HI there, I am wanting to double check the taxation on gifts of Business Property relief (BPR) assets (i.e those which are free from IHT after being held for two years) into a discretionary trust.
There is no 20% tax charge at the outset, irrespective of the amounts gifted into trust, providing the two year period has been satisfied. Also there are no periodic or exit charges while ever the BPR assets continue to be held within trust.
However I am interested in what happens if trustees divest of those assets after they have been transferred into trust? Does the seven year clock start again at that point, or would the seven year clock still apply from when the trust was created? Presumably also periodic charges and exit charges would then become chargeable going forward? Is there any implication however for a retrospective 20% charge to apply on the excess over the NRB gifted into trust retrospectively?
Whilst there is no IHT “entry” charge on the transfer of BPR assets into a trust, until the trustees satisfy the 2 year rule, starting with the date such assets are settled, BPR is not available.
Until the first 10 yearly charge, any exit charge is calculated by reference to the value of the assets immediately after they have been settled which, by definition, excludes the benefit of BPR (or APR,) where otherwise applicable.
Accordingly, unless the unrelieved value of all assets settled is within the settlor’s NRB, a distribution within the first 10 years will normally give rise to an actual IHT exit charge.
Once within a relevant property trust, the time frame to be conscious of is 10 years, rather than the 7 year period applicable to individuals.
Following on to Paul’s advice it might be helpful if I mentioned the
’Transfers within seven years before death of the transferor’ provisions in
s113A IHTA 1984 and in particular sub section (2) onwards.
Consequently if the trustees dispose of BPR qualifying assets settled
(without acquiring qualifying replacements) and the settlor dies within 7
years of the date the BPR qualifying assets were settled a charge will
arise.
That is why I would normally advise that a written in trust reducing 7 year
term policy on the life of the settlor is considered.
I always suggest separate ‘crunching the numbers’ examples are prepared
[not only for BPR/APR qualifying asset transfers but also immediately
chargeable at 20% transfers into relevant property settlements] assuming
death within each of 3 years onwards from the settlement date, having
regard to the provisions of s131 and in particular s7(5) which in certain
circumstances can produce some surprising beneficial results, in order to
ascertain the extent of any insurance cover considered appropriate.
Also remember that if the BPR qualifying assets are sold after 4 years from
being settled that provided the proceeds are reinvested by the trustees in
a fairly liquid non BPR qualifying asset form the provisions of section
113B can be utilised by the trustees to acquire BPR qualifying assets and
therefore avoid the death charge.
In depth knowledge or research of the legislation coupled with careful
planning and detailed advice to clients can avoid pitfalls and PI claims.
Thanks Paul. To clarify, the assets will be held for the two years before being transferred into trust in order to be exempt from a charge on establishment of the trust. On this basis, assuming the assets continue to be held as BPR assets, then I am of the belief that no periodic charges or exit charges would be applicable in the first ten years or indeed for however long such assets are held and continue to qualify for BPR
The settlor’s period of ownership does not carry over to the trustees. The assets lose their BPR status as soon as they are transferred into the trust and, under the rules as they currently stand, will only regain it if they are owned by the trustees for the minimum 2 year period. Accordingly, any capital distribution before the first ten-year anniversary may attract an actual IHT exit charge. See, in particular, s.68(5)(a) IHTA 1984.
If the assets re-qualify for BPR, then, on their own, they will not give rise to an actual IHT periodic charge or exit charge whilst they continue to so qualify.
HI Paul. sorry to harp on about this but I am trying to get the facts exactly clear in my head. The link here would suggest that gifts of BPR assets would continue to qualify as long as they are held whilst the donor is alive.
This would obviously prevent the trustees from selling the assets during the lifetime of the settlor (or at least benefitting from IHT relief on the sale) but on this basis, I would assume that the transfer into trust is not subject to the CLT even if the amount exceeds the NRB?
If the trustees continue to hold the shares and they continue to qualify
for BPR then there can be no IHT charge even if the settlor dies within 7
years.
After the 7 year settlor survival period there will be no IHT on a
subsequent transfer out of the shares or a 10 year anniversary.
The summary on GOV.Uk is amazing brief and, I believe, too vague to be relied upon.
Going back to basics, to qualify for BPR, an asset must be held for a minimum of 2 years, in addition to meeting various other criteria.
If S settles BPR qualifying assets, at the time the assets are settled no IHT is payable.
Immediately the assets are settled, the trustees’ period of ownership commences. The assets do not qualify for BPR in the hands of the trustees until the trustees have held them for the minimum 2 years period, provided also that the assets then meet the other relevant criteria.
If the trust is a relevant property trust (which most lifetime trusts are), any capital distribution before the first 10-year anniversary will be subject to an exit charge, with the IHT being calculated on the basis that the initial value settled did not attract BPR (or APR). Accordingly, unless the assets being distributed themselves qualify for BPR at the time of the distribution, an actual IHT charge will be in prospect (assuming the value settled, ignoring any reliefs) exceeded the settlor’s available nil rate band as at the date assets were settled).
Should the settlor die within 7 years after settling BPR assets, no IHT death charge will arise in relation to those assets if, at the time of death, they qualify for BPR in the trustees’ hands. If the trustees hold no BPR qualifying assets as at the date of death of the settlor, then the benefit of BPR at the time the assets were settled is lost, so that the trust will be subject to the full 40% charge (less any taper relief if death was between 3 and 7 years after the assets were settled). If the settlor died within 2 years of settling the BPR assets and, at the time of death the assets would have attracted BPR if still held by the settlor then, notwithstanding that they do not attract BPR in the hands of the trustees, BPR would be allowed when assessing the potential additional IHT charge on the trustees by reason of the settlor’s death.
In respect of your specific questions:
Until the assets re-qualify for BPR in the hands of the trustees, they attract BPR for the limited purpose of assessing IHT on the death of the settlor within 7 years of their being settled;
If assets attract 100% relief under BPR, no immediate charge to IHT arises at the time they are settled;
I would never view BPR as a block on trustees selling assets which might qualify for BPR, although it will be factor when considering the possibility of a disposal. If there is a serious risk that the value of an asset might plummet, I would rather have 60% of the current value, than 100% of perhaps nothing. Having said that, it is not unusual for BPR shares to be settled ahead of an IPO or acquisition by a third party (whether for cash, shares or a mixture), especially if the acquirer is a listed entity.
Can we widen this to look at death cases, especially where business relief (BR) assets are gifted in a Trust on death of first to die, and the assets are then sold to the widow in exchange for cash/non BR assets, in the hope that the assets will be held by her for 2 years in order to attract BR on her death
As far as I can see, we get the same issue, which implies that either the family accept the fraction of 40% exit charge, or we ought to defer release until after the first 10 year anniversary. Anyone disagree?
In the absence of any potential BPR assets within the trust fund, I am not sure what tax advantage might be achieved (if I am allowed even to breath that expression) by deferring the release of assets until after the first 10-yearly charge.
Whilst I frequently see NRB discretionary trusts being wound up routinely after the death of the surviving spouse, I often wonder if the family necessarily understands the benefits the flexibility of such trusts provide, especially when they are perhaps making their own wills at that time and are being advised to include an NRB discretionary trust. By taking the assets into their own estates, often they are merely exacerbating their own IHT issues, and bringing them into the realm in which they can be targeted more easily in a divorce or taken into account when considering care fees, etc.