Trusts and Inheritance Tax

Precatory trusts

Produced by Tolley in association with Peter Gausden, Consultant Solicitor at Rowlinsons
  • 05 Jan 2022 08:51

The following Trusts and Inheritance Tax guidance note Produced by Tolley in association with Peter Gausden, Consultant Solicitor at Rowlinsons provides comprehensive and up to date tax information covering:

  • Precatory trusts
  • Precatory trusts in Wills
  • Statutory guidance on tax consequences of giving effect to a precatory trust
  • Securing the benefit of inheritance tax precatory trust relief
  • Capital gains tax and precatory trusts
  • Other taxes and precatory trusts
  • Gifts to executors or trustees

Precatory trusts

Precatory trusts in Wills

A so-called ‘precatory trust’ is when a testator makes an outright gift of property to a legatee, but also includes in the Will an unenforceable direction to the legatee to further dispose of the property in favour of others. Often the direction is expressed as a ‘wish’, ‘hope’, or ‘desire’. Since no imperative fiduciary duty falls on the legatee, as with a normal trust, the legatee is free to ignore what the testator has said and is at best under only a moral obligation to dispose of the property in accordance with the testator’s direction.

The most common form of precatory trust is one of the testator’s chattels, such as:

‘I give to John Smith absolutely all my personal chattels as defined in section 55(l)(x) of the Administration of Estates Act 1925 and without imposing any trust or binding obligation upon him to distribute the same in accordance with any memorandum of my wishes left by me.’

The advantage of such an arrangement is to give more flexibility to the testator ― a letter of wishes can be amended or rewritten multiple times over the years, without the need to formally change the Will.

If the legatee chooses to respect the testator’s direction and transfers the property, issues can arise as to whether there is a transfer of value for inheritance tax or a disposal for capital gains tax purposes.

Statutory guidance on tax consequences of giving effect to a precatory trust

The only direct statutory guidance relates to inheritance tax.

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