If a NRB DT is wound up before the ten year anniversary then I understand that its value at settlement date is used to calculate the exit charge (which I have to say seems very generous!)
But does that value include the 15% discount we’ve benefitted from as a result of funding the trust using the deceased’s share of the joint property?
H died before W and we funded the DT with a part of his share of the jointly owned property. The value was £380K less 15% = £323K.
Do we use the £380K value or £323K value for calculating the exit charge?
Likewise at the first ten year anniversary when the trust fund is valued, do we get to use the 15% discount again? And again if the exit date is after ten years?
I’m thinking probably not but definitely worth me checking.
As a matter of fact, usually, the market value of an X% interest in a property is worth less than X% of the market value of the whole:
You simply instruct the valuer to value an X% interest in property Y. The value of the whole is usually irrelevant.
In the case of probate valuations related property needs to be taken into account. Here you instruct the valuer to value the aggregate of X% and the percentage that is related property.
Related property is property owned by the surviving spouse.
So, in the case of a property owned 50:50 by a married couple there is no discount on the the death of the first to die. It seems that too large a share of the property was put into the trust, if H is the settlor.
Thank you Duncan for your reply but I beg to differ.
I listened to a seminar given by John Bunker recently who continues to sing the praises of using the NRD DT in wills. One advantage being (and where a couple own the property 50-50) that you can enjoy a 15% discount on the half share of the first to pass away providing you use the property share to fund the trust. This is higher than the usual 10% if the surviving co owner (usually spouse or partner) continues to occupy the property. Then when the survivor dies a further 10% discount is available on their share.
When the wife of the now late Leo Price QC died their home was valued at £1.5m. He, as executor of her estate, contended that her half share should be valued at £637,500 (ie after a 15% discount) or even less. HMRC disagreed. He lost in the FTT (Price [2010] TC 0736).
The FTT (Jonn Walters QC & Alex Mcloughlin) said at 66
“Where section 161 applies, the two items of property which are to be valued (on the facts of this case comprised in the estate of Mrs Price and the estate of the Appellant respectively) are to be valued on the basis that they are offered for sale together and at the same time. If a greater price would be achieved ‘in real life’ on such a sale, as compared to the price which would be achieved if the items had been offered for sale individually, and such a sale would not have required undue effort or expense (which was not suggested by the Appellant), then that greater price must be attributed to the two items by application of the formula contained in section 161(3) (compare IR Commrs v Gray at p. 8,043).”
The valuation sans discount is a fictitious one and the value of the asset received by the trustees of a will trust, would be, say,15% less than the probate valuation of that asset. If the competing valuations were £750K and £637.5K and the available NRB was £325K could 50.9% of the deceased’s moiety be transferred to the trust or only 43.3%? I think that the answer is the smaller fraction because the object is to put as much as possible, as valued for IHT purposes, into the trust without incurring a tax liability. Happy for you* to gainsay that or for you to point out that I’m barking up the wrong tree.
Property already held in a DT made before death is outside s161. Even if the spouse is the settlor. But if owned wholly or partly by the deceased spouse at death and left by Will on a DT, or directed there by s142, it is within s161 on that death. The DT will get the discount for IHT trust charges after death. All of this of course subject to any future use of The Reeves Gambit and checkmate
If the settlement value of the half share is £382 (i.e the maximum value before the DT becomes taxable) then how is the exit charge calculated if the DT is wound up before the first ten year anniversary? Do we use £382 or £324.7 as the settlement value? The former would of course mean an IHT charge.
If the settlor had a nil cumulation and made no additions, his settling £323,000 would give distributions before the first TYA a nil rate regardless of the value transferred. At the TYA, the rate then and for the next 10 years would be based on the value at the TYA date, which might have increased even above the trust’s NRB. This is why trustees should consider a distribution before a TYA from an IHT viewpoint, although they must apply their minds to whether that is desirable from a non-tax viewpoint.
If the trust in question is a NRB DT and legacies and failed PETS aggregated to £2K then only assets with a PV of £323K went into the trust. If the entirety of the property was valued at £764K (working backwards from your assertion that a half share was £382K) then the fraction of the house that went into the trust was 323K/764K (42.3%). (The widow already owned a 50% interest and presumably inherited a further 7.7%).
Or perhaps the trust does own the 50% you assert then in that case there are two settlors and, for IHT purposes, two trusts.
Isn’t the answer here that for the settlor and the value of the asset settled it is by ref to the settlor so related person rules apply but for the calculation of the 10yr charge it is the initial value of the asset as received by the trustees which would invoke a discount as they have nor related persom.
Sorry and just to follow up the value of the half share at the exit is based on the value at that time less the discount but the rate of tax is calculated by ref to the initial value. So if the Initial value is within the NRB there is no tax regardless of the value at the exit before the 10 yr charge
The value of the property which is a component of the IHT rate chargeable on a transfer before the first 10 year anniversary is its value immediately after it entered the settlement. s68 (5) (a) says: “the value, immediately after the settlement commenced, of the relevant property then comprised in it;”. So if a mathematical half share is worth £382k, the correct value is the discounted value, here £323k. This component is part of the settlor’s notional lifetime transfer, which will also include his cumulation in the 7 years before the transfer into the RPT, but which, and ideally, may be nil. The value of any “related settlement” is also added.
The discount is only 15% and not 10% “Where at the valuation date any co-owner remains in occupation of the property, as their main residence, (other than the co-owner whose share is being valued) the normal approach is to take half the freehold vacant possession value and deduct 15%”: VOAM IHT section 18.4 (undivided shares) and Practice Note 2. This 15% discount will only be available at the first TYA if the same circumstances then apply and of course the property itself has to be revalued at that date. There is a wealth of guidance at https://www.gov.uk/government/collections/valuation-office-agency-manuals on the principles of valuation for IHT and CGT etc. with which any adviser should be familiar unless relying on the advice of a valuer.
Another trap with NRB DTs in a Will is s62 (related settlements). s68 (5) (b) includes as another component of the rate: “the value, immediately after a related settlement commenced, of the relevant property then comprised in it;” Another RPT in the Will can have this effect on each or all of them, but not an IPDI as this is not an RPT. This is a permanent issue for later chargeable events. The related settlement value component remains applicable in a continuing RPT even after all or any related RPT settlements no longer exist at the date of the future TYA or any transfer out. A related settlement is one made by the same settlor on the same day. If it is made earlier and within 7 years it may add to his relevant cumulation for the RPT(s) currently being created; if made later it will enter into his relevant cumulation for that later RPT, together with his transfer(s) into the current RPT(s) and any earlier ones provided they were all made within 7 years before the later RPT. Where a settlor’s PET fails it will then count in his cumulation for subsequent chargeable events in an existing RPT, but not for such events that occurred while the 7 year period was running: s3A(4)(5). See IHTM42085.
Related property rules apply on the death of the settlor, as the deemed transfer on his death takes place " immediately before his death" :s4 IHTA. So no discount.
The component of the notional lifetime transfer for a charge before the first TYA is the value settled “immediately after the settlement commenced”: s68(5)(a) So a discount.
This component is not included at the first TYA or subsequent ones. See s66(4)
The settlor’s cumulation before making the settlement is a component of the rate on each occasion: ss 66(3)(b) and 68(4)(b).
The Condoc canvasses an anti-fragmentation rule for the £1m APR-BPR threshold to prevent multiple trusts by the same settlor having £1m per trust. A single threshold will be allocated in chronological order. There is no mention of bringing RPT property into s161 generally.
When CTT came in only RPT trusts made by either spouse before 27 March 1974 were related property and that provision was repealed by the IHT[CTT] Act 1984 so later trusts have never been included.