I have been asked to advise on a 1997 settlement by which the settlor gave her freehold property to the trustees to hold on protective trusts to pay the income to herself and thereafter the property would pass outright to her children.
There has been no divesting act so the trust is ongoing. The settlor is still alive but is elderly and has recently moved permanently into a nursing home.
Can anyone comment on what the likely IHT position will be upon the settlor’s death, please?
Also, am I correct in saying to the local authority that we do not need to include the capital value of the property in any financial assessment of the settlor’s assets for care fees purposes?
The settlement was made over 20 years ago when the settlor was in fine health and there was no contemplation at that time that she may need to go into residential care.
Edited -
I’d assume GWRB.
PET would start now as she’s entered care.
Care fees is typically intention and foreseeability.
No intention to transfer to trust to avoid care fees and the need for care is not forseen, its unlikely the local authority will pursue deprivation of assets.
For IHT, trusts are classified into those with qualifying interests in possession or those without (ignoring privileged trusts). The term “settlor interested” is of relevance for income and capital gains taxes.
The settlor who has the qualifying interest in possession (ie the right to trust income as it arises) will have reserved a benefit in the trust property ie the settlor has made a gift with reservation. Accordingly, on death, the trust property in which the interest subsists is treated as falling into the settlor’s estate for IHT.
I don’t think that the move into care causes the interest in possession to automatically terminate ie the settlor continues to have a current entitlement to the trust income in which case the trust property continues to fall into the settlor’s estate on death.
Re care home fees, it seems unlikely that the creation of the settlement would constitute so-called “deprivation of capital” even though the deprivation rule may in principle override the disregard of a life interest in the current scenario. It seems highly unlikely that back in 1997 assuming the settlor was healthy that he/she could forsee the need for care home assistance. In short, the value of the right to receive the trust income should be disregarded.
See section 88 IHTA 1984 for the current treatment of protective trusts.
Your trust appears to be a qualifying (pre-FA 2006) interest in possession and, thereby, aggregable with her estate for IHT purposes. The transfer into trust was neither a PET nor a chargeable transfer, as there was no reduction in her IHT estate when the transfer was made. Therefore reservation of benefit rules are not relevant.
Yes, it is a settlor-interested trust, as the settlor can benefit. However, because of the IIP, the settlor is currently taxed on the income in any event (there are certain nuances in how the income is reported and the tax paid in settlor-interested trusts).
If an event occurs whereby the trustees start to have discretion over the income, the IHT treatment does not change - it remains a qualifying IIP for IHT purposes; it will also continue to be settlor-interested, notwithstanding the fact that the settlor no longer has an actual IIP (for trust law purposes).
NB Unless it somehow was able to qualify as a disabled person’s interest, it would not have been a qualifying IIP if it had been settled after 21 March 2006 and would, in that case, have entailed a chargeable transfer into the trust and resulted in a reservation of benefit under FA1986.
As for the “deliberate deprivation” point - I agree with the previous posters.