I should be grateful if you could please help me with the following scenario.
Our client transferred her property into a discretionary trust in 1996. Then, in 2016, we submitted the 10 year return stating that no IHT was due as the client continues to live in the property and therefore has a right to occupation and qualifying interest in possession, under Statement of Practice 10/79. The Revenue has since rejected our argument because we have not positively exercised, by deed, our power to permit occupation.
So far, we have quoted HMRC’s responses to queries raised by STEP & CIOT in 2007 (I’m unable to attach this but can forward to anyone or it can be accessed on STEP’s website) in which the Revenue confirmed it is not necessary for trustees to exercise their powers in writing before conferring an interest in possession, but they have refused to budge.
Instead, they have requested to see correspondence from 1996 which purports to support our argument, but unfortunately none is available. We have since submitted a retrospective trustee resolution, formalising the arrangement, together with a signed statement by the client confirming her intention to continue living in the property once transferred into the trust.
I imagine this is becoming more and more common and wondered if anyone has been successful in arguing their case?
I take it that there is no doubt the settlor is within the class of
beneficiaries to whom the trustees could validly have granted a right of
occupation.
Her right to reside rests with a Settlor or as joint Settlors and is not a power available to trustees Trustees. While trustees may have a power with respect to beneficiaries no power extends as to what a Settlor may vest in a trust. If, when the trust was set up, she retained the interest in possession to herself as Settlor/joint Settlor no trustee deed/power can alter the original instrument. The trust is defined as ‘revocable’ and no further confirmation is needed. (Settlements Legislation Part xv ICTA 1988) I would point out that a Statement of Practice is the HMRC’s best guess at understanding the legislation and should never be relied on as definitive. It is the Settlor that determines the contents of a trust, not the Trustees notwithstanding they may be one and the same.
IHTA 84 S.80
80 Initial interest of settlor or spouse [F1or civil partner].
(1)Where a settlor or his spouse [F2or civil partner] is beneficially entitled to [F3a qualifying interest in possession] in property immediately after it becomes comprised in the settlement, the property shall for the purposes of this Chapter be treated as not having become comprised in the settlement on that occasion; but when the property or any part of it becomes held on trusts under which neither of those persons is beneficially entitled to [F3a qualifying interest in possession] , the property or part shall for those purposes be treated as becoming comprised in a separate settlement made by that one of them who ceased (or last ceased) to be beneficially entitled to [F3a qualifying interest in possession] in it.
This limits any exposure of any IHT/TYC to a time when either or both have died or have given up their interest. At such a time IHT may be payable depending on the property value at that time. It is noted in section 60, IHTA 84, Commencement of Settlement that the ten year charge is payable only when the settlement has commenced. (I am assuming that the trust was initially set up with a spouse or by Will.)