PLANNING TAX-EFFICIENT WILLS
Carl Islam, Barrister, TEP (www.carlislam.co.uk), author of ‘Tax-Efficient Wills Simplified
2014/2015’ (available to from Amazon & Waterstones online in October), and the founder of
and presenter for www.wealthplanning.tv.
Presented to the Gloucestershire & Wiltshire Branch of STEP at the Royal Agricultural
University in Cirencester on Thursday 4 September 2014.
1.
2.
3.
Introduction
1.1
Process.
1.2
The big picture – an ‘Estate Inventory’.
Planning framework
2.1
Objectives.
2.2
Constraints.
Planning environment
3.1
Stability of APR/BPR and change in rates?
3.2
NAO Report.
3.3
Change in approach by the courts.
3.4
HMRC’s armory in combating tax avoidance.
3.5
The Ramsay principle.
3.6
The GAAR.
4.
General principles of tax planning
5.
Planning tools
5.1
APR/BPR rules, s.39A, & will planning.
5.2
Transferable NRB.
5.3
NRB discretionary trusts.
5.4
2 year discretionary trusts.
5.5
Special trusts.
5.6
Gifts of residue.
5.7
Gifts for children and grandchildren.
5.8
Overriding powers.
5.9
Termination/surrender of an IPDI, automatic reading-back and variations.
5.10
Gifts to charity.
1
6.
5.11
Burden of tax.
5.12
Survivorship clauses.
Tax-efficient will planning matrix
Please note
T = Testator.
S = Spouse/Civil partner.
C/GC = Child/grandchild.
NRA legacy = a gift of T’s nil rate amount, which is the maximum amount of cash he can give on his
death without incurring a liability to IHT.
During the course I will primarily discuss planning that is appropriate for a traditional family
comprising husband (‘T’), surviving spouse (‘S’), children (‘C’) and grandchildren (‘GC’), and have
assumed that both T and S are UK domiciled, and that S survives T.
The diagrams follow the numbering in which they appear on the ‘Diagrams’ page at
www.wealthplanning.tv.
To request a free one month subscription to Wealth Planning TV please send your full name and email address to [email protected].
INTRODUCTION
Process
1.
The client’s objectives & my: why, what, where, whom, & when?’ formula - the lay Client
answers 5 questions.
1.1
The question ‘Why’ asks - what are the needs, obligations, and purpose(s) your
wealth is to fulfil after your death, i.e. the reason or purpose for the making of each
gift provided for in your will, e.g. to ensure the continued lifestyle and welfare of your
surviving spouse and transfer the wealth that remains after her death, to children or
to a registered charity.
1.2
The question ‘What’ asks - what are the assets you are gifting and the extent of your
beneficial (i.e. actual) ownership interest in each asset that comprises your estate,
e.g. the family home, which can be jointly held on either:
1.2.1
a legal and beneficial joint-tenancy – in which case your interest will
automatically pass to your surviving spouse outside your estate by what is
known as ‘survivorship’; or
1.2.2
as tenants in common in defined shares – in which case you can make a gift
of your share through your will, e.g. to a trust, in order to ring-fence the
capital value for the benefit of children.
1.3
The question ‘Where’ asks - what is the location i.e. the ‘legal situs’ of each asset which determines the registration of ownership, tax, and succession laws that apply
to the transfer of the asset.
1.4
The question ‘Who’ asks – who are the recipients of your bounty, (which may include
e.g. a class of beneficiaries under a trust).
2
1.5
And finally the question ‘When’ asks - whether a gift is absolute or subject to a trust,
and the terms of the trust, which e.g. may entitle your trustees to pay capital to a
beneficiary under a life interest trust. Which requires careful drafting.
2.
Fact-finding: mapping the testator’s ‘Wealth & Family Tree’ (trunk – Testator; Branches =
Asset Classes; leaves/fruit = assets & value (including potential growth); and roots = family
& dependants), and working backwards from the IHT 400 – an ‘Estate Inventory’.
3.
CLT, PET, & NRB analysis.
4.
Preliminary IHT calculations.
5.
IHT exemptions & reliefs analysis.
6.
Assembly of records for future probate & number crunching by the client’s accountant:
available annual exemption & cash gifts that qualify as normal expenditure out of income.
7.
Isolate the problem:
7.1
what assets make up the rump chargeable estate?; and
7.2
what are they realistically worth now and in the future – NB potential growth & hope
value? - get the facts and figures spot on for IHT valuation purposes before
developing a plan.
8.
Identify the planning constraints – including e.g. family & commercial issues surrounding the
use, exploitation, and ultimate destination of capital assets.
9.
My personal method - developing a commercial solution through logic & subtraction, i.e.
enable the solution present itself.
The big picture – an ‘Estate Inventory’
Please note that numerals in square brackets, e.g. [45], correspond with the box numbers on the form
IHT 400.
[TESTATOR ]
DOB
Residence
DOMICILE ANALYSIS
[6]
ESTATE COMPONENT
ANALYSIS
Own assets
Jointly-owned assets
Inheritance
Other
3
FAMILY TREE &
DEPENDENTS
WILL STRUCTURE &
TERMS ANALYSIS
Why
What
Where
Whom
When
Gifts & beneficiaries
GIFTS MADE IN LAST
7 YEARS
Gift & date
Recipient
Value
INTEREST
Current open market value
(& projected growth
including hope value)
NOTES
CLT analysis
PET analysis
GWR analysis
NRB ANALYSIS
Own
Inherited
ESTATE INVENTORY
ASSET
Assets held in trust [45]
Bank & Building Society
accounts [33]
Business & partnership
interests & assets [40]
Debts due to the estate
(including loans made to
friends) [43]
Director’s loan account
Farms farmhouses &
farmland (including
4
woodlands) [41]
Foreign assets (including
bank accounts) [44]
Household & personal
goods (including cars etc)
[34]
Houses Land Buildings &
interests in land [32]
Interest in another estate
[42]
Listed stocks & shares
[38]
Jointly-owned assets [31]
Life assurance &
annuities [37]
National Heritage assets
[47]
Pensions [36]
Unlisted stocks & shares
& control holdings
(including shares in
family owned companies)
[39]
Other
TOTAL
LIABILITIES
Debts owed [46]
Mortgages
Other
TOTAL
Household & personal
goods donated to charity
[35]
5
Total
NET TOTAL
ROUGH IHT BILL
CALCULATION
AVAILABLE IHT
EXEMPTIONS &
RELIEFS
ESTIMATED NET IHT
BILL
MY NOTES
Accountant:
Solicitor:
PLANNING FRAMEWORK
1.
In will planning, the primary non-fiscal objectives with which tax-efficiency usually
competes include:
1.1
2.
ensuring the continued welfare and lifestyle of S – which requires:
(i)
liquidity to discharge bills and pay for living expenses, private medical care,
and holidays etc; and
(ii)
access to capital when required to meet extraordinary expenditure e.g. to buy
a new car, or increasingly to help out with the payment of a grandchild’s
school/university fees;
1.2
ensuring that S can continue to live in the matrimonial home;
1.3
preserving assets for children – e.g. sheltering the capital value of T’s beneficial
interest in the matrimonial home i.e. where held jointly as tenants in common with S;
1.4
business and farming succession planning – which may result in the sale of land to
finance legacies to other children if the eldest inherits;
1.5
dynastic planning to preserve wealth for future generations;
1.6
asset protection to protect against profligacy by e.g. children and to a limited extent
against divorce;
1.7
flexibility to deal with changing circumstances and needs – including if S re-marries
after T’s death; and
1.8
professional wealth and investment management as good husbandry, to ensure
ongoing regulatory compliance, and where e.g. S is not used to dealing with personal
finances, or a child is vulnerable / incapable of handing their own affairs.
If any of these objectives take primacy, then tax planning adds value but should not become
the tail that wags the dog. That said, for a married couple the will is now the principal tool in
saving IHT.
6
3.
What we are addressing today, are techniques to enhance a scheme of dispositions provided
for by T in his will, by lawfully mitigating IHT so as to maximise tax-efficiency within the
design of T’s overall testamentary plan.
4.
In structuring a tax-efficient scheme of gifting, the availability and application of any
technique is constrained by T’s circumstances, estate, and instructions.
5.
T’s planning constraints include:
5.1
5.2
5.3
5.4
whether the intended beneficiary of a gift is:
(i)
an exempt beneficiary, i.e. S / charity; or
(ii)
a non-exempt beneficiary, i.e. C/GC;
whether at the time of his death any assets in T’s estate:
(i)
benefit from the availability of an IHT relief e.g. APR/BPR; or
(ii)
are excluded property (which is relevant where T is neither actually nor
deemed for IHT to be legally domiciled in the UK);
the property and interest gifted to the beneficiary, i.e. whether:
(i)
an absolute gift of T’s entire estate or of specific assets/residue outright; or
(ii)
a gift of property subject to the terms of a discretionary or life interest trust;
the powers conferred by T on his Trustees under his will, e.g:
(i)
to cause S to make PET’s by terminating an IPDI; or
(ii)
to transfer trust property to new and separate trusts, combine trusts, and split
a trust with sub-funds into separate trusts with separate classes of beneficiary
(i.e. by using an overriding power of re-settlement);
5.5
whether a trust is created as a relevant property trust (i.e. a discretionary trust), or as a
tax-privileged special trust i.e. a BMT / 18-25 trust, DPT, or IPDI – which determines
its tax treatment;
5.6
the boundaries of lawful tax planning, and a change in the tax laws (which could
operate with retrospective effect);
5.7
potential tax planning traps e.g. the gifts with reservation of benefit rules (‘GWR’);
and
5.8
the existence of facts and circumstances that could result in a challenge being made to
T’s will after his death, e.g. under the Inheritance (Provision for Family and
Dependants) Act 1975 (the ‘Inheritance Act’), and/or on the grounds of:
(i)
lack of mental capacity;
(ii)
lack of knowledge and approval;
(iii)
undue influence;
(iv)
constructive trust; or
(v)
proprietary estoppel.
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PLANNING ENVIRONMENT






Stability of APR/BPR and change in rates?
NAO Report.
Change in approach by the courts.
HMRC’s armory in combating tax avoidance.
The Ramsay principle.
The GAAR.
Stability of APR/BPR and change in rates?
Is there a planning window until 7 May 2015 in which to optimise APR/BPR planning?
In a conversation with John Whiting, Director of the Office of Tax Simplification at a conference in
London in October 2013, I asked him whether the existing Inheritance tax exemptions and reliefs are
stable. The answer I received is yes, because IHT is a political hot potato, and politicians do not want
to tamper with it before the next election on 7 May 2015.
‘The key question for the practitioner advising on IHT planning is whether the present rates can
safely be relied upon for the next few years. If they can…it may be prudent to retain assets in the
hands of the older generation…overall however where the assets are substantial and donees can be
trusted to look after them, there is much merit in encouraging large transfers of property subject to
100% relief. Where a gift is made early enough and without reservation, such that the transferor
survives by 7 years, all the complications of clawback can be avoided. Interesting situations arise
where planning opportunities are currently available which could easily be lost by changes to the
rates of relief. Since very little legislative effort would be required to reduce the present 100% rate for
BPR to 50% and to reduce the existing 50% to, say, 30%, it makes sense to do the transaction now.’
‘Business and Agricultural Property Relief,’ by Toby Harris and Chris Erwood, 6th ed, 2014, p.385.
NAO Report
‘The parliamentary National Audit Office (NAO) is launching an investigation into the misuse of tax
reliefs.
The NAO is concerned that HMRC and the Treasury are not systematically monitoring the amount of
tax revenues sacrificed through certain tax reliefs, of which over a thousand are in regular use. Last
week, the office published a preliminary report examining the impact of the most important of these
reliefs.
About a quarter of the 92 reliefs examined have experienced significant changes in value in recent
years. In particular, it noted that the total value of agricultural property relief (APR) and business
property relief (BPR) from inheritance tax (IHT) has almost doubled in five years. The combined
APR/BPR relief now being claimed annually is worth more than five times the total GBP3.1 billion of
IHT actually collected each year. The existence of a substantial nil-rate band is an even more
generous 'relief', says the report.
The sum of all tax reliefs has increased from 16 per cent of GDP to 21 per cent since 2005/06, not
least because successive governments have continued to complicate the system with more and more
reliefs. But because HMRC conducts so few evaluations of the cost of tax reliefs, it cannot estimate
the extent to which a given relief is misused, says the NAO. It is now evaluating the administration of
these reliefs, and will publish its findings later this year.
'HMRC and the Treasury need a much tighter grip on the use of reliefs in the tax system,' commented
Margaret Hodge, PAC Chairman.’
8
‘Alarm sounded at soaring value of farming and business IHT relief’, STEP briefing, Monday, 31
March, 2014 (http://www.step.org/alarm-sounded-soaring-value-farming-and-business-iht-relief).
Change in approach by the courts
1.
2.
In Futter and another v The Commissioners for Her Majesty’s Revenue and Customs, and
Pitt and another v The Commissioners for Her Majesty’s Revenue and Customs [2013]
(Supreme Court) Lord Walker:
1.1
spoke about ‘an increasingly strong and general recognition that artificial tax
avoidance is a social evil’;
1.2
criticised tax planning (which in that case he described as being ‘by no means at the
extreme of artificiality’) as ‘hardly an exercise in good citizenship’; and
1.3
warned that ‘In some cases of artificial tax avoidance the court might think it right to
refuse relief, either on the ground that such claimants, acting on supposedly expert
advice, must be taken to have accepted the risk that the scheme would prove
ineffective, or on the ground that discretionary relief should be refused on grounds of
public policy.’
‘We submit that if one compares the views of the House of Lords in 1935 in the Duke of
Westminster case with the views of the Supreme Court in 2013, a clear change in approach
can be seen. Perhaps the difference in views can be explained by the fact that the House of
Lords and the Supreme Court were asked to do two different things. In Futter and Pitt the
court was being asked to exercise its equitable discretion to do something positive: intervene
and set aside a disposition on grounds of mistake. Whereas in the Duke of Westminster, the
court was only being asked to construe the words of deeds and a statute to decide whether or
not payments were remuneration for services. If the court is being asked to exercise its
discretion to do something positive, arguably it is proper for the court to want to assess the
justice of the disposition and understand the substance of the transaction first, before
deciding whether or not to set it aside on the grounds of mistake. This is in contrast to the
court merely being asked to construe a document and statue to decide whether or not a
transaction should be taxed, which does not require an active exercise of discretion to
intervene and set aside a transaction.
Notwithstanding that, it is difficult to ignore the apparent shift in judicial attitude towards tax
mitigation or avoidance.
In an article entitled ‘Ramsay 25 years on: some reflections on tax avoidance’, Lord Walker
refers to a paper he wrote which was never published: Seven Types of Tax Avoidance. He
draws on this earlier paper to discuss seven varieties of the forms of tax avoidance:
1. Using a relief: ‘Using a relief or an exemption is what Lord Templeman would call tax
mitigation, and would not term as tax avoidance at all. Familiar examples are annual
exemptions of all sorts… But it is worth noting that many lay clients would regard some
of these things as tax avoidance, simply because for many of them the whole business of
tax planning (especially if it uses unfamiliar vehicles such as trusts, insurance policies
and pension schemes) is pretty mysterious. They may well be right...’
2. Dodgy offshore schemes: ‘As regards offshore schemes, I must make absolutely clear that
I do not regard all or most of them as dodgy. But there are some schemes, usually
involving nominal settlors, concealed beneficiaries, and questionable fiduciary control,
which to my mind come uncomfortably close to the boundary between avoidance and
evasion, at least in that practice they seem to rely on official ignorance of their
existence.’
9
3. Finding a gap: ‘… the clearest or neatest example of finding a gap is when a tax seems at
first sight to apply, one way or another, to every possible case, but is then shown not to
do so…’
4. Exploiting (or abusing) a relief: ‘The choice of language may depend on whether you are
a poacher or a gamekeeper, or on the degree of confidence with which it can be asserted
that whatever Parliament intended the relief to cover, it cannot have been this taxavoidance scheme.’
5. Anti-avoidance karate: ‘The label refers to occasional opportunities for the taxpayer to
use for his own advantage statutory provisions designed to prevent tax avoidance.’
6. Unnatural assets and unnatural transactions: ‘By contrast the fifth category… is very
large indeed. In order to get within some helpful provision, or to avoid some unhelpful
provision, taxpayers’ advisers have, like Frankenstein, fashioned monsters which have no
place in the ordinary world.’
7. Pre-ordained transactions.
If one accepts the categorisation set out above, the difficulty that arises is in determining
where the dividing line concerning the availability of equitable relief should lie. Clearly,
relief is likely to be denied in cases falling within categories (5) (6) and (7). Similarly, it will
almost certainly not be denied in a case falling within category (1). Interestingly, category (2)
appears to be a more deserving case for withholding relief than (3). It is therefore difficult to
predict which mistakes as to tax in an ‘avoidance’ or ‘mitigation’ scheme would fall on the
right side of the line. Lord Walker’s comments in relation to Futter suggest that the
conventional distinction based on artificiality will not apply in this context.’ ‘An exercise in
good citizenship’ by Jennifer Seaman and Richard Wilson, published on the STEP
website, September 2013 (http://www.step.org/exercise-good-citizenship).
HMRC’s armory in combating tax avoidance
1.
The principal weapons in HMRC’s armory in combating tax avoidance are:
1.1
anti-avoidance legislation;
1.2
the disclosure of tax avoidance schemes (‘DOTAS’) legislation, which give HMRC
early notice of marketed schemes, enabling them to respond, if necessary, with
amending legislation;
invoking the General Anti-Abuse Rule (the ‘GAAR’); and
taking cases before the courts arguing that:
1.3
1.4
(i)
the avoidance scheme failed under the relevant legislation; or
(ii)
more generally, is nullified as a matter of statutory construction under the
Ramsay principle.
The Ramsay principle:
1.
In WT Ramsay Limited v IRC [1982], Lord Wilberforce stated, that
‘It is the task of the Court to ascertain the legal nature of any transaction to which it is sought
to attach a tax, or a tax consequence, and if that emerges from a series, or combination of
transactions, intended to operate as such, it is that series or combination which may be
regarded.’
2.
Application of the Ramsay principle involves:
2.1
a realistic factual analysis of the transaction by the Judge;
10
2.2
2.3
consideration of what the legislation means; and
deciding whether the transaction is of the sort that the statute has in mind i.e. whether
it falls within the ambit of the statute and is therefore caught.
3.
Any analysis of the facts which is adopted must be by reference to the relevant statute.
4.
‘…the ultimate question is whether the relevant statutory provisions, construed purposively,
were intended to apply to the transaction, viewed realistically.’ Ribeiro PJ, Collector of
Stamp Revenue v Arrowtown Assets Ltd [2003].
5.
Any pre-arranged scheme which involves either tax avoidance, tax deferral or merely the
preservation of an existing tax benefit is potentially within the scope of the Ramsay principle.
6.
‘Prescriptive legislation undoubtedly leaves less scope for purposive…interpretation by
judges. Certain recent cases illustrate that legislation may be so prescriptive it prohibits a
realistic view of the facts which was permitted in Ramsay…For example, in the case of
D’Arcy, the Revenue abandoned a Ramsay argument prior to the Special Commissioners
hearing and Mrs D’Arcy won the hearing in the High Court on the basis that the Revenue’s
contention would have led to an absurd result on the language of the statute.’ ‘Tax
Avoidance’, 2nd edition 2013, by Rebecca Murray.
7.
There is no ‘substance over form’ doctrine in English law.
The GAAR
1.
The FA 2013 introduced a general rule aimed at countering abusive tax avoidance schemes.
2.
The GAAR has been described by commentators as HMRC’s nuclear weapon, which is not
aimed at sensible tax planning such a lifetime giving, outright or into trust, or for example
leaving assets in trust for a surviving spouse and children.
3.
The rule is aimed at tax advantages arising from tax arrangements that are abusive.
4.
For an arrangement to be abusive HMRC must show that it cannot reasonably be regarded as
a reasonable course of action (the double reasonableness test).
5.
The test does not require the Judge to give a view on whether the tax arrangements were a
reasonable course of action.
6.
Instead the Judge is required to consider the range of reasonable views that could be held in
relation to the arrangements.
7.
‘[The] GAAR is itself a piece of legislation and it must be applied as such, in conjunction with
the existing rules. In applying the existing rules, principles of statutory construction will be
applied in the usual way. The approach of the courts which is cited in Part A [of the GAAR
Guidance] as being rejected by the GAAR, has been rejected by the courts in any event. There
is nothing in the GAAR to prevent ingenious tax planning per se. Nor is the GAAR results
based in that the results of a transaction or arrangement cannot be viewed in a vacuum.
[In Fishers Executors v CIR [1926] Lord Sumner stated,
“…the highest authorities have always recognised that the subject is entitled so to arrange
his affairs as not to attract taxes imposed by the Crown, so far as he can do so, within the
law, and that he may legitimately claim the advantage of any express terms or of any
omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under
liability nor incurs blame.”
11
It must be stressed that this is still the case notwithstanding the GAAR: The rule of law still
operates in England and Wales and none of the tax legislation has been rejected as a result of
the enactment of the GAAR.
Furthermore, the GAAR is a piece of legislation which must be applied as such, it is not a
rule of law which operates in a vacuum to cure all tax avoidance, nor is it a rule of
construction or interpretation of statutory language.
The most important point to emphasise in this context is that the GAAR must be applied in the
context of and in conjunction with, the applicable tax legislation. Indeed it only operates on
the hypothesis that the existing legislation has been purposively construed and applied to the
tax arrangements in question and that the tax arrangements do achieve the tax advantage
which they aimed to achieve.
Taxpayers are entitled to plan their tax affairs even in the light of the GAAR.
While the GAAR does contain a priority rule such that it takes priority over the existing tax
law, it does so in a way which is consistent with it. Thus it would be misleading to say that
there is a blanket overriding statutory limit in relation to tax planning…the GAAR takes
precedent over existing tax rules but only where it applies and in order to determine whether
or not it applies one must have regard to the existing tax rules.
It is crucial that the arrangements are only judged in the context of the legislation. One can
think of numerous Alice in Wonderland type provisions in the tax legislation which require
departure from the commercial world into a deemed world in which the amount of tax is
calculated in accordance with highly prescriptive provisions instead. Where the legislation is
highly prescriptive in this way, the fact that the tax consequences do not follow the
commercial consequences would not be an indication of abuse. [Quoting Judith Freedman –
‘Defining Taxpayer responsibility: in support of a general anti-avoidance principle’ [2004]
BTR 4,]
Artificiality alone cannot be said to be a hallmark of tax avoidance, when so much about tax
is artificial.’ Tax Avoidance, 2nd edition, 2013, by Rebecca Murray.
GENERAL PRINCIPLES OF TAX PLANNING
1.
‘There are cases we know of where transactions are completed solely for the benefit of a tax
gain, which of course was not intended by Parliament. The question is, is it avoidance or does
the activity go beyond avoidance and cross the boundary between avoidance and evasion?
This can sometimes be difficult to decide…It may be that as the legal principles of avoidance
become defined in case law , [a person who] implements an avoidance scheme which has
been held by the Courts to be avoidance could be embarking on a course of conduct which
amounts to evasion.’ From the text of the 10th Hardman Memorial Lecture delivered on 14
November 2002 by Richard Broadbent, former Chairman, Customs & Excise, British Tax
Review, Issue No.2, 2003.
2.
‘[The] hallmark of tax avoidance is that the taxpayer reduces his liability to tax without
incurring the economic consequences that Parliament intended to be suffered by any taxpayer
qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other
hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by
the tax legislation, and genuinely suffers the economic consequences that Parliament
intended to be suffered by those taking advantage of the option.’ Lord Nolan in Willoughby
and another v IRC (1997) (an Income Tax case).
12
3.
In the Revenue’s own words,‘Tax avoidance is not the same as tax planning. Tax planning
involves using tax reliefs for the purpose for which they were intended [when]
Parliament…passed the relevant legislation.’ (HMRC Issue Briefing: Tackling tax avoidance
September 2012).
4.
Prudent and careful planning involves making sensible use of the available exemptions and
reliefs provided for in the tax legislation, i.e. ‘playing by and within the rules’.
5.
However, the ‘rule of law is the foundation of everything we do in tax. Questions of legal
right and liability should ordinarily be resolved by the application of the law and not by the
exercise of some discretion of some official, in effect giving them quasi legislative powers.
The trouble is the letter of the law has been replaced by the spirit of the law [and taxpayers]
do not know what to do about it. Let us be perfectly clear, politicians and HMRC are a major
part of the problem. For almost two decades each year they have enacted reams of badly
worded and highly complex legislation with totally inadequate parliamentary scrutiny. Noone seriously believes that politicians understand the legislation they are enacting in anything
more than a superficial way – they have neither the time nor the training to do so. HMRC
suggest the problem and then proposes the legislation that purports to solve it. Then when
shortcomings inevitably appear, the fault is attributed to those who identify them and not
those who conceive them.’ ‘Tax Administration and the Rule of Law’, by Anthony Thomas,
presented at the conference held at the Bingham Centre for the Rule of Law – ‘Do our tax
systems meet the rule of law standards?’ 20.11.2013.
6.
The ‘rule of public opinion’ as voiced by the Press and MP’s has to some extent usurped the
‘rule of law’.
7.
‘…as a legal matter there is no equity in a tax statute, and therefore it seems to the writer to
be inappropriate to try and identify fairness in a tax: the law can be unfair, but at least you
know where you are with the rule of law…The rule of law requires that the government of the
day exercise its powers to collect tax, by reference exclusively to its rules, regulations and
legal practices as laid down in statute and built up through case law. The law is sacrosanct,
and an individual is entitled to govern his or her affairs exclusively by reference to the law in
force, particularly so far as is concerned the citizen’s obligation to pay tax…Put it another
way, tax may be raised only pursuant to the rule of law and not otherwise…we have a
fundamental principle of statutory construction , which is that, in seeking to give meaning to
legislation, the requirement is to find the intendment of Parliament which underscores the
legislation in question…to the extent that the rule of law is perceived by Parliament and the
public to be unacceptable and/or immoral then Parliament should change the law.’ The Rule
of Law, Tax Avoidance and the GAAR, by Patrick Way QC.
8.
‘…the intention of Parliament is an objective concept, not subjective. The phrase is a
shorthand reference to the intention which the court reasonably imputes to parliament in
respect of the language used. It is not the subjective intention of the minister or other persons
who promoted the legislation. Nor is it the subjective intention of the draftsman, or of
individual members or even of a majority of individual members of either house.’ R v
Secretary of State for Environment, Transport and the Regions ex parte Spath Holme Ltd
[2001].
9.
As ‘Lord Hoffman has observed extra judicially (in his article ‘Tax Avoidance’ [2005] BTR,
197,206)… it is a contradiction in terms to suggest that successful tax avoidance is that
which is structured to avoid a tax which Parliament intended to impose. This is because
[quoting Lord Hoffman],
“[the] only way in which Parliament can express an intention to impose a tax is by statute
which means that such a tax is to be imposed. If that is what Parliament means, the courts
should be trusted to give effect to its intention. Any other approach will lead us into
13
dangerous and unpredictable territory.” [i.e. quoting Michael Furness QC, “to characterise
as tax avoidance any transaction which produces a tax result contrary to the intention of
Parliament is liable to produce circularity. This is because the intention of Parliament is
expressed in the legislation, and if the legislation on its true construction says that the tax
avoidance transaction works, then ex hypothesi it cannot be contrary to the intention of
Parliament”].
It is for this reason that some avoidance schemes flourish whilst others flounder. In the event
that a scheme is not a sham, yet involves one or more interlinked steps which have no
commercial purpose except for the avoidance of tax, it is not open to the courts (when viewing
the transaction realistically) simply to ignore the artificial steps without any reference to the
underlying legislation that the taxpayer is seeking to exploit.’ Hui Ling McCarthy, ‘HMRC v
Mayes: SHIPS that pass in the night – reconciling Mayes and Drummond.’ [BTR, Issue 3,
2011].
10.
‘Paradoxically, the proponents of a GAAR considered that it would restore the rule of law.
They felt this, it seems, because they had identified that the courts, in their desire to do down
distasteful (‘egregious’) schemes , were at best ‘bending’ the rule of law to find against a tax
avoider, and at worst ignoring the rule of law entirely. So the aim seems to have been to
introduce a GAAR (within the rule of law, therefore), to allow judges better to dispense the
rule of law rather than ignore it because of their moral repugnance of the avoidance
involved…the writer considers it unlikely that the GAAR will achieve this result (of bringing
cases involving avoidance back within the rule of law), because the GAAR is too vague and
unclear and leaves too much open to debate and uncertainty. In other words the judges will
not be able to follow a clear statement of the law in respect of the GAAR but will be left to
their own subjective devices. This leaves the citizen unclear as to where the law will be from
time to time.’ The Rule of Law, Tax Avoidance and the GAAR, by Patrick Way QC.
11.
‘…it is not a judge’s role to make the law, only to interpret it. The Bill of Rights in 1688 said:
“...levying money for or to the use of the Crowne by pretence or prerogative with Grant of
Parlyament for longer time or in other manner than the same, is or shall be granted is
illegall.” This has always been and is still part of the UK constitution: in direct tax cases,
Parliament makes the rules and judges construe them.’ Tax Avoidance, 2nd edition, 2013,
Rebecca Murray.
PLANNING TOOLS

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APR/BPR rules, s.39A, & will planning.
Transferable NRB.
NRB discretionary trusts.
Two-year discretionary trusts.
Special trusts.
Gifts of residue.
Gifts for children and grandchildren.
Overriding powers.
Termination/surrender of an IPDI, automatic reading-back, and variations.
APR rules
1.
2.
3.
APR operates by way of an automatic percentage reduction in the value of the property
transferred, and is applied before any other exemption or relief (including BPR).
APR is due to the extent that the value transferred by a transfer of value is attributable to:
2.1
the ‘agricultural value’;
2.2
of ‘agricultural property’;
situated in:
14
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
3.1
the United Kingdom, Channels Islands or Isle of Man; or
3.2
an actual EEA state;
provided:
‘(a)
it was occupied by the transferor for the purposes of agriculture throughout the
period of two years ending with the date of the transfer, or
(b)
it was owned by him throughout the period of seven years ending with that date and
was throughout that period occupied (by him or another) for the purposes of
agriculture,’ [s.117].
s.122 allows APR on the value of shares in, or securities of, a company if:
5.1
the agricultural property forms part of the assets of the company, and part of the value
of the shares or securities can be attributed to the agricultural value of that
agricultural property; and
5.2
the shares or securities gave the transferor control of the company immediately before
the transfer.
s.122(2) (which specifies the definition of control for s.122) provides that there is no control
if:
6.1
the shares or securities would not have been sufficient , without other property, to
give the transferor control of the company immediately before the transfer; and
6.2
the value of the shares and securities is taken to be less than the value previously
determined under the related property provisions of s.176, i.e. where there is a sale
within 3 years of T’s death.
s.115(2) defines ‘agricultural property’ as meaning, ‘agricultural land or pasture and
includes woodland and any building used in connection with the intensive rearing of livestock
or fish if the woodland or building is occupied with agricultural land or pasture and the
occupation is ancillary to that of the agricultural land or pasture; and also includes such
cottages, farm buildings and farmhouses, together with the land occupied with them, as are of
a character appropriate to the property.’
Agricultural land or pasture has its natural meaning and is taken to mean bare land used for
agriculture (IHTM 24031).
Farmhouses only attract APR if appropriate to the size and nature of the farming business
carried on using the land where the land is occupied together with the farmhouse (IHTM
24036).
The criterion is the purpose of the occupation, which is a functional test, Arnander and
others (executors of McKenna, deceased) v Revenue and Customs Commissioners (2006).
The words ‘of a character appropriate to the property’ are ordinary English words.
Parliament has not provided any specific criteria to be used in deciding whether the test of
being ‘of a character appropriate to the property’ has been fulfilled.
In Lloyd’s TSB (Personal representative of Antrobus) v IRC (2002), the test of whether a
‘farmhouse’ was ‘of a character appropriate’ was framed by the following questions:
13.1
is the house appropriate by reference to its size, content and layout, to the farm
buildings and the particular area of farmland being farmed;
13.2
is the house appropriate in size and nature to the requirements of the farming
activities conducted on the agricultural land or pasture in question;
13.3
is the subject property a family home of some distinction;
13.4
would an educated rural layman regard the property as a house with land or as a farm;
13.5
how long has the house in question been associated with the agricultural property;
and
13.6
was there a history of agricultural production.
These issues were examined by the Special Commissioner in Arnander (2006), and she made
the following general comments on the meaning of ‘farmhouse’ in s.115(2):
14.1
it is a dwelling for the farmer from which the farm is managed;
14.2
the farmer of the land is the person who farms it on a day to day basis rather than the
person who is in overall control of the agricultural business conducted on the land;
14.3
the status of the occupier is not the test, the purpose of occupation is what matters;
15
14.4
15.
16.
17.
18.
19.
20.
21.
if premises are extravagantly large, then even though occupied for the purposes of
agriculture they may have become something more grand; and
14.5
whether a building is a farmhouse is a matter of fact to be decided upon the
circumstances of each case, judged by ordinary ideas of what is appropriate in size,
content, and layout in the context of the particular farm buildings and the area of land
being farmed.
A farm cottage is eligible for relief if it satisfies two conditions:
15.1
the occupier has the required status (IHTM 24034); and
15.2
it is of a character appropriate to the agricultural land (IHTM 24050).
In view of s.91, where an unadministered residuary estate includes agricultural property, a
residuary beneficiary is treated as owning the agricultural property, or an appropriate share of
it (IHTM 22022).
There are two rates of agricultural relief for IHT: 100% and 50%.
100% relief applies where:
18.1
T’s interest in the property immediately before the transfer carries with it the right to
vacant possession or the right to obtain it within the next twelve months (which
includes land let on grazing licences which are essentially for less than a year);
18.2
Extra Statutory Concession F17 (IHTM 24144) applies to extend the period of 12
months specified in s.116(2)(a) to 24 months; or
18.3
property is let on a tenancy beginning on or after 1 September 1995 (IHTM 24240).
Where S acquires APR property from T on his death, she automatically acquires T’s period of
ownership.
Complex rules apply to replacement property, which limit APR to the value of property that
has been held for the 2 year period.
Discussing areas of key concern, Toby Harris and Chris Erwood in the 6 th edition of
‘Business and Agricultural Property Relief’ point out that:
21.1
‘for trusts and partnerships there are quite complicated rules as to occupation of land
so as to qualify for APR’;
21.2
‘the valuation of agricultural estates is intricate’;
21.3
‘Limited liability partnerships give rise to difficult issues’; and
21.4
‘post FA 2006, the creation of any inter vivos trust, unless created for a certain
narrow category of beneficiary such as the disabled, will be a relevant property trust.
The trustees of such trusts qualify for APR as the legal owners of the land, rather
than the beneficiaries. By holding the land continuously, these trustees will escape
ten-year charges on the fund; and by distributions only in specie they will escape exit
charges once they have held the land for 7 years (or 2 years if they do the actual
faming).
Summary of the BPR rules
1.
Where certain conditions are satisfied, relief from IHT is available on the transfer of ‘relevant
business property’ located anywhere in the world.
2.
The essential conditions are:
2.1
2.2
2.3
the business is a qualifying business;
the asset is relevant business property; and
the minimum period of ownership has been met.
3.
BPR operates by way of a reduction in the ‘net value’ of ‘relevant business property’
transferred, s.104.
4.
The relief is given automatically where it is due, and is given after APR (if applicable) and
before any available exemptions.
16
5.
‘Business’ is defined in s.103(3), and includes a profession or vocation but does not include a
business carried on other than for gain.
6.
Note that the following businesses do not qualify for BPR:
6.1
a business or company that mainly deals with securities, stocks or shares, land or
buildings, or in making or holding investments (s.105(3));
6.2
a not-for-profit organisation;
6.3
a business subject to a contract for sale, unless the sale is to a company that will carry
on the business and the transferor will be paid wholly or mainly in shares of the
acquiring business; and
6.4
a company that is being wound up, unless that is part of a process to enable the
business of the company to carry on.
7.
Once a business crosses the line and becomes mainly a business that carries out an excluded
activity, all relief is lost.
8.
The investment business exception in s.105(3) involves an all or nothing test: either the
property in question is relevant business property, and qualifies for the relief in full, or it is
not.
9.
The question whether a business consists wholly or mainly of making or holding investments
is a question of fact.
10.
The business must be looked at in the round and, in the light of the ‘overall picture’, to form a
view as to the relative importance to the business as a whole of the investment and noninvestment activities in that business.
11.
This involves looking at the business over a period of time.
12.
In so doing, regard can be had to various factors, such as:
12.1
12.2
12.3
12.4
the overall context of the business;
the turnover and profitability of various activities;
the activities of employees and other persons engaged to assist the business; and
the acreage of the land dedicated to each activity (including the capital value of that
acreage).
13.
None of these factors is conclusive on their own as the exercise involves looking at the
business in the round.
14.
‘Relevant business property’ is defined in s.105 as:
14.1
property consisting of a business or an interest in a business;
14.2
securities of a company which are unquoted and which, either by themselves or
together with other such securities owned by the transferor and any unquoted shares
owned by the transferor, gave the transferor control of the company immediately
before the transfer;
14.3
any unquoted shares in a company;
14.4
shares in, or securities of, a company which are quoted and which, either by
themselves or together, gave the transferor control of the company immediately
before the transfer;
17
14.5
any land or building, machinery or plant which, immediately before the transfer, was
used wholly or mainly for the purposes of a business carried on by the company of
which the transferor then had control or by a partnership of which he then was a
partner; and
14.6
any land or building, machinery or plant which immediately before the transfer was
used wholly or mainly for the purposes of a business carried on by the transferor and
was settled property in which he was then beneficially entitled to an interest in
possession.
15.
Relevant business property within 5.1 - 5.3 above qualifies for relief at 100%, and property
within 5.4 – 5.6, at 50%.
16.
Note that the test of ‘control’ (which is defined in s.269) is subjective, and depends upon
whether a person can actually exercise control over the company, and s.105(1ZA) defines
unquoted as meaning not listed on a recognised stock exchange (IHTM 18336 and 18337).
17.
Under s.112 (Exclusion of value of excepted assets) relief is not available on an ‘excepted
asset’.
18.
Under s.112(2) an asset is excluded where it was:
18.1
neither used wholly or mainly for the purposes of the business during the preceding
two years (or period of ownership if less), see s.112(2)(a) and (3); nor
18.2
required for future use in relation to those purposes at the time of transfer, see
s.112(2)(b) and (3).
Note that ‘required’ does not mean ‘possibly might be required should an opportunity arise to
make use of the property’. It implies, ‘some imperative that the money will fall to be used
upon a given project or for some palpable business purpose.’ Barclays Bank Trust Co Ltd v
CIR [1998].
19.
In order to qualify as relevant business property, the property must be owned by the transferor
throughout the two years immediately preceding the transfer, s.106 (Minimum period of
ownership).
20.
Where T transfers a business asset to S during his lifetime, she must own it for at least two
years before being able to benefit from BPR, or if T dies, and T’s and S’s combined period of
ownership exceeds two years, BPR will usually be available (sections 106, 108, and 109).
21.
Net value is calculated in accordance with s.110 (Value of business) which provides:
‘(b)
the net value of a business is the value of the assets used in the business (including
goodwill) reduced by the aggregate amount of any liabilities incurred for the
purposes of the business;
(c)
in ascertaining the net value of an interest in a business, no regard shall be had to
assets or liabilities other than those by reference to which the net value of the entire
business would fall to be ascertained.’
The reduction takes place before any grossing up.
22.
Because the relief is granted before IHT is calculated, the tax relief is greater than the nominal
percentage if the donor bears the tax on the grossed-up equivalent of the business property
transferred.
23.
s.104, provides that,
18
‘Where the whole or part of the value transferred by a transfer of value is attributable to the
value of any relevant business property, the whole or that part of the value transferred shall
be treated as reduced –
1.
in the case of property falling within section 105(1)(a) [(b) or (bb)] by 100 per cent;
2.
in the case of other relevant property, by 50 per cent.’
24.
All that s.104 requires is that the value transferred by the transfer of value is attributable to
the ‘net value’ of the business.
25.
Under s.108(b), where S acquires business property on T’s death, her period of ownership is
aggregated with that of T.
26.
Under s.109, BPR may also be available in respect of a successive transfer of property
provided the ownership requirements were satisfied in respect of the first transfer and one of
the transfers took place on death.
27.
Note that in relation to a limited liability partnership (a ‘LLP’) s.267A provides that for the
purposes of the IHTA 1984 and any other enactment relating to inheritance tax:
‘(a)
property to which [an LLP] is entitled, or which it occupies or uses, shall be treated
as property to which its members are entitled, or which they occupy or use, as
partners;
(b)
any business carried on by [an LLP] shall be treated as carried on in partnership by
its members; and
(d)
any transfer of value made by or to [an LLP] shall be treated as made by or to its
members in partnership (and not by or to the [LLP] as such).’
28.
Where a chargeable or potentially exempt transfer is made by T within seven years before his
death, s.113A (Transfers within seven years before death of transferor) restricts the
availability of BPR.
29.
In the 6th edition of ‘Business and Agricultural Property Relief’, Toby Harris and Chris
Erwood observe that:
29.1
‘it can be very difficult to know in advance that property qualifies for BPR. HMRC
have introduced a clearance procedure “…to provide certainty for businesses
operating in the UK, as a useful practical service at a level whereby speed of
response from HMRC can be reasonably assured .” As part of the service HMRC will
also give their view of the tax consequences of a transfer of value that involves a
change in ownership of a business (succession) where this transfer, leaving aside the
application of BPR, would result in an immediate IHT charge’;
29.2
‘the future of the pilot trust has now been thrown into doubt following the release of
the HMRC consultation document dated 6 June 2014 in which HMRC clearly state
their intention to proceed with a single settlement nil rate band with a retrospective
application date of 6 June 2014…With APR and BPR at 100%, it might seem that
these particular rules may safely be ignored but such a view assumes that the relief
will continue at that level. In the event that a single settlement has been created with
substantial funds, all qualifying at present for APR or BPR at 100%, and there is a
change in the availability of the reliefs, the charge either at the 10-year anniversary
or on the capital appointment might be very considerable’; and
29.3
‘FA 2013, by s.176 and Sch 36, has radically changed the way that liabilities are set
against property that qualifies for relief. The new rules mainly apply to transfers of
value on and after 17 July 2013: see Sch 36, para 5(1) but apply with effect from 6
April 2013 to new liabilities incurred: see Sch 36, para 5(2). In simple terms , the
19
new rules require debt relevant to the property qualifying for relief to be set against
the property irrespective of where the debt is actually secured, thus reducing the
value on which relief may be claimed.’
30.
Commenting on deduction of debts, Robert Maas, in ‘Property Taxes 2013/2014’ states,
‘Debts can be deducted in calculating the amount liable to inheritance tax on death. A debt
that is secured on a specific asset must be deducted as far as possible from the value of that
asset. Accordingly up to 6 April 2013, it was relatively easy for a UK domiciled individual to
significantly minimize his IHT liability by keeping his UK property fully mortgaged. However
from 17 July 2013, a liability that arises after that date can be taken into account on death
only to the extent that it is discharged in money or money’s worth on or after death out of the
estate or from excluded property (non-UK property of a non-UK domiciled individual) owned
by the individual immediately before his death (IHTA 1984, s.175A(1) inserted by FA 2013,
Sch 36, para 4(1). It can also be deducted if it is not so discharged but there is a ‘real
commercial reason’ for its not being discharged and securing a tax advantage is not a main
benefit of leaving it undischarged. There is a real commercial reason only if it can be shown
that the debt (or other liability) is to a person dealing at arms length or, if it were, that person
would not require the liability to be discharged (IHTA 1984, s.175A(2) (3)…Where property
qualifies for IHT business property relief and the transferor has a liability that is attributable
(wholly or partly) to financing (directly or indirectly) the acquisition, maintenance or
enhancement of the property, the liability must be deducted , as far as possible, from the value
of that property before applying the relief (IHTA 1984, s.162B(10(2). This rule also applies to
liabilities that relate to agricultural property (IHTA 1984, S.162B(3)(4)and to forestry land
where the value of the growing property is left out of account under IHTA 1984, s.125(a) in
determining the value on death (IHTA 1984, s.162B(5)(6)).’
s.39A
1.
2.
3.
Where:
1.1
part of T’s estate is exempt; and
1.2
includes property attracting APR or BPR,
then special rules apply in relation to the valuation of specific and residuary gifts.
As Robert Maas explains in paragraph 18.22 of ‘Property Taxes’ 2013/2014,
‘Agricultural property relief (and also business property relief) is deducted from the value of
the agricultural property if that property is the subject of a specific gift. This means that if, for
example, the agricultural property is gifted to the deceased’s widow the benefit of the relief
will be lost. If the agricultural property is included in the residue the relief is apportioned on
a pro-rata basis between exempt and chargeable parts of the residue – so part of the benefit
will be lost to the extent that the widow has an interest in the residue (IHTA 1984, s.39A).’
‘Section 39A(2) requires the value of any specific gifts of relevant business property or of
agricultural property to be taken to be their value after relief. Actually, in each case the relief
reduces the value transferred by a transfer, rather than the value of the property, but that is
the way the legislation is framed. Section 39A(3) requires the value of any specific gifts which
do not qualify for relief to be 2the appropriate fraction” as defined in s.39A(4) as being one
where:
 the numerator is the difference between the value transferred and the net value of any
gifts qualifying for relief as reduced; and
 the denominator is the difference between the unreduced value transferred and the
gross value of gifts without the value of relief.
The effect of s.39A(3) can be to attribute part of the APR or BPR to an exempt transfer. This
causes wastage of the relief. Paragraph 15.15 of 6th edition of ‘Business and Agricultural
Property Relief’ by Toby Harris and Chris Erwood (2014).
Will planning
20
1.
2.
The gift should always be dealt with by way of a specific gift made to a chargeable
beneficiary, otherwise the relief is wasted and the s.39A attribution rules will apply if S is a
residuary beneficiary under a discretionary trust that contains property attracting 100%
APR/BPR.
APR and BPR can be re-cycled where:
2.1
2.2
2.3
3.
T leaves the qualifying property (the ‘property’) to a chargeable beneficiary under his
will, for example his son or daughter (‘C’), which is then inherited tax free;
after T’s death S purchases the property from C for cash; and
S survives T by 2 years (and note the requirement under s.117 – Minimum period of
occupation or ownership).
Since APR / BPR will then become available on the property in the estate of S, because she is
not within s.120, this enables S to make an IHT free gift of the property to C under her will.
Transferable NRB
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
T and S are each entitled to one full NRB.
However if S survives T, then on S’s death, her estate may be entitled to benefit from the
maximum amount of the value of two fully available NRB’s.
s.8A(7) defines the nil rate maximum as the upper portion of the value charged at 0% (for
2014/2015 = £325K) which imposes a ceiling on the amount available for transfer under the
rules.
If T has survived more than one deceased spouse the maximum value of the unused NRB
that can be used against tax on his death is limited to this amount (in effect to one extra
NRB).
Basic IHT planning for spouses requires that each should make full use of their individual
NRB’s on death.
Where T dies leaving part of his NRB unused, then on S’s death her personal representatives
(‘PR’s’) can make a claim under s.8A for her NRB to be increased by the proportion of T’s
unused NRB.
s.8A sets out various formulae for calculating T’s unused NRB and the increased NRB
available to S’s PR’s on her death.
If T leaves everything to S or to a life interest trust created by his will for S, (an ‘IPDI’), then
on her death, S’s PR’s can take advantage of two NRB’s.
That is because the amount of S’s NRB is increased by the percentage of T’s NRB which
remains unused at the time of his death.
S can take portions of an unused NRB inherited from any number of spouses or civil partners.
Whilst S’s estate may benefit from the availability of more than one unused transferable
NRB, S can only inherit the amount of one full NRB.
Therefore S’s death estate cannot benefit by more than the full value of one additional NRB.
Where under his will, T makes a gift of his unused NRB (which is referred to in these notes
as a gift or legacy of the Nil Rate Amount (‘NRA’)), to a trust, it results in the full depletion of
his NRB, and the amount of his unused NRB ceases to be available for transfer to S (unless
restored).
Note that the introduction of the transferable NRB means that in certain circumstances it is
preferable not to include a survivorship clause in a will.
Transferable NRB’s cannot be made by:
16.1 a co-habiting couple who are not legally married / registered as civil partners; or
16.2 family members who occupy the same property.
The transfer of any unused NRB requires a formal claim, and for HMRC guidance see IHTM
43001 to IHTM 43068.
NRB Discretionary trusts
21
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
Introduction.
How the trust is constituted.
The debt scheme.
The charge scheme.
CGT.
SDLT.
Appropriation of T’s share (i.e. in the matrimonial home) to the NRBDT more than 2 years
after his death followed by the granting of an IP in it to S.
Two-year discretionary trusts.
Introduction
1.
2.
3.
The transferable nil-rate band (‘NRB’) does not apply to:
1.1
unmarried co-habitees; and
1.2
singletons.
Use of a nil-rate band discretionary trust (‘NRBDT’) can result in:
2.1
freezing the value of an asset likely to grow by a greater percentage than the
percentage increase in the NRB between the death of T and S;
2.2
prevention of T’s share of the equitable interest in the family home (his ‘share’)
being collapsed into residue;
2.3
the ring-fencing of capital value for the benefit of children of an earlier marriage; and
2.4
NRB maximisation by:
(i)
avoiding S’s NRB being wasted where T has one NRB and S already has
two; and
(ii)
the sheltering of more than two NRB’s.
The actual tax treatment of an NRBDT is determined by:
3.1
how the trust is constituted; and
3.2
how the underlying planning arrangement is implemented.
How the trust is constituted
1.
2.
A NRBDT can be constituted by:
1.1
appropriating assets to that value to the Trust (including T’s share of the equitable
interest in the matrimonial home (his ‘share’); or
1.2
with a debt or charge instead (see the ‘debt’ or ‘charge’ schemes below).
If T’s share is worth less than the NRA, and he owns other assets there are three options:
2.1
the balance of the NRA legacy can be waived;
2.2
further assets can be appropriated; or
2.3
the money owed to the Trust Fund can be left outstanding as a debt from S (which is
the ‘debt’ or ‘charge’ scheme).
The debt scheme
1.
2.
3.
4.
Under this arrangement, instead of an immediate payment, the NRA legacy is satisfied by a
debt owed to the NRA Trustees by either:
1.1
S (where residue passes outright to her); or
1.2
the trustees of the residuary trust fund (where residue has been left on trust for S).
On T’s death S promises to pay the NRA personally to the NRA Trustees by giving them an
IOU, and in return receives the whole of T’s unencumbered residuary estate, but incurs a debt
that is deductible against her chargeable estate for IHT on her death.
Under the terms of T’s will the NRA Trustees must be:
3.1
required to accept the debt in satisfaction of the NRA legacy; and
3.2
permitted to waive interest on the debt.
The debt is repayable on demand.
22
5.
6.
7.
8.
To avoid HMRC arguing that the debt is not repayable on demand because repayment can be
prevented by S, she should not be an NRA Trustee.
Ideally the executors and NRA Trustees under either the debt or the charge scheme should not
be the same persons.
In particular under the debt scheme S should not be an executor and an NRA Trustee.
To be deductible from S’s estate on her death the debt must:
8.1
be incurred for full consideration in money or money’s worth; and
8.2
not infringe the artificial debt rules contained in s.103 FA 1986.
The charge scheme
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
It is preferable to satisfy the NRB by use of a charge arrangement rather than a share in the
matrimonial home.
The NRBDT is set up by means of a non-recourse charge created by T’s executors over assets
in his estate, commonly his ‘share’, on terms that neither the executors nor any beneficiary to
whom the charged property is assented is personally liable to make repayment.
Under this arrangement the executors:
3.1
impose an equitable charge over either:
(i)
the property; or
(ii)
T’s equitable interest in the property (his ‘share’), so S does not incur a debt;
and
3.2
transfer the charge to the NRA Trustees in satisfaction of the NRA legacy.
S does not receive the entire unencumbered residuary estate, but the assets that are transferred
to her (by assent) are reduced in value by the charge on T’s property.
Under the terms of T’s will:
5.1
the NRA Trustees must be required to accept the benefit of the charge in satisfaction
of the NRA legacy; and
5.2
the executors should be:
(i)
given an express power to assent assets to the beneficiaries subject to an
executor’s charge;
(ii)
permitted to allow the debt to remain outstanding; and
(iii)
relieved from liability for recovering the debt.
The charge must be repayable on demand and only be enforceable by the NRA trustees
against either:
6.1
the property; or
6.2
T’s share (where S takes the residue outright).
However whilst S remains in occupation of the matrimonial home and the charge is growing
in value it is unlikely that the NRA Trustees would succeed in persuading the court to enforce
the charge if S objected.
Under the charge documents, the debt must not be enforceable against either:
8.1
S as the ultimate owner of the property (where residue passes to her outright); or
8.2
the trustees of the residuary trust fund (where the residuary estate is held on any
continuing trusts).
Provided the executors have power to charge the NRA legacy on any property passing to S
they will be protected from claims by the NRA Trustees if they do so.
They may then assent the charged property to S who is not personally liable for the debt.
If this procedure is followed then although there is an encumbrance it was not imposed by a
disposition made by S, and S has never personally incurred a debt, in which case there is no
room for the application of s.103.
S must not acquire a life interest in the NRA Trust fund within 2 years of T’s death, otherwise
the entire advantage of the charge arrangement is lost, because the interest will automatically
be read-back under s.144, and will therefore be an IPDI.
If the charged property is sold, the debt falls to be repaid to the NRA Trustees.
23
14.
15.
Provided that S does not need the use of the repaid money, no problems arise, but if she
requires any part to be loaned back then the loan will fall foul of s.103 because at that point S
incurs a debt personally.
It is at this point that the FA 2006 changes are helpful, because if the NRA Trustees purchase
a share in the replacement property with S and at the same time appoint a life interest in it to
her then:
15.1
for IHT purposes that appointment is a ‘nothing’, and
15.2
s.103 issues do not arise.
CGT
1.
2.
Under either the debt or charge scheme the property ends up being wholly owned by S or by
the trustees of the residuary trust fund in which S has an IPDI.
If the property is occupied by S as her principal private residence then:
2.1
no CGT arises on a sale during S’s lifetime; or
2.2
an uplift in the base cost of the property occurs for CGT on her death.
Stamp Duty Land Tax (‘SDLT’)
1.
2.
3.
4.
Under the debt scheme an SDLT charge arises on the value of the debt.
To mitigate the amount of the potential SDLT charge the legacy can be funded:
2.1
with a debt limited to the maximum amount upon which SDLT is charged at 1%
(currently £250K); and
2.2
by funding the balance with cash.
Under the charge scheme the documentation can be drawn up so as to avoid liability to SDLT.
As a general rule no chargeable consideration for SDLT arises where:
4.1
the executors charge T’s property with the payment of the legacy;
4.2
it is agreed that the NRA Trustees cannot enforce payment of the legacy personally
against the owner of the property;
4.3
the NRA Trustees accept the charge in satisfaction of the legacy; and
4.4
the property is transferred to S subject to the charge.
Appropriation of T’s share to the NRBDT more than 2 years after his death followed by the
granting of an IP in it to S
1.
2.
Where an interest in possession in favour of S is created more than two years after T’s death
it is not a qualifying IP (because it cannot be an IPDI), and therefore the underlying trust
property will not be aggregated will S’s estate for IHT on her death, and can pass IHT free to
C absolutely.
‘For first deaths on or after 22 March 2006 the debt or charge scheme provisions in [T’s]
will could be ignored and instead [T’s] interest in the property could be appropriated to the
NRB discretionary trust. Although this has the disadvantage as far as [S] is concerned of
trustees co-owning the home with [her] it would mean that FA 1986, s.103 would be
irrelevant because no liability had been incurred which would trigger the anti-avoidance
provision. The NRB trustees would co-own the property and once the two-year reading-back
period from death expires (IHTA 1984, s.144) they could appoint the half share on an IP for
[S] for life with remainder to the children or other beneficiaries. [This could not be an IPDI
because it was created more than two years after T’s death and has two further advantages]:
 It provides more security for [S] in that he or she now has a right to enjoy the use of the
property as the beneficiary with the interest in possession in it and therefore enjoy the
income from the fund should the property be sold.
 [S] may be occupying the property under the terms of the trust and if so, he or she affords
the trust PPR relief for CGT from that point onwards.’ [Trust Practitioner’s Handbook by
Gill Steel, p.291].
24
Two-year discretionary trusts
1.
s.144 allows a distribution to be made under s.142(1) within 2 years of death, without any
charge to IHT out of assets settled on discretionary trusts by T’s will.
Therefore where T:
2.1
gives his estate (or some part of it) to his trustees to hold on discretionary trusts;
2.2
conferred wide powers of appointment on the trustees under his will exercisable in
favour of a specified class of beneficiaries, leaving it to his trustees to distribute his
estate or declare further trusts of Trust property;
2.3
trustees exercise the power within 2 years of his death; and
2.4
no-one obtained a life interest within that time,
then tax will be chargeable as if the gifts or trusts were made by T on his death, and the
appointment will not be subject to the usual IHT regime for discretionary trusts.
The back-dating operation of s.144 only applies where on a distribution from the trust tax
would otherwise have been charged.
As a result, if the discretion is exercised within 3 months of T’s death, s.144 will not apply
because tax would not otherwise have been chargeable, Frankland v IRC [1997] (the
‘Frankland trap’).
However there is no need to wait 3 months if the effect of the deed of appointment is to create
an IPDI.
If an appointment is made within the s.144 time limit the minimum period of ownership
requirements for APR and BPR start afresh from the time of T’s death, and under s.144(2) S
should inherit T’s period of ownership.
Where an interest is fully relieved it may be more tax-efficient to appoint it directly or in trust
for the next generation rather than to S (i.e. in case there is a change in the nature of the
interests owned at the date of S’s death or a change in the nature of the relief).
Where a two-year discretionary trust over residue in included in T’s will it should not contain
an NRBDT.
Instead a cash sum equal to T’s unused NRB can be paid out to e.g. C/GC by the trustees, or
be kept in trust for their benefit.
2.
3.
4.
5.
6.
7.
8.
9.
Special trusts




Disabled person’s trusts.
Bereaved minors trusts.
18-25 trusts.
Immediate post-death interest trusts.
Disabled person’s trusts (DPT’s)
1.
The definition of a DPT is set out in s.89B.
2.
Four types of interest qualify:
2.1
a deemed life interest in a trust for a disabled person under s.89(2);
2.2
a deemed life interest in a ‘self-settlement’ (i.e. trust) created by a potentially disabled
person under s.89A;
2.3
an actual life interest in settled property (other than an interest within 2.1 or 2.2
above) to which a disabled person has become entitled on or after 22nd March 2006;
and
2.4
an actual life interest in a ‘self-settled’ trust (other than an interest within 2.1 or 2.2
above) into which settled property was transferred on or after 22nd March 2006, which
meets the requirements of potential disability set out in s.89A(1)(b), and which
25
secures that if the capital is applied for the benefit of any beneficiary it is applied only
for the benefit of the settlor.
3.
Trusts which create a ‘disabled person’s’ interest receive s.49 treatment.
4.
For IHT the disabled beneficiary is treated as being beneficially entitled to the trust property.
5.
From 22nd March 2006, the lifetime creation of a DPT is a PET provided the settlor is not the
person with the disabled interest (s.49(1)).
6.
The IHT legislation allows T to create a will/trust that benefits a disabled person in a way that
the disabled person has no absolute right to income, by taking the trust outside the RPR.
7.
This treatment applies to non-interest in possession trusts within s.89, where the principal
beneficiary satisfies the conditions for a disabled person at the date of the settlement.
8.
A ‘disabled person’ is defined in s.89(4).
9.
If the s.89 conditions are satisfied the disabled person is treated as having a qualifying interest
in possession in the settled property so that it is not within the RPR.
10.
On the death of the disabled person his deemed interest in possession will result in the
aggregation of the settled property with his free estate (see IHTM 04102).
11.
In Barclay’s Bank Trusts Co Ltd (as Trustees of the Constance Mary Poppleston Will Trust
and another v RCC [2011] (Court of Appeal), the trustees appealed against HMRC’s ruling
that s.89(2) applied to treat the trust property under the will/trust of the deceased disabled
person as part of his chargeable estate.
12.
Dismissing the appeal, Lady Justice Hallett stated that, ‘[the] inheritance tax treatment of
settlements with an interest in possession is different from the treatment of settlements where
there is no such interest. In very general terms, in the case of the former the person so entitled
is treated as being beneficially entitled to the property in which the interest subsists.
Inheritance tax is charged on any transfers of value of such property including the
termination of that limited interest. In the case of the latter, tax is charged every ten years on
a percentage of value of the settled property. It is evident that the purpose of s.89 is to include
in the former category settlements for the benefit of disabled persons which, because of their
disability, conferred on them something less than full interests in possession. In the latter case
the disabled person is to be ‘treated’ as having an interest in possession so as to fall into the
former category when, by definition, he did not. Such treatment avoids any depletion of the
trust property in his life by the imposition of the periodic charge.’
13.
Note that the s.89 restrictions (on the application of settled property) only affect capital.
14.
Therefore income may be held on unrestricted discretionary trusts throughout a disabled
person’s lifetime.
15.
However the exercise of an overriding power to create continuing trusts for a beneficiary
other than a disabled person gives rise to a chargeable transfer for IHT.
16.
In consequence the appointed assets fall into the RPR.
17.
Any outright appointment is treated as a PET made by the disabled person.
Bereaved Minors Trusts (BMT’s)
1.
Under a BMT no IHT is payable:
26
2.
1.1
during the bereaved minor’s infancy;
1.2
upon becoming absolutely entitled to capital on or before the age of 18; or
1.3
if the bereaved minor dies before attaining the age of 18.
To qualify the trust must satisfy the following conditions set out in s.71A(3):
‘(a)
that the bereaved minor, if he has not done so before attaining the age of 18, will on
attaining that age become absolutely entitled to –
(i)
the settled property,
(ii)
any income arising from it, and
(iii)
any income that has arisen from the property held on the trusts for his benefit
and been accumulated before that time,
(b)
that, for so long as the bereaved minor is living and under the age of 18, if any of the
settled property is applied for the benefit of a beneficiary, it is applied for the benefit
of the bereaved minor, and
(c)
that for so long as the bereaved minor is living and under the age of 18, either –
(i)
the bereaved minor is entitled to all of the income (if there is any) arising
from any of the settled property, or
(ii)
no such income may be applied for the benefit of any other person…’
3.
The requirement that the trust be created by will is satisfied if it is created by the exercise of a
special power of appointment under the will.
4.
While s.71A applies to settled property, it is not ‘relevant property’, and no IHT is payable:
4.1
4.2
4.3
during the bereaved minor’s infancy;
on becoming absolutely entitled to capital on or before 18; or
where the minor dies before attaining that age.
5.
Where the trust is established by way of a class gift, the trustees may vary the bereaved
minors’ shares or cross-apply the income attributable to one bereaved minor’s share for the
benefit of another bereaved minor.
6.
If the trust is created by using a power of appointment under T’s will, then provided there is
no prior interest that qualifies as an IPDI, the trust must come into effect:
7.
6.1
within 2 years of T’s death (otherwise s.144 cannot apply); or
6.2
immediately upon the termination of an IPDI.
If an IPDI (conferred upon another beneficiary i.e. S) is terminated during the bereaved
minor’s lifetime by the exercise of a power of appointment under T’s will, the termination
will be a PET.
18-25 Trusts
1.
Under an 18-25 trust no IHT is payable:
1.1
until the beneficiary becomes 18 years old;
27
2.
3.
1.2
where a beneficiary becomes absolutely entitled to capital before 18; or
1.3.
a power of advancement is exercised before a beneficiary becomes 18, in order to
defer his entitlement to capital beyond the age of 25, however, the trust property will
become subject to the relevant property regime from the date of the exercise of the
power.
If the trust continues between the ages of 18 and 25, there will be an exit charge at the rate of
0.6% for each year (up to a maximum of 4.2%) where:
2.1
the beneficiary does not become absolutely entitled to capital until 25; or
2.2
between the ages of 18 and 25 capital is advanced to him (or for his benefit), which
includes the deferral of his capital entitlement beyond the age of 25.
To qualify the trust must satisfy the following conditions set out in s.71D:
3.1
the property is held on trusts for a beneficiary who has not yet attained the age of 25;
3.2
at least one of the beneficiary’s parents must have died;
3.3
if he has not done so before then the beneficiary on attaining the age of 25 will
become absolutely entitled to:
(i)
the settled property;
(ii)
any income arising from it; and
(iii)
any income that has arisen from the property held on trusts for his benefit and
been accumulated before that time;
3.4
that for so long as he is living and under the age of 25, if any of the settled property is
applied for the benefit of a beneficiary, that it is applied for his benefit; and
3.5
that, whilst he is under 25 the income and capital of his presumptive share can only
be applied for his benefit, or for the benefit of other members of the class who are
also under 25 years old.
4.
Whilst s.71D applies to settled property, it is not relevant property.
5.
However, a charge similar to an exit charge will apply where a beneficiary becomes
absolutely entitled to capital between the ages of 18 and 25.
6.
Where the trust is established by way of a class gift, the trustees may vary the beneficiaries’
shares, or cross-apply the income attributable to one beneficiary’s share for the benefit of
another beneficiary.
7.
Whilst an 18-25 trust can be created by exercising a power of appointment under T’s will, a
lifetime termination of an IPDI conferred on another beneficiary will be an immediately
chargeable transfer by the life-tenant for IHT.
8.
If a power of advancement is exercised before a beneficiary becomes 18 to defer his
entitlement to capital beyond the age of 25, the property will fall into the relevant property
regime.
9.
When the beneficiary becomes absolutely entitled at 25, or where capital is advanced to him
between 18 and 25, there will be an exit charge at 0.6% for each year after 18, resulting in a
maximum exit charge of 4.2% if capital vests at 25.
28
Immediate post-death interest trusts (IPDI’s)
1.
An IPDI exists where a will/trust provides for a tenant for life, and not for bereaved minors,
or for a disabled person, and the life interest exists continuously from T’s death.
2.
A trust created on death where a person becomes immediately entitled to an interest for life
will be:
3.
4.
2.1
treated as that beneficiary’s property;
2.2
aggregated with his estate (note that the beneficiary, for example S, is treated for IHT
as owning the whole of the capital fund see Inland Revenue Press Notice 12
February 1976); and
2.3
if the interest is created in favour of a spouse, or passes on the death of a beneficiary
to a spouse, will be a spouse exempt gift.
An IPDI exists and will be taxed under s.49A where three conditions are satisfied:
3.1
the trust was effected by will or under the law relating to intestacy;
3.2
the life tenant (for example S) became beneficially entitled to the life interest on the
death of T; and
3.3
the trust must not be for bereaved minors and the interest is not that of a disabled
person, which requirement must have been satisfied at all times since S became
beneficially entitled to the life interest.
The first requirement is satisfied where:
4.1
4.2
4.3
under T’s will funds are transferred into a pre-existing life interest trust;
T’s will is varied to create a life interest trust; or
an appointment is made within 2 years of T’s death that is automatically read-back
into his will under s.144.
5.
If T creates an IPDI in favour of S the gift is spouse exempt, and on her death S will be
treated as owning the whole of the capital fund, which is aggregated with the rest of her
chargeable estate for IHT.
6.
An IPDI can also be created within 2 years of T’s death, by trustees exercising an overriding
power of appointment (which extends to both income and capital) under T’s will to give S an
immediate interest in possession, resulting in the property out of which the income is
appointed benefiting from the spouse exemption.
7.
An IPDI may be terminated by:
7.1
the life-tenant (a ‘surrender’);
7.2
under the express terms of the trust (for example, in the event of re-marriage); or
7.3
by the trustees (defeasance).
8.
If as a result of the termination of a life tenant’s life interest, the property in which the spouse
interest subsisted becomes comprised in the estate of another absolutely, then the life tenant
will be treated as having made a PET.
9.
Provided S survives for a period of 7 years after the transfer, it will not become chargeable
(sections 3a, 51, 52).
29
10.
If the property passes on to further trusts, it will be treated as a chargeable transfer subject to
the GWR rules, hence a tax-efficient termination can no longer be on discretionary trusts for
the benefit of the life-tenant and issue.
11.
IPDI’s are used to determine the ultimate destination of trust property, and to preserve wealth
for the benefit of for example, T’s children from a former marriage.
12.
On S’s death the remainder interests in T’s estate may be in favour of:
12.1
absolute interests, for example for T’s adult children;
12.2
a discretionary trust, for example for T’s children who are minors or for young grandchildren; or
12.3
exempt gifts, e.g. to a UK registered charity.
13.
On S’s death no further IPDI’s can be created over residue left to her on an IPDI.
14.
However a surviving spouse who is left a life interest with no right to capital is likely to have
a claim under the Inheritance (Provision for Family and Dependants) Act 1975 (the
‘Inheritance Act’), therefore this strategy may not protect capital unless S remarries.
15.
Under the IHTA 1984 the pecking order between:
15.1
15.2
15.3
the bereaved minor’s trusts;
18-25 trusts; and
IPDI’s,
is: 1st a BMT; 2nd an IPDI; and 3rd an 18-25 (s.71D trust).
16.
If T by his will gives a minor ‘an immediate right to income with capital vesting at 25’ this is
not a s.71D trust but instead gives the child an IPDI.
17.
Therefore s.144 can operate to destroy what appears at first sight to be a s.71D trust.
18.
Where a s.71D trust results from conversion of a discretionary trust within 2 years of T’s
death, it will be read-back to the date of T’s death under s.144, in which case no exit charge
will arise on the ending of the earlier relevant property trust.
19.
Whereas, if the conversion occurs more than 2 years after T’s death, a s.71D trust comes into
existence on that date, resulting in an IHT exit charge arising on the ending of the relevant
property trust.
Gifts of residue
30
1.
T may leave a gift of residue to:
1.1
2.
3.
S (who is an exempt beneficiary) either:
(i)
outright (by making an absolute gift); or
(ii)
on a life interest trust (an IPDI);
1.2
children and grandchildren of any age (to skip a generation) of:
(i)
chargeable property outright up to the amount of his unused NRB, which will
then become depleted;
(ii)
assets qualifying for business or agricultural property relief (‘APR’/’ BPR’);
and
(iii)
excluded property; or
1.3
children who are minors on:
(i)
a bereaved minor’s trusts (a ‘BMT’);
(ii)
an 18-25 trust;
(iii)
an immediate post-death interest trust (an ‘IPDI’); or
(iv)
a discretionary trust.
An 18-25 trust can be put in place with a maximum charge at current rates of 4.2% payable
when capital is distributed, thereby deferring the vesting of capital until the beneficiary
becomes 25 years old.
The spouse exemption is available (provided the conditions in s.18 on domicile are satisfied)
where residue is left to S:
3.1
4.
outright; or
3.2
on an IPDI.
This is particularly useful where:
4.1
T wants to preserve capital for example for children from an earlier marriage; and
31
in enabling trustees to exercise overriding powers of appointment to cause PET’s to
be made by the spouse.
From 22.03.06 the spouse will only be treated as making a PET (rather than an immediately
chargeable transfer) where the appointment is:
5.1
to another beneficiary absolutely;
5.2
to a disabled person; or
5.3
into a bereaved minor’s trust.
In the case of a gift to S for life using an IPDI, she becomes entitled to a life interest on T’s
death, the trust does not qualify as a BMT or as a DPT, and must not do so throughout the life
of the IPDI.
Most intended life interests will take effect as IPDI’s except for example where unusually a
discretionary trust arises before the life interest can take effect.
On S’s death, the whole of the capital fund constituted by the gift will be aggregated with her
estate to calculate IHT payable on her estate.
The points to address when considering leaving residue to S either absolutely or on an IPDI
include the following:
4.2
5.
6.
7.
8.
9.
9.1
9.2
9.3
9.4
9.5
9.6
if residue is given to S outright, she can only make gifts if she has mental capacity or
if an application is made to the Court of Protection;
if the house is left on trust the trustees can take the decision as to whether S’s interest
should be terminated in whole or in part and PET’s made;
if S is left the residuary estate outright, she can establish IPDI’s for the children in her
will;
there may be CGT advantages in transferring the property into trust for S because
future disposals that might trigger gains can be minimized;
if property is left outright to S she cannot make lifetime gifts on trust for T’s children
to take effect as PET’s, and therefore such transfers will be chargeable; and
by contrast if S is given an IPDI in the will which is then terminated so that the
property becomes held on a bereaved minor’s trust during her lifetime that will be a
PET.
32
10.
Where T is not survived by S then to benefit his children T’s default options include:
10.1
10.2
10.3
10.4
an absolute gift (for example to adult beneficiaries);
a bare trust for example for T’s grandchildren (who can then take absolutely at 18);
a bereaved minor’s trust (s.71A) ; or
an 18-25 Trust (s.71D), where T wishes to leave assets to children who are under the
age of 25.
Overriding powers
1.
2.
3.
4.
5.
6.
7.
‘Overriding powers’ are wide and flexible powers given to trustees, to enable them to achieve
T’s intention to benefit the beneficiaries in the most appropriate way when exercised.
The existence of such powers also prevents a profligate beneficiary from selling their interest
because the trustees can revoke it the next day.
A ‘power of appointment’ is a power to vary the administrative and beneficial provisions of a
trust, or to create new trusts for the beneficiaries.
In a standard trust deed, the exercise of a power of appointment would normally require
execution of a deed.
A ‘power of resettlement’ is a power to transfer trust property to a new and separate trust for
the beneficiaries, and may also be used to combine trusts, and to split a trust with sub-funds
into separate trusts with separate classes of beneficiary.
A ‘power of advancement’ is a power to transfer trust property to a person, or apply it for his
advancement or benefit, and may be used:
6.1
to transfer trust property to a new trust;
6.2
to create new beneficial interests under an existing trust (which may replace an
existing beneficial interest in whole or in part); and
6.3.
to vary the administrative provisions of a trust.
Unlike the transfer of capital to a beneficiary under either a power of:
33
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
7.1
appointment; or
7.2
resettlement,
the exercise of a power of advancement does not require the execution of a deed.
However, the trustees should record their decision either in a written resolution or in minutes
of meeting.
Great care is required to avoid inadvertent adverse tax consequences resulting from the
drafting of a deed of appointment.
As a matter of trust law, there may not be much difference between:
10.1
the alteration of the terms of an existing trust using a power of appointment; and
10.2
a transfer of trust property to a new trust by exercising a power of re-settlement.
However, there are important differences for tax purposes:
11.1
a transfer to another trust is a disposal for CGT (whereas the exercise of a power of
appointment does not normally involve a disposal); and
11.2
if only part of the trust fund is transferred to a new trust, the result is two separate
trusts.
For a discussion of whether the exercise of a power of advancement or appointment creates a
new settlement, and of the CGT consequences, see SP 7/84 (HMRC’s interpretation), and
CGTM 37841.
Whilst trustees can make an appointment of residue (or of a share of residue) at any time, they
cannot make an appointment dealing with particular assets, until those assets have been
appropriated or assented to them out of T’s estate.
Therefore T’s will should provide that his executors may exercise a power of appointment
during the course of the administration of his estate.
No liability for CGT arises out of the appointment if the power is exercised by executors,
because for CGT the appointee takes as legatee.
When the creation of a life interest is coupled with the granting of wide ‘overriding powers of
appointment’, the trustees can appoint property comprised in the trust on to new trusts, and in
favour of different (and additional) beneficiaries.
The inclusion of overriding powers in a will confers maximum flexibility on trustees over:
17.1
the disposition of trust property;
17.2
the payment of income;
17.3
the advancement of capital; and
17.4
the creation (or ‘appointment’) of new trusts, for the benefit of beneficiaries.
Termination/surrender of IPDI’s, automatic reading-back and variations
Termination/surrender of an IPDI
1.
If trustees exercise their power to terminate an IPDI during S’s lifetime in favour of an
individual absolutely, that would cause S to make a PET.
2.
s.3A(1A) provides that,
‘Any reference in this Act to a potentially exempt transfer is also a reference to a transfer of
value—
(a)
which is made by an individual on or after 22nd March 2006,
(b)
which, apart from this section, would be a chargeable transfer (or to the extent to
which, apart from this section, it would be such a transfer), and
(c)
to the extent that it constitutes—
(i)
a gift to another individual,
(ii)
a gift into a disabled trust, or
34
(iii)
a gift into a bereaved minor's trust on the coming to an end of an immediate
post-death interest.’
3.
‘Following the Finance Act 2006, gifts must be made either to an individual outright, to a
bare trust, to a disabled trust or, in certain circumstances, to a bereaved minor’s trust in
order to qualify as a PET… Thus if A, a life tenant with a qualifying interest in possession,
surrenders his qualifying interest so that the trust fund passes to his daughter B absolutely, A
will have made a PET…[However] if on the termination of the qualifying interest in
possession the trust fund is then held otherwise than absolutely or on bare trusts, e.g. on wide
discretionary trusts, not only will the transfer not be a PET, so that A will have made an
immediate transfer of value, but, in addition, special anti-avoidance rules may apply.’
[McCutcheon on Inheritance Tax, paragraphs 5-17 and 5-18].
4.
Where an IPDI is terminated during S’s lifetime the property can be retained in trust where
the trust qualifies as a BMT under s.71A.
5.
Following the introduction of FA 1986, s.102ZA, the surrender or termination of an interest
in possession will, from 22 March 2006, be treated for the GWR rules, as if the life tenant had
made a gift.
6.
Therefore, if the former life tenant may benefit from the assets previously subject to the
interest in possession, the GWR rules can apply.
7.
A PET will be made should the life tenant cease to have a reservation of benefit as at the date
the reservation was released.
8.
s.102ZA FA1986 provides that the termination of a life interest will be regarded for the
purposes of s.102 and Schedule 20, as a disposal by way of gift by the beneficiary entitled to
the interest if the following conditions are met:
8.1
T is beneficially entitled to a life interest in settled property;
8.2
his interest is treated as part of his death estate because he became beneficially
entitled to the life interest either:
8.3
(i)
before 22nd march 2006; or
(ii)
on or after that date and the life interest is an IPDI or a DPT; and
the life interest comes to an end during T’s lifetime.
9.
Then T will be deemed to have made a gift of ‘the no longer possessed property’ (see
s.102ZA (2) and (3)).
10.
That is the property in which his interest in possession had subsisted immediately before it
came to an end, other than any of it to which T became absolutely and beneficially entitled in
possession upon termination of his life interest.
Automatic reading-back
1.
s.144 allows an appointment from a will/trust to be automatically read-back into T’s will, so
that T is treated as having disposed of his property in accordance with the appointment.
2.
The section applies where property comprised in T’s estate immediately before his death is
settled by his will and:
2.1
within 2 years of his death; and
2.2
before any interest in possession in the property subsists, there occurs either:
(i)
an event on which an exit charge would be imposed; or
35
(ii)
3.
4.
an event which would have resulted in such a charge were it not prevented
from being imposed by s.144.
Then by virtue of s.144(2):
3.1
no tax is charged on the event; and
3.2
the IHT legislation is treated as having effect as if the will had provided that on T’s
death the property should be held as it is held after the event in question.
Note that:
4.1
there can be a s.144 appointment after a variation has been made within s.142; and
4.2
s.142 can apply in relation to property in respect of which s.144 has applied.
Variations
1.
Under s.142(1) a deed of variation can be executed by a beneficiary to rearrange the
distribution of T’s estate by varying or redirecting his entitlement, with the effect that the
altered gifts are automatically read-back into the will as having been made by T.
2.
A deed of variation takes place on its actual date, hence any gift made under the deed of
variation is not payable before the date of the instrument.
3.
There can be more than one variation in respect of T’s estate provided the deeds of variation
do not attempt to redirect the same property more than once.
4.
Where T left a NRB legacy to a discretionary trust under his will and following his death it is
decided to preserve his NRB for transfer to S, then either:
5.
6.
7.
8.
4.1
T’s will can be varied under s.142 resulting in the fund passing instead to S and free
of IHT under s.18 (spouse exemption); or
4.2
his trustees can appoint the fund to S between 3 months and 2 years of his death, so
that it is read-back into the will under s.144 and benefits from the spouse exemption.
Under s.142 it is possible to:
5.1
insert a NRA legacy to a discretionary trust into T’s will, for example to avoid
wasting the NRB where there is a second marriage and one party already has a double
NRB as a result of his or her first marriage;
5.2
posthumously sever a beneficial joint-tenancy in any property, so that T’s equitable
share can pass under his will to S, rather than by survivorship;
5.3
provide in T’s will that a bereaved minor will become absolutely entitled at the age of
18; and
5.4
vary a partial interest resulting in a gift of part and retention of the remainder.
The advantages of using a deed of variation are:
6.1
the beneficiary does not make a transfer of value;
6.2
the GWR rules do not apply (even if the taxpayer continues to use or enjoy the
redirected property);
6.3
the POAT charge does not bite (because a disposition is disregarded for the purposes
of the charge if by virtue of s.17 it is not treated as a transfer of value by the
chargeable person, FA 2004, Sch.15 para 16; and
6.4
it enables a person who wishes to effect lifetime planning to set up qualifying interest
in possession trusts (IPDI’s) that do not fall within the RPR.
Note that the GWR rules do not apply to the redirection of property in which a beneficiary
had a beneficial interest which he continues to enjoy, because for IHT:
7.1
the settlor is T; and
7.2
the person making the variation is not seen as having at any time owned the property
even though the initial beneficial interest was given to him.
Following severance of a beneficial joint-tenancy, T’s interest can pass under his will for
example to give S an IPDI, however because s.142(1) only provides that a qualifying
36
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
variation is to be treated as if it had been effected by the deceased, and does not expressly
provide that the variation is to be treated as having been made by T under his will, then until
HMRC provide a clear statement of their view on this matter, caution should be exercised in
using s.142 to create a life interest for S.
To be effective for IHT the variation must:
9.1
be made within 2 years from T’s death;
9.2
be made by a written instrument that contains a statement by all the relevant persons
to the effect that they intend s.142(1) to apply to the variation;
9.3
be a disposition, whether effected by will, under the law of intestacy, or otherwise of
property which was comprised in T’s estate immediately before he died;
9.4
not be made for any consideration in money or money’s worth, other than
consideration consisting of the making, in respect of another of the dispositions of the
deceased, or a variation or disclaimer which qualifies for relief under s.142(1); and
9.5
not result in the variation of property that has previously been varied under s.142,
Russell v IRC (1998).
Anybody can benefit from the variation and all parties who are prejudiced by it must agree
and be party to it.
Whilst a minor can benefit under the deed of variation of somebody else, he cannot be party
to a deed of variation that affects his beneficial entitlement under T’s will, unless the Court
provides consent on his behalf.
Where a discretionary trust includes minor or unborn beneficiaries the parties are more likely
to use s.144 to take advantage of the transferable NRB as unlike s.142, there is no
requirement for the Court’s sanction under the Variation of Trusts Act 1958.
Note that there is a look-through provision if the redirection is to a trust which ends within 2
years of T’s death.
s.142(4) provides,
‘Where a variation to which subsection (1) above applies results in property being held in
trust for a person for a period which ends not more than two years after the death, this Act
shall apply as if the disposition of the property that takes effect at the end of the period had
had effect from the beginning of the period; but this subsection shall not affect the
application of this Act in relation to any distribution or application of property occurring
before that disposition takes effect.’
Therefore where the variation sets up a trust which lasts for not more than 2 years, on
termination of the trust HMRC will tax T’s estate as if the gift to the beneficiary had been
made from T’s estate.
This effectively prevents a non-exempt beneficiary from giving a limited interest by deed of
variation to his own spouse and thereby obtaining the spouse exemption under s.142(1) as a
result.
s.142 (2) provides that,
‘Subsection (1) above shall not apply to a variation unless the instrument contains a
statement, made by all the relevant persons, to the effect that they intend the subsection to
apply to the variation.’
s.142(2A) provides,
‘For the purposes of subsection (2) above the relevant persons are –
(a)
the person or persons making the instrument, and
(b)
where the variation results in additional tax being payable, the personal
representatives.
Personal representatives may decline to make a statement under subsection (2) above only if
no, or no sufficient, assets are held by them in that capacity for discharging the additional
tax.’
The effect of the statement is to confirm that the disposition being made by the deed of
variation is to be treated as if it had been made by T.
In the real world a gift is being made to the new beneficiary (‘B’) by the person varying his
entitlement.
B cannot enforce the gift unless he gives consideration.
37
22.
As a general rule the gift will not qualify for relief under s.142 (1) if it is made for
consideration (s.142(3)).
23.
Therefore the written notice required by s.142 (2) should be executed as a deed, which
requires attestation in accordance with the provisions of the Law of Property (Miscellaneous
Provisions) Act 1989 (‘LP(MP)A’).
24.
Under s.62(7) TCGA 1992 an election has to be made for a variation to be effective for CGT.
s.62(7)TCGA 1992 provides, ‘subsection (6) above does not apply to a variation [unless the
instrument contains a statement by the persons making the instrument to the effect that they
intend the subsection to apply to the variation.]’
25.
If an election is not made for CGT the variation will be treated as if it had only been made for
IHT, and for CGT will be treated as a disposal by the person(s) making the variation.
26.
The situations in which it might not be desirable to make an election for CGT include:
26.1
where a loss on an asset could be used by PR’s or the person(s) making the variation;
26.2
where an asset is going to be disposed of quickly, because taper relief may be more
favorable to the PR’s or person(s) making the variation;
26.3
when the gain is within the annual exemption of the PR’s or person(s) making the
variation; and
26.4
where the PR’s or person(s) making the variation have losses that can be set against
the gain.
Gifts to charity
1.
2.
3.
4.
5.
6.
7.
8.
9.
For a gift to a charity to be exempt under s.23(1) there are two requirements:
1.1
the charity must have the requisite charitable status; and
1.2
the exemption of the gift must not be prevented by any of the exclusions and
limitations that are designed to confine the exemption to gifts which are genuinely
charitable, and can only be used for charitable purposes, i.e. anti-avoidance rules.
For deaths on or after 6 April 2012 a reduced rate of IHT at 36% applies where an individual
leaves at least 10% of his net estate to charity.
To qualify for the reduced rate, the charitable giving condition must be met, which is set out
in Schedule 1A, paragraph (2).
In order to qualify for the lower rate the ‘donated amount’ must be at least 10% of the
‘baseline amount’.
The ‘donated amount’ is defined in Schedule 1A, paragraph 4 as the amount of the
component which is attributable to property that qualifies for charity exemption.
This could be a legacy of a specific amount, a share of the residue, or a share of the estate that
is quantified so as to ensure the estate, or a component of the estate, will meet the 10% test.
The calculation for the ‘baseline amount’ is set out in Schedule 1A, paragraph 5, and is
broadly the value transferred by a chargeable transfer but after adding back the amount that
qualifies for charity exemption. Schedule 1A, paragraph 7, provides for an election to merge
two or more components of an estate where the donated amount from one or more is at least
10% of the baseline amount for that component.
The election has to be made within two years of death and must be made in writing by all
those entitled to make it.
‘Where a person’s estate is comprised only of their ‘free estate’, the value of the total estate
for the purposes of deciding whether the 10% threshold is met (the ‘base-line amount’) will
be based on the value of the net estate charged to IHT after deducting all available reliefs,
exemptions, and available nil rate band, but excluding the charitable legacy itself. The total
amount of the charitable legacies will be compared with the ‘base-line’ amount to see if the
estate qualifies for the reduced IHT rate (the ‘10% test’)… The calculation is more complex
where the deceased’s estate comprises jointly held property and/ or a life interest in an IIP
trust. In these circumstances, the following three components of the estate will first be
assessed independently:
 the ‘free estate’ (the ‘general component’);
 jointly held property (the ‘survivorship component’);
 settled property i.e. interests in IIP trusts (the ‘settled property component’).’
38
10.
11.
12.
13.
14.
15.
‘High Net Worth Individuals’ Tolley’s Tax Digest, March 2012, by Naomi Smith.
The reduced rate of IHT will apply automatically, without the need to make an election, if the
estate or a particular component of the estate passes the 10% test.
If the 10% test is not met, IHT will be charged at the full rate of 40%. However it will be
possible to elect for the reduced rate not to apply, e.g. where the benefit obtained from
applying the reduced rate is likely to be minimal and the personal representatives do not wish
to incur additional costs of valuing assets left to charity.
IHTM 45001 to IHTM 45051 contain guidance on the reduced rate of IHT for charitable
gifts.
STEP (www.step.org) have issued a model clause that might be adopted by persons wishing
to leave a legacy qualifying for the new relief.
(http://www.step.org/sites/default/files/Policy/Model_Clause_August_2013_updated_8.8.201
3.pdf)
The clause can also be adapted for use in a post-death deed of variation.
‘In relation to the new lower rate of IHT on estates that make charitable legacies of 10% or
more of the net estate, James Kessler QC explained that the precedent produced by STEP
should not be applied in all cases. In particular, the formula is not appropriate for an estate
holding property that qualifies for BPR or APR, because the attribution laws may have
unexpected results and there are too many uncertainties as to how the figures will work out.
The best solution for estates of this kind is a discretionary Will trust.
Equally, if the formula includes the survivorship component and the estate holds survivorship
property, it is possible for the legacy under the formula to amount to the entire free estate. In
practice, the safe course is therefore never to use the survivorship component in the formula
because the scope for disaster is too great. If the individual holds joint property and wants
IHT charitable legacy relief, consider severing the joint tenancy during the lifetime of the
individual.’ Taxation 11.10.12, report by Malcolm Gunn of a lecture by James Kessler QC at
the Key Haven Oxford Conference in September 2012
(http://www.taxation.co.uk/taxation/Articles/2012/10/10/294681/key-haven-oxfordconference).
Burden of tax
1.
2.
3.
4.
5.
‘The incidence of IHT (i.e. who bears the tax) varies according to whether the gifts are made
subject to IHT (so that the recipient bears the tax) or free of IHT (so that the residuary estate
bears the IHT). It is important that the will should state whether any particular gift in a will is
to be subject to or free of IHT. If the will is silent on the point IHT will normally be payable
out of the residue. As a result, unless there are provisions to the contrary, specific gifts are
free of IHT whether or not the asset in question is land.’ (Paragraph 4.32 of Ray &
McLaughlin’s Practical Inheritance Tax Planning).
Unless otherwise stated in a will s.211(1) provides,
‘(1)
Where personal representatives are liable for tax on the value transferred by a
chargeable transfer made on death, the tax shall be treated as part of the general
testamentary and administrative expenses of the estate, but only in so far as it is attributable
to the value of property in the United Kingdom which –
(a)
vests in the deceased’s personal representatives, and
(b)
was not immediately before the death comprised in a settlement.’
In the absence of a contrary intention expressed by T in his will, the IHT will be payable as
part of the general testamentary and administrative expenses of his estate.
s.211(3) further provides that, ‘Where any amount of tax paid by a personal representative on
the value transferred by a chargeable transfer made on death does not fall to be borne as part
of the general testamentary and administration expenses of the estate, that amount shall,
where the occasion requires, be repaid to them by the person in whom the property to the
value of which the tax attributable is vested.’
s.211 does not apply settled property in the UK, foreign sited property, and property held as
joint-tenants that passes by survivorship.
39
6.
7.
8.
9.
10.
11.
Then IHT is to be borne ‘where the occasion requires’ by the person in whom the property
vests, e.g. the trustees of settled property, the beneficial owner of overseas property, or the
surviving co-owner, s.211(3).
Where residue goes in whole or in part to an exempt beneficiary, then legacies which are
expressed to be free of IHT must either be:
7.1
grossed-up amongst themselves (if the entire residue goes to the exempt
beneficiaries); or
7.2
be additionally re-grossed at the estate rate of the whole chargeable estate (e.g. if part
of the residue goes to a non-exempt beneficiary).
Where the disposition of an estate is made partly in favour of an exempt beneficiary (for
example S) and partly in favour of a non-exempt beneficiary (for example C) the allocation of
exemptions between different gifts is determined by reference to sections 36 to 42.
This requires careful consideration where the non-exempt gift is a share of residue, the
balance of which is given under an exempt gift.
s.41 establishes two rules:
10.1
no tax falls on any specific gift to the extent that the transfer is exempt; and
10.2
no tax attributable to residue falls on any gift of a share of residue if or to the extent
that the transfer is exempt.
Otherwise to relieve the residuary estate of the liability to IHT there must be an express
provision in the will.
11.1
A gift of residue usually includes an express direction that IHT be paid from residue.
11.2
Matthew Hutton and Ian Maston recommend the following drafting policies in
paragraph 18.12.8 of ‘Hutton on Estate Planning’:
(i)
avoid partly exempt residue – make gifts of residue to S entirely, whether
absolutely, or on an IPDI;
(ii)
where there are net legacies, any charitable gifts should be given by way of
legacies rather than a share of residue;
(iii)
where residue is wholly exempt, legacies should ideally not exceed the NRB
threshold – where they do legacies should bear their own tax; and
(iv)
where the estate is wholly taxable i.e. because there is no spouse /civil partner
exemption and no charitable share of residue, to avoid a combination of tax
free and subject-to-tax specific legacies will make life less complicated
(though such a combination will not affect the total IHT payable).
Survivorship clauses
1.
2.
3.
4.
5.
6.
s.92(1) provides,
‘Where under the terms of a will or otherwise property is held for any person on condition
that he survives another for a specified period of not more than six months, this Act shall
apply as if the dispositions taking effect at the end of the period, or if he does not survive until
then, on his death (including any such disposition which has effect by operation of law or is a
separate disposition of the income from the property) had had that effect from the beginning
of the period.’
Therefore if S survives T by the period of the survivorship clause (which must not exceed six
months from T’s death), the spouse exemption is available in the estate of T.
If S failed to survive that period then the spouse exemption is not available in either the estate
of T or S.
In the case of a gift outside the spouse exemption to a non-exempt beneficiary, the possibility
of a double charge to IHT is excluded by the inclusion of a survivorship clause, if the same
property were to pass through the estates of both T and S.
However, the same result is obtained under s.141 (which gives relief in the event of a
beneficiary dying within five years of T’s death).
s.184 LPA 1925 (the rule as to commorientes) provides, ‘where…two or more persons have
died in circumstances rendering it uncertain which of them survived the other or others, such
deaths shall (subject to any order of the Court), for all purposes affecting the title of the
40
7.
8.
9.
10.
11.
12.
13.
14.
15.
property, be presumed to have occurred in order of seniority, and accordingly the younger
shall be deemed to have survived the elder.’
Where it cannot be known who died first under s.4(2), persons are assumed for IHT to have
died at the same moment, and their estates are taxed separately (which prevents a double
charge to IHT). s.4(2) provides, ‘where it cannot be known which of two or more persons who
have died survived the other or others they shall be assumed to have died at the same instant.’
s.4(2) does not displace s.184 LPA 1925.
Although the estate of each spouse passes under the terms of their own will, because for IHT
the estate of the elder is deemed to have passed to his surviving spouse, the s.18 (spouse
exemption) is available to fully relieve IHT on his estate.
However, in the case of spouses where each has left their estate outright to the other (or
created an IPDI for the other) it is more tax-efficient if the survivorship clause does not apply
where the order of deaths is uncertain.
Where the survivor (for example S) does not own sufficient assets, the inclusion of a
survivorship clause can prevent full utilisation of the NRB’s of both spouses.
Unless there are residuary beneficiaries who are minors, this can be cured by the redirection
of assets post-death using a deed of variation.
Under his will T could also give a legacy to S of an amount of his unused NRB to cover the
shortfall with a declaration that the survivorship clause will not apply in relation to the gift.
The editors of Williams on Wills conclude that, ‘Survivorship provisions can have a useful
role to play but the substantive dispositions affected by the will are more important. Wills of
husbands and wives should have the same ultimate destination for their combined assets, or
else should give each other life interests only. Where that is so, survivorship conditions
imposed on gifts to each other are superfluous and could have an IHT disadvantage.
Substantial gifts to issue or to near relations should provide substitution of the issue of the
donee in case the latter predecease the testator. In the case of the latter type of gift a
survivorship clause can usefully be added.’
Emma Chamberlain and Christopher Whitehouse in their book, ‘Trust Taxation’ (published
by Sweet & Maxwell) specifically warn about the problem where one spouse has insufficient
assets to fully use his/her NRB, and recommend that from an IHT perspective, it may be
better not to have a survivorship clause. They illustrate the point with an example where A
and B are civil partners. A has an estate worth £400,000 and B has £200,000. Neither has
made any chargeable transfers. Each leaves everything to the other. A dies first, followed by
B two days later. Without a survivorship clause A’s property passes without IHT to B and B
has a double NRB available. With a survivorship clause, A’s property does not pass to B and
if it passes to non-exempt beneficiaries, IHT will be payable on the portion in excess of the
NRB and part of B’s NRB is wasted. There is no problem if the deaths occur in the opposite
order.
TAX-EFFICIENT WILL PLANNING MATRIX
The tax planning techniques we have considered are summarised in the following matrix, which I
hope will be of practical use to you as an alphabetical road-map.
Please also note that in May 2015 Wealth Planning TV (www.wealthplanning.tv) will contain
podcasts and videos for my new 3 hour training course, ‘Inheritance Tax Planning Strategies
2015/2016’. For more information about the course please visit the ‘Courses’ page at
www.carlislam.co.uk.
GIFT
IHTA
BENEFITS & RISKS
Gifts to chargeable beneficiaries
that benefit from APR/BPR.
s.103-114
s.115-124
Specific gifts of property into a discretionary
trust for C/GC. Otherwise:
(i) if left to S relief redundant & wasted
41
because of the available spouse exemption;
and
(ii) not certain at time of drafting whether on
T’s death relevant property will attract 100%
relief.
Whilst trust continues and property qualifies
there will be no anniversary & exit charges.
If business sold and trust receives cash:
(i) on next decennial anniversary there will
be a charge (because the trust contains nonrelievable property);
(ii) if sold & cash distributed before
decennial an exit charge may arise (even
though no charge arose when the qualifying
assets were settled); and
(iii) if the sale occurs after the decennial
anniversary no exit charge arises provided
cash is distributed before the next 10 year
anniversary.
Gifts to chargeable beneficiaries
of excluded property.
s.3(2)
s.5(1)(b)
Attribution rules trap, s.39A.
Excluded property is carved out of charge.
T’s estate immediately before death does not
include excluded property.
If T was a non-dom when he died, excluded
property will not be brought into charge by
the GWR claw back.
Whenever a UK domiciliary receives a
substantial inheritance from a non-UK
domiciliary, consider setting up an
excluded property settlement by deed of
variation.
Gifts to charities.
Gifts of residue on an IPDI for S.
Remaindermen are C/GC.
Reduced 36% rate.
Computation is complex.
Status.
RSPCA v Sharp, i.e. providing
for a substantial gift to be made in form of
a legacy (updated from time to time) rather
than a share of residue.
If not desired trust can be unscrambled by an
appointment of the trust property to S absolutely within
2 years of T’s death which is automatically read-back as
a spouse exempt gift under s.144.
This restores T’s NRB available for transfer to S.
42
S can then makes PET’s and create IPDI’s for C/GC in
the former trust property.
Termination/ surrender by S (or brought about by T’s
trustees exercising overriding powers) = PET if in
favour of e.g. C/GC.
Out of charge after 7 years and can obtain failed PET
insurance to manage risk.
Frankland trap – make the appointment more than 3
months from date of T’s death.
s.102ZA FA 1986 trap. It treats the termination of an
interest in possession by S as being a gift by her thereby
bringing the GWR rules into play, and specifically
targets the abuse of ‘peg lives’, where S is younger than
T, and he can effectively use S as a bridge for the
making of substantial gifts to his children.
Gifts of residue to C using
Special Trusts.
A BMT or an 18-25 trust may be used when
T wishes to leave assets to children under 25.
The trust does not have to be set up in the
will itself.
If the estate is left on discretionary trusts the
Trustees can exercise their powers at any
time and alter the terms of the trust to secure
that the BMT or s.71D (18-25 trust)
conditions are met.
NRB discretionary trusts
(class includes S, C, & GC)
Therefore it may be better to leave residue on
discretionary trusts, then T’s trustees can
decide whether to set up a BMT or 18-25
trust (depending upon the age and
circumstances of the children at that time).
The NRBDT should be constituted by either:
(i) a debt owed to the trustees by S who has
received all the assets of T’s estate; or
(ii) by a charge being placed over the assets
in T’s estate (typically over his share of the
equitable interest in the matrimonial home)
which are then assented to S – which is the
best route.
Under the charge scheme the NRBDT is set
up by means of a charge created by T’s
executors over assets in his estate. The
charge should be non-recourse, i.e. the
trustees can only look to the charged property
for payment of the sum owing & neither the
executors nor S (as the beneficiary to
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whom the charged property is assented) is
personally liable to make repayment.
Because in the case of T’s ‘share’ the charge
is created over an equitable interest it is not
registerable as a legal charge at HM Land
Registry.
Constitution of the NRBDT depletes T’s
Transferable NRB.
Use charge scheme where artificial debt rules
(s.103 FA 1986) could be invoked e.g. where
S has made substantial lifetime gifts to T,
as in Phizackerley.
If not desired trust can be unscrambled by an
appointment of the trust property to S absolutely within
2 years of T’s death which is automatically read-back as
a spouse exempt gift under s.144.
This restores T’s NRB available for transfer to S.
Frankland trap – for an absolute
Appointment (but not one on an IPDI) make
the appointment more than 3 months from
date of T’s death.
Appropriation of T’s share to the
NRBDT more than 2 years after his
death followed by the granting of an IP
in it to S.
Where more than 2 years after his death:
(i) T’s executors appropriate his share to the
trustees; and
(ii) the trustees appoint a life interest in the share to S,
the trustees will not have done anything within 2 years
of T’s death to confer rights of occupation on S.
S will acquire an interest in possession outside the two
year period which cannot be an IPDI.
Transferable NRB planning.
T’s share will therefore not be a qualifying interest in
possession and not form part of S’s estate on her death
and can pass to C absolutely as remainderman.
If T leaves everything to S absolutely entire
estate is spouse exempt and has advantage of
amount of up to 2 full NRB’s.
Shelters an inherited NRB portion.
Limitation to full amount of 1extra NRB.
S can then makes PET’s and gifts into special
Trusts (including IPDI’s).
Nb property in an IPDI by T to S cannot be
gifted on IPDI by S to C/GC.
Risk of IHT on failed PET’s by T being
offset by T’s NRB reducing it to zero.
Capital at risk (i.e. not preserved for C/GC e.g. for an
earlier marriage).
Capital cannot (to any permitted extent) be shielded against
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future nursing home fees incurred by S.
Two-year discretionary trusts.
Beware of survivorship clauses.
s.18(2) trap for non-dom S = £325K.
Maximum flexibility e.g. for a singleton.
s.144 automatic reading-back.
Can appoint property to a beneficiary
outright or on to another form of
trust e.g. an 18-15 trust or IPDI.
End of STEP RAU presentation handout (September 2014).
© Carl Islam 2014
Disclaimer
The information set out above is for training and intended as a general guide, and is provided on the
basis of no liability for the information given.
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