1. finance
2. accounting and auditing
3. tax preparation and planning

TIPS AND TRAPS
WITH RELEVANT
PROPERTY TRUSTS
Chris Whitehouse
5 Stone Buildings
Lincoln’s Inn
WC2A 3XT
Tel 0207 242 6201
Fax 0207 831 8102
Email [email protected]
These notes are intended as an aid to stimulate debate: delegates must take expert advice
before taking or refraining from any action on the basis of these notes and the speaker can
accept no responsibility or liability for any action or omission taken by delegates based on the
information in these notes or the lectures.
STEP Annual Tax Conference
September / October 2014
CONTENTS
I
THE IHT TREATMENT OF SETTLEMENTS
0
II
IHT SETTLEMENTS: SIMPLIFICATION
0
III
THE CONSULTATION PAPER ON THE SNRB
0
IV
ASPECTS OF THE REGIME
0
Form 1
0
Form 2
0
Form 3
0
I
THE IHT TREATMENT OF SETTLEMENTS
1.
Position before 22 March 2006
There were three categories of settlement:
a.
settlements with an interest in possession: by a fiction capital was
treated as beneficially owned by the life tenant. This had been the
position for estate duty;
b.
all others: notably discretionary and accumulation trusts were subject
to 10 year / exit charges;
c.
certain privileged trusts: otherwise falling within (b). The most notable
example (which became the “settlement of choice”) was the A&M trust.
2.
Position after the FA 2006 changes
a.
All new settlements fall within the relevant property regime with the
only exception being qualifying trusts for disabled beneficiaries (taxed
as a deemed or actual qualifying interest in possession with the capital
taxed to be part of the beneficiary’s estate).
b.
In the case of will trusts, it is possible to set up an IPDI (an immediate
post-death interest in possession) and there are special rules for gifts
in a will to young children of the testator (so-called BMTs and 18-25
trusts).
c.
Limited transitional relief: eg for TSIs (“transitional serial interests”).
This is a successive life interest for a spouse / civil partner which
comes into being on the death of a pre-22 March interest in
possession beneficiary.
3.
Consequences of the changes
a.
The broad division is between qualifying interests in possession and
“relevant property trusts”.
b.
The form of a lifetime settlement no longer matters: i.e. even if it
creates an interest in possession it will still be taxed under the relevant
property regime so that the death of the beneficiary will not trigger an
1
IHT charge (unless there is an exit charge because the settlement
then ends) nor a CGT uplift in the value of the settled assets.
c.
The creation of settlements now involves an immediately chargeable
transfer by the settlor, not a PET (the only exception is for disabled
trusts). This presents major problems in the use of settlements.
4.
Upsides of the changes
a.
CGT hold-over relief is more widely available on creation of a
settlement but beware “settlor-interested” trusts (TCGA 1992 s260).
b.
Changing beneficial entitlement within a continuing settlement will
generally have neither IHT nor CGT consequences. For instance, the
creation of a life interest in a discretionary trust is a “nothing” (this may
be attractive for income tax and CGT entrepreneurs’ relief).
5.
The relevant property regime
a.
The current regime was introduced in 1982 with the aim of taxing
settlements to the same extent as individuals (a “level playing field”).
In effect, the trust is a separate taxable person and the 6% charge
every 10 years (after any available nil rate band) is considered to
equate to a charge on individuals once a generation at 40%.
b.
With the 2006 changes, many more settlements have fallen into the
relevant property regime with a consequent increase in the filing of the
IHT100. Typically many old A&M trusts became subject to the regime
from 6 April 2008.
Example 1
On 1 March 2004 when her chargeable transfer total stood at £120,000, Anne set up
an accumulation and maintenance trust with cash of £800,000 for her four
grandchildren, each of whom was to have an equal share of:
1.
income at the age of 18; and
2.
capital at the age of 30.
On 1 October 2005, Anne’s oldest grandchild celebrated his 18th birthday and
2
became entitled to a one-quarter share of income and so enjoyed a qualifying
interest in possession.
Despite learning of the then Chancellor’s plans for accumulation and maintenance
settlements in FA 2006, Anne and the trustees decided not to lower the vesting age
on the ground that, as she put, ‘18 is far too young for someone to be given a
substantial sum of capital’.
On 6 April 2008, therefore, the accumulation and maintenance trust became a
relevant property settlement and so a 10-year anniversary charge arose on 1 March
2014. None of the other grandchildren had reached the age of 18 by this stage. The
value of the accumulation and maintenance trust fund was £1,260,000 as at 1 March
2014 and the oldest grandchild’s fund amounted to another £500,000.
Anne is still alive.
In order to calculate the IHT which is due on the first 10-year anniversary, the
following points are relevant:
a.
Anne’s cumulative total for the seven years immediately prior to the creation
of the trust was £120,000.
b.
The gift of £800,000 on 1 March 2004 was a PET and, because Anne
survived the requisite seven years, there was no tax to pay on this gift.
c.
When Anne’s grandson attained the age of 18 and became entitled to income,
there was no IHT charge because the original S71 IHTA 1984 legislation was
still in force. He then enjoyed an interest in possession in ¼ of the fund.
d.
There was no entry charge when the balance of the trust became a relevant
property settlement on 6 April 2008.
e.
As a result, the 10-year anniversary charge is calculated under S66(4) IHTA
1984 on:
£
Value of relevant property on 1 March 2014
Add: Initial value of non-relevant property (¼ x 800,000)
3
1,260,000
200,000
£1,460,000
f.
Using lifetime rates, the IHT on £1,460,000 is:
£
On £120,000 – £325,000 = £205,000 @ 0%
On £325,000 – £1,580,000 = £1,255,000 @ 20%
–
251,000
£251,000
The effective rate is:
251,000/1,460,000 x 100 = 17.192%
g.
However, because the assets in what used to be the accumulation and
maintenance trust have not been relevant property throughout the 10-year
period, S66(2) IHTA 1984 allows the rate at which IHT is charged to be scaled
down by 1/40th for each complete successive quarter which elapsed before
the trust assets became relevant property. In this case, 16 quarters expired
between 1 March 2004 and 6 April 2008, leaving a fraction of 24/40ths to be
applied to the IHT rate.
h.
The rate actually charged on the £1,260,000 is:
17.192% x 30% x 24/40 = 3.095%
Thus the trustees must settle a liability of 3.095% x £1,260,000 = £38,997.
6.
Pilot trusts
A pilot trust is set up with property of nominal value (£10) and substantial
assets added later. Taxpayer sets up a series of pilot trusts in order to benefit
from a multiplicity of nil rate bands (available provided the settlor has not used
up any of his nil rate band at the time when he creates and adds property to
the settlement). But there is still the problem of getting property into the trusts
without an IHT entry charge.
4
II
IHT SETTLEMENTS: SIMPLIFICATION
The simplification exercise for relevant property trusts has produced the following:
1.
further consultation on splitting the nil rate band (which will have the effect of
destroying the future use of pilot trusts): see Section III below;
2.
revised accounting dates for trustees (six months after the end of the month
when the charge arose);
3.
rules deeming the accumulation of certain income (so that it is relevant
property) for 10 year charges effective from 6 April 2014.
A.
Accumulated income and the relevant property regime
1.
The pre-April 2014 position
a.
The basic rule is that the IHT charge is on “relevant property”
comprised in the settlement before the 10 year anniversary
(IHTA 1984 s64). Income only became relevant property and
so subject to the charge when it was accumulated (see SP
8/86). Until this occurred it was not subject to the charge and
could be distributed free of IHT (see IHTA 1984 s65(5)(b)).
b.
In the case of property which has not been in the settlement for
the entire 10 year period leading up to an anniversary charge,
there is a proportionate reduction in that charge (IHTA 1984
s66(2)).
In the case of accumulated income, a separate
calculation has to be made in respect of each accumulation.
2.
When is income accumulated?
a.
The position may be regulated by the trust instrument which
may give the trustees a power to distribute for (say) two years
from the end of the tax year of receipt after which it becomes
part of the capital (i.e. is accumulated).
b.
More common is a trust to distribute subject to which there is a
power to accumulate income or a provision that income is to be
accumulated (i.e. a trust power) unless the trustees exercise a
5
power to distribute it. See, for instance, Kessler and Sartin
Drafting Trusts and Will Trusts (11th Ed) at 15.4:
“The Trustees shall pay or apply the income of the
Trust Fund to or for the benefit of any Beneficiaries.”
(the distribution limb)
“The Trustees may accumulate the whole or any part of
the income of the Trust Fund.” (the accumulation limb)
c.
Trust deeds commonly provide that even after income has
been accumulated, the accumulations can be applied as
income: see, for instance, Kessler and Sartin:
“The trustees may apply accumulated income as if it
were income arising in the current year” (see 21.31).
An interesting question then is whether the distribution is taxed
as income in the hands of the beneficiary. On balance this is
thought to be the case, although HMRC may not agree.
B.
The changes in FA 2014 s117: Sch 25 para 4
“2
Inheritance tax: ten-year anniversary charge
(1)
IHTA 1984 is amended as follows.
(2)
In section 64 (charge at ten-year anniversary), after subsection
(1) insert.
“(1A)
Basic
deeming rule
(1B)
For the purposes of subsection (1) above, property held
by the trustees of a settlement immediately before a
ten-year anniversary is to be regarded as relevant
property comprised in the settlement at that time if(a)
it is income of the settlement,
(b)
the income arose before the start of the five
years ending immediately before the ten-year
anniversary,
(c)
the income arose (directly or indirectly) from
property comprised in the settlement that, when
the income arose, was relevant property, and
(d)
when the income arose, no person was
beneficially entitled to an interest in possession
in the property from which the income arose.
Where the settlor of a settlement was not domiciled in
the United Kingdom at the time the settlement was
6
made, income of the settlement is not to be regarded
as relevant property comprised in the settlement as a
result of subsection (1A) above so far as the income-
Excluded
property
settlements
(1C)
(3)
No
discounting
C.
is situated outside the United Kingdom, or
(b)
is represented by a holding in an authorised unit
trust or a share in an open-ended investment
company.
Income of the settlement is not to be regarded as
relevant property comprised in the settlement as a
result of subsection (1A) above so far as the income(a)
is represented by securities issued by the
Treasury subject to a condition of the kind
mentioned in subsection (2) of section 6 above,
and
(b)
it is shown that all known persons for whose
benefit the settled property or income from it
has been or might be applied, or who are or
might become beneficially entitled to an interest
in possession in it, are persons of a description
specified in the condition in question.”
In section 66 (rate of ten-yearly charge), after subsection (2)
insert.
“(2A)
(4)
(a)
Subsection (2) above does not apply to property which
is regarded as relevant property as a result of section
64(1A) (and accordingly that property is charged to tax
at the rate given by subsection (1) above).”
The amendments made by this section have effect in relation to
occasions on which tax falls to be charged under section 64 of
IHTA 1984 on or after 6 April 2014.”
Points of detail
1.
The basic deeming rule is in the new s64(1A) which applies to income
which arose “before the start of the five years ending immediately
before the ten year anniversary”. So if a periodic charge falls due on
1 April 2015, the provision is concerned with income arising in the
period before 1 April 2010. This can include income arising before the
date of the previous 10 year anniversary (on 1 April 2005). Originally
a two year period had been proposed by HMRC.
2.
Deeming is unnecessary if, at the time of the periodic charge, the
income has been accumulated by the trustees.
7
3.
The legislation does not indicate which income is distributed first: for
instance, if in the above example there was income from 2004 and
2011 in the “pot” and the trustees paid out part of that just before the
10 year anniversary, is it the earlier or the later income which is
distributed? In the consultation document, HMRC indicate that a first
in first out (“FIFO”) allocation will be accepted. Presumably this will be
the case even if it is clear that as a matter of fact it is the later income
which has been distributed.
4.
The new s66(2A) removes the element of discounting: i.e. the income
will attract the full anniversary rate of tax despite the fact that it may
not have been relevant property throughout the 10 year cycle. The
reason given (to avoid a need for trustees to keep detailed records) is
hardly convincing and this is a case where the effect of the changes is
to increase the tax take.
5.
A similar objection may be raised to the new rules taking effect from
6 April 2014 which can impose a retroactive tax charge on income
arising before this date.
6.
The definition of “relevant property” in IHTA 1984 s58(1)(f) does not
include excluded property. Because the deemed accumulations are
said to be relevant property in the new s64(1A), it is necessary to
provide separately for this exemption (see the new s64(1B) and (1C)).
It may be noted that the other exclusions in s58(1) are not dealt with.
D.
The perils of deeming
Draftsman of fiscal legislation commonly deem a state of affairs to be other
than it is in reality and the result is frequently to create practical and
theoretical difficulties (a good example being the post-death variation
provisions in IHTA 1984 s142).
As a result of the accumulated income
changes, trustees need to be aware that:
1.
there may be income which they have accumulated and which is
capital for all purposes; and
2.
there may be income which is deemed to be accumulated for IHT but
not other purposes.
8
So if trustees resolve to accumulate income, it becomes relevant property
from that date (which may, of course, be within five years of a periodic charge
arising) and will benefit from the normal discount under s66(2). As already
noted, the discount is not available in respect of deemed accumulations.
So far as the IHT deeming is concerned, as a matter of trust law the income
remains available for distribution and, if distributed, will be taxed as income in
the beneficiary’s hands and will not attract an IHT exit charge (see s65(5)(b)).
There is, of course, no question of undoing the deeming in respect of a
previous periodic charge.
E.
Planning
Example 2
The periodic charge for the Silbury Settlement falls on 1 April 2016. On reviewing the
position on 30 March 2016, the trustees discover:
1.
that they have undistributed income from before 1 April 2011 totalling
£100,000; and
2.
after that date, a further £75,000. If they do nothing, the £100,000 will be
deemed relevant property at the time of the anniversary and may therefore
suffer a tax charge of £6,000.
But if the trustees resolve on 30 March to accumulate that £100,000 of income then,
although it will suffer a periodic charge, there will be a discount for the 39 quarters
during which it was not relevant property so that the tax charge is reduced to £150.
Also bear in mind that if there is the usual power to distribute accumulations as
income, it can still be distributed without an IHT exit charge if subject to income tax in
the hands of the beneficiary.
9
III
THE CONSULTATION PAPER ON THE SNRB
1.
The revised proposals
On 6 June 2014 revised proposals for further consultation were produced by
HMRC with a view to legislation in the 2015 Finance Act and with
implementation from 6 April 2015:
2.
Existing settlements
Settlements established before 7 June 2014 will not be affected by the
changes in treatment of the nil rate band (this is a significant departure from
the previous proposals and preserves the benefit of fully constituted pilot
trusts). However, the addition of property to such a settlement will be treated
as a separate fund in that settlement and will be subject to the new rules.1
3.
A settlor nil rate band
In the case of all “new” settlements (viz set up on or after 7 June 2014) the
settlor will have the benefit of a settlement nil rate band (“SNRB”) (currently
£325,000). This is nothing to do with his personal nil rate band.
Example 3
Sid has used up his IHT nil rate band when in 2015 he settles property (income
benefitting from the normal expenditure out of income exemption so that no IHT
charge arises) on discretionary trusts. This is the first settlement that he has created
since 6 June 2014 and he should elect that it shall receive all or a percentage of his
settlement nil rate band. The fact that he has exhausted his personal nil rate band is
irrelevant.
4.
The necessary election
The election of the settlor in respect of the SNRB will be on a form prescribed
by HMRC and the allocation between the settlements that he has created
must be in percentage terms so as to allow for future increases in the NRB.
The settlor must give a copy of the form to his trustees so that they will know
1
Existing settlements will, however, benefit from the simplified calculation of IHT that is being
introduced. Presumably, in the case of death before 7 June where a will is varied by the inclusion of a
settlement and reading-back under s142(1) occurs, this will be an “old” settlement for these purposes.
10
what percentage of the NRB is available to them. If no election is made by
the settlor, the default position is that they are not entitled to a NRB.
Example 4
Sid decides that he may make further settlements and accordingly decides to
allocate 25% of his SNRB to his 2014 trustees.
The settlor’s PRs after his death can make an election on his behalf in respect
of unallocated SNRB: for instance, if settlements are created by his will.
5.
Reallocations of SNRB
Once a percentage of the SNRB has been allocated to a settlement and has
been taken into account for the purposes of calculating a periodic or exit
charge, it cannot then be reduced: before that event, the allocation can be
amended or withdrawn. However, if further funds are added to the trust (even
a nominal sum?) the percentage of SNRB can then be increased.
An
allocation of SNRB can be made when property is added to an old trust (pre7 June 2014). Of course, the settlor must not overclaim SNRB: were this to
happen, penalties may be imposed on him.
Example 5
Sid establishes a further settlement in 2018 (at a time when he again enjoys a full
personal NRB) to which he allocates a further 25% of his SNRB.
When he
subsequently dies, 50% of his SNRB is unallocated and the PRs can do this (eg they
might provide for 50% SNRB to be available in the case of each of the lifetime
settlements that he has established). If he had established a relevant property trust
in his will, they could allocate the 50% unused SNRB to that trust.
6.
What happens if a trust ends?
If a trust is wholly ended in the settlor’s lifetime (it is not sufficient that there is
only a partial ending of the trust), then any SNRB allocated to that trust again
becomes available to the settlor. However, if a trust is wound up after the
death of the settlor then the SNRB allocated to it is lost (as the settlor is dead
it cannot be reallocated). If the trust is converted to a charitable trust, this is
treated as a winding up and allocated SNRB may be reallocated during the
settlor’s lifetime. Similarly, if a relevant property trust becomes a disabled
11
person’s trust (eg if the conditions of IHTA 1984 s89 become met) then
because the settlement now falls into the qualifying interest in possession
regime, reallocation is possible. Bear in mind, however, that on the death of
the disabled person the settlement, if it continues, will fall back into the
relevant property regime and if the SNRB has been reallocated it will not
automatically be reinstated.
7.
Who is the settlor?
If property is added to a settlement created by another person then for IHT
purposes there will be a separate settlement of the added property and the
person who makes the addition is the settlor (see generally IHTA 1984
s44(2)). Accordingly a SNRB may be allocated to that separate settlement.
If a will establishes an interest in possession trust (an “IPDI”) for the testator’s
surviving spouse / civil partner, then IHTA 1984 s80 provides that if a relevant
property trust comes into being after the ending of the IPDI, it is the surviving
spouse / civil partner who is treated as being the settlor of that trust. There is
no indication that this provision is to be amended which means that it is the
survivor who will need to allocate a SNRB to that settlement.
8.
Property moving between settlements
IHTA 1984 s81 provides that property transferred from one relevant property
trust to another is treated as remaining comprised in the original trust (i.e. the
transferor settlement). The reason for this provision is to stop property being
switched out of a settlement with a 10 year charge approaching into a new
settlement with a 10 year delay before the charge.
This provision will
continue to apply.
Example 6
Jack sets up a pilot trust in 2015 to receive the death benefit under his pension policy
(commonly called a “spousal by-pass trust”). The majority of pension policies involve
a trust being established when the pensioner joins the scheme. So if Jack took out
the pension in 2006, it follows that because it is already subject to a trust, if the death
benefit is paid to the 2015 pilot trust, it will be deemed (by s81) to remain comprised
in the 2006 trust (i.e. it will be outside the rules dealing with the SNRB).
12
9.
Simplifying the tax treatment
It is proposed that the following changes will be made in respect of relevant
property charges on and after 6 April 2015:
a.
ignore the chargeable transfers of the settlor in the seven years before
setting up the settlement;
b.
ignore related settlements;
c.
after deducting the NRB (if any), tax is charged at 6% but with the
existing rules that provide for a discount when the property has not
been in the trust throughout the previous decade.
There are two important points to note:
i.
if there are exit charges then the SNRB is allocated against them and
only the balance will be available at the time of the next periodic
charge. For instance, if the trust has a SNRB of £162,500 (50% of
SNRB) and makes a distribution of £200,000 in year five, then on the
following 10 year anniversary (which occurs five years later), there is
no SNRB available so that tax is charged at 6%. Presumably if the
NRB has increased above £200,000, the increased sum will be
available. If, at the time of the next periodic charge there have been
no exit charges, then a full SNRB will be available;
ii.
these new rules will generally apply to existing trusts so potentially
reducing the tax bill. It is necessary to calculate the available NRB of
the trust (after deducting previous transfers of the settlor in the seven
years before its creation) but ignore related settlements.
10.
Practical advice
a.
Although the intention is to bring in the new rules in FA 2015 operative
from 6 April, the 2015 General Election makes it unlikely that the
Finance Act in the spring will be anything more than a skeleton dealing
only with the essential rates and allowances.
This measure will
doubtless have to wait for the second Finance Act next year
introduced by the new Government. In these circumstances, there is a
13
chance (particularly if it is decided to have a general review of the
operation of IHT) that it will not be introduced.
b.
Avoid adding property to existing (pre-7 June 2014) settlements.
c.
In the case of new settlements, it will be necessary to advise the
settlor about the SNRB so that he can determine how much to allocate
to it.
d.
In the future, PRs will need to check the SNRB position of the
Deceased especially if his will establishes a relevant property trust.
14
IV
ASPECTS OF THE REGIME
1.
Business and agricultural property
It is not uncommon for relevant property settlements to be set up in order to
hold business or agricultural property attracting valuation reliefs for IHT
(business property relief is given by IHTA 1984 Pt IV Ch.1 and agricultural
property relief by Ch 2). Typically, the trust may hold shares in the family
trading company. In such a case:
a.
if the property qualified for relief at 100% the value transferred into the
trust will be nil although an IHT return is still necessary under .216
since the general rule is that every transferor who is liable for
inheritance tax on the value transferred by a chargeable transfer or
who would be so liable if inheritance tax were chargeable on that value
must deliver an account. The requirement for an account if there
“would be” liability covers chargeable transfers within the nil rate band
and chargeable transfers that qualify for business property relief or
agricultural property relief;
b.
the trustees must then satisfy the normal requirements (for instance
the two year ownership requirement under s106 or the occupation
requirement under s117) if they are to be entitled to either business or
agricultural property relief. Subject to that, normal reliefs will be due in
the case of both anniversary and exit charges (IHTA 1984 s103(1),
s115(1));
c.
the legislation is not, however, straightforward in a case where the
business or agricultural property is sold by the trustees and the cash
received is then distributed to beneficiaries.
Example 7
1.
A settles property qualifying for 100% business property relief in 2004. In
2010, the business is sold and the cash distributed amongst the beneficiaries.
It might be thought that the IHT exit charge in 2010 will be nil on the basis that
the value of the property originally settled was, after relief, nil. However, IHTA
1984 s68 (which deals with the rate of tax before the first 10 year anniversary)
provides that the rate is calculated by reference to “the value, immediately
15
after the settlement commenced, of the property then comprised in it” (IHTA
1984 s68(5)(a)).
Accordingly it is the value ignoring business or agricultural relief which must
be taken and hence the distribution of cash may attract an exit charge.2
2.
If, however, the business property remained in the settlement beyond the first
10 year anniversary, is then sold and the proceeds paid out to beneficiaries,
the IHT position is as follows:
a.
there will be no 10 year charge (since BPR at 100% is then available);
b.
the rate of tax charged on the distribution of the cash after sale of the
business will be calculated by reference to appropriate fraction of the
rate at which it was last charged rather than by reference to the value
of the property in the settlement at the last 10 year anniversary (IHTA
1984 s69(1)). Assuming, therefore, that the only property in the
settlement qualified for relief at 100% so that the rate of tax previously
was 0%, the rate of the exit charge will be nil.
Finally, bear in mind, that one result of the 2006 changes in the IHT treatment
of settlements is that once the property has been in the settlement for the
qualifying period (two years under s106)3 business relief will be available and
changes in the form of the settlement (for instance if the trustees appoint an
interest in possession) will not affect the position: specifically it will not cause
a new two year qualifying period to commence.4
2.
Planning for the 10 year anniversary
a.
Review the income position (see Section II above).
2
If the trustees had distributed the business property when it attracted relief at 100% no problem would
then arise given that although tax would be chargeable on the basis of the value of the property
originally settled the charge will be on a nil value.
3
A similar period applies for agricultural property relief under s117 if the land is occupied by the trustees
for the purposes of agriculture (for the purpose of this provision if the trustees allow a beneficiary—such
as the life tenant—to farm the land that this requirement is met). Alternatively, agricultural property relief
may be due once the land has been owned by the trustees for seven years provided that it was
occupied (for instance by a tenant) for agricultural purposes throughout that period.
4
The only situation where this problem can still arise is if the trustees of a relevant property settlement
were to appoint a disabled person an interest in possession within IHTA 1984 s89B(1)(c). Because that
person is treated as beneficially entitled to the property (IHTA 1984 s49(1), (1A)(b)), he will need to
satisfy a fresh qualifying period before relief is available (see, generally, Burrell v Burrell [2005] S.T.C.
569). Of course, if a qualifying interest in possession ends and the settlement continues as a relevant
property trust, relief will only be due once the trustees have owned the business assets for the required
period.
16
b.
In the case of a NRB trust, consider breaking it up (with no charge)
immediately before the anniversary.
c.
How do appropriations of business assets work?
Example 8
The Jenkins accumulation and maintenance trust was set up in 2003 for the settlor’s
two grandchildren who take interests in possession at 18 (as a result of TA 1925
s31). The elder grandchild (Sid) became 18 in 2005 and the younger (Sad) in 2009.
As a result, the IHT treatment of the settlement is that:
1.
Sid has a qualifying interest in possession in half the fund;
2.
Sad’s moiety is taxed under the relevant property regime.
The assets in the settlement comprise (as to 50%) a portfolio of quoted investments
and as to the balance shares in the family trading company capable of attracting BPR
at 100%. A 10 year anniversary falls due in 2013 and the trustees appropriate the
BPR shares to Sad’s fund. Subsequently they switch the appropriation and hold the
shares on the trusts of Sid’s fund (? two year ownership?).
d.
“Liability” schemes no longer work after FA 2013: eg charge UK
property and invest borrowing offshore in the case of excluded
property trusts (see IHTA 1984 s162A) or charge eg a share portfolio
and invest in business property / agricultural property more than two
years before the periodic charge (see IHTA 1984 s162B).
3.
Creating (and changing) interests in possession
It is possible to convert a discretionary trust into an interest in possession
trust and to change interests in possession without an IHT charge arising (and
given that a resettlement does not occur without a CGT charge). See Forms
1 and 2.
4.
Trusts and real property
X has owned a let industrial property for many years. Total value £1m. He
wants to keep the rent for (say) the next 15 years but give away the capital
value. Consider granting a reversionary lease (vesting after 15 years) to a
settlement for his children. He keeps the rent (because he is the freeholder)
17
and the capital value settled is heavily depleted because of the deferral.
Value settled more than £325,000? CGT hold-over relief. No reservation of
benefit provided that either of the let outs in FA 1986 s102A(3) or (5) apply.
5.
Will trusts and shearing operations
On his death X leaves his house to his second wife Mona, on a flexible IPDI.
The trustees carve out a 21 year lease for her and appoint away the freehold
to the children (a PET by Mona but no reservation of benefit: cp FA 1986
s102ZA(3): definition of “the no longer possessed property”).
This is a
“shearing operation” which would be caught by the reservation of benefit rules
if the house had been left to Mona outright.
6.
Sharing arrangements and disabled children
Jenny lives with her disabled daughter Trudy. She settles a beneficial 50%
interest in their home on a disabled trust for Trudy. A PET by Jenny and no
reservation of benefit (see FA 1986 s102B(4): the “donee” is Trudy who has a
qualifying interest in possession: this is the only case where a settlement can
be used as part of a sharing arrangement). For a disabled trust, see Form 3.
18
Form 1: Exercise of a power of appointment to convert a discretionary trust
into an interest in possession5
THIS DEED OF APPOINTMENT is made the [ ] day of [ ] 20[ ] by [ ] (‘the
Appointors’).
SUPPLEMENTAL to a deed of settlement dated [ ] and made between [ ] (‘the
Settlement’)
WHEREAS
A.
By clause [ ] of the Settlement the Trustees have power to appoint capital and
income of the Trust Fund amongst such of the Beneficiaries as they may see
fit. The power is exercisable and any exercise may be made revocable during
the Trust Period.
B.
B is a member of the class of Beneficiaries.
C.
The Appointors are the present Trustees of the Settlement and the Trust Period
has not expired.
NOW THIS DEED WITNESSES
1.
Definitions
In this Deed “the Trustees”, “the Trust Period”, “the Trust Fund” and “the
Beneficiaries” shall have the meaning given to these terms in the Settlement.
2.
Exercise of power of appointment
In exercise of the power of appointment conferred on them by clause [ ] of the
Settlement and of all other relevant powers the Appointors hereby appoint that
from and after the date hereof the Trust Fund shall be held on trust to pay the
income thereof to B for his life.
3.
Power of revocation reserved6
The Trustees may at any time or times during the Trust Period by deed or
deeds revoke or vary either wholly or in part the appointment contained in
clause 2 above.
4.
Exclusion of apportionment of income7
5
The deed may be used to convert a discretionary trust into an interest in possession trust. The interest
so created is not ‘qualifying’ for IHT and so for the purposes of this tax the deed is a ‘nothing’. However,
it will change the income tax treatment of the trust. The appointment may be over the entire trust fund or
selected assets (eg ‘all stocks and shares’ or ‘shares in X plc’). It is common in the latter case to refer to
an Appointed Fund and list the assets in a Schedule. The appointment has no CGT consequences: it
has the effect of modifying the existing settlement, not creating a new one. Whilst the trust is interest in
possession, the ‘tax pool’ cannot be used: i.e. it is in abeyance. However, if in the future the trust
becomes discretionary it can then be used to ‘frank’ distributions in the usual way. Whilst the interest in
possession subsists, the trustees suffer only basic rate income tax (or equivalent) leaving the
beneficiary to pay any higher or additional rate tax for which he is liable.
6
The deed is revocable during the Trust Period. This enables the Trustees to switch the income to
another beneficiary. Note that if nothing is said about the power being exercised revocably then it is
irrevocable. For a deed of revocation and new appointment see Form 2.
19
All income of the Trust Fund received by or on behalf of the Trustees from and
after the date of this Deed shall be treated as if it had arisen wholly after such
date.
IN WITNESS etc
7
To avoid laborious calculations, it is important to exclude apportionments of income. This clause is
unnecessary after the Trusts (Capital and Income) Act 2013 became law in October 2014 but may be
included so that the position is made clear.
20
Form 2: Exercise of a power of revocation and new appointment to change the
interest in possession beneficiary8
THIS DEED OF REVOCATION AND APPOINTMENT is made the [ ] day of [ ]
20[ ] by [ ] (‘the Appointors’).
SUPPLEMENTAL to:
1.
a deed of settlement dated [ ] and made between [ ] (‘the Settlement’)
2.
a revocable deed of appointment dated [ ] and made by the Appointors (‘the
Revocable Deed’).
WHEREAS
A.
By clause [ ] of the Settlement the Trustees have power to appoint capital and
income of the Trust Fund amongst such of the Beneficiaries as they may see
fit. The power is exercisable and any exercise may be made revocable during
the Trust Period.
B.
By the Revocable Deed B a member of the class of Beneficiaries was
appointed a life interest in the income of the Trust Fund.
C.
The Appointors are the present Trustees of the Settlement and are desirous of
revoking the Revocable Deed and making such new appointment as is set out
below.
D.
The Trust Period has not expired.
NOW THIS DEED WITNESSES
1.
Definitions
In this Deed ‘the Trustees’, ‘the Trust Period’, ‘the Trust Fund’ and ‘the
Beneficiaries’ shall have the meaning given to these terms in the Settlement.
2.
Revocation of Revocable Deed
In exercise of the power reserved to them the Appointors hereby revoke in its
entirety the Revocable Deed.
3.
Exercise of power of appointment
In exercise of the power of appointment conferred on them by clause [ ] of the
Settlement and of all other relevant powers the Appointors hereby appoint that
from and after the date hereof the Trust Fund shall be held on trust to pay the
income thereof to C for his life.
4.
Power of revocation reserved
The Trustees may at any time or times during the Trust Period by deed or
deeds revoke or vary either wholly or in part the appointment contained in
8
Similar comments to those made in relation to Form 1 apply to this deed: for IHT purposes it is a
‘nothing’ and, for CGT, does not lead to a deemed disposal of the trust property. Retain flexibility by
making the appointment revocable.
21
clause 3 above.
5.
Exclusion of apportionment of income
All income of the Trust Fund received by or on behalf of the Trustees from and
after the date of this Deed shall be treated as if it had arisen wholly after such
date.
IN WITNESS etc.
22
Form 3: IHTA 1984 s89 trust for the disabled which also satisfies the vulnerable
beneficiary provisions for income and capital gains tax and obtains a full CGT
annual exemption
THIS SETTLEMENT is made the ...... day of .........
BETWEEN:
(1)
(settlor) of (address) (‘the Settlor’) and
(2)
(original trustees) of (addresses) (‘the Original Trustees’)
WHEREAS
The Settlor wishes to make the settlement set out below and has paid or transferred
into the joint names of or placed under the joint control of the Original Trustees the
assets described in the schedule to be held upon and with and subject to the
following trusts powers and provisions
NOW THIS DEED WITNESSES as follows:
1
Definitions and interpretation
In this settlement the following expressions have where the context permits the
following meanings:
1.1
‘the Trustees’ means the Original Trustees or other the trustees or trustee for
the time being of this settlement and ‘Trustee’ means each and any of the
Trustees
1.2
‘the Trust Fund’ means the assets described in the schedule all assets at any
time added to it by way of further settlement (whether by the Settlor or any
other person) accumulation of income capital accretion or otherwise and all
property from time to time representing the same
1.3
‘the Principal Beneficiary’ means (disabled person)
1.4
‘the Discretionary Beneficiaries’ means:
1.4.1 any [husband][wife] (whether present or future) or [widower][widow]
whether or not remarried of the Principal Beneficiary
1.4.2 the children and remoter issue of the Principal Beneficiary
1.4.3 the spouses (whether present or future) widows or widowers (whether
or not remarried) of the persons specified in clause 1.4.2 above9
1.5
‘spouse’ shall include a civil partner registered under the Civil Partnership Act
2004 and ‘widow’ and ‘widower’ (and ‘remarried’) shall be construed
accordingly
1.6
‘Section 89’ means Section 89 of the Inheritance Tax Act 1984
9
Should the trustees be given power to add further beneficiaries so that charities can be included?
23
1.7
‘interest in possession’ means an interest in possession within the meaning of
subsection (1)(a) of Section 89
1.8
‘the Trust Period’ means the period of 125 years from the date of this deed
2
Beneficial trusts during the lifetime of the Principal Beneficiary10
2.1
During the lifetime of the Principal Beneficiary the Trustees may from time to
time pay or apply the income of the Trust Fund to or for the benefit of the
Principal Beneficiary PROVIDED that:
2.1.1 such payment or application shall from time to time be made in such
manner and upon such terms and conditions (if any) as the Trustees in
their discretion shall from time to time think proper
2.1.2 the Trustees shall accumulate the whole or any part of the income of
the Trust Fund that is not paid out under clause 2.1.1 by investing the
same and the resulting income of it in any investments by this
settlement authorised and adding the accumulations to the capital of
the Trust Fund
2.2
The Trustees shall have power in their absolute discretion to pay transfer or
apply in any manner to or for the benefit of the Principal Beneficiary the whole
or any part or parts of the capital of the Trust Fund
3
Beneficial Trusts after the death of the Principal Beneficiary
3.1
After the death of the Principal Beneficiary the Trust Fund and the income of it
shall be held in trust for all or any one or more exclusively of the other or
others of the Discretionary Beneficiaries at such ages or times and if more
than one in such shares and with such provisions for their maintenance
advancement and benefit generally (including discretionary trust powers or
provisions) as the Trustees (being at least 2 in number or a trust corporation)
shall (due regard being paid to the law concerning remoteness) by deed or
deeds revocable or irrevocable made before the end of the Trust Period
appoint and in default of and subject to any and every such appointment upon
trust for such of the children of the Principal Beneficiary as attain the age of
21 years if more than one in equal shares absolutely
3.2
Subject thereto the Trustees may during the Trust Period pay or apply the
income of the Trust Fund to or for the benefit of all or any one or more
exclusively of the other or others of the Discretionary Beneficiaries for the
time being in existence
10
This clause is designed to meet the revised requirements of IHTA 1984 s89(1) which are that during
the life of the disabled person there is no interest in possession in the property and that no other person
can benefit from income or capital. Consider the power to apply income or capital up to “the annual limit”
otherwise then for the benefit of the disabled person: see s89(3)(a). Should an express provision
allowing this be included along the lines of the following:
“Notwithstanding the provisions of sub-clauses 2.1 and 2.2, the Trustees may, in any period of
12 months that begins on 6 April, pay or apply to or for the advancement or otherwise for the
benefit of any of the Discretionary Beneficiaries an amount of income and/or capital of the Trust
Fund not exceeding the Specified Amount.”
“The “Special Amount” shall mean an amount which does not exceed the annual limit defined
in s89(3A) of the Inheritance Tax Act 1984.”
24
3.3
Notwithstanding and in derogation of the above trusts powers and provisions
set out in clauses 3.1 and 3.2 (but without prejudice to any prior application of
the Trust Fund or the income of it) the Trustees (being at least 2 in number or
a trust corporation) shall at any time or times after the death of the Principal
Beneficiary have power during the Trust Period in their absolute discretion to
pay transfer or apply in any manner to or for the benefit of any one or more of
the Discretionary Beneficiaries the whole or any part or parts of the capital of
the Trust Fund
3.4
Subject to all the trusts powers and provisions of this settlement and if so far
as (for any reason whatever) not wholly disposed of by it the Trust Fund and
the income of it shall be held upon trust for (beneficiary)
4
Administrative powers
The Trustees shall (in addition to all other powers vested in them by this settlement
or by law) have the following additional powers:
4.1
power at their absolute discretion to retain the Trust Fund or any part of it
(including any uninvested money) in its actual state and condition for any
period and to vary or transpose the mode of investment of the Trust Fund
within the range authorised below
4.2
power to invest trust money in the acquisition by purchase or otherwise or
upon the security of such property of whatever nature and wherever situated
as the Trustees shall in their absolute discretion think fit and so that:
4.2.1 the acquisition with trust money of property with a view to its
enjoyment in kind by the Principal Beneficiary and after his death by
any of the Discretionary Beneficiaries shall for the purposes of this
settlement be deemed to be an investment of it
4.2.2 any immovable property which may be acquired for any of the
purposes of this settlement (including its enjoyment in kind) may either
be vested in the Trustees upon trust for sale with power to postpone
sale or held by such persons or person and in such manner as the
Trustees may think fit
4.3
power to invest or hold or allow to remain in the name or under the control of
some or one only of the Trustees or of any person or persons corporations or
corporation as nominee or nominees of the Trustees the whole or such part of
the Trust Fund as the Trustees shall in their absolute discretion think fit and
the Trustees shall not be liable for any loss to the Trust Fund or income of the
Trust Fund occasioned by the exercise of this power
4.4
Power to lend money with or without security to the Principal Beneficiary
during his lifetime and thereafter to any Discretionary Beneficiary with or
without the payment of interest and upon such terms as to repayment or
otherwise as the Trustees in their absolute discretion think fit.
4.5
power (exercisable either expressly or by implication) to allot appropriate
partition or apportion any property whatever which (or the future proceeds of
sale of which) are for the time being subject to the trusts of this settlement in
or towards satisfaction of any share or interest in the Trust Fund or the
income of it in such manner as the Trustees shall in their absolute discretion
25
(without the necessity of obtaining any consent) consider just according to the
respective rights of the persons interested
4.6
power for any of the Trustees (other than the Settlor or any spouse of the
Settlor) to be employed and remunerated as a director or other officer or
employee or as agent or adviser of any company body or firm in any way
connected with the Trust Fund and to keep as his property (and without being
liable to account for such) any remuneration fees or profits received by him in
any such capacity notwithstanding that his situation or office may have been
obtained or may be held or retained in right or by means or by reason of his
position as one of the Trustees or of any shares stock property rights or
powers whatever belonging to or connected with the Trust Fund
[5
Trustee indemnity11
In the professed execution of the trusts and powers of this settlement no
Trustee shall be liable for any loss to the Trust Fund arising by reason of any
improper investment made in good faith or for the negligence or fraud of any
agent employed by him or it or by any other Trustee although the employment
of such agent was not strictly necessary or expedient or by reason of any
mistake or omission made in good faith by the Trustee or by reason of any
other matter or thing except wilful fraud or dishonesty on the part of the
Trustee who is sought to be made so liable]
6
Appointment of new Trustees
6.1
The statutory power of appointing new or additional trustees as modified
below shall apply to this settlement and shall be exercisable by the Settlor
during the life of the Settlor and thereafter by the Trustees
6.2
Except where the Trustees include or comprise a trust corporation there shall
never be less than 2 Trustees but so that any sole Trustee may act while
being such sole Trustee for the purpose of appointing a new Trustee or
Trustees but (unless a trust corporation) for no other purpose
6.3
The statutory power of appointing new or additional trustees shall be modified
as follows:
6.3.1 any person or persons may be appointed as Trustee or Trustees
notwithstanding that such person or persons may be resident
domiciled carrying on business or (if a body corporate) incorporated
outside the United Kingdom and the receipt of such person or persons
for the whole or such part or parts of the Trust Fund as may be paid or
transferred to such person or persons pursuant to such appointment
shall be a complete discharge to any other Trustee or Trustees
accordingly
6.3.2 the statutory power of appointing new trustees shall not be exercisable
by reason only that a Trustee remains out of the United Kingdom for
more than 12 months
11
Only insert this clause if it has been drawn to the settlor’s notice and he has agreed it.
26
6.3.3 the statutory power of appointing additional trustees shall be
exercisable notwithstanding that one of the Trustees for the time being
is a trust corporation
6.4
Any corporate body may at any time be appointed either as a general trustee
or as custodian trustee of this settlement on such terms and conditions as to
remuneration (payable out of income or capital) and otherwise in all respects
as the person or persons making the appointment shall prescribe or approve
and may act by its proper officers in the discharge of its duties as such trustee
and in the exercise of the powers and discretions conferred by this settlement
or by law
7
Trustees charging provision12
The Trustees may employ any of their number (other than the Settlor or any spouse
of the Settlor) who may be engaged in any profession or business and any of the
Trustees so engaged may charge and be paid all professional or other reasonable
costs and proper charges for any business done or services rendered or time spent
by him or his firm in connection with the trusts powers or provisions of the settlement
whether or not within the usual scope of his profession or business and although not
of a nature requiring the employment of a professional or business person
8
Exclusion of the Settlor from benefit
Notwithstanding anything above contained or implied none of the powers authorities
or discretions by this settlement or by law conferred on the Trustees or on any other
persons shall at any time or in any circumstances whatsoever be exercisable in any
manner which may benefit the Settlor or any spouse of the Settlor and no part of the
capital or income of the Trust Fund shall at any time or in any circumstances
whatsoever be lent to paid to or transferred to or applied for the benefit of the Settlor
or any spouse of the Settlor
[9
Clause headings13
The headings to the clauses of this settlement are for the purposes of information
only and are not part of and shall not be used in the construction of this settlement or
any part of it]
IN WITNESS etc
SCHEDULE
Assets
(describe assets referred to in the recital)
(signatures of the parties)
(signatures of witnesses)
12
Ensure that the settlor knows of and approves this clause.
This provision is optional given that even in the event of a conflict between the headings and the
clause, it is not thought that the heading would override the express terms of the clause. In other cases
(eg when the clause contains some ambiguity), the court might consider that using the heading for the
purpose of resolving such ambiguity is sensible.
13
27