Implications of asset sale surplus, pre-death, gifted to beneficiary

Trusts Discussion
1

Hi all,

An APT has been set up by our client with the view that the sole asset (her main residence) would remain unchanged until her death. Her circumstances changed, however, and as settlor she has successfully sold the property for £400k, purchasing a new main residence for £300k with the remaining £100k cash in a bank account in her name. She is planning to gift the £100k cash to one of the original beneficiaries.

There is no CGT consideration as both properties are main residences. Are there any implications, specifically of the gift in this case?

Thanks in advance.
Raj

2

I take it the Trust value was below £325K when established? And if so, and below 80% of the NRB, an IHT 100 was not submitted. And set up within 10 years?

Also, I assume the Trust is registered with HMRC and that PPR claimed as part of the Trust CGT return for the property disposal, required as PPR needs to be claimed.

Was the trust terminated as part the house sale? Then the £100K would be a straight PET.

The APT would be a GRoB. If the Trust still in existence, then the £100K is still a Trust asset. So, I think I am right that the £100K would be a PET as no longer treated as the APT GRoB. Some of the more learned TDF contributors may provide a different answer.

3

Thank you for your reply Karl.

No IHT100 was required and it was setup within the last ten years. PPR was indeed claimed. The trust was not terminated as part of the house sale however.

I understand the £100K being a PET in this case (although a loan from trust instead of gift could also be an option here?) but could you kindly explain the rationale behind the APT becoming a GROB as the £100K cash is still held in the settlor’s name?

4

The trust assets would be a GROB because the settlor is presumably a beneficiary and/or in any case is occupying the trust property.

How is the cash in S’s name? If it is just because S was the sole trustee when the trust property was sold, and the conveyancer paid it to S, they are presumably holding it as trustee for the settlement. It would still be subject to a GROB because S is the settlor and a beneficiary of the settlement.

1 Like
5

I understand the APT was the property, which continued to be lived in by the settlor, so it’s a GRoB; as it would be if an absolute gift to an individual. This point is either not appreciated, or purposely not mentioned by many advisors who promote APTs. APTs of property also lose the RNRB, another point rarely made to potential settlors. In general, I see little point to APTs that include the residence of the settlor.

A GRoB becomes a PET from when the GRoB factors are removed, hence why I believe the £100K cash will be a PET.

On the info you have given, the surplus is still a Trust asset even though held in the settlors sole name.

6

Thank you both for the considerate replies and apologies for the delay in my own - I’ve just returned from a much needed extended break.

@andrew.goodman - the cash is indeed held by S as sole trustee.

@Karl - I agree, APTs seem to be a convoluted device when including main residences of the settlor.

Would the best course of action be to wind up the trust rather than risk the PET? Or is there a more tax-efficient alternative? Apologies for the rudimentary questioning but APTs in this case are not my area of expertise and my client has already been given poorly grounded advice once before, when setting up this very APT.

Thanks in advance.

7

I appreciate the replies given so far. If anybody is able to shed any further light on what an optimal resolution to this might be - avoiding a PET when a trust asset still exists, albeit as cash now rather than property - it’d be much appreciated.

Thanks.
Raj

8

Essentially - if a £100k cash gift would be considered a PET, due to a property trust asset having been sold, and so no longer a GROB, what would be the best method for the settlor to transfer this cash to a beneficiary?

Thanks in advance.
Raj

9

If it was initially a Grob the sale proceeds held in trust remain a Grob. Presumably the trust allows a distribution to the beneficiary concerned. That has 2 consequences;

1 The Grob disappears and is treated as a PET by the Settlor

2 The trustees face an IHT charge although the rate will not exceed 6% and could be much less

Jack harper

10

Thank you for the reply Jack. In this case, what would affect the IHT charge?

Thanks in advance.
Raj

11

If the capital is extracted the trust maybe subject to an exit charge (as Jacks comments above).

Broadly, if no tax was due on creation of the trust there’s normally no IHT due on any capital distributions made in the first 10 years. [Subject to other factors].

Why is making the PET an issue?

Richard C. Bishop
PFEP

12

1 The Settlor’s cumulation immediately before transfer into trust

2 Any later additions by the Settlor

3 The initial value of the trust property

4 The value of the distribution

Where 1 and 2 are nil and 3 is less than the the Nil Rate Band the rate will be 0% on 4 if it is made before the first 10 year anniversary.

Unless you are used to doing these calculations it is similar to astrophysics for me

Jack Harper

13

Thanks both.

I agree @jack ! I feel as though I’m finding myself near a sizeable black hole at the moment…
1 and 2 are nil, 3 is 400k, 4 is 90k. Do you have the rate thresholds in this case to hand?

It seems the settlor was missold the APT and the implications were not explained to her clearly @Bish . She is elderly and has discovered these potential IHT charges recently and so is looking for any viable alternatives. My first instinct was a deed of variation but the settlor is not deceased.

Raj

14

As Jack indicates the £100k sales proceeds remain settled property and subject to a reservation of benefit on the part of the settlor. Any appointment out of the £100k will result in the cessation of the reservation of benefit in the £100k and the settlor will be treated as having made a deemed PET of the £100k §(FA 1986 s. 102(4)); no annual exemptions deduction are permitted. If the settlor (donor) survives seven years the PET will be ignored in ascertaining any IHT on the settlor’s death.

The PET is not circumnavigated even if the settlor’s spouse is within the class of discretionary beneficiaries and the £100k is appointed out to the spouse FA 1986 s. 102(5); IHTA 1984 s. 18).

“Related settlements” (IHTA 1984 s. 66) may affect the IHT charge.

Malcolm Finney

15

I did indeed omit related settlements. If this is the only trust then the calculation is:

£400,000 + £90,000 = £490,000 minus (NRB assumed) £325,000 = £165,000 x 20% = £33,000

£33,000/ £490,000 = 6.73% x 30% = 2.01%

£90,000 x 2.01% = £1809.

As this chargeable event is before the First 10 year Anniversary the tax is reduced to the number of complete quarters from the date of commencement to the date of the chargeable event, If 25 quarters have elapsed:

£1809 x 25/40 = £1130.63 provided the transferee pays the tax. If the trustees pay the tax the £90,000 is grossed up by 90000/100 minus 2.01 = £101260 minus £90000 = £11260

See https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42114

Advice is not given on here, so this is based on IHTM42114 which is in the public domain and on certain assumptions not verified by me. The question for you is; if you are doing this professionally should you be and, if not, should you be on the basis of consulting a non-recourse source of information?

Jack Harper

As Jack indicates the £100k sales proceeds remain settled property and subject to a reservation of benefit on the part of the settlor. Any appointment out of the £100k will result in the cessation of the reservation of benefit in the £100k and the settlor will be treated as having made a deemed PET of the £100k §(FA 1986 s. 102(4)); no annual exemptions deduction are permitted. If the settlor (donor) survives seven years the PET will be ignored in ascertaining any IHT on the settlor’s death.

The PET is not circumnavigated even if the settlor’s spouse is within the class of discretionary beneficiaries and the £100k is appointed out to the spouse FA 1986 s. 102(5); IHTA 1984 s. 18).

“Related settlements” (IHTA 1984 s. 66) may affect the IHT charge.

Malcolm Finney

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Previous Replies
Thanks both.

jack:

Unless you are used to doing these calculations it is similar to astrophysics for me

I agree @jack ! I feel as though I’m finding myself near a sizeable black hole at the moment…
1 and 2 are nil, 3 is 400k, 4 is 90k. Do you have the rate thresholds in this case to hand?

Bish:

Why is making the PET an issue?

It seems the settlor was missold the APT and the implications were not explained to her clearly @Bish . She is elderly and has discovered these potential IHT charges recently and so is looking for any viable alternatives. My first instinct was a deed of variation but the settlor is not deceased.

Raj