ABSTRACT
This rule applies where there are different interests in a trust which includes a non-income producing asset such as a reversion or a life policy. The proceeds of the non-income producing asset are apportioned between the life tenant and the remainderman. The remainderman receives a sum which, if invested at compound interest at the date of death at 4% per annum (less income tax), would produce the proceeds of sale. The balance is paid over to the life tenant.
Where the residue of an estate is left to a life tenant, the assumption is that the life tenant is to be entitled to income on the ‘pure residue’ only. Where there is a delay in paying debts, inheritance tax, legacies and other liabilities, the life tenant’s income is augmented. But for the rule, the longer the delay in settling debts the larger the gain to the life tenant. The effect of the rule is to charge the life tenant with interest on the sums used to pay debts and other liabilities in order to maintain equality between the beneficiaries. As the various expenses are paid, they should be apportioned between income and capital. The amount charged to capital should be such capital sum which, if invested at the date of death, would amount exactly to the sum paid. The balance is charged to income. The rate of interest to be used in this calculation is the average rate of interest received during the year.
