Asset Protection Trust - Closing - GROB issues

Trusts Discussion
1

I have a case where H has just died. H&W jointly settled an asset protection trust of what is 65% of the value of their property in 2013 (65% being now valued at £442k). H and W each retain 17.5% of the family home absolutely. Overall estate is just under £2m.

H&W continued to live in the property. H was in a care home in the last year or so.

For IHT purposes, I’ve got to declare the lifetime trust on the IHT account for H, as there would have been a Gift with Reservation. The estate passes by way of a FLIT in favour of W and then issue (all of which I will be appointing to W within 2 years, and she will be making lifetime gifts to their only child).

My question is, will any of the NRB be lost in this case due to the deemed Gift with Reservation over the lifetime trust?

And will my appointing the estate from the FLIT to W combat this in any way?

I fully appreciate the lifetime trust is subject to the RPT regime and is deemed to be separate from the deceased’s estate.

I also understand that because of the FLIT the deceased’s “estate” is deemed to pass to W and therefore no IHT is chargeable.

My concern is that the GROB causes a loss to the NRB which we can’t undo.

IF so, The next step then is to combat this loss, and in that case, appoint H’s share of the property (£442/2 = £221k value share) from the lifetime trust to daughter (rather than to W) to make use of the loss of the NRB (or even to allow the lifetime trust to continue running given it is within the NRB).

However, the lifetime settlement JOINTLY settled the property into trust, and I am concerned that I can’t see how it can be deemed that if the settlement is joint, we can be seen to be appointing W’s share of the property back to her (to try and preserve as much of the RNRB / TRNRB as possible given she will have the same GROB issue if we don’t close the trust), and H’s share of the property out to his daughter, or am I overthinking this?

The W’s share of the property held in the lifetime trust will be deemed to be a Gift with Reservation all whilst it continues as she still lives in the property. We want to close the trust as it has no benefit and causes loss to the RNRB/TRNRB, but I am concerned as to whether I am overthinking the “jointness” of the lifetime settlement. Another matter I am working with settled the property by way of two trust deeds which makes a lot more sense to me, than jointly settling, for exactly this reason.

Any thoughts would be greatly appreciated.

2

The facts speak eloquently of the horror that is a joint settlement. The laconic content of s44(2) leaves too much to the imagination and the biggest problem is likely to be that the class of objects of a power of appointment and of any discretionary

beneficiaries will usually be common. The life interest of each spouse in the other’s notionally separate trust does not cause a GROB. More controversial is whether the retention by each spouse of a share in the property is not referable to the gift or attracts s102B and so no GROB. See my comments at https://trustsdiscussionforum.co.uk/t/tax-consequences-for-giving-up-a-life-interest-in-will/15946/21. Your facts introduce an additional factor. Can trustees “occupy” a property for ss102 and 102B?
Plainly not unless also beneficiaries. The life tenant also plainly does, despite the RPT status of the trust. If that is not “occupation” by “the donee” then a settlement of part of a property must always be a GROB. Well done again draftsman!

The NRB is going to apply in principle to H’s estate whether there is a GROB or not of his settled share. I assume that H’s estate is left to W (rather a key omission of fact). If there is no GROB then there is no taxable estate and W has full TNRBs. If there is a GROB it will absorb the NRB and RNRB. You cannot vary a GROB under s142 as it is not a will disposition, nor is a pre-existing trust. The termination of H’s life interest in W’s notional trust is not an RPT chargeable event. There is no double charge as H’s CLT (presumably within the then NRB) was no longer cumulating at his death.

You are left with two trusts. H’s is still operative but in W’s the remainders have presumably vested unless a DT arises. Both are RPTs and need to be managed as such but nothing the trustees do now can reverse the GROB. There seems to be an incentive to argue no GROB. Put the arguments to HMRC if instructed to do so. If you are not or don’t succeed, the GROB will have prevented TRNBs to W. This may constitute negligent advice if H and W were not advised of the possibility of a GROB. It is hard to quantify the loss because if H’s estate secures a full NRB and RNRB there may be a modest loss or none at all. Tax payable now which could have been postponed to the spouse’s death. Arguably the past costs of the scheme could be a loss if the claims made for it prove unfounded. In 2013 it had become state of the art that a NRB DT on the death of the first spouse to die was unnecessary save in particular circumstances. The TRNRB only arrived in 2015 so was not foreseeable then.The consequential loss of the transferables may be speculative at this stage. Arguing no GROB to a reasonable extent might be essential mitigation. As well as the usual hazards of litigation there is also the question of the limitation period and when it begins.

Jack Harper