I have a slightly unusual client situation requiring a slightly unusual situation, but I want to check that I’m not about to step into a bear trap as I draft their Wills. I can provide further background if needed, but my specific issue is as follows:
Husband proposes leaving a significant portion of his estate in an immediate post death interest (IPDI) trust; wife is life tenant, remaindermen are his children. Intention is to time-limit the trust, so that on his death it is treated for IHT as passing to wife (spouse exemption applies) but then fairly quickly the life tenancy terminates automatically and the trust fund passes to his children – treated for IHT as a PET from her estate. She is 10 years younger than him and hence there is a good chance that the funds reach the children entirely free from IHT liability.
RNRB is in play. Her estate plus the trust fund will exceed £2 million, which will taper or even completely remove available RNRB. However, if the funds have become a PET then they don’t count towards tapering of RNRB. Hence the desire is to minimise the period within which she has the life interest. Is there is minimum duration for which the right to income should exist
to avoid legal problems
or practical problem (note wife is entirely in agreement with proposal)
or indeed any challenges from HMRC
For example, if the right to income were made contingent upon her surviving him by 28 days and automatically terminated 29 days after his death is that okay?
If the conditions to create an IPDI (IHTA 1984 s49A) are satisfied I’m unaware of any minimum time period the IPDI must subsist for (note IHTA 1984 s 142(4)).
I haven’t checked GAAR but can’t recall any problems arising from it.
I suppose the only comment is whether the proposal suggested is somewhat “provocative” to HMRC and whether it may be perhaps less provocative if the IPDI was, say, for six months or alternatively maybe a revocable life interest might be better. Having said this either the interest qualifies as an IPDI or it doesn’t.
The query raises the old chestnut (or spectre?) of the tax adviser’s “decent interval” which most resembles the optimum length of a piece of string. The use of an IPDI to secure an immediate spouse exemption from IHT followed by an appointment away from and a PET/CLT by the spouse is commonplace and so far as I know is unchallenged but the interposition of the trustees’ discretion (even if the spouse has a consent veto) greatly assists.
There are circumstances, where a lifetime gift is followed by the donee’s onward gift, that may cast doubt on whether the donee acquired beneficial ownership at all. To cement that one often paid a dividend on the gifted shares before they were transferred onward. This argument in a trust context cannot operate unless the trust is a sham. If the spouse is a trustee there must be at least one other I suggest, but a fixed period IPDI would mean no discretion in any case.
A survivorship condition has never been attacked in principle but s92 sets an arbitrary period of 6 months for reading back. Amending legislation sometimes has tackled the issue to thwart tax planning: s102ZA FA 1986 preventing the dodging of a GROB and ss 87 I J and K TCGA 1992. HMRC adopted an implausible position under s126 TCGA that a debenture repayable within 6 months was not a debenture at all (purleeze!) so no reorganisation relief. They may still take that view but you will not find it in CG51700P where, if they do, the omission is unforgivable. Of course, just because a “loophole” is blocked does not prove it existed.
The termination of a short period IPDI does not affect its PET/CLT consequences, which includes the RNRB position as stated; and I do not see that as a shortcoming in the law which is thus exploited. I agree with Malcolm and add that in my view GAAR does not apply; what is contemplated is within the spirit of the legislation and doubly reasonable. A ridiculously short period could be seen as unreasonable. HMRC seem to accept (perhaps through clenched teeth!) the lugubrious practice of transferring an asset to a spouse with a terminal illness to obtain the CGT-free uplift to market value on death, even where that is prepared well in advance of any such diagnosis by cross options (see GAAR Part D19 especially D.19.8.1).
I would suggest a 6 month period but possibly either revocable or subject to appointment away within that period in case the spouse were to die and the trustees had time to act. The ages and current health of the spouses are not stated but the death risk might be covered by insurance if cost-effective. This is an entirely reasonable risk with any prospective termination of an IPDI and the policy could be settled in a lifetime trust for those upon whom the IHT liability would fall if the PET became chargeable. While in theory implementation would also be possible after the first death the LT might then be much older and in poorer health.
My instinct had been to go for the IPDI being limited to 2 years, but with overriding powers in place so that the family could revoke the life interest earlier. This would include the power to appoint out to an alternative settlement, so that some of the inheritance could be kept under the protection of a long term trust if that had become appropriate for a member of the family. However, the difficulty created by tapering of RNRB led me to consider using a shorter period, but I didn’t want to push my luck too far.
In this particular case the husband is 10 years older than the wife, with both appearing to be in rude health so ‘on average’ she should live a further 13 years after his passing which would make this very effective for his family. This is a one-sided situation (i.e. her Will does not mirror his since her estate is much smaller and she has no children of her own) and I see no basis for it being a collusion between them.
My revised thinking is to include in his Will a gift to the value of his NRB directly to his children; with current values that would keep the widow’s IHT estate just under the £2 million level which is helpful. I’d put a 3 month survival clause on the IPDI, so that the family have a reasonable breathing period in which to consider using their overriding powers promptly if they feel they need to, but with an automatic 12-month termination of the IPDI to deal with things if the family don’t bother.