CGT and IHT returns on death of life tenant when Lifetime Settlement converts to a discretionary trust

I am acting for the trustees of a flexible life interest trust that was created in 2012.

The Settlor was the life tenant and died in December 2019. At that stage, the trust converted to a discretionary trust.

As at the date the life interest ended, the trust assets were a half share in a property (half share being valued at around £60,000) and an investment bond valued at around £25,000.The values had barely altered since the trust was created. There had never been any other assets in the trust and no distributions have ever been made.

  1. Am I correct in saying that, as the gift into trust was a GROB, the life tenant’s PR’s had to complete an IHT400 and therefore the trustees must compete also submit an IHT100B?

  2. I am also unsure if the trustees should have reported a deemed disposal of their share in the property on the death of the life tenant (because the value exceeded four times the personal allowance), or if this was not necessary as the trust continued (albeit on discretionary terms)?

The only commentary I can find on this relates to pre-2006 IIP trusts and IPDI’s, whereas this trust is neither.

Many thanks in advance

For IHT purposes the trust qualifies as a relevant property trust as there is no qualifying interest in possession.

The initial settlement is a chargeable lifetime transfer (not a PET).

The settlor has retained an interest in the property he settled which gives rise to gifts with reservation. Hence, on his death this property is included as part of his estate and IHT payable.

The death of the life tenant precipitates no IHT issues for the trustees and no disposal of the trust assets is deemed to have been made by the trustees for CGT purposes (because on death no person became absolutely entitled to those assets). The reference you make to “four times the personal allowance” is I assume meant to refer to “four times the annual exempt amount” contained in TMA 1970 s 8C? However, as there is no CGT disposal no CGT Return is necessary.

Malcolm Finney

Thank you Malcolm, that is most helpful.