I have a client (X). X is the sole director and shareholder of a limited company. The company has obtained a term life policy where X is the life assured. The policy was put into a discretionary trust in 2017 the company is named as the settlor and is paying the premiums. X is a potential beneficiary of the trust.
My questions are
(a) whether this will be considered a GROB, on the basis that X is the sole director and shareholder of the settlor company, and also a (potential) beneficiary of the trust; and
(b) if so, then in the event of Xâs death, will the value of the GROB be the value of the premiums contributed by X or will it be the value of the entire payout?
Schedule 20 Finance Act 1986 states in relation to the application of the GROB rules that âproperty in trust that is not property from the original gift, and does not represent and is not derived from that property, is excludedâ. I expect HMRC would say that the payout is derived from the premiums, and therefore the entire payout is chargeable, however I cannot find confirmation of the point.
This can arise where âan individual disposes of any property by way of giftâ. Not a company donor then: s102 (1) FA 1986. Nor trustees. A disposition is required for a TOV: s3 IHTA. Although a âpersonâ, so including a company, can make a disposition and thus a TOV but only an individual or trustees can make a chargeable transfer: s2. A gift includes a TOV but also non-TOVs, but can only be made by an individual donor: IHTM04052-3.
The reservation must relate to THAT property (or its substitute by tracing per Sch 20). The counteraction is to treat the donor as beneficially entitled to the property immediately before his death, if it then subsists; or if it ceases prior to that as a PET made by him: s102 (3) and (4). A company cannot die or make a PET during âthe relevant periodâ because that period ends on the donorâs death.
No company âgiftâ is mentioned in s102. You would expect that it would if it was intended. Nor is there any mention of a connection with s94 IHTA, neither here nor there. IHTM is silent: 14311-15, 14421-31, and 14451-3. I doubt HMRC have not thought of the point though are spiteful enough to hold a non-published settled position ready for a Gotcha.
2 s94 IHTA
A TOV by a close company can be apportioned to a participator. A gift need not be a TOV but the worst view is that an apportioned TOV can be a gift and so a GROB. despite that not being made clear here or in s102 FA 1986.
But the payment of premiums need not be a TOV by the company at all.
If the policy belongs to the company itself there is no TOV as a matter of computation and if the proceeds are tax deductible s 12 IHTA would prevent a TOV: BIM45500 and 40751. This would apply to trading and property rental companies. For investment companies however see CTM08320.
s10 IHTA might well apply where the benefit of the policy is the companyâs, entirely or substantially, albeit with premiums non-tax deductible. Beware s10(3) for associated operations and the GAAR. The fact that it is a term policy and not a savings policy is helpful. as it might indicate some anticipated risk. Much may depend on the nature of that risk and the prospective impact on the company.
I think you may have some problems here as the policy has been set up incorrectly (which I see all the time).
Company buy-back schemes are written life of another (No trusts) - the company pays the premiums and receives any proceeds.
Youâve ended up with 50% Buy and sell agreement 50% Company Buyback Scheme. On either scheme the director should not be a beneficiary!
Why would a single director need cash to buy the shares back from the estate?
More complex is the tax treatment of the share buyback - payment is a distribution (that is, a dividend) unless the payment falls within s1033 Corporation Tax Act 2010 in which case the buyback will represent a disposal for CGT purposes.
Typically you need HMRC clearance to obtain the CGT route - preferable as the shares have an uplift in death - HMRC may refuse this as the scheme is not life of another and therefore not âcommercialâ in nature.!
In estate planning funding for the tax payable is often Cinderella. Unquoted shares are a problem.
Even where 100% BPR is due the shares will not usually constitute a liquid fund for paying the tax on other illiquid assets or on other more realisable assets that the family would prefer not to sell in order to do so, like the family pile. There is no PPRR for IHT on death. Family Investment Companiesâ shares add to the total tax bill and may be more or less illiquid depending on the underlying investments.
Pre-emption provisions in the Articles may make minority interests unsaleable unless they or a shareholdersâ agreement helps. And just because the majority is willing (or under the Articles/SA can ultimately be forced to buy) does not of itself release funds for the purpose. Minority shares without BPR will have to be valued ignoring the reality that they may be made by the Articles legally unsaleable or unattractive to a third party buyer. Notwithstanding that market value theology will acknowledge that the price will be affected by any purchaser stands in the sellerâs shoes with a similar prospective problem on resale.
Some make gifts of assets which are unsaleable or preferably not to be sold âfree of taxâ without thinking that through. Does that make a sale inevitable?
I often found that these issues had been neglected, making the administration more complex and thus more costly and sometimes causing rows in the family.
I meant to say âsubject to taxâ but âfree of taxâ is anyway the default position and both need consideration. In the first case an illiquid asset creates a potential problem and in the latter case residue may not prove to be sufficient overall, and a liquid asset made subject to tax would be a preferable alternative and prevent abatement.
Jack and Richard, thank you for your very helpful comments which I have now had a chance to consider properly.
It seems that the position is complex and I can see we may need to take counselâs advice, especially given the substantial value of the death benefits in this case.
The trust deed permits the trustees to exclude beneficiaries, so it seems on the face of it that they should be advised to exclude X from potential benefit as soon as possible. Even if there is a GROB, this would be a PET and so fall out of charge after 7 years. However, the value of a PET is the loss to the transferorâs estate (IHTM04031) but I am not clear what this loss would be, given it is a term life policy and may never pay out. I also wonder what the position would be if X died within 7 years of the PET, but after expiration of the term of the policy - would HMRC still expect the PET to be brought into charge? If so, then the PET will be potentially detrimental and so even here we will need to be cautious.
You have not told us much about the trust save that it is a DT and X is a potential beneficiary.
1 In a standard form DT the value of the mere spes of a beneficiary is NIL. So excluding such a beneficiary to release a GROB would be a PET of NIL whatever the then value of the trust property. His interest is not an IIP whenever it was acquired and never formed part of his IHT estate, so there can be no TOV. There is no RPT charge as the trust property is not disposed of or reduced in value.
2 Life policy trusts are not always in that format. Sometimes the beneficiary may have a vested interest subject to defeasance e.g. by the trusteesâ exercising an overriding power of appointment. Or a default absolute or contingent interest, following an initial DT in so far as discretion is unexercised. That interest has some very small intrinsic value but what matters for IHT is whether it is an old style pre-March 22 2006 QIIP or not.
If it is not, the PET would NIL be as analysed in 1 above. Because the interest never formed part of the beneficiaryâs IHT estate, when it is extinguished there is no TOV. No RPT charge either. A revocable life interest would be treated in the same way if revoked.
A QIIP would give rise to a termination charge in âthe no-longer-possessed propertyâ, which would be the underlying trust property in which it subsists: s102ZA (3) FA 1986. The cruel effect of the old rules is that a QIIP is deemed to subsist in the entire underlying trust property, even if subject to defeasance or revocation, unless it only extends to part of it, whereas its intrinsic value is negligible, even if no income is being currently produced (as with a bond). The IHT charge is on the open market value of the property, i.e. the policy itself, which if it is term assurance may have only a modest value:IHTM200083-4 and s167(3) IHTA. Not an RPT trust at all so no related charge: it may become one as a result of the termination and its commencement date will be when it was first settled, so a 10 year interval may be unexpectedly close.
The trust was created in 2017 so there is no QIIP.
However, my understanding it that excluding the settlor to release a GROB in a discretionary trust will be a PET of the value of the trust fund at that time - IHTM42254 and IHTM14393. I accept the point that IHT charge would appear to be on the open market value of the policy which is likely to be modest during the settlorâs lifetime.
As I have said the key issue is the nature of the settlorâs interest causing the GROB which you have not told us. If he was just a discretionary object excluding him as such will be a PET per s102 (4) FA 1986 but will not result in an IHT RPT charge. So will it be a non-event unless the settlor has a an IIP which falls within s102ZA (1)(b) and which terminates. That is not the conventional groupthink view and so may be wrong.
Like the legislation in s102(4) IHTM04072 and all related Manual guidance is silent in explaining what is the deemed TOV is deemed to transfer. It only states that it is not an actual TOV and not eligible for the annual exemption. Compare s102ZA (3) inserted by FA 2006. Someone though carefully about the point but made no change to apply a similar definition to s102.
At any rate the lack of comment in the Manual is odd as Reg 5 of the Double Charges SI1987/1130 is plainly based on the assumption that the deemed PET transferred an amount of a positive number and not nil. The lack of a definition in s102(4) of what is transferred is unfortunate. If a discretionary objectâs exclusion is a deemed PET arguably the deemed TOV is all the property in the trust at whatever is its then value, unless the object is not eligible to benefit from all of it. It is not apparently restricted to assets settled (or traceable thereto) by the deemed transferor. HMRC choosing to limit the PET in that way, if they would, without statutory authority is not right. s44(2) applies only to âthis Part of this Actâ.
McCutcheon on IHT adverts to this omission and questions whether a death bed release of the reservation could be opportune to avoid aggregation with the free estate!
I am sure the worst view is the one to adopt but as ever I would prefer to be taxed by clear law and not extrapolation from an SI or analogy with s102ZA(3) and even less beholden to HMRC generosity. I do not think I am making an merely academic point here. S102 (4) should surely have said in what property the deemed PET is deemed to subsist and so is the deemed TOV.
Jack Harper
I have no problem with answering a query in the alternative as it perhaps reaches a wider audience but if such a key point is left out of the query a tailored answer is not possible.