It is fairly common to include a gift in a Will of assets qualifying for APR and/or BPR to a discretionary trust on the first death. A typical precedent would not specifically identify the assets, but might provide, for example, that any assets qualifying for 100% relief would pass to the trust. My understanding is that in such a case HMRC will not give an opinion on the question of whether or not relief applies, because there is no IHT at stake, but this leaves the onus on the executors to make that judgment.
I have often wondered what the consequences would be of the executors coming to the wrong conclusion. So, for example, if they believe BPR at 100% to be available and they transfer the business assets to the discretionary trust, but at the 10 year anniversary HMRC decide they were wrong, what happens? Was there a chargeable transfer by the residuary trustees or spouse at the time of the transfer to the DT? Would s10 IHTA help (I suspect not)? Can the trustees simply go back and say that it was an error and should have been in the other trust?
I feel sure this must have come up before but can find nothing on it in the books or HMRC manual, so would be interested to know if anyone has had any experience of this situation, or thoughts about the consequences.
At first sight I would expect that the transfer would be a breach of trust and void ab initio so not a transfer of value at all. The executors would have a claim for recovery of the BPR assets or proceeds (unnecessary if the trustees are the same people).
When looking to assess the trust for IHT on the first 10 year anniversary, HMRC will consider the circumstances of the business on the day before the 10 year anniversary. It may be that BPR (or APR) is denied due to changes in the assets or changes to the law (or the interpretation of the law) since the death, and that as at the date of death 100% relief would have applied.
I suggest that if the assets did not qualify for the relief as at the date of death, the appropriation by the executors to the trustees would be classified as a “mistake” and it may be possible to set it aside (although HMRC would likely require the trustees to obtain a court order to that effect).
However, if, at the time of the death or appropriation, the executors had obtained a report from a suitably qualified person to the effect that the asset(s) in question qualified for the relief, I believe that should help protect the executors and trustees against a claim by both HMRC and the disadvantaged beneficiaries who should have received the assets rather than them being transferred to the trustees.
If there is agricultural property within the estate, the advice obtained should consider both if any “farmhouse” would qualify for APR and whether or not the open market value of the land exceeds the agricultural value and, if so, to what extent. A large farmhouse occupied by the “farmer” who merely collects the eggs and pays the bills whilst the son runs the 20 acre farm from a cottage down the road may well be excluded from the relief; and the 50 acres in another estate with an agricultural value of, say, £2,000 an acre on the outskirts of a village ripe for expansion could have an open market value of well over £1 million. For the executors themselves just decide that the assets “must/should” qualify for 100% relief, and not have that backed up by a suitably qualified person, could result in the executors being personally liable for the costs of remedying the situation.