i would welcome views on the following:
- Testatrix left NRB to be divided between 2 discretionary trusts set up by her in her lifetime and the residue to a family interest in possession trust where the beneficiary was her spouse (unless and until an appointment was made in favour of other named beneficiaries. The Testatrix died in July 2016. the 3 lifetime trusts were dated on 3 consecutive dates in March 2016.
- The value of her estate is approximately £600,000.
- the surviving spouse is one of the discretionary beneficiaries of the 2 discretionary trusts.
If the trustees of the 2 lifetime discretionary trusts appoint the majority of the assets to the surviving spouse within 2 years of the Testatrix’ death will that attract spouse exemption as though it had been created by the will? and therefore preserve most of the TNRB?
With regard to the gift of residue to the interest in possession lifetime trust will this attract spouse exemption on first death?
If the residue is transferred to the interest in possession trust is that trust taxed every 10 years as it is not an IPDI?
Francis and Co
- Yes, an outright appointment (s.144(1)) or an appointment of an IPDI to the spouse (s.144(3)) would allow the executors to claim the spouse exemption. That should preserve the TNRB.
- Yes, the gift to the IinP trust should attract spouse exemption.
- The IinP trust should be an IPDI. The fact it pre-dated the death should not be an issue.
The treatment of legacies to pre-existing trusts was covered by Q18 on the CIOT/STEP Q&A with HMRC. I struggle to find the document now but set it out below. My first two answers are reached by applying the answer by analogy to discretionary trusts and s.144 - ie that “settled by his will” in s.144(1) includes a legacy to a pre-existing trust.
Can it be confirmed whether, when a will leaves property to an existing settlement (whether funded or unfunded) and under that settlement a beneficiary takes an immediate interest in possession, that interest will qualify as an IPDI?
Such arrangements are common for US and other foreign domiciliaries in order to avoid complex probate issues.
It might be argued that the interest in possession in the existing settlement does not arise under the will of the deceased. However, there are two arguments against this.
First, HMRC’s own analysis is that additions by individuals to existing settlements should be treated as new settlements. Hence the addition by will to an existing settlement is a new settlement set up by virtue of the will.
Second, the wording in IHTA 1984, s 49A, Condition 1, refers to ‘the settlement was effected by will or under the law of intestacy’. The question though is what ‘the settlement’ refers to. It would seem that it refers not as such to ‘the settlement’ in the sense of a document but rather to the settlement into trust of the settled property which certainly is effected by will.
The same wording is used on deeds of variation under IHTA 1984, s 142 and HMRC have always accepted that where property is added by will to a pre-existing settlement there is no reason why the beneficiary of that settlement cannot vary his entitlement.
We can confirm that the IIP in this scenario would qualify as an IPDI. We agree that ‘settlement’ in this context relates to the contribution of property into the settlement rather than the document under which it will become held.
Osborne Clarke LLP