Discretionary Trust not falling outside estate despite seven year survival?

Hi all. Whilst I deal in Trusts occasionally as a general practitioner, you know how it is when someone is adamant your opinion is wrong and you start to doubt yourself…

Position is that a PET was made for £300k in 2007. In 2013 a loan is made for £140k, documented, and then it’s proposed to transfer a property worth £250k (not let, not private residence - holiday home) into a non-settlor interested Discretionary trust in 2017.

Main reason being availability of CGT holdover for property pregnant with gain and to get asset out of the estate if client lives for seven years to 2024 or better.

I’m being told that a QC has commented that a Discretionary trust may not fall outside the estate even if the client lives for seven years and that the position with the previous PETs is a problem. This appeared to be due to HMRC challenging the Trust itself rather than gift linking.

My understanding - if the 2013 loan is formally released as a gift at the same time as the gift of the property into the D/Trust, we’ve got a PET and a CLT in 2017. Both require client to live seven years.

As long as market value rent is paid to trust for use of the asset and no interest is retained, after 2024 the PET loan release and the property fall out of the estate.

Am I missing something? Or is there an alternative? Is a discretionary trust potentially not valid for getting the asset out of the estate?

Richard Halsey
Halsey & Co

I suspect that you are not providing all of the information as you do not have it, as “I’m being told that a QC has commented that a Discretionary trust may not fall outside the estate even if the client lives for seven years” does not explain why the QC considers this.
I cannot see why the 2007 PET needs to be considered or is “a problem” for tax purposes, unless there is a gift with reservation.
On the assumption that the 2017 trust is not settlor interested as defined (you say “no interest is retained”), I suspect that the reservation of benefit issue for the trust needs to be carefully considered, to ensure that at any time in the relevant period the property is not enjoyed to the entire exclusion, or ‘virtually’ to the entire exclusion, of the donor.
Although the payment of market value rent for use of the asset is usually sufficient to ensure a reservation of benefit does not arise, is it possible that the QC is concerned that market value rent is being construed too narrowly by the client (or his adviser)? For example, are the trustees to be constrained in their actions, so that they cannot let the property on the open market?
I think you need more detail as to the reasons why the QC considers that there is a problem.

Also, assuming that there is no reservation of benefit, then although after 2024 the PET loan release and the value of property CLT are not liable to Inheritance Tax on the death of the donor, the CLT will need to be taken into account for the subsequent seven years when considering Inheritance Tax on failed PETs or CLTs which were made within seven years of the 2017 CLT.

Carlton Collister
landtax llp