A settlor creates, by instructing an IFA, a self-settled disabled persons trust under s.89(A)(1)(b) Inheritance Tax Act 1984.
The IFA claim that the settlor had a condition at that time that would in the future result in the settlor falling within the definition of a “disabled person” in para 1 Sch 1A Finance Act 2005 and therefore being exempt from Inheritance Tax on creation of the trust.
In relation to making a claim to be treated as a “disabled person” under s.89B(1)(d)(iii) (and s.89(A)(1)(b) to which it refers), it states that you need to satisfy HMRC that the settlor had such a condition that would expect them to fall within the definition of “disabled person” in the future.
(1) How necessary is it to get HMRC clearance for the trust before the trust is created?
(2) How difficult is it to obtain HMRC clearance after the trust has been created?
(3) We assume a letter to HMRC with the evidence to show the settlor had a condition at the time the trust was created that would lead to the settlor falling within the definition of a “disabled person” in para 1 Sch 1A Finance Act 2005 is required? Is a doctor’s report assessing the condition essential?
(4) What is your experience of how HMRC approach this?
The only asset within the disabled person’s trust is the settlor’s property i.e. her principal private residence. The IFA created the trust and in the schedule to the trust, includes the property. No other assets have been added.
However, it seems to me that as the transfer into trust is an immediately chargeable transfer against which relief is sought, the appropriate account should be sent to HMRC when the trust is set up, and the relief claimed at that time. The application for the relief should be supported by appropriate medical reports (do you need specific written authority from the settlor to disclose the report(s) to HMRC?)
If HMRC does not accept the settlor qualifies, then a charge to IHT might arise and/or the settlor may become liable to penalties for late disclosure.
I can understand a reluctance to report the transaction now as the medical report that would be required might not “tick” all of HMRC’s boxes. However, if the settlor should die before the condition in question progresses to the stage where they are clearly within the definition of “disabled” for the purposes of s.89 IHTA 1984, HMRC might the refuse to allow the relief and impose penalties etc.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals