Suppose a divorced man dies fairly young. Under the will his daughter, his only beneficiary, is entitled if she attains 21, and she is nearly 20 at the death.
While the estate is still in administration, the daughter attains 21. Shortly afterwards the deceased’s house is appropriated to the daughter.
For inheritance tax my understanding is that there is IHT as normal on the father’s death, and also an exit charge from the 18 to 25 trust upon the daughter attaining 21. I assume that is not affected by the fact that the trust was never funded because the estate was still in administration when it terminated.
I haven’t come across the issue before, for CGT, though. Do forum members think that the daughter simply takes the property with the deceased’s date of death value as her base cost? Alternatively, is that an appointment from the 18 to 25 trust which is taxable on the trustees, unless held-over?
Any thoughts gratefully received! Kind regards, Andrew Jones.
First of all, IPDI status overrides 18-25 status. If the provision in s31 Trustee Act 1925 giving a right to the income of the trust fund at age 18 is not overridden, then the daughter had an IIP from the date of death, which would have meant the trust was an IPDI and therefore no exit charge. If the relevant age under s31 was increased by the terms of the Will to 21, then s144 IHTA will apply to the daughter taking her interest outright at age 21, as there had been no interest in possession prior to that. Again, that would mean that, for IHT purposes, it is treated as if the daughter took outright at the date of death (so, again, no exit charge).
If no exit charge, no holdover relief would have been available under s260 TCGA.
Where estate assets are not transferred first to the trustees, it is generally accepted that, in a situation like this, the beneficiary’s base cost is the probate value of the assets appropriated to her.
The answer does raise a further question in my mind though on the CGT point, which is: what happens if the administration period goes on for a long time? In the real-world case which inspired my question the assent happened more than two years after the father’s death. And I can imagine really extreme hypothetical cases: suppose my question above had said that the daughter was only 10 at the death but that (because of some unrelated complication) the estate was still in administration when she attained 21.
Is there a time after which it’s not tenable for the assent to be treated as a distribution from the estate rather than a distribution from the trust? Or can we say that in ANY case where the beneficiary attains a vested interest before the administration period ends, there will be no transfer to trustees and therefore no CGT payable on the termination of the trust.
In theory there is no maximum time period. A beneficiary, which in this context includes trustees of any continuing will trust, takes “as legatee” under s62(4) TCGA when the administration period comes to an end as regards the asset in question. This can only happen when as a matter of fact the PRs no longer require it to meet debts, expenses, and legacies. As regards residue this occurs when residue is ascertained. The timing of that is necessarily subjective and genuinely somewhat elastic, as HMRC fully recognise. An assent is not necessary for pure personalty and may be implied from conduct e.g. actual transfer of the asset but there is the controversial decision in Re King’s WT that with land including leaseholds an assent in writing is required. While the AP has not ended wrt a specific gift of a chargeable asset for CGT or one comprised in residue it has not become “settled property” for CGT under ss60 and s68.
You ask us to assume that the daughter is 10 at the date of death. But the AP is still on foot when she is 21. The chargeable asset(s) to which she is prospectively entitled will not be settled property nor is she absolutely entitled to it because, by definition, the PRs may still need it for administration. She will become entitled to it when the AP ends wrt it and being she (or her PRs) will take as legatee absolutely with no CGT charge. Meanwhile she is not competent to dispose of it but she does have a valuable thing in action, current value dependent on the likelihood of her eventually getting it or some part of its sale proceeds. IHTA s91 deals with the IHT position of a person who has an interest in possession, including an absolute vested interest, and and defines “unadministered estate” but without any clue as to when it ceases to be such. If the AP ends earlier than 21 the asset will become settled property, the trustees taking as legatee, until the age contingency is either fulfilled or fails, with or without a gift over. She or someone else may then become absolutely entitled with a s71 charge on the trustees but as Paul says without s260 relief if there is no corresponding IHT charge (if she had an IPDI at the time).
On the basis of knowing what one is up against there is useful information on HMRC’s position in TSEM1007 and 6045 and CG30700 and 30780. This is orthodox piety but the boneheads in charge of the TRS seem oblivious to it. You should be fine if you can get as far as HMRC’s Solicitors Office (“Not an SRA-regulated law practice” per the SRA) but you may first have to kiss a lot of frogs.