IHT gift into Trust 7 year clock

Trusts Discussion
1

Hello,

I am hoping someone could help with the below, which I am sure is very basic for most on this forum.

I am dealing with setting up a Discretionary Trust for a client who has gifted money into it, within an Offshore Bond. My question is when does the 7 year IHT clock start ticking? There is a significant time period between the 3 dates for various reasons.

  1. The day the trust was established (I would say no, as no gift had been made at that point)
  2. The day the cheque was written
  3. The day the cheque is cashed

Thank you for your help.

Regards,
Oliver.

2

A transfer to a discretionary trust is a chargeable lifetime transfer, not a PET. Anything over the NRB is immediately taxable at 20%.

1 Like
3

The gift is effective on the date the cheque clears through the donor/settlor’s bank account.

Until than it is deemed to be revocable – i.e. the settlor can always put a “stop” on payment.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

4

Valid transfers of legal interests or equitable interests each require that the relevant formal rules are adhered to. X may transfer the legal title in land to trustees which would require an appropriate conveyance. The transfer is then effected once all the relevant formalities have been complied with.

In the case of a gift of cash by way of use of a cheque no such transfer has occurred where the cheque has simply not been presented ie the mere writing of the cheque passes no transfer of value to any person. Once the cheque has been presented to the bank for clearance (ie paid in to the recipient’s bank account) then in the absence of any attempt to effectively “stop” the cheque clearing by the original transferor the funds will be available to the recipient to draw thereon and a transfer effected.

IHTA 1984 s48A provides for the date of commencement of a settlement (ie when property first becomes comprised in the settlement; s61). This may not be the date of execution which appears on the trust deed.

Malcolm Finney

5

Thank you for the response Paul

6

If land is settled and a deed of gift executed, does the date the legal title is transferred of any relevance?

Ray Magill

7

As ever, the wording of the actual deed might matter a great deal, so I answer on the basis that it is silent.

1 If the deed is valid it is in principle effective to transfer a legal estate of unregistered land (if that is its intent and the deed is unconditional and not an escrow) but it must be registered by first registration within 2 months:s 52 (1) LPA 1925, ss 4 and 6 LRA 2002. The date of execution of the deed is the date of transfer of the land because it passes both legal estate and equitable interest to the donee. Not any later date of registration of the legal estate.

2 If the land is registered the legal estate is only transferred (by a TR1 or TR5 or AS1) when the disposition is registered: s27 LRA 2002. But the deed will pass the equitable interest in the land and give the donee a right to call for the transfer of the legal estate, unless the deed provides otherwise e.g. the donor is to hold the legal estate as bare trustee other than absolutely for the donee. Here the date of transfer of the land is when the equitable interest passes on the date of execution of the deed, not any later date of registration. “Later” is the operative word; I am still waiting for HMLR to deal these last 5 months and counting.

The above principles of property law will apply for tax purposes, absent any contrary provision in the relevant tax statute.

HMRC refer to the date of disposition for IHT within IHTM14881-5 and at 14883 for land. This barely attains the standard of “Janet and John go to Land Transfers” and may have originated from a fag packet, Christmas cracker, fortune cookie or search engine.

I consider that the dates in 1 and 2 above would also be the date of disposition for IHT and the date of disposal for CGT, even though HMRC introduce the canard “beneficial ownership” in CG12700; and for SDLT (the acquisition of a chargeable interest in land) the “effective date” being, in context, “completion” in s119(1)(a) FA 2003 and not any later date of registration, though exempt under Sch 3 of course.

I repent of my usual incorrigible prolixity and refrain from also analysing a contract for sale for ÂŁ1 save to say that the rules are different for all the 3 taxes.

Jack Harper

8

Thanks, Jack, I enjoy and am becoming ever better informed by all your contributions.

While you’re hammering HMRC, have you had any personal experience completing a CGT UK land return where the the property sold was acquired as two 50% interests on separate occasions. I am told that the software doesn’t admit that possibility. I am no longer in practice, so am not able to check myself. I would have expected such possibilities, as a single return is required to report all disposals completed on the same day.

Ray

9

Just to be clear Jack, I assume you’re not suggesting re the original post (ie cash by transfer by cheque) that you consider that the dates in 1 and 2 above would also be the date of disposition for IHT and the date of disposal for CGT,

Malcolm Finney

10

I agreed with the answers on cheques and here HMRC’s succinct statement seems in accord:

IHTM14882 - Lifetime transfers: dating of dispositions: gifts by cheque

Gifts by cheque are not completed until the cheque itself is cleared since until that time payment under that instrument can be revoked
It is important to bear in mind that

  • a gift by cheque is not complete until the cheque itself is cashed (following Re Owen, Owen v IRC [1949] 1 A11 ER 901 and for IHT in Curnock v CIR SpC 36[2003] STC (SCD) 283).
    Jack Harper
11

I would commend very highly The Law of Property 3rd ed 2021 by Michael Bridge and others. It deals comprehensively with the creation transfer and protection of legal, equitable and security interests in personal property, goods, chattels, things in action, equity and debt securities, other documentary intangibles. It examines the rules for outright and settled gifts of such items.

There is also a shorter version by the author alone which is less expensive, Personal Property Law 4th ed 2015.

Even so I was not able to find an answer to my query at Giving shares within the NRB
to which no one was able to reply.

Jack Harper

12

If, under the terms of the trust deed itself, the settlor gave, say, £100,000 to the trustees to hold on the terms of the trust (with apologies for the rather loose language), or if the settlor declared that the settlor held that sum on trust for the trustees, etc, the deed would, effectively, be a “deed of gift” and the date of the “gift” is the date of the deed, even though the £100,000 may still be in the settlor’s bank account. If the settlor then writes a cheque payable to the trustees for £100,000 and it is banked and clears one month later, the date of the gift is still the date of the deed. In a similar way, trustees of a discretionary trust might execute a deed of appointment on 5th April to appoint £100,000 to a beneficiary - typically by stating that the trustees hold the sum on trust for the beneficiary absolutely; the date of the “distribution” for inheritance tax and capital gains tax purposes (ie to determine the relevant date for the exit charge / relevant date for the disposal - the latter not relevant for CGT, but might be relevant if a non-cash asset) is not when the money is actually paid over to the beneficiary (which might be a week later), but the date of the deed (when the beneficial ownership passes).

If, instead, the trust is established with ÂŁ10 and the cheque is intended to be an addition of ÂŁ100,000 to the trust fund (without any additional deed of gift/addition/etc), then the gift of ÂŁ100,000 takes effect when the cheque clears.

It is therefore important to be clear exactly what documentation is in place and the circumstances surrounding the gift.

Paul Davidoff
New Quadrant

13

Not only is the declaration not a deed, as indicated by the quotation marks, it is not a perfect gift unless the settlor declares himself a trustee of a ÂŁ100,000 in a specific bank account. Similarly with the deed of appointment and in that case, as I argue in 4 below, even that may not be sufficient.

1 Any trust, to be valid, requires the certainty of trust property (one of the 3 certainties).

2 There are two methods of creating any trust;
(a) a present irrevocable declaration of trust: or
(b) an effective transfer to trustees of a trust which is already or thereby becomes completely constituted (but need not be irrevocable, though that raises other questions)

If a trust is defective as regards one attempted method it cannot be saved by interpreting it as valid under the other.

3 Under 2(a) the settlor must either own the designated trust property or a third party must hold it unequivocally to his order.

Case law illustrates practical difficulties where the trust property is fungible and either intangible, like money in an account, or tangible, like goods (most famously cases of wine held to order by a vintner or shipper). Issues have also arisen with part of an asset, like a debt, goods in bulk, shares and other documentary intangibles.

It is well established that certainty can be satisfied by a settling (by either method) a specific part of property e.g. a number or fraction or proportion of a greater whole which itself is identifiable and is owned by the settlor or held to his order.

So a purported declaration of trust or transfer of £100,000 simply does not work, whereas “£100,000 of my account at X bank etc” does for a declaration and may also for a transfer. An issue arises if there is less than the amount in the account.

In Jones v Lock a declaration of trust of a valid cheque made out to the donor but not indorsed to the donee failed the test.

4 Under 2(b) not only must the gift pass the certainty test it must also pass another test:
the donor must do those acts necessary to transfer the property which he (as opposed to a third party) is obliged to do.

Exactly what acts must be done is highly fact-dependent and in essence the contrast is between Re Rose and Re Fry. Unfortunately Pennington v Waine has since raised the spectre of the Court having too much discretion in identifying those acts.
There must be a doubt where the transfer is of ÂŁ100,000 at X bank if the donor has not instructed his bank to transfer or has only drawn an uncleared cheque but this doubt seems only as to the timing if the donee acquires the funds. That may matter e.g. whether the donor has survived 7 years before then.

5 Equity will not assist a volunteer, so will not perfect an imperfect gift, but nor will it excessively strive to defeat it: Choithram v Pagarani.

6 A distinction must be drawn between an imperfect gift and whether Equity will provide a remedy to the donee, even specific performance, but the crucial timing must be the date of the court order. This covers proprietary estoppel claims, voidable transfers such as for undue influence, and marriage settlements (which Equity regards as for consideration) and trusts created by a covenant of a promise at least where the claimant is party to the deed. It raises the question whether HMRC or a third party e.g. a trustee in bankruptcy can complain if the parties to the transfer do not challenge the validity of the gift.

7 My earlier unanswered question concerned a transfer of X number of shares or such lesser number of shares whose market value is not greater than £325,000 by reference to HMRC’s agreement thereof. There is authority that a transfer to a trust is valid even though an equitable interest under it may vary in quantum, and so be pro tem floating or suspended, but I do not accept that a bare trust for the settlor of shares found to be surplus by the formula can be retrospectively regarded as never given, with some strange and unintended tax consequences. If the gifted property is not ascertainable it is not certain uless and until ascertained.

There is a difference between the positions of arguing for a favourable treatment after the event and advising beforehand what will be effective. In the latter case the advice must surely be that the safest course is to regard the effective date of the gift as when the ÂŁ100,000 has been credited to the trustees (if they can find a bank to open an account!).

Jack Harper