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Readers’ forum: Trust dilemma

/ 20 March 2018

Terry Jordan

Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on the inheritance tax position of a trust settlement for the benefit of various family members.

We have been asked by a client to advise on his entitlement under trusts created by his grandparents in the 1990s. The trusts were established as interest in possession settlements for his aunt during her lifetime, and she died just before Christmas.

Having obtained the trust documents, I can see that, rather than distributing the funds to remaindermen on the death of the life tenant, the trusts continue for the benefit of the grandchildren in equal shares. I believe that these trusts are now considered relevant property and therefore subject to ten-year charges and exit charges.

My query is, whether I look back to the original settlors when considering the inheritance tax position of the trusts, or is it the life tenant who is now treated as settlor? If it is the recently deceased aunt, on what basis would exit charges be calculated, given there was no previous ten-year charge on the trusts?

I look forward to hearing from readers.

Query 19,136 – Trustee.

Reply by  Terry ‘Lacuna’ Jordan, BKL.

The client’s late aunt enjoyed a life interest in trusts created in the 1990s. Because they arose before 22 March 2006 the underlying capital value formed part of the aunt’s inheritance tax ‘estate’. That value would have been aggregated with her free estate and any other taxable property to determine the inheritance tax liability.

The funds in which the life tenancy subsisted would have benefited from an uplift to market value for capital gains tax purposes under TCGA 1992, s 72 on the aunt’s death.

The ongoing trusts for the settlors’ grandchildren are not ‘transitional serial interests’ under any of the relevant provisions so the value fell into the inheritance tax relevant property regime when the aunt died. Under IHTA 1984, s 60, the settlements commenced when property was first comprised in them in the 1990s.

Ten-year anniversary charges would be counted from the date(s) of creation of the trusts. However, the fact that the value had not been relevant property throughout the whole ten years would be reflected in the calculation of the tax under IHTA 1984, s 64 and s 66.

If a proportionate or ‘exit’ charge arises under IHTA 1984, s 65 on an outright appointment to a beneficiary before the next ten-year anniversary, the rate would be derived in accordance with IHTA 1984, s 69.

As Dymond’s Capital Taxes states at 19.525: ‘Section 69(3) is drafted in a somewhat complicated way and can be more simply expressed as follows:

(i) if the property was not relevant property immediately after it became comprised in the settlement, but it later became relevant property comprised in the settlement, we take the value it had when it became (or last became) relevant property;

(ii) in any other case, we take the value of the property immediately after it became comprised in the settlement.’

Accordingly, the value at the date of the aunt’s death would be relevant if an exit charge arises before the next ten-year anniversary.

The article is also available to subscribers on the Taxation website.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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