Writing for Taxation magazine’s readers’ forum, BKL tax adviser Terry Jordan responds to a query on mixing an estate distribution with savings to fund a new trust.
Beneficiary writes: My client is the sole residual beneficiary of his late mother’s estate. Legacies have been paid and there is £208,000 in cash plus a £300,000 house left in the estate. He is considering a deed of variation to redirect £300,000 into a discretionary trust. The client prefers the full value of the house to be transferred into his own name for simplicity, so would like £200,000 of the cash from the estate plus £100,000 he could provide from his own savings to fund the trust.
Would this create a stamp duty charge?
I look forward to hearing from readers.
Query 19,106 – Beneficiary.
Reply by Terry ‘Lacuna’ Jordan, BKL
If a variation involving land is made for no consideration and the deed of variation is made on or after 1 December 2003, it is exempt from stamp duty land tax (FA 2003, Sch 3 para 1). Here, the £100,000 would rank as chargeable consideration. Although below the normal £125,000 residential threshold, consideration would have to be given to any properties already owned by the son.
The Sunday Times (14 January 2018) ran an article on the complexities of stamp duty land tax since the introduction of the 3% surcharge and the unreliability of HMRC’s online calculator in particular circumstances.
Creating a discretionary trust for the original beneficiary and his family by means of a qualifying variation within two years of a person’s death under IHTA 1984, s 142 can have inheritance tax benefits. Namely, that the deceased is the settlor for inheritance tax purposes and the trust is therefore outside the reservation of benefit provisions. Because the variation is not retrospective for income tax purposes in this case the son will be taxable on all the income while he and his spouse or civil partner are potential beneficiaries regardless of who receives the income.
The problem here is that the ‘extraneous consideration’ provisions in s 142(3) would deny retrospective treatment if the son introduces £100,000 of his own money.