Trust created by deed of variation - initial value and application of s66(2) IHTA

A deed of variation created a trust of a property (as if it were a specific gift). The property had actually been sold by the time the deed was executed, so at that stage there was only cash to go into the trust.
The start date of the trust for IHT is the date of death, but I am struggling to decide on the initial value of the trust fund. Is it the probate value of the property, or the cash proceeds available at the time of the DOV?

This is important because in this case it will determine whether the initial value is above or below the NRB, but I cannot find an answer.

Another question I am struggling with in the same case is at what point did the trust property become relevant property for IHT purposes? Is it the date of death or the date of the DOV? If it is the date of the DOV, then s66(2) IHTA will apply to reduce the rate of tax at the 10 year anniversary. I would have thought this question is relevant to all trusts arising on death, because there will usually be a delay between the date of death, and the date when the assets are transferred to the trustees, but again, I don’t seem to be able to find an answer or any example calculations addressing the point.

Any help or thoughts would be much appreciated.

Diana Smart
Gordons LLP

The 10 year period will commence on the date of death, which is the date the trust is deemed to have been constituted (s.83 IHTA 1984).

Accordingly, on the date of the first 10 year anniversary, the trust property will be deemed to have been relevant property for the full 40 fortieths.

As the variation made a specific gift of the property, the value constituting the trust for IHT will be the property value as at the date of death. However, any uplift in the value of the property on the sale, pre-variation, will now be assessable to CGT in the hands of the trustees, and not the executors - see the third bullet point of HMRC’s recently updated Capital Gains Manual at CG31630.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

The effect of the D of V is that the transaction effected is read back to the date of death. The trust must therefore be deemed created on the date of death with the value at the date of death being the starting point for CGT acquisition base and the ten yearly charge.

Michael McCabe
Heath Square Private Client Limited

Thank you for your responses to my query, which I understand and am inclined to agree with.

However, I would like to widen the query slightly, to consider a situation where property is appropriated to a Will trust at less than
probate value.

For example, consider the following situation. A Will contains a nil rate band discretionary trust, with residue passing absolutely
to a non exempt beneficiary. The intention behind limiting the trust to the NRB might be to allow distributions IHT free in the first 10 years. The estate includes a property valued for probate at £375K, and that value is accepted by HMRC. 18 months later
the property has not sold, and the market value has now fallen to £325K, so the executors decide to appropriate the property to the trust rather than sell it at the lower figure, perhaps to rent it out or for occupation by a beneficiary.

I believe HMRC accept that the property should be appropriated to the trust at its market value at the date of appropriation, and in
this case I assume the initial value of the trust fund for IHT purposes will be £325K, not the probate value of £375K. If this is correct, it seems illogical that the reduced value of the property is used in this situation, whereas in my original case it is
the original probate value. I appreciate that there is a difference between the two, in that in one case the property is specifically given to the trust (albeit by DOV), whereas in the other it is appropriated to the trust, but do you agree with my analysis
in the latter case?

Diana Smart
Gordons LLP

I am inclined to agree with your analysis as the property was not originally in the trust. The same would apply if for example shares held by the deceased were appropriated. In that case you would use the value at appropriation and not their probate value. As the Will created a NRBDT, the maximum value going into the trust under the terms of the Will cannot exceed.
Patrick Moroney

The appropriation is made at market value at the date of appropriation, not probate value.

Thus, the percentage of the property which can be appropriated to the NRBDT is greater due to the fall in value as compared to what it would have been based on probate value.

For example. Property PV 650,000. Thus, based on PV, 50% of the property can be appropriated. However, later the property is worth, say, 325,000. In which case the whole of the property can be appropriated to the NRBDT.

The above is, of course subject, to the terms of the will (see para 22 of Standard Provisions of the STEP, second edition where PV permitted).

Malcolm Finney