In the non tax case of Ware v Ware [2021] EWHC 694 (Ch), the High Court agreed to rectify flawed trust deeds of appointment which resulted in unexpected tax charges. The trustees had never intended to make the changes included in the deeds.
The surrender of a Pre-2006 Life Interest in a UK trust and creation of a new interest in possession is a Chargeable Lifetime Transfer (CLT) for Inheritance Tax (IHT), subject to tax at 20%.
- It also brings the trust into the Relevant Property regime causing it to be subject to IHT Ten-year Charges and Exit Charges.
- In some cases, it can also result in a Gift with Reservation by the life tenant.
Rectification is a remedy that allows trustees’ actions to be overturned by the courts.
Constance and Nicholas Ware were mother and son and were beneficiaries and co-trustees of two will trusts which had been created by a Deed of Variation (DOV) in 2005 on the death of their husband and father.
- Under the DOV Nicholas Ware was granted lifetime Interests In Possession (IIPs) in both trusts.
- In 2013 two deeds of appointment were executed which, due to how they had been worded, mistakenly terminated Nicholas’ IIPs and created new ones. The deeds were only intended to appoint additional beneficiaries.
- If the changes stood the trust would suffer tax liabilities which would deplete the trust funds.
- These would be immediate, due to there being a CLT, and ongoing, due to the trusts joining the relevant property regime.
- Nicholas would have made a gift with reservation and as a result on his death there would be no Capital Gains Tax uplift in the value of the underlying trust property.
- Nicholas asked the court to either rectify or rescind the deeds of appointment.
- HMRC declined to be a party to the proceedings despite the fact they would be prejudiced if the claim was allowed as the immediate and future tax charges would no longer be due.
The High Court ruled that the deeds were flawed; the trustees did not intend to terminate and create the IIPs, but only to increase the pool of beneficiaries.
The order for rectification was granted meaning that the matter of rescission did not need to be considered. The deeds stood in respect of the additional beneficiaries but not in respect of the termination and creation of the IIPs.
Comment
Some trusts created before the relevant property regime was introduced in 2006 benefit from advantageous tax treatment compared to post 2006 trusts, but this can be lost if certain changes are made to the trust.
As a result, trustees and advisers must be very careful about making changes to pre-2006 trusts, whether by design or, as in this case, poor drafting, which had unintended and costly consequences.
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