CG37600 - Absolute entitlement: mergers of interests
Life interest released in favour of remainderman
Purchase by one beneficiary of other interest
Purchase of life interest and reversion
Introduction
If a beneficiary simultaneously acquires all the interests under a settlement, he has become absolutely entitled as against the trustee, and TCGA92/S71 (1) therefore immediately applies.
Take the simple case where property is held in trust for A for life with remainder to B. B's interest is vested, but it is a remainder, not an interest in possession. If B dies before A then that interest passes to his heirs. A can realize funds by selling the interest; indeed there are long-established companies that carry on a trade of buying such interests. The value of such an interest is based on the life expectancy of A and the value of the trust assets.
Clearly in this situation A and B together hold all the interests under the settlement. They can agree to divide the trust assets between themselves. Alternatively one may buy the interest of the other or a third party may acquire the interests of both. Sometimes the life tenant may surrender his or her interest so that the remainderman can enjoy the property immediately. All these are occasions of charge under Section 71(1).
Non-mergers
However sometimes an intended merger does not succeed, because there are other interests which have been overlooked. Therefore the person who now has the interests of the life tenant and the remaindermen does not have all the interests and there is no occasion of absolute entitlement.
An example is where the life tenant of an English trust has a `protective' life interest. Section 33 Trustee Act 1925 provides that where a protective interest is created, then if the life tenant commits an act which would deprive him of the income, this is replaced by discretionary trusts for the life tenant and his or her immediate family. Such a life tenant cannot therefore assign or surrender his or her life interest to the remaindermen because this brings into play the discretionary trusts. By providing for the protective life interest to terminate on an act of bankruptcy, it can be protected from the life tenant's creditors.
Scottish law has a different concept, the `alimentary liferent'. So far as it does not exceed what is needed to maintain the liferenter at the level to which he or she is accustomed, the alimentary liferent is safe from the claims of the liferenter's creditors. The alimentary liferent may not be surrendered without the consent of the Court under Section 1(4) Trusts (Scotland) Act 1961.
Another example which may be met is where the interest of the remaindermen is contingent, not vested. A contingent interest is one which will only vest on the occurrence of a particular contingency. A typical example would be for the trust deed to give A a life interest, with remainder to such of B C and D as are alive at A's death. The interests of B C and D do not vest until A's death, because they must be alive then to get anything. There is the possibility that they may all die before A does. Therefore someone else, who may be specified in the deed, or may be the settlor or his heirs, has an interest under the deed. A surrender by the life tenant would not then be an occasion of absolute entitlement.
Life interest released in favour of remainderman
Section 71(1) applies where a life tenant releases his or her interest in favour of any remaindermen who then becomes entitled to an absolute interest as against the trustee. The release of a life interest gives rise to a possible Inheritance Tax liability if the life tenant should die within seven years of the release, and the trustee may retain sufficient funds for to cover any such liability. Notwithstanding this retention by the trustees, the Capital Gains Tax charge should cover the whole of the chargeable asset released by the life tenant.
Purchase by one beneficiary of other interest
Where an original life tenant of settled property makes a payment to the original remainderman in consideration for which the remainderman surrenders his or her interest to the life tenant, the life tenant becomes absolutely entitled to the property, as against the trustees who are consequently chargeable under Section 71(1). The property is deemed to have passed to the life tenant at market value.
The life tenant is not liable under TCGA92/S76 (2), see CG38040, because he or she becomes absolutely entitled to the property as the holder of both interests and not as the holder of the remainder within the terms of Section 76(2). No allowance is due in respect of the payment.
Although, as a result of the transaction, the remainderman has disposed of his or her interest, no chargeable gain accrues, except that between 10 March 1981 and 18 March 1991 inclusive, there was a charge on the trustees if they ceased to be resident, see CG38040.
The instructions in the first paragraph, also apply to a remainderman who, by making a payment to the life tenant, becomes absolutely entitled to the settled property, see CG37600.
Purchase of life interest and reversion
Where a person, who has acquired a life interest or remainder in settled property for a consideration in money or money's worth, subsequently acquires the other interest (also for a consideration in money or money's worth) and so becomes absolutely entitled as against the trustees to the settled property, there is an `occasion of charge' on
- the trustees under TCGA92/S71 (2), and
- the person who acquired the interest under TCGA92/S76 (2), see CG38040.
Mergers of interests examples
A has a life interest in settled property and B is the remainderman; both are original beneficiaries. N buys A's life interest and, before it terminates, he also buys the remainder interest from B. N therefore becomes absolutely entitled to the settled property as against the trustees, and there is an `occasion of charge' on both the trustees and N.
The facts are the same as above, except that the remainderman B, for a consideration in money or money's worth, acquires the life interest of A. B thereupon becomes absolutely entitled to the settled property as against the trustees, and there is an `occasion of charge' on the trustees. B, however, is not chargeable under Section 76(2) because, when he became absolutely entitled to the property, he was regarded as still being the original beneficial owner of the remainder.