I understand that if a person gifts the home where they continue to live into a discretionary trust, it is a GROB, but no RNRB can apply when they die. If they therefore wish to transfer the property back out of the trust and to themselves outright (assuming the trust terms permit this), this would allow the RNRB to be claimed on their death, but would they still be considered to have used up their NRB on the original transfer into trust if they died within 7 years of that original transfer? The double taxation guidance (e.g. IHTM14711 onwards) only specifically refers to GROBs which continue to death or cease to be subject to a reservation and become a deemed PET, there does not appear to be guidance on a situation where the GROB ceases because it is transferred back absolutely to the donor. I have seen suggestions by some practitioners that s.102(4) Finance Act 1986 can be read to mean that a PET is deemed to arise for inheritance tax purposes when GROB property ceases to be subject to a reservation, even where the property is transferred back to the donor of the GROB, because the only requirement seems to be that the property ceases to be property subject to a reservation. I would be interested to hear the views of members.
Where a reservation of benefit ceases, under FA 1986 s 102(4) a disposition occurs which is treated as a deemed PET.
However, if the trustees appoint the trust property back to the settlor (who is a beneficiary) the initial reservation of benefit arising on initial settlement ceases and the property again falls within the settlor’s estate on death on normal principles. However, although a deemed PET, there is no loss to the donor’s/settlor’s estate as a consequence and so no actual IHT charge arises on the deemed PET.
Malcolm Finney
The official guidance on Non-Statutory Clearances is lacking. Only Annex A indicates that a business is essential and similarly just the heading to ONSCG2100 where the applicant is described as a “customer”. The refusal of HMRC to engage with non-charitable trust deeds or settlements etc is ambiguous. I believe an individual taxpayer not in business has a legitimate expectation to be able to apply for a clearance that another type of taxpayer can apply for and further that inheritance tax should be covered.
I regard it as Wednesbury unreasonable, if it is the case, that a taxpayer who has made a gift with a possible reservation under FA1986 cannot seek a ruling on whether the reservation has ceased, via an actual not hypothetical occurrence, causing a PET under s102(4), which requires no immediate return to be submitted, so the gifted property is no longer in his or her estate, avoiding a potential 70 year period of related uncertainty. In such a situation the lack of a return calculated to engage HMRC, HMRC’s somewhat quixotic and resource-governed choice, is a counter-intuitive and proximate cause of that uncertainty and should be amenable to an application subject to all other published onerous but reasonable caveats. Such applications can assist taxpayers to avoid the unwieldy and expensive Judicial Review route, which involves HMRC also in cost and personnel time. Can anyone clarify or share their experience of any HMRC direct communication about this?
Such a clearance might be useful in ascertaining whether in HMRC’s opinion an after-acquired reservation overrides retrospectively the tracing rules identifying property subject to a reservation where a cash gift is made and later, perhaps very much later, the donee buys a property which the donor occupies and which would have been a GROB at the outset if the property itself had been gifted. Also how identifiable must the link between the cash gift and the purchase funding be and how long the interval? I accept that one could only ask HMRC about the actual facts in a specific case and not speculatively.
Jack Harper
I can’t disagree with Jack’s comments.
I have read most if not all of the arguments which have tried to somehow give rise to a reservation of benefit when cash is gifted and a property purchased for occupation by the donor of the cash.
Unless a specific gift of cash is made by X to Y subject to Y agreeing (whether by contract or otherwise) with X that a property is to be purchased by Y for X’s occupation I doubt very much that HMRC could successfully argue that X has either continued to enjoy the cash given or can trace the cash through to the property (FA 1986 Sch 20).
Isn’t this precisely why the POAT rules were introduced?
There is a protection from a POAT charge if occupation of the property occurs more than seven years after the date of the cash gift [FA 1986 Sch 15 para 10(2)(c)].
Malcolm Finney
An irritation (to me at least) is that paragraph 10(2) Sch 15 FA 2004 contains 5 sub-paragraphs (a)-(e) but does not immediately make clear whether all of them must apply or just any one of them. The key word “or” appears only at the end of (d), so (d) and (e) are clearly alternatives. Craies para 8.2.13 describes this as “the modern practice” where it is intended that any one sub-paragraph can apply. In the old days, says Craies, “or” would have been inserted after each sub-paragraph save the last. This would have made the position clear. As ever, the old days were the best.
Jack Harper
I agree with Jack that the “old days” were undoubtedly the best. I have certainly noted the move in many cases to only insert “or” after the penultimate sub-para rather than at the end of each of a number of sub-paras within a para.
In such cases it then becomes necessary to ascertain if all of the sub-paras need to be satisfied or is each sub-para an alternative.
Having said this, I think that re FA 2004 Sch 15 para 10(2) there is little doubt for it to make sense that sub-paras 10(2)(a) to (e) provide for five, not one, excluded transactions.
I’m not sure when and why such a change (and others) was made.
Malcolm Finney
PS apologies for referring to FA 1986 instead of FA 2004 in my earlier post.
S.102(4) says the cessation of benefit is treated as a disposition which is (already) a potentially exempt transfer. Doesn’t that mean that the initial test of the effect on the donor’s estate is ignored?
Ray Magill
My understanding is that if the original disposition is a chargeable lifetime transfer, which will often be the case, that is not ignored if the reservation is released.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Para 5 (principally (2)(f)(ii) of it) of the IHT (Double Charges Relief) 1987 SI 1987/1130 deals with this. In essence you ignore first the CLT and then the deemed PET, do the maths, and the higher resultant tax charge prevails.
Unfortunately despite para 5 (7) there is no exact example in the Schedule Part II but only one which deals with 2 CLTs, both outside the 7 years, and a PET which becomes chargeable but with the GROB property still retained in the death estate. The Parliamentary draftsperson, or the author of the instructions, must have been so exhausted, self-congratulated, over-excited or just plain bored that s/he could not proceed to provide another example of a deemed PET following one or more cumulating CLTs/ actual PETs. A great pity as the example are cogent and welcome. More please.
The key variables are the donor’s cumulation at the two different dates and the value of the property at the date of the original gift and at the later date of releasing the reservation. The value can go down as well as up!
Bearing in mind that a reservation can pop up as well as be released, or both, within 7 years of death the interval could be close to a lifetime. But the original CLT/PET or all of them might have ceased to cumulate by the second date of the deemed PET, which in turn might be survived by 7 years.
It signals a potential trap if a donor survives by 7 years all or any original gifts (Gift 1) creating a reservation, makes another lifetime gift (Gift 2) before releasing the reservation (but within 7 years of it), and then dies within 7 years of the release but more than 7 years after Gift 2. The deemed PET will cumulate with Gift 2 even though Gifts 1 and 2 do not cumulate with the death estate, although there will be only a single charge on the death estate under the normal rules.
We often learn in this Forum of incautious or unadvised GROBs and perhaps of equally incautious or unadvised releases of reservations. I recently warned an old friend who was contemplating this kind of risk, all unawares but incredulous as to such an outcome. So I sent him a copy of Regulation 5 and Schedule Part II to confirm he would be in rocket science territory. And that he or his PRs would have to engage an expensive rocket scientist, who would not however be able to reverse the effect of the proposed future release; which we can now describe as a “non-rapid unscheduled disassembly” of his simple plan.
It is treated as a disposition whether it would otherwise be one or not. Quite conceivably the release, e.g. ceasing to occupy, might not be a disposition on general principles (it is not a defined term) or an omission within 3(3) IHTA. Even if it were, it might not be a PET within s3A. This characterisation prevents it from being a CLT with a potential 20% lifetime charge if it were an actual disposition or, if not, only deemed to be a disposition but not also a PET. It also expands the persons liable to include the donor’s PRs under s199 (2). It does not determine exhaustively what kind of event constitutes “property ceasing to be subject to a reservation” which will depend on what the reservation was in law and fact and whether the subsequent event qualifies it in law as causing it to cease on the facts.
Jack Harper
When I said it was ignored I meant in the context of the deemed PET. I don’t think that one can look at a loss to the donor’s estate; the PET is intact.
Ray Magill
Under s102 (4) the deemed disposition is of “the property” i.e. of the property which “ceases to be property subject to a reservation”. This is apparently intended to override s3(1) which is subject to " to the following provisions of this Part of this Act". It is a moot point whether under s114 (5) FA 1986 the IHT provisions of that Act are in “this Part"of the IHTA but otherwise there would be a conflict and I would expect a judge to so hold (but cf Marshall v Kerr where “this part” was strictly construed”).
Jack Harper
My curiosity took me to Chamberlain and Whitehouse, 4th ed para 26.38 footnote 84. The authors note that the property is not treated as part of the deceased’s estate. This might confirm that, although a PET, it is not a normal transfer of value within s 3(1).
This may not be HMRC’s view. The authors go on to say that HMRC accepts that if the cesser of the reservation results in the property returning to the donor’s estate there is no charge because “there is no loss to the donor’s estate”. Only a transfer of value imports that concept; and not for example the termination of an old IIP or new IPDI. They quote no source.
IHTM is not entirely helpful. At 4064:
“Because these transfers are deemed to be PETs, and a PET is transfer of value (IHTM04024) that would, apart from IHTA84/S3A be a chargeable transfer, (IHTM04027) they join the charging structure as chargeable transfers. This means that no exemptions (IHTM11000) may be deducted.The same would apply for reliefs such as agricultural relief (IHTM24000) and business relief (IHTM25000). However, these reliefs are specifically available against the deemed PET that arises on the cessation of reservation (FA86/SCH20/PARA8)”
Para 8(4): “In this paragraph, “the material transfer of value” means, as the case may require,—
(a)the transfer of value under section 4 of the 1984 Act on the death of the donor; or
(b)the transfer of value under subsection (4) of the principal section [sc. s102] on the property concerned ceasing to be subject to a reservation”.
(b) assumes it is a transfer of value.
A chargeable transfer within s2(1) must be a transfer of value within s3. s3(4) would allow an exemption for events deemed to be transfers of value but s19 (5) denies the annual exemption save for e.g. IIP terminations within s52. s102(4) does not deem the cesser to be a transfer of value but only a disposition and a PET. A normal PET is in essence a transfer of value under s3A(1) but also in essence one made to a particular person; why should the deeming only import one essential ingredient?
The authors cite as an example of HMRC’s practice as “where a gift is unscrambled”. Presumably they mean an outright gift; where the property is settled, the cesser of a reservation in it will not necessarily result in anyone, let alone the settlor, becoming entitled to anything.
So two long and uncertain replies to Ray’s very succinct question. The paucity of coverage in IHTM probably signifies that HMRC regards it as a rare event (or perhaps only rarely reported, as it requires no concurrent return and so depends mainly on the ultimate knowledge of the PRs).
The loss to donor concept, if it applied, would operate oddly as the cesser might have no significant effect on the donor’s estate, certainly not as regards settled property, and it must surely apply to both or neither. I suspect that therefore a judge would agree with Ray if by “intact” he means that the that the value transferred by the deemed PET is that of the property in which the reservation ceases. This would be consistent with a s52(1) chargeable event that is treated as a PET. Neither apply the loss to donor concept.
Jack Harper
OriginaMessage
Reverting to the original question, isn’t the donor still enjoying a benefit by occupying the property? S.102(3) suggests that. If so, s.102(4) doesn’t apply.
After nearly 40 years one might have expected the oddities of s.102 to have been revealed in practice, such as the situation in this query and the possibility of multiple ‘cessations of benefit’ in the seven years preceding a donor’s death. But one can imagine executors, faced with a GROB at death, not realising the possibility of earlier occasions meriting a deemed PET under s.102(4).
I think you have a good argument with an outright gift but with a settled gift the continuing occupation is enjoyed in a different capacity. The reservation in the trust property as such ceases even though factually when it returns to the Settlor’s free estate occupation is unbroken.
I think too that the reason these unexplored oddities have not surfaced in 40 years is that advisers to the well-advised keep within the well-known safe harbours, non-disclosure intentional or through ignorance flies under the radar, and blatant blunders are quietly settled with HMRC as not worth fighting. In this it shares characteristics with much other anti-avoidance legislation which is designed to operate “in terrorem” and does so effectively. Now if it doesn’t get you the GAAR probably will!
Jack Harper
I’m not entirely convinced that your point about ‘the different capacity’ is valid. A gift is a gift; not identified (in the Act) by the donee. Nor do I think that well-informed advisers in practice follow up all their clients sufficiently closely to recognise subsequent deemed PETs. Omission through ignorance will rarely be spotted by HMRC, who therefore will not have the opportunity to ‘quietly settle’.
Ray
I think my point is seriously moot and so might be a hopeful last desperate throw of the dice by HMRC in correspondence or Crown Counsel before the tribunal and so by the same token not one on which a planner would care to rely.
I am sure you are right about the lack of follow up in practice though I would hope all good initial advice would include the cesser possibility and indeed the trap that a reservation can arise at any future time if that falls within 7 years of death regardless of the date of the gift.
As to “spotting” by HMRC, this is just one of those mercurial possibilities which a deceased’s PRs are technically obliged to enquire about, most obviously cumulating PETs or CLTs and any iffy claim for lifetime exemptions or non-transfer of value dispositions. No doubt in some cases there will be difficulties in obtaining evidence, some wilful suppression of it by those who have it, and some application by PRs of Nelson’s telescope strategy.
The PRs (and any trustees of settled property) can only do their best to ensure limitation of their personal liability under the IHTA provisions dealing with liability and its limitation, s216 (1) (bc) being in point with a GROB, and IHTM10824. They need to beware of making a distribution which could prejudice funding their personal liability from the estate, despite the potential liability to pursuit of the distributee, or insure against it, and if they obtain a certificate of discharge ensure that s239(4) will not trip them up. HMRC have various alternative rights of recovery and will pursue anyone worth powder and shot, so “Sauve qui peut”.
Jack harper
I think we agree that s.102 FA 1986 etc is a mess. Less obvious is s.103, which unthinkingly speaks of an earlier transfer of value to the donee/creditor, not a chargeable transfer. How many PRs reviewing liabilities are conscious of the possibility that a debt owed to a surviving spouse might be non-deductible because of s.103? And are less likely to note the possibility of earlier deemed PETs under s.103(5) FA 1986.
Ray Magill
Yes, another one Ray. I believe the Legislature and the legislative process is at fault in many areas for not anticipating all the easily foreseeable consequences of new law. Especially as professional specialists can and do point them out before enactment.When they are pointed out later they seem almost totally reluctant to amend the law unless it favours HMRC. This is a democratic deficit.
Jack Harper