the IIP beneficiary (careful analysis of the trust provisions would be required to ensure the charity wouldn’t feel they have been disadvantaged) then paying capital to the IIP beneficiary via investment bond withdrawals would be a potential option. However, the issue with using a bond is any chargeable event gains would be assessed at the trustee rate of tax. And if there are funds left in the bond post the IIP beneficiaries death, the charity cannot recover any tax paid on the chargeable event gains by the trustees.

In such a scenario, an OEIC is likely to strike an appropriate balance of the IIP and remainderman beneficiary interests. An OEIC will allow the trustees to generate trust income for the IIP with the ability to take capital withdrawals if required. OEICs are also qualifying investments for charities and therefore could be transferred to the charity with no negative tax implications.

Q. Will trust with a lifetime tenant, the spouse, the will states income or capital but beneficiary does not want the income, is it best tax wise that the tenant pays the tax due on dividends not taken or the trustees to pay it.

A. Regardless of whether the life tenant wants income or not, they are entitled to it and will be taxed on it in the tax year it arises.

Q. If an IIP 'converts' to a discretionary trust, when is the first periodic charge - 10yrs after death or 10yrs after conversion?

A. The 10 year anniversary will be based on when the trust first commenced rather than when the property become “relevant property”. See section 42221 of HMRCs IHT manual for further guidance.

Q. What happens if a couple own a house as joint tenants but the spouse dies and leaves his share to kids from a previous marriage in an IPDI trust to their kids?

A. If the house is jointly owned it will pass to the surviving owner on first death so would not pass to the children. If the property was owned tenants in common, both owners have the power to dispose of their share when they die. If one spouse died and left their share to their children, or to a trust where the children were life tenants, there would be multiple owners of the property. This can cause complications, especially if the parties do not have a good relationship. Legal advice should be sought if someone is considering this type of arrangement.

Q. How are joint assets treated under a IIP will trust/IPDI? E.g. if a house is in joint tenants does it automatically pass to the other joint tenant and if yes, is there anything that can be done to change that post death? Any different between English and Scottish law?

A. If held on a join tenancy basis, when one owner dies, the asset will pass to the survivor so would not form part of an IIP trust written into the deceased’s Will. It is possible to retrospectively sever the tenancy so that the deceased’s share can be disposed of separately but legal advice should be sought. This is the case under English and Scots Law.

Q. My client crystallised benefits of £1m when the Standard LTA was £1m. Now that the Standard LTA increases by CPI can they crystallise further benefits without incurring a LTA excess?

A. If your client crystallised £1m of benefits when the Standard LTA was £1m this will have used up 100% of their LTA. Therefore, as they have no LTA remaining they will not benefit from the CPI increase and any further benefits they crystallise will be subject to a LTA excess tax charge.

Miscellaneous Matters

Q. DT- Any reason why you can't just loan spouse money and she then invests herself- repayable on death?

A. It’s possible but whether it will be appropriate will be case specific as matters such as whether interest should be charged (and the tax implications) need to be considered. It would be best practice to have a loan agreement drawn up by a solicitor.

Q. Is the annual exempt amount for CGT in non-absolute trusts split between all trusts created in a settlor's lifetime and on death?

A. Correct

Q. You mentioned that someone could inherit several nil rate bands from their spouse, if client was widowed and remarried and that spouse died would they potentially have 3 NRB?

A. We have an example in our Transferrable nil rate band - planning ideas article on our Tech Matters site which you should find helpful.

Q. Does it make any difference if a will includes or does not include STEP provisions? What are the benefits?

A. The STEP Standard Provisions are a collection of clauses that can be used in a Will. Whether some or all of these provisions should be included or not depends on what powers the testator wants the executors or trustees to have in dealing with the estate.

Q. When talking about Will trusts does this include on death putting into a trust an amount of cash which then the trustees can decide what to do with it /how to invest? But also on death an asset being put into trust i.e. a bond or property?

A. A Will trust is a trust that is created by the terms of the Will and may involve a sum of cash, investment or property.

Q. Should we be concerned about investor protection for offshore bonds?

A. Investor protection for “offshore” (non-UK bonds) varies depending on the location of the provider. Information on the protection available should be available from the provider and will need to be considered as part of the overall advice. For example, would the investor protection be more important than the tax advantages the offshore route might provide.

Q. What Happens if estate after taxes are less than these gifts?

A. If there are insufficient assets to make the gifts outlined in the Will clearly they cannot all be made as detailed. Legal advice should be sought to see whether certain gifts are given priority.

Q. Is there potentially a CGT liability if a Trust is wound up by DOV within 2 year period?

A. Not sure what this questions refers to exactly. Normally a DOV would be used to create a trust where there was none as opposed to winding up a trust that’s already been created.

If you need further assistance please get in touch with your usual M&G contact who can get in touch with our team if required.

Q. Are there any disadvantages to the capital redemption route?

A. The capital redemption option is only available on a non UK bond so if a non UK bond is not appropriate for the case then it wouldn’t be wise to down this route.

Q. If a client just wants to leave a small amount for a child or grandchild under age 18, is there a better way of wording this wish i.e via letter of wishes etc to avoid trustee bank accounts etc when the amounts for example are less than £10,000?

A. I think the crux of this question relates to the fact some investment vehicles have a minimum of investment amount of £10,000. Therefore if the will creates a bare trust for a beneficiary who is a minor, the trustees investment options might be limited.

In this scenario, if there’s more than one bare beneficiary it might be possible to invest the funds together (assuming the executors are trustees) if they can clearly identify the fund for each beneficiary. For example, if there are four beneficiaries with £5k each, an offshore bond with say 400 segments could be used with 100 segments earmarked for each beneficiary.

How bequests to minor beneficiaries will be dealt with, particularly the investment side of things is often overlooked when the will is drafted so ideally this should be discussed in more depth at the time. An alternative option would be to consider making lifetime gifts so if the gifts where options such as a JISA might provide a better solution.

Q. If a home is left to a bereaved minor trust, would this still apply for the Residence NRB?

A. Yes, if the beneficiary was a lineal descendant this would be classed as closely inherited.

Q. You referred to a bereaved minor's trust as a discretionary trust but there are no periodic and exit charges. Is it a special type of discretionary trust?

A. Yes, a bereaved minors trust is a special type of discretionary trust created by the law. The conditions are outlined in the IHT Act 1984 s71A. These were first introduced in the  Finance Act 2006.

Q. With a property say half left to wife half left to children, would the wife still be able to claim the deceased's full RNRB?

A. The surviving spouse could potentially claim any unused RNRB of the deceased. Some (or all) of this may have been used in the transfer to the children on first death so it would depend on the values involved.

Q. If you are not married- allowing them to live in house- is there problem with RNRB as not lineal descendent and is it then just lost

A. Giving an unmarried partner the right to live in a property in your Will would give them a life interest. The transfer of value would not be covered by the inter-spouse exemption and the property held in trust would form part of the surviving partners’ estate for IHT purposes. If the property then passed to the children of the partner who died first, the RNRB would be lost. Neither the transfer on first death or second death would be passing to a lineal descendant.

Q. Gift into Absolute trust, starts 7 year clock on gift, but the gift is instantly in beneficiary estate? Is there danger of double taxation.

A. Potentially. “Quick succession relief” can mitigate the tax in some circumstances but not all. See section 22042 of HMRCs IHT manual for further guidance.

Q. I attended a M&G session on bonds on 16th & 17th and have not received the slides and a cpd cert. Is someone able to look into this. Many thanks

A. Please get in touch with your usual M&G contact who will help you.

Q. After this session I wonder if someone could look at something for me.

A. Please get in touch with your usual M&G contact who will help you and if necessary they will be able to your query to our team.

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