Nil Rate Band discretionary trust - tax planning

Thinking of Claire Spinks’s recent thread regarding deeds of variation and anti-avoidance, can I raise a different but related question please? If first spouse dies with a will creating a nil rate band discretionary trust, is there any difficulty with appointing the whole of the trust fund to the spouse within two years, and for the spouse to make a PET of £325k to the children? The idea would be to preserve the transferable nil rate band, and get the potential saving if the second spouse survives seven years.

My thinking is that this differs from the DOV situation in that there’s no consideration passing as between the beneficiaries as such, and it’s section 144, not 142, so the question doesn’t arise. But I’d be grateful for your thoughts please.

Ben Leach
Molesworths Bright Clegg

I don’t see an initial tax problem provided the exercise of the power is valid. If the children are eligible beneficiaries of the NRB trust this must surely be so. If not there might be a fraud on the power and even if the trust allows beneficiaries to be added trustees might be reluctant to join in that (unless they cannot object, given the particular drafting).

While the tax consequences will follow the validity issue, HMRC do not take such a point of their own motion; but if validity were successfully challenged by someone else at a later date (in our new world of virtually unlimited elastic limitation periods) the past tax treatment may very well be set in stone under tax law’s own finality rules. The children benefiting, if adults, may well be precluded from a later challenge (scarcely likely to be in their interests unless vindictive) and disappointed objects of such a trust usually find it hard to challenge for undue administration provided the trustees have made a conscious decision.

While giving reasons normally affects trustees similarly to those offering no comment when interviewed under caution, a positive trustee minute explaining why the spouse alone has been benefited and all others eligible have been deliberately passed over may be appropriate. The statement must be true (always a welcome bonus) but logically the spouse must be seen by the trustees as fully entitled to do what she wishes with the money and a strong suspicion on their part about such wishes is not a vitiating factor. No one will be naive about the children being sounded out in advance but there must not be a firm multilateral plan.

Such a statement has been known to shoot HMRC’s fox when it suits them to argue that the distribution is “really” one directly out of the trust to the children with the spouse being “a mere conduit”. Presumably the chosen path will secure IHT spouse exemption on the death so such an argument if successful would substitute a tax charge arising as on a direct distribution to the children. While strictly there is no need for the time-honoured “decent interval” before the onward gift one might be prudent; a Judge will be unimpressed but HMRC may feel it reduces their percentages.

Such an argument was favoured by HMRC in relation to distributions to non-doms by non-resident trustees (followed by onward gifts to residents) before HMRC procured a change to s87 TCGA 1992. The fact that HMRC resorted to that extreme measure may be a clue to the degree of conviction (as opposed to intimidatory enthusiasm) that they attached to the ploy.

The conduit brand of wickedness was approved in Parliament early on in IHT as regards gifts by one spouse to the impecunious other to maximise onward gifts attracting the annual exemption. This kind of thing may be helpful now that apparently clear tax treatment, according to unambiguous statute, is often only available on the “good chap basis” by virtue of the GAAR’s reasonableness test.

The GAAR Panel’s latest Opinion 16 shows that statements of Ministers in Hansard may be key in determining whether a given taxpayer is “one of us” or not. Whether what you propose as a course of action would be seen as “reasonable” (as opposed to being just merely lawful) by HMRC and the GAAR Panel and, if one can afford it, a Tribunal or Judge is open to question where HMRC have not given prior approval in Part D of the GAAR Guidance or ad hoc after a specific request. The latter may tempt fate of course.

Clients invariably crave the pre-Covid19 certainty of a bygone golden fiscal era, so probably need to be warned that success may ultimately depend on the cut of their jib. I am not aware of HMRC objecting to what is proposed but bolts from the blue are a modern Departmental speciality.

Jack Harper

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IHTA 1984 s144 permits what you suggest. As you say the problem re s142 is that no consideration must be involved and trying to circumnavigate this requirement using “clever” planning may not work (see the case of Lau cited in the post to which you refer).

Using s144 as you suggest is not tax avoidance. A testator could leave part/the whole of their estate to their spouse who then makes PETs as appropriate; this is no different to providing for a DT in the will followed by an appointment within two years out to the surviving spouse who subsequently makes PETs as appropriate.

Malcolm Finney

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