I have a client who has settled their house into an Asset Protection Trust with a Will writing company. Due to the value of the property I believe there will be an immediate charge to IHT as the house is worth circa £600k.
How is that tax paid? I must confess I have not used these trusts so I dont know the logistics behind it all!
Gemma Van Duke
Whether the trust is a “life interest” or “discretionary” trust the transfer of the property will be a chargeable transfer for IHT and therefore IHT will arise at that time (subject to nil rate band).
If the transferor pays the IHT the value of the property will need to be grossed up; if the trustees are to pay the IHT then no grossing up is necessary.
Such liability is due for payment on 30 April of following tax year where transfer effected between 6 April and 30 September; otherwise settlement due 6 months after end of month in which transfer occurred.
Instalment option possible.
Form IHT 100.
Likely a reservation of benefit will arise.
No RNRB on settlor’s death.
No CGT on initial settlement as presumably private residence relief applies. In any event trust will be settlor interested and hence no hold-over available for CGT purposes on initial settlement.
Is the house jointly owned by husband and wife and they have each settled their half?
Or has settlor settled a share of the property and not the whole ?
Northwood Banks & Co Ltd
Any chance it’s a husband and wife (and therefore two nil rate bands)?
If not (and having had clients with similarly pointless trusts), I’d love to hear how it turns out.
Osborne Clarke LLP
Hi thanks for your reply.
Presumably the NRB of £325,000 is deducted first leaving £275,000 liable to tax. I am not sure what you mean by the grossing up aspect? If the only asset within the trust is the property, how would the trustees pay the tax to mitigate the grossing up?
Gemma Van Duke
The wife is the sole surviving spouse and has settled the whole value into the trust.
Gemma Van Duke
I agree with others that there may be a transferrable allowance so potentially no IHT on creation.
Malcolm Finney quite correctly mentions the issue of the Trust being a GROB which was the point I was trying to clumsily clarify in my posting last week - http://trustsdiscussionforum.co.uk/t/lifetime-settlement-grob-and-iht-treatment-on-death/10252/3: -
Assuming the creation is a GROB, this would mean that on death of the life tenant / beneficiary, the value of the property they transferred into the Trust, is still included in their estate for IHT (assuming continued occupation / benefit). This would appear to be the case irrespective of the fact that the Lifetime Trust is indepently taxed as a RPT. Can someone please confirm my understanding on this is correct?
If so, then potentially so many of these arrangements will be disadvantageous from an IHT perspective especially in view of the RNRB.
Brewer Harding & Rowe
Subject to earlier lifetime chargeable transfers the full NRB would be available against the value transferred.
My reference to a possible grossing-up was for completeness. Any trustees’ liability (ie if trustees are to discharge the IHT due; no grossing up) would require either further injections of cash or trustee borrowings.
Enlarging on Malcolm’s remark about grossing-up, if we assume the settlor is to pay any IHT due, the property is worth £600k, and he or she has an unused nil rate band of £325,000 and the annual £3,000 exemption for 2 years is available, the chargeable transfer will be £272,000 grossed-up at 20% That is £340,000, and IHT of £68,000 will be due. If the settlor dies within 7 years, so that further IHT is payable, notwithstanding the notional inclusion of the property in his or her estate under S.102(3) FA 1986, SI 1987/1130 will afford some relief from double taxation.
I would agree with your comment re. the trust being taxed as an RPT, i.e. 10 year periodic charges etc.
Only point I see that doesn’t seem quite right is the sentiment that the transferrable allowance can be utilised on the lifetime transfer unless i’m misinterpreting what you meant!
My understanding is that the transferrable nil rate band from the late husband/wife could only be claimed on death, meaning that a lifetime IHT charge would still apply if we have 1 settlor and that person is settling the full value of the property worth £600,000, which is of course subject to the terms of the trust and/or the declaration (if applicable) transferring the property into it.
Countrywide Tax & Trust Corporation Ltd
Andrew, I don’t think my post does suggest/state that the transferable NRB can be utilised re lifetime chargeable transfers. I therefore agree with your comment that
My understanding is that the transferrable nil rate band from the late husband/wife could only be claimed on death,
You are correct, the TNRB can only be used on death, and it could be used then to reduce any additional charge arising then in respect of a lifetime gift, unlike the RNRB which can only be used against the death estate.
I fear my arithmetic was slightly awry in my earlier reply, when I only gave the settlor an unused annual allowance of £3,000. If he as two years’ free, the chargeable transfer would be £269,000 grossed-up, assumed he or she will pay the IHT.