H dies leaving a NRD Discretionary Trust in his Will, with residue to spouse on life interest trusts. H’s estate is valued at say £1.325m, and W say £2m. The home is jointly owned as TICs at say £350,000. Could half the home be appropriated to the NRB DT, for it to then be appointed out to children so that the RNRB is claimed on first death? If so, would a balance of £150,000 be needed to satisfy the NRB DT, or could you push a further £325,000 into the trust?
An alternative scenario, is with husband’s Will simply being for the entire estate to be held on flexible life interest trust (FLIT) for the surviving spouse. Can a share of the home be appointed from the FLIT to the children to claim the RNRB? Answering my own question, the answer is in the negative, so to circumvent that problem, can the house be appointed to the wife, who then enters a DoV leaving the house to the children? (This will be treated as if husband’s estate left the house to children directly so as to benefit from the RNRB in his estate.)
With regard to the first point, it is important not to confuse the IHT deeming effect with the actuality of what the trustees receive.
If the house is appropriated to the trustees and then appointed out by them, the NRBDT has received value and so is entitled only to such further value as will satisfy the legacy in full. In the example this is only £150,000.
Turning to the alternative scenario, s.144 IHTA cannot apply, as Haroon identifies. Do the trustees have the powers to effect the proposed beneficial ownership without first appointing the property to the widow? If not, then such appointment may be a fraud on a power (applying the principle discussed in Wong v. Burt). If the trustees do have such power, does the Ramsay principle apply so that HMRC will ignore the intermediate steps and look only at the final outcome?
Might the preferred solution be for each testator (on the first death only?) to make a specific devise of their share of the home to the children. The NRBDT gift may then also be reduced to reflect the extent that the value of the deceased’s share of the home exceeds the available RNRB (if at all)?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
One issue with the ‘preferred’ solution is the decision has to be made ‘now’, with the circumstances at the time of death unknown. Does this pave the way to have a RNRB DT? That probably deals with most of the issues but I don’t have Kessler’s precedents for that… and I am reluctant to try my own, albeit in principle I can’t see a problem with it. You can even have the RNRB DT limited to six months/two years after which it passes to spouse/children absolutely, depending on the inclination of the client.
Haroon
I appreciate your concern, but someone once said there are only two certainties, death and taxation. I am very far from the first to suggest the third certainty, i.e. that tax law will, and does, change - and it may well be that the rules applicable at the date of death are not as you may have envisaged.
Accordingly you have to draft now - my own preference was to leave flexibility to cope with different tax/family/personal issues, but individual clients need individual guidance/advice.
If you choose to advise on the basis of current law, you should also consider the terms of your client letter - in particular whether you are or are not responsible for advising the client of any change in the future, whether UK law or elsewhere.
So far, I have only seen one RNRB DT precedent, and I wonder if any lay person will understand what they need to do. I would not like to pass comment upon the use of such clauses other than that I suggest they might only be appropriate where there is a professional executor involved.
Referring back to Haroon’s initial posting, I do not believe the widow would be able validly to use a s.142 IHTA variation to pass the property to the children. The appointment to her out of the FLIT will not have the benefit of s.144 IHTA so that, for IHT purposes she will not have received it as a result of a (deemed) disposition on the death of the testator.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I agree the wording appears to support your line of thought, as advice from Technical seems only to be required if the taxpayer strongly presses the view that s.142 does not apply to a purported variation after any of the specified events. However, the fact that HMRC says “any subsequent redirection by the beneficiary MAY (my emphasis) qualify as an IHTA84/S142 variation” seems to undermine that position.
Personally, I do not feel IHTM35084 is sufficiently worded for me to feel confident that the approach you have suggested is necessarily acceptable to HMRC.
It would be interesting to learn of other’s experiences in relation to this scenario.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The iht manual says “any subsequent redirection by the beneficiary may qualify as an IHTA84/S142 variation.” I certainly would not want to rely on this for forward planning, far better to use a RNRB gift clause to take advantage of it on the first death, if that is what is wanted.
The redirection could only be interpreted as a s.142 redirection if furniss v dawson was in point-a series of related transactions; if it was, then the appointment would be void as a fraud on the power, so would still not work.
i am not sure if your clients are both alive or if one has died.
if they are both alive you may want to do a DT to reduce the value on teh first death and also give an interest in property up to the value of the RNRB (it has to be an interest in the land to qualify)… This would remove £500,000 from the estate on the first death and the balance could then go on life interest trusts. The estate on the second death would still exceed £2m however given your values so the surviving spouse may want to do some tax planning to be able to use their own RNRB - perhaps setting up a lifetime trust up to the NRB from cash or investments (PETs not counted for £2m value for RNRB on death so if not surviving 7 years it would still work from that point of view for the allowance).
In relation to a FLIT if the beneficiaries interests have vested on the first death (spouse and adult children vested at the date of death) then they can all vary under S142 IHTA 1984 and be read back for IHT purposes. IT does not work under S144 though as life interest existed so can only be done via S142 if no minors (otherwise Court permission needed).
Regarding Haroon’s first point, if £325,000 is appropriated to the NRB Discretionary Trust and then £175,000 appointed to the children and the balance of £150,000 to spouse within two years, the appointments are read back for IHT purposes. Therefore, in the IHT computation will it be read as if the deceased had used their full RNRB allowance, (as the RNRB is due automatically). Further, because the remaining £150,000 passes to spouse, is the TNRB is available. Is this analysis correct? (This is assuming of course from the £175,000 appointed to children this consists of a qualifying residential interest.)