Lifetime Settlement, GROB and IHT treatment on death

In 2011, H&W enter into 2 Lifetime Settlements. H transfers his 50% share of the matrimonial home into his settlement and wife transfers her 50% into her settlement. They remain in occupation.

Under each of the Settlement deeds, both H&W are named as Life Tenants and there is a power for the Trustees to appoint capital to them. In default of that, there is also a power for the Trustees to appoint capital to a discretionary class of beneficiaries - the children - who are also the default beneficairies.

I understand that each of the two settlements are taxed as Discretionary Trusts and potentially iable to the 10 yearly charge etc.

My question is, how would forum members treat the Settlements on death of either H or W given they are both named as Life Tenants in each of the Settlement deeds? Would this count as a GROB?

Presumably there would be no RNRB available. Assuming so and “capital protection” is not the main concern, is bringing the arrangment to an end - appointing back to H&W, a disaster? Combined estates inculding property circa £800k.

Apologies if i am missing “the obvious” and many thanks in advance.

Justin Wallace
Brewer Harding & Rowe

If H had only an interest in possession (not within s 49 IHTA 1984) without any possible interest in capital it would be arguable that no reservation of benefit had arisen (adopting the carve-out argument). However, you state that he may share in capital and thus there has been a reservation of benefit.

On death the trust property will be included as part of his estate (due to the ROB) and no RNRB will be available.

If the trust terminates on the death, an exit charge for IHT arises and a CGT charge also arises on any capital gain due to the deemed disposal and re-acquisition by the trustees (subject to hold-over relief; however, hold-over relief should not be needed due to PPR relief under TCGA 1992 s 225).

As a non-qualifying interest in possession, on death there is no automatic CGT cost uplift.

If the trust does not terminate on death no IHT or CGT arises (apart from the ROB).

The trust is settlor interested for CGT and thus no hold-over relief could have applied on initial settlement but presumably PPR relief would have applied to any capital gain.

An appointment back to the settlor gives rise to an exit charge for IHT; cessation of the ROB; and a CGT charge albeit subject to PPR relief.

Malcolm Finney

Thank you Malcolm. To clarify;

The Settlement is described as a “Life Interest Settlement” but the operative provisions provide: -

(a.) for the Trustees to appoint whole or any part of capital to any one of the Dsicretionary Class of Beneficairies;
(b.) In default of [a] for the Trustees to hold the Trust Fund and pay the income to the Life Tenants [being the original settlors];
(c.) In defualt of either a or b, for he children of the Settlors (or in the event of predecase their issue)

The Trust period is 125 years. It seems like a Relevant Property Trust but what is making me hesitant is the use of the words “Life Tenants” and the fact that in each document, both Settlors are named as “Life Tenants”.

The key point I am trying to clarify is, does the value of the Trust aggregate with the free estate of the Settlors?

Justin Wallace
Brewer Harding & Rowe

Describing the trust as a “life interest settlement” does not per se make it such.

Aggregation with the settlor’s “free estate” would require that at the date of death the interest in possession fell within s 49 IHTA 1984 (which seems clearly not to be the case) or the transfer of property on trust gives rise to a reservation of benefit on the part of the settlor.

As the settlor has reserved a benefit then aggregation on death is required.

Malcolm Finney

A couple points to add here.

Bringing the settlements to an end could be a disaster, if they were to go into care immediately thereafter.

An issue I suspect is that the planning was put in place to potentially combat care costs and possibly avoid probate etc. but in the current state, it could be an expensive device to manage (periodic charges).

You are still within the first 10 years of the trust and assuming that there was not an entry charge, you could appoint all of the assets out of the trust now without creating a charge to IHT, presumably CGT would be fine too considering they are life tenants and have continued to occupy the property, but then any protection the trust was already offering them given the timescales since settlement would be lost.

Andrew Drakes
Countrywide Tax & Trust Corporation Ltd

Assuming they have lineal descendants would appointing back to the settlors a share of the property sufficient in value to claim their RNRB be an option?

Roland Borriello
Northwood Banks & Co Ltd

For the purposes of allowing them to claim the RNRB, if you appointed say, £350,000 combined to them absolutely then yes, that would allow sufficient value to pass via the estate and therefore allow the RNRB to be claimed, however;

For the purposes of avoiding periodic charges, the above will not achieve a great deal in terms of the first 10 year charge given that the exit from the trust would in fact be added back in when calculating the charge.

It would therefore have a neutral effect but for any growth in the value of the property appointed out.

Andrew Drakes
Countrywide Tax & Trust Corporation Ltd