Gifting inherited property immediately after death

Trusts Discussion
1

Can I run this one by you …

W dies intestate leaving H and their only child X.

H and X agree to vary the intestacy to leave everything to H.

H then makes a PET of an investment property (which was in W’s sole name) to X. X will of course take all rental income and any other benefit.

When H dies full NRB allowances will be available up to £1million.

Is this all OK or anything I need to be aware of?

Can H as W’s legal representative transfer directly out of the estate to X i.e. bypassing H.

Investment property value is well over value of one standard NRB so we can’t vary the estate to leave to X.

H is in good health and likely to survive at least 7 years.

Really appreciate your feedback thank you!

2

I suggest you might have an issue should HMRC raise s.142(3) IHTA 1984, as it could hold the variation invalid for IHT purposes.

HMRC may well ask if there has been any discussion or agreement between H and X as to future gifts by H (which might be construed as “consideration “ for the variation) - if already discussed with the client, it may be difficult to say “No”.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

Thank you Paul but I’m unclear at what point HMRC would have the opportunity to raise that? Do you mean when H dies? H is in good health and more than likely to survive seven years so by the time he dies there will be no mention of this investment property on the IHT forms.

Am I right in saying that had W written a Will leaving everything to H, then this would not be an issue? He’d be able to gift the investment property immediately to son as a PET (i.e not wait for any specific period following death?)

Many thanks for your help.

4

Deborah - presumably HMRC could (and occasionally do) raise it when given notice of the DoV in W’s estate to secure the spouse exemption.

5

If you’re claiming spouse exemption for the entire estate, notwithstanding that the son is also entitled under the intestacy, at some time HMRC will need to see the variation to confirm the husband’s estate’s entitlement to the deceased’s NRB and RNRB.

If an IHT400 needs to lodged with the grant application, then the variation will need to be submitted with the IHT400.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

6

Professor King gave a recent talk on this:

Proceed with caution: see Vaughan-Jones and another v Vaughan-Jones [2015] EWHC 1086 (Ch).

You could explain in writing to families considering such a variation the of the need to avoid any consideration and the fact that the spouse will be free to deal with the property as they see fit. Adult children may well reconsider the wisdom of the variation if there can be no control. An attractive alternative is to vary to create an IPDI with overriding termination powers. The lifetime termination of an IPDI passing the capital to the remainder beneficiaries is a PET by the life tenant.

However, s142(4) is a problem. Make the IPDI last more than two years. Don’t make it exactly two as HMRC takes the view that this is too short a period. See Kevern and Ayres v HMRC [2014] EWHC 165 (Ch).

7

Apart from the folly of basing any plan on HMRC’s not finding out, is it worth taking the risk that HMRC may successfully raise the consideration issue? The opportunity cost is to waste the solution as suggested by Andrew, given the short time limit and prohibition of a double variation of the same property. H will then instead make a PET of the settled property more than 2 years later by virtue the trustees’ appointment, terminating the IPDI. The latter requires a preliminary absolute appointment of fixed remainders so it is a PET not a CLT unless the variation itself is to that effect.

Technically ANY consideration is caught by s142(3) so it is still arguable that acquiring a mere spes is caught, even if it might be worth 1p! But the fact that X gives up his intestacy rights only for 1p makes the link improbable. However see my third paragraph; the IPDI route can overcome the consideration issue altogether because of the proviso in s142)3).

I am not sure that the IPDI should be for a fixed term of just more than 2 years: IHTM35095. With that the remaindermen have only to wait 2 years, a racing certainty given H’s life expectancy. A genuine life interest, plus the trustees not being able to appoint without the concurrence of an independent trustee, decouples the settlement of the trust property from X’s giving up his intestacy share. X should not be the sole remainderman but rather one object of several in a default group. Don’t include a charity as they are in context potential troublemakers.The interest of each object of the default class subject to the IPDI becomes a mere spes and it is difficult for HMRC to allege that X gives consideration for a variation which only secures for him such a nebulous interest.

Strictly the proviso in s142(3) should apply whatever the type of remainder to the IPDI: “other than consideration consisting of the making, in respect of another of the dispositions, of a variation or disclaimer to which that subsection applies.” X gives up his intestacy right in the estate for another interest in it. This then is not tainted consideration. IHTM35100 uses the words “out of the estate”, which are more intelligible, and IHTM35093 encapsulates the HMRC approach. If the mere relinquishment of such an interest was prohibited consideration just because the person relinquishing thereby obtained another interest in the estate few variations would succeed. Doing it in exchange for a PET of the varied property is not for “another of the dispositions” of the estate. This is why entitlement under a IPDI of the property given up is excepted as consideration. It is an outright PET of the same property in which the intestacy right subsisted that is dangerous, whenever made and even before the variation. A settlement on trust of which X is a beneficiary is not prohibited consideration for his rights on intestacy (or under a Will) whatever the nature his rights under the trust

It would be absurd if an initial right to the estate given up by a variation in favour of a spouse of the deceased effectively prevented the survivor from ever being able to provide for that person, by later gift or even a Will, where that person was someone for whom such provision would be entirely normal. However HMRC regards this as possible outside s142 in some cases, largely within their discretion of course.

A downside is that under the IPDI trust H will be entitled to the income meanwhile.

Jack Harper

8

Thank you for all of your responses.

I believe my client (and I) want to keep the process as simple as possible.

The property is worth £450K - Could we vary to leave a two third share to son X and one third to H?

Two and a half years down the line could H gift his third to X? Or sooner than that? In the meantime could H gift his share of the rental income to X under the gift of surplus income exemption?

9

1 HMRC’s target mischief, causing them to raise the “consideration” issue, occurs where the variation turns a chargeable estate into an exempt one. Here the proposal would not achieve this but rather the exact opposite if X receives more than his strict intestacy entitlement. Of course the chargeable estate is intended to be covered by the NRB. This is ideal for cash flow but of course reduces the TRNB on H’s death; he may then use his own NRB on the later PET of the one-third share to X. If his life expectancy at that later date is more than 7 years there is a good chance it will become exempt and the NRB be fully reinstated. If he dies and it becomes chargeable, the PET will cumulate and he will only have W’s TRNB (s) and any increase (some hopes!) in the general NRB rate. The TOV of the later PET will be reduced by 10% being a joint interest.

2 The financial downside of the plan, if it works in principle, is the loss of W’s NRB on H’s death, requiring an estimate of his death estate’s value, and, in that context, the NPV of the loss to the extent it would otherwise have reduced it, a function of his life expectancy at the date of the variation. The loss of W’s NRB is permanent. If H has his own NRB when he dies (the PET having become exempt) that loss will only matter if the value of his estate is greater. The loss in tax terms is £325,000 x 40% = £130.000. The NPV at 5% over 10 years is £80,000, over 20 it is £49.000. Over 5 it is £102,000, and remember the failed PET will then absorb H’s own NRB increasing the probability perhaps of an actual loss.

3 There will be some inevitable crystal ball gazing. The planning is predicated on the current law applying; the estimate of H’s estate value; and whether 5% is the right rate. The big question is who will sign off on the assumptions and explain them cogently to H and X, so their heirs don’t complain.

4 The consideration issue remains a theoretical point if X receives less than his strict intestacy entitlement: does X then agree to the variation because H in turn agrees to make the later PET? X’s intestacy right is presumably in W’s entire estate. This is apparently 50% of it above £322,000. Will that exceed £325,000? If X gives up less than that amount to receive two thirds of the property worth £325,000, he has given no consideration which could be attributable to H’s later PET. If his entitlement is greater, then the argument is available to HMRC that the difference will be compensated by H’s future PET, which is not another interest in W’s estate.

It seems counter-intuitive to me that that a variation which increases the chargeable value of an estate (albeit attracting W’s NRB) would be offensive to HMRC. That will be the case if two thirds of the property value exceeds the strict value of X’s intestacy share, already chargeable. I am assuming that the property interest will be given to him in full discharge of his intestacy share and still be within the NRB amount. (More might be available if W had RNRB). No one can really say how long should be the period before the later PET is made. Certainly H himself must make the final decision, on the basis of full information as to the risk, to avoid come-back on the adviser. Someone needs to go on the hook for predicting the value the VOA will accept for the property and thus for the varied slice of it.

There must be no contemporaneous agreement for the PET to be made. 3 years is the period which the legislation in s 87I TCGA lays down for sanitising an “onward gift” so that may be a guideline. But this remains fundamentally guesswork.

5 If the disposable income criterion in s21 IHTA can be met by H without his one third of the rent after tax then exemption for a regular gift of it to X should be available. What does “expenditure” mean? It is wider than just a money transfer: IHTM14243. Is a TOV necessary? Yes, otherwise no exemption would be required.

A disclaimer does not need s21. A regular annual disclaimer before the rent falls due is a nuisance, even more so if due quarterly or less often. These would come within s93 IHTA but are not TOVs at all to my mind. A once-off disclaimer of all future rent would work unless H is not happy with a permanent disclaimer. If he is, why not make it a term of the variation that all the future rental income from the property goes to X? Rent accrued before the variation is made will have to be taxed as estate income. Presumably taxable on H and X in proportion to the values of their respective original intestacy entitlements.

Jack Harper