Relief for loss on sale of land - prior appointment out of discretionary trust


(Diana Smart) #1

The deceased left the whole of her estate, including her home, on discretionary trusts. In order to be able to claim the RNRB and to avoid having to pay the IHT upfront, the
trustees executed a deed of appointment appointing the property to one of the children prior to the submission of the IHT400 and to the application for the Grant, but the property has not been transferred to the beneficiary and there has been no assent or
appropriation to the trustees. The property is on the market for sale and the estate continues to pay the utilities. The estate administration is not yet complete.

It now seems likely that the property will sell for less than the probate value, and the intention is that the sale will be by the executor. In these circumstances am I right
in thinking that we can still claim loss on sale relief? Or does the appointment to the beneficiary under the trust prevent that?

Also, on a related point, will the sale also be by the executor for CGT purposes? (I assume one follows the other, so if the sale is by the executors for the purposes of IHT,
the same is true for CGT, but it is particularly pertinent in this case because the beneficiary in question is not UK resident).

Diana Smart

Gordons LLP


(Paul Saunders) #2

If the trustees have made a valid appointment to the beneficiary, they can only hold as bare trustee for the beneficiary in whose favour the appointment has been made.

Consequently, a subsequent sale cannot be made by them as executor (i.e. the “appropriate person”) for the purposes of claiming IHT loss on sale relief, or for claiming a loss for CGT.

If you want to argue with HMRC that the appointment was invalid this could have other repercussions, and the potential scenarios should be explored before an approach made to HMRC.

Paul Saunders


(Diana Smart) #3

Thank you, Paul, for your response. I did think the same as you, but started to wonder whether this was correct when I compared this situation with one where the property is specifically bequeathed under the Will. In such a case I believe it is still possible for the executors to claim loss on sale relief provided the property has not been appropriated or assented to the legatee prior to sale, and it seems that my situation is similar.

HMRC might argue that there must have been an implied appropriation to the trustees to enable them to make the appointment, but again, I wonder whether this is correct? I am sure it is possible for trustees of a discretionary will trust to make appointments out of the trust before the assets have actually been transferred to them, and it seems that is what has happened here, in which case I feel the the executors could still be selling as executors rather than bare trustees.

**Diana Smart
**Gordons LLP


#4

I have read your points with interest.

I agree the CGT situation is clear and well established, but I think I would submit a claim for relief from IHT. I base this on the wording of the form, and the guidance in the Manual.

The executors will be the ones selling, and it seems to me they will thereby be able to make a claim as it is they who are therefore ’the appropriate person’.

Appropriate person’ seems to relate to who paid the tax; who can make the claim; and and who is selling the property - not who has the right to receive the proceeds of sale. The executors hold the property in the estate; have paid tax on the value used for probate; and now find that when they sold it they sold for less than the probate value, and so should claim relief on the IHT they suffered.

By the way, this is a Relief, and it is not entirely uncommon for CGT and IHT to be assessed differently.

Shaun Freeman
Freemans solicitors


(Paul Saunders) #5

Whilst Shaun Freeman rightly identifies that a sale by the “person” who paid the tax will enable a claim for loss on sale relief to be allowed, my understanding is that HMRC looks at the capacity in which the person makes the sale to identify if they are the “appropriate person”. If the IHT is paid by A as the executor, and the property is sold by A as, say, bare trustee for the beneficiary entitled, a claim for relief is likely to be refused.

Looking at Diana’s most recent posting, I agree she has a good point – if the property was appointed by the trustees to the beneficiary B without the executors having made an appropriation in favour of the trustees, the property must still be vested in the executors in that capacity.

If the appointment is valid, for the purposes of estate administration B’s interest in the property is probably on par with that of a specific devisee.

However, for IHT purposes I suspect the situation may depend upon whether the appointment was made during, or outside of, the 3 month period following the testator’s death. If within the 3 month period, I fear the “Frankland Trap” may apply, so that the appointment is not treated as having been effective from the date of death for IHT purposes, thus undermining the application of the RNRB claim. I wonder if practitioners have any experience of whether HMRC taking this point.

Paul Saunders


(Diana Smart) #6

In answer to Paul Saunders’ query about the Frankland Trap, in this case the appointment was outside the initial 3 month period, but I believe that trap no longer applies (to deaths post December 2014) in any event?

Diana Smart

Gordons LLP


(Paul Saunders) #7

In reply to Diana’s comment, my understanding is that the change, effective for appointments on or after 10 December 2014, applies only to appointments in favour of the (surviving) spouse or civil partner of the deceased, as referred to in the Explanatory Notes to the Finance (No. 2) Act 2015:

Section 14: Distributions etc. from property settled by will

Summary

  1. This section amends the inheritance tax (IHT) legislation relating to property that is settled by will. It provides that where property is left in trust in which no interest in possession subsists and an appointment of that property is made within 3 months of the date of death, that appointment can be read back into the will, The effect of this is that where an appointment is made to the spouse or civil partner of the testator, exemption from IHT can apply. The amendment applies to cases where the testator’s death occurs on or after 10 December 2014.

Details of the section

  1. Subsection (1) amends section 144 of the Inheritance Tax Act (IHTA) 1984 to insert a reference to section 65(4) IHTA 1984. The effect of this change will be that where a trust is wound up in whole or part within 3 months of the date of death that appointment of property can be read back into the will. Where the appointment is made in favour of the deceased’s spouse or civil partner, exemption from IHT, under section 18 IHTA (transfers between spouses or civil partners), can apply.

  2. Subsection (2) provides that the amendment applies to cases where the testator’s death occurs on or after 10 December 2014.

Background note

  1. This amendment resolves an anomaly in IHTA 1984 and ensures that where an appointment is made within three months of the date of death in favour of the deceased’s surviving spouse or civil partner, it can be read back into the will and exemption under section 18 can be given.

I am not aware of any subsequent amendments to s.144 IHTA 1984.

Paul Saunders


(Paul Saunders) #8

I realise I had included an error in my last post, which I have corrected in the posting below (original words to be omitted, in brackets).

In reply to Diana’s comment, my understanding is that the change, effective where the testator’s death occurs (for appointments) on or after 10 December 2014, applies only to appointments in favour of the (surviving) spouse or civil partner of the deceased, as referred to in the Explanatory Notes to the Finance (No. 2) Act 2015:

Section 14: Distributions etc. from property settled by will

Summary

  1. This section amends the inheritance tax (IHT) legislation relating to property that is settled by will. It provides that where property is left in trust in which no interest in possession subsists and an appointment of that property is made within 3 months of the date of death, that appointment can be read back into the will, The effect of this is that where an appointment is made to the spouse or civil partner of the testator, exemption from IHT can apply. The amendment applies to cases where the testator’s death occurs on or after 10 December 2014.

Details of the section

  1. Subsection (1) amends section 144 of the Inheritance Tax Act (IHTA) 1984 to insert a reference to section 65(4) IHTA 1984. The effect of this change will be that where a trust is wound up in whole or part within 3 months of the date of death that appointment of property can be read back into the will. Where the appointment is made in favour of the deceased’s spouse or civil partner, exemption from IHT, under section 18 IHTA (transfers between spouses or civil partners), can apply.
    
  2. Subsection (2) provides that the amendment applies to cases where the testator’s death occurs on or after 10 December 2014.
    

Background note

  1. This amendment resolves an anomaly in IHTA 1984 and ensures that where an appointment is made within three months of the date of death in favour of the deceased’s surviving spouse or civil partner, it can be read back into the will and exemption under section 18 can be given.

I am not aware of any subsequent amendments to s.144 IHTA 1984.

Paul Saunders


(Nigel Scase) #9

I am not sure I agree with Paul’s analysis.

S144 was amended to include ref to s65(4) but I cannot see anything in the legislation to suggest this only applies when the appointment is made to a spouse/CP. I think this provision was aimed at NRBDT’s being closed in favour of the spouse (hence the commentary) but is not limited to that.

Nigel Scase
Greene & Greene


(anthony.nixon) #10

Paul the change made in by Finance (No. 2) Act 2015 means that section 144(1) of IHTA now reads:

“Subsection (2) below applies [in other words there is no exit charge and there is read-back to the testator’s will] where property comprised in a person’s estate immediately before his death is settled by his will and, within the period of two years after his death and before any interest in possession has subsisted in the property, there occurs—

(a ) an event on which tax would (apart from subsection (2) below) be chargeable under any provision, other than section 64 or 79, of Chapter III of Part III of this Act, or

(b ) an event on which tax would be so chargeable but for section 65(4), 75, 75A or 76 above or paragraph 16(1) of Schedule 4 to this Act.”

It is section 65(4) that disapplies exit charges “if the event in question occurs in a quarter beginning with the day on which the settlement commenced or with a ten-year anniversary” reference to which was newly introduced to section 144 wef from 10/12/14.

The result is that the Frankland trap has gone for all appointments from will trusts within 3 months of death, not only those in favour of spouses.

There is still, of course, a horrible CGT trap for trusts where assets leave in the three months after a 10 year anniversary, where holdover under s260 of TCGA is not available because there is no exit charge. HMRC could easily have changed this, when they removed the Frankland trap, by changing section 65(4) to provide for a 0% exit charge in the three months, rather than no exit charge. I encourage everyone interested in this, to draw this point to the attention of the OTS, in connection with their IHT review, and to HMRC, in the present trust consultation. It is an anomaly that serves no purpose, except to catch out unwary taxpayers and their advisers.

**Anthony Nixon
**Irwin Mitchell Private Wealth


(Paul Saunders) #11

I thank Nigel and Anthony for their responses.

On this occasion I was persuaded by the Explanatory Notes published by the Government in support of the legislation, which clearly mislead.

With regard to Anthony’s last paragraph, this is an issue that needs to be addressed. In its review of trust taxation, HMRC asserts “fairness” as one of its 3 pillars, which cannot apply to this particular provision as it stands. I therefore support Anthony’s wish to encourage respondents to both the OTS review of IHT and the HMRC review of trust taxation to seek for the change he suggests to be implemented. Whilst I have raised it a number of times with HMRC, the general response has been that politicians won’t understand it and, even if they did, it is insignificant in the scheme of things and would not therefore attract any support. If there is sufficient criticism of this provision in the consultation responses, perhaps the need for change will be recognised (and implemented!).

Paul Saunders