I have received many conflicting theories on this subject with regards to the tax implications on the settlor and/or the trust. So any help would be appreciated - with reference to legislation if possible.
Mr A holds BR assets, valued at £1m, for 2 full years, then transfers them into a discretionary trust:
a) No IHT entry charge applies and so no exit or periodic charges will apply whilst the trustees hold them as BR assets?
b) On settlement, do trustees have to hold them for a further 2 years before BR relief applies to them?
c) What tax implications are there if Mr A dies within 7 years of the settlement and the trustees have retained the BR assets?
d) What tax implications are there if Mr A dies within 7 years of the settlement but the trustees sold the BR assets after the 2 years of their ownership?
e) What tax implications are there if Mr A dies within 7 years of the settlement but the trustees sold the BR assets within the first 2 years of their ownership?
a) no entry charge because BPR by settlor. Exit charges will be liable in first two years. periodic charge should be 0%.
b) trustees have to hold for 2 years for BPR to be eligible in trust. no exit charge thereafter.
c) if assets retained relief available in settlor’s estate.
d) & e) if assets sold before settlor dies then relief is lost in the Estate.
I hope this helps.
Lucy Orrow CTA TEP
Lambert Chapman LLP
Just adding to Lucy’s reply:
a) when looking at the initial value of the trust the bpr received on the way in is ignored
c) Depending on the type of assets settled not only do they have to be retained (or replaced with other business assets if sold) but if they are assets other than unquoted share they also have to qualify for BPR at the date of the settlors death (s113A(3))
d & e) if assets sold but replaced with other BPR assets as just mentioned the relief may not be lost if the conditions are met (S113B)
Thank you both for your prompt replies.
For d) and e) then, if the BR assets are sold before the settlor dies, does it then create a CLT of 20% on the date the original assets are sold by the trust?
Thank you Lucy and Nigel
For d) and e) then, if the BR assets are sold before the settlor dies, does it then create a CLT of 20% on the date the original assets are sold by the trust
No, the effect is on the Estate at death.
Thank you so much for your concise responses so far. One final scenario!
What implications are there if the settlor has held the BR assets for 2 years, places them into trust but then dies the year after. The trustees then sell the assets before they have held them for 2 years?
In answer to your first point if the settlor dies the year after the gift then the BR question will hinge on whether the assets are still held by the trustees and whether they still qualify as BR assets (if not unquoted shares) at the date of death. If the conditions are not met the BR on the gift is withdrawn.
If the Trustees sell the assets after holding them for a year the BR question will depend on what they do with the proceeds. if reinvested into other BR assets the replacement provision may apply. If not then they no longer hold BR assets and on future exit/10yr charges IHT may be payable