I am currently dealing with an estate where the Will has made provisions for an immediate post death interest trust with remainder falling into a discretionary trust. The DT has a letter of wishes for specific gifts to chargeable individuals, some spousal gifts with the residue to charity. The trustees are intending to honour the letter of wishes once the estate has been realised.
I am preparing the IHT400 and would like to take advantage of the s144 provisions now with IHT payable only on the chargeable elements.
However it’s not clear how this should be detailed on the IHT400, is it simply a case of declaring the reliefs that I am claiming in the additional information?
Note, the estate has sufficient cash to pay the IHT on the chargeable elements, but the other assets are property and a business which are in the process of being sold. I understand that we could pay by instalments and later claim a repayment of the overpaid IHT, however I would rather not go down that route if possible.
I appreciate any guidance that could be offered here - it’s not something that I have come across before.
We’re not touching the IPD. Only looking at the DT with a claim under s144 (property within a discretionary will trust being appointed out to a beneficiary within 2 years of death)
Did you mean the residue of the estate (rather than remainder) is on discretionary trusts? i.e. the IPDI only applies to a legacy but the rest of the estate is subject to an immediate discretionary trust.
If your question is how do i claim the charity exemption on the IHT400 ahead of the s144 appointment my answer would be that you cannot. The exemption is not in play until the appointment has been made. So you either do the appointment now and then file it with the IHT400 or you pay the tax and then get a refund later.
s144 IHTA can never apply to the trust because the IPDI rules it out:
(1) “where property comprised in a person’s estate immediately before his death is settled by his will and, within the period of two years after his death and before any interest in possession has subsisted in the property, there occurs—”
The DT is reversionary to the IPDI. While the IPDI subsists the trustees can make any appointments permitted under their DT powers without any IHT repercussions unless property leaves the trust altogether. For IHT purposes the IPDI owner is regarded as owning the underlying trust property by s49(1) and (1A) so for the time being that property is not treated for IHT as comprised in the DT so RPT charges will not be engaged until the IPDI terminates. The commencement date for TYAs in the DT is the date of death: s83 IHTM42221.
You do not indicate the identity of the IPDI owner. A surviving spouse or civil partner owner will engage s80 and see. IHTM42231. This changes the identity of the settlor for IHT purpose to the IPDI owner who is deemed to make a transfer into the DT of a value equal to the value of the trust property at the date of termination of the IPDI and their then prior cumulation will feed into the RPT charges not that of the deceased. Also trustees need to beware of s102ZA FA 1986 unless the IPDI terminates on death.
If the trustees distribute the property out of the trust they will cause a termination of the IPDI in that property and a PET/CLT by the IPDI owner. Sometimes trustees of a reversionary DT will be prohibited from doing that while the IPDI subsists, or require the IPDI owner’s consent, but many such powers are overriding and do not need consent.
CGT is also in point as this will be settled property and while termination of the IPDI with the settlement continuing will not cause a deemed disposal that will occur as regards any assets distributed out of the trust to a beneficiary who becomes absolutely entitled.
If the IPDI owner is not entitled to a s18 exemption a s142 variation of the reversion for IHT and CGT would not increase the tax bills but an apparent difficulty might be that not all of the beneficiaries of the DT could give consent e.g. unborns. The trustees alone could perhaps give consent on the basis that the variation, so far as it provided for absolute interests alongside the IPDI, represented gifts that they had the power to make under the DT and would have been minded so to do, the variation being a alternative way of achieving that without a termination of the IPDI. The other beneficiaries of the DT could not complain as long as the trustees had decided fairly and responsibly to benefit others, especially in accordance with a LOW.
Thanks Jack, I think my original wording was incorrect however.
We have an IPDI (for husband) of lets say £400k. The trustees will not be doing anything with this trust, it will remain in situ for the remainder of husband’s life.
And we have a discretionary trust of lets say £1.5m. The letter of wishes for this DT states for the benefit of husband, chargeable individuals and charity. The trustees will be distributing the trust assets in line with the letter of wishes, and we want to take advantage of s144.
Sorry if I have missed the point. May I clarify the terms of the Will? Does the Will provide as follows:
1 £400,000 to the trustees to pay the income thereof to the husband for life and upon his death the £400,000 is held on discretionary trusts for a wide class of beneficiaries?
2 The residue of the testator’s estate (about £1.5 million) is held on discretionary trusts for a wide class of beneficiaries including: the husband, various individuals and charities?
The trustees then have a letter of wishes for the discretionary trust for a wide class of beneficiaries, with say £0.5m going to individuals including husband, and £1m going to charity.