If a property is placed in a trust during lifetime by H & W and the settlors retain a benefit but the trust then sells and repurchases another property in which the settlors also reside and still retains a benefit is this a GROB of the new property also ? How would this effect the IHT exemptions.
What value do we use for IHT for the GROB of the first settlor to die? Is it the value of the first property when H transferred their share to the trust?
This will be treated as two separate trusts: s44(2) IHTA. Joint settlors are a thoroughly bad idea because the precise application of the law is often unknown territory.
If the settlors have no interest at all under the trust but reside in the trust’s property it is breach of trust and possible a sham transaction, never mind a GROB though it is.
A benefit, e.g. life interest, to a settlor’s spouse is not a GROB. But the settlor’s own life interest in their own settled share in the property is. FA 1986 Sch 20 deals with changes in the settled property so the GROB would continue into any replacement property.
If separate settlements are made by each spouse on the other for life of the settlor’s share in the property there is the argument that the occupation of the settlor is not a failure to entirely exclude himself or herself or a benefit by contract or otherwise because he or she occupies as spouse. HMRC do not necessarily accept this argument and there are veiled threats of that in IHTM14338-9. This would be the argument with an outright gift although s18 would exempt it and specifically that prevails over a GROB. s18 does not apply to a lifetime gift to a life interest settlement on a spouse after March 22 2006.
In theory if the argument works at all it ought to work with a joint settlement but the entanglement will give rise to uncertainty and confusion.
What is the objective behind such a plan? The transfer (s) into trust are CLTs and not exempt under s18, though they may be within the settlor’s NRB, and they create RPTs. Plus there is serious risk of a GROB. It should be possible to finesse PPR for CGT on the way in, during, and on the way out. Surely it is better to make the provision by Will with each spouse being given an IPDI with a tenancy in common or survivor’s right of accrual in a joint tenancy and with s18 applying. The settlement may not be proof against creditors and could be a deprivation of capital for care fees unless these are possibilities not imminent and a the settlement endures for a “decent” period of time. It does prevent each spouse from changing their Will without the palaver of mutual wills so the children or other remaindermen can have a vested interest rather than a mere expectancy.
These arrangements are hawked by IHT avoidance snake oil salesmen who are largely distinguished by their general ignorance of the law amd most other things.
Jack Harper
@jack thank you for your detailed response. You have raised some points i might not have considered.
It seems the intention was for care planning the trust was initially drafted in 1996 and never for IHT planning . H & W now deceased. There is no specific life interest although the initial documentation (correspondence) states the intention is for the settlors to continue to reside at the property.
I do believe that even if this is included in the estate the NRB should cover this but what is the availability of RNRB in this instance. Is it lost? The trust does indeed pass to children and step children.
From a practical point of view from the IHT return, is this type of trust listed in the GROB section rather than the Trust Schedule.
I did then wonder the position for the trust for CGT purposes and the ability to claim PPR without a right to reside or IIP etc does the above info change your thoughts on this?
Lucy, it is very hard to respond without a sight of the trust instrument. It must be bizarre. What were the beneficial limitations? If these gave H&W a right to reside then they made a GROB and it must be reported on IHT403. If not correspondence may be evidence but it does not confer rights. Even so, I think simple de facto continued residence creates a GROB and the fact that they never owned the property at death as it passed under the trust does not prevent the deeming effect i.e. that they continued to own it fictionally.
The NRB would be available to each as the GROB of a 50% share is fictionally part of each’s estate together with any property actually owned. But as it is a fictional asset it cannot be transferred to a surviving spouse with s18 exemption. But it does reduce the amount of unused NRB for transfer under s8. RNRB (and so TRNRB) is apparently not due because the gift is not inherited within s8J. s8J(6) covers GROBS and only gives relief where the GROB arose from a direct gift to a donee and not via a trust.
Jack Harper