K is seriously ill. her time on this world is now being measured in months rather than years.
She lives in an expensive property in London. The property was purchased many years ago by a Liberian company, wholly owned by a Swiss trust created by her late father. Her father was neither resident nor domiciled in the UK. K is not domiciled here under current rules. When K dies, the property will be sold; the intention being that the proceeds end up with her two (UK-resident) daughters. ATED has been paid each year. The trust has no assets other than the shares in the company.
It seems to me that if K dies and the property is sold before 6 April 2017, then the company will realise a Capital Gain by reference to the property value as at 1 April 2013. This will be charged at 28%. Once the company has paid the tax, it will be wound up at which point the Trust will itself realise a capital gain. All of the proceeds will be distributed to the daughters who will have to pay CGT to the extent of the trust’s gain. No relief will be available for the CGT paid by the company.
My question concerns what happens if K survives until 6 April 2017. Will the property fall into her Estate? If so, it will have to be sold to meet the IHT bill. Will the company get an uplift in value to avoid a CGT charge? Will the company be able to pay the IHT as this will be a payment to K’s Executors? Are there any tax consequences of this payment (and receipt)? I know that we are awaiting the draft 2017 Finance Bill, but I should be grateful for any insight that members of this forum may have into the likely way that the legislation will work.
It seems likely that the property will be exposed to IHT (as it will no longer be excluded property) but will only be subject to IHT on her death if she has a pre-2006 interest in possession. If not, and it is relevant property, you will have to consider when the next 10 year anniversary is due - hopefully not in May 2017. Exit charges should be avoidable after sale provided the cash proceeds are removed from the UK before being distributed to the daughters (so being a distribution of excluded property under s.48(3)).
If the trust is a pre-2006 interest in possession then the trustee should consider revoking the IIP before 6 April. This should avoid a charge on death but it is not yet certain. Deemed transfers of value made prior to 6 April 2017 are not subject to tax (s.53(1)) but it is necessary to check when the legislation is published that a post 6/4/17 death will not somehow bring that transfer back into charge - given that on the death it will no longer be excluded property. I would hope and expect that it should be grandfathered but it is possible that by error or design it will be caught.
It is not clear whether the company will get an uplift in value and we will have to see the legislation (issue like this may be the reason we have not yet seen it) - I suspect that the company shares will be deemed to be excluded property only in proportion to the status of the underlying assets (so here 0%) so there is an uplift in the company shares rather than the property itself.
Re: your initial analysis, I think there is one further gain to be considered. The company will not be subject to tax on the pre-1/4/2013 non-ATED gain but it will still accrue and be attributed to the trustee under s.13 for onward attribution under s.87. There may well be relief under s.13(7).