I am dealing with an estate the deceased has died leaving some cash and three properties (2 rental and one his home) to his three children. One child gets each of the properties and then cash split three ways. All three properties have large mortgages on and the legacies are subject to the mortgages being paid off by the beneficiary. No IHT issue.
The issue is that the deceased’s late spouses will contained a NRBDT which has never been dealt with. It seems the only assets she had were 1/2 shares in the two rental properties above held as tenants in common with the surviving spouse (the deceased as mentioned above). Surviving spouse (now deceased) and one child are trustees and never did anything with the trust. Surviving spouse has treated the properties as passing to him and received all rent himself and paid income tax on that rent as though his but nothing has ever been signed on the trust so no deeds etc.
IHT should not be an issue as two estates are well under IHT levels due to mortgages on all properties owned but CGT will be as the properties have increased in value since first death.
My questions really are -
Has anyone had this before with the income tax position on the trust and the fact that the spouse has treated it as his income but had no right to do so with no deeds being signed? if so how can this now be sorted with the revenue? Will they just accept that the trustees agreed to this even though no formal documents signed?
The properties are to be sold but if 1/2 shares of them are still presumably in the trust they will not have been uplifted to market value so CGT gains will apply. I thought that I had read somewhere (but typically cant find now) that the trustee could accept cash into the trust to the value that should have been in there now rather than those 1/2 shares of the properties which if so would get around this but cant find any authority that this is the case?
Any help would be appreciated since I seem to be going round in circles as to how best to unravel the trust and what the tax consequences would be.
Thank you
Presumably the wife dies before the husband, but as you mention a Trust, was this in respect of the assets of her estate? How her estate was distributed and dates of death may help clarify how to move forward.
Also, is it one child gets each of the properties or each child gets one property? Differing net values may also bring up agreement problems?
The will died first a about 12 years ago leaving a will in which the NRB passed into a NRBDT. Will/estate were never dealt with. From what we can find out she only owned 2 properties as tenants in common with husband so both would be under the trust. Husband never dealt with her estate so properties remained in 2 names and probate never applied for and trust not dealt with. The 2 properties have increased in value so potential CGT issue when sell them (husbands ½ share uplifted to his date of death but if wife’s ½ share of each are in the trust hers would not be). Husband has received all rent from those properties until he died so treated it as his income and paid income tax on it (but wasn’t entitled to it as the trustees never signed anything to give him a life interest.
1 property passes to one child, 1 to another, and a third property (which was joint tenants) passes to third child. Estate is uneven so that is also a potential problem but the immediate one is how to deal with this trust from the late wife’s will. From reading the trust in the will it had to be formally appointed out by deed which it wasn’t so those ½ shares are still there. Trying to find the best way of dealing with this from a CGT perspective and income tax on the rents also. IHT is not an issue as we would be under levels both on the estate and the trust.
Thank you for the additional information. I expect this will encourage others to add their comments, however,your first post indicated the two rental properties were owned as tenants in common and I have assumed that the residence was similarly owned, accordingly this is how I would see this.
On the death of the wife owning 50% of the property value net of any mortgage and that value being below the nil rate band allowance, ALL of her assets in accordance with the Will, would pass into discretionary Trust.
From there on, 50% of rents should have been considered as Trust income and not the Husbands, as you say, with the other 50% remaining as an asset of the Husband who could receive rent as income.
The fact that the Land Registry were not notified that the properties were then 50/50 between the Trust and the Husband is not a concern as the ownership was determined by the Will and creation of the Trust determined this.
The Husbands death then releases his ownership of 50% of the net value in favor of the beneficiaries. On sale of the properties, the gain in value would need to be calculated and apportioned in tax between the estate and the Trust.
It would ease the situation if the children could agree to each receiving one third, otherwise the calculation would need to deal with individual costs on each property and possible upset at one receiving more than the other. That is unless there was a particular reason that the parents decided on specific property for each child.
A very difficult case, which others may wish to comment on as they see the position, but last resorts would be to speak with the Tax office, who have been know to be most helpful in such complex matters.
I agree entirely. It would be highly desirable to put matters right and if you are governed by the PCRT your clients’ refusing to instruct you accordingly would dictate termination of retainer/engagement. There will no doubt be a possibility of interest and penalties. The very good news is that H has returned and paid tax on all the rent. 50% will have to be treated retrospectively as the trust’s and taxed at the trust rate but H must be treated as receiving the income under deduction as a distribution of the income (though exactly when may be a moot point and I would argue when the rent fell due as no formality is needed to appropriate cash). Any interest deficit as between the trust and H should be small as H’s overall liabilities are unlikely to be changed much if at all but there is a differential between interest payable and receivable.
On penalties the question is whether the trustees used reasonable care. CH81120 is promising save for:“In HMRC’s view it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar to take care to find out about the correct tax treatment or to seek appropriate advice”. The trustees were presumably lay and included or simply comprised H. Even if HMRC don’t accept that, any penalty should be towards the lower end of the 0-30% range.The scenario is far from uncommon in practice (and often worse e.g. where the first or later 10 year IHT charges or interim distributions at a positive rate (due to increase in value) have been overlooked).
As regards IHT there was a 10 year anniversary at which presumably nothing was done. The nil rate might still have applied and even the excepted transfer rules (IHTM06000). As land is involved it might have substantially increased in value, although the 10% discount would apply (not related property).If it has, the question worth addressing is whether H’s de facto “appropriation”, presumably to be timed notionally at or near the commencement of the settlement on W’s death, should be treated as a distribution; almost certainly at a nil rate as the trust property was below NRB immediately after the death. Although it is true that HMLR formalities are irrelevant as regards the legal estate an effective transfer of the equitable estate arguably cannot and could not be made without writing. Whereas I would not be sanguine about debating that with any other part of HMRC, Capital Taxes may raise the point but if they do may be prepared to compromise as it neatly disposes of the issue and would not be a distortion of the factual matrix.
From a CGT perspective, the trust ‘acquired’ their half share of the properties at the value at the wife’s death. If they are appointed out of the trust to the beneficiaries (by formal deed of appointment), the trustees are treated as disposing of the property for current market value and liable to capital gains tax on the increase in value.
However, the appointment would also be a chargeable event for IHT which would allow for holdover under Section 260 TCGA 1992 to be claimed.
This would mean the beneficiaries would ‘acquire’ their share of these properties for the Trust’s base cost (being the value at the wife’s death) and the trustees gain would be reduced to nil so they would not have a CGT liability to pay as a result of the appointment out of the trust.
Following the above, the recipients of the properties that were half in trust will have base costs equal to half the value at wife’s death and half the value at husband’s death. This will likely mean the recipient(s) of these properties will have a higher CGT charge to pay in future than a beneficiary receiving a property wholly from the husband’s estate (which will have a full base cost of the current/probate market value) so this may need to be considered when deciding on the appointment of the properties to the beneficiaries of the trust (if equality is desired).
For IHT, you have said this is not an issue as the values mean there is no IHT charge but note Jack’s point re 10-year charge when the property values in the Trust may have been more than the NRB at that time and would mean IHT at that time and also on the appointment out now.
If the Estate hasn’t been administered then the NRBDT can’t yet have been established as the PRs have not assented to the vesting of the half shares in the Trustees. Given the time that has passed and because you need to use current values to assess what proportion of W’s shares can be used to satisfy the NRB legacy (+ interest), you may well find that the proportion of the properties will perhaps now be less than the full half shares with the balance then passing to the Husband under the gift of residue. This could be good news for the potential CGT but bad for the IHT on H’s estate as he will have a greater share of the properties.
From an Income Tax point of view, the rents would be due to the PRs who would be liable to BRT on them. Hopefully the NRBDT allows the PRs to exercise the discretionary powers available to the Trustees. If so, I think that RAT would not apply to the PRs but stand to be corrected.
Graeme Lindop Probate Consultant Coles Miller Solicitors LLP
I would be cautious about the non-administration bit. Equity looks on as done what ought to be done. If a discretionary object or even a trustee were to argue that the NRBDT should be notionally reconstituted as of the date of death with all logical consequential adjustments and equitable remedies and H be made liable to make good (he is a volunteer not a BFP for value and probably a trustee in breach of trust, so no clean hands) I suspect the Court would order accordingly.
Of course the spectre at the feast is HMRC and their attitude to acts that are void as opposed to voidable and thus to Rectification and Mistake and not least their reluctance to be joined even in actual litigation save to ask for certain authorities to be cited to the court (nudge, nudge know what I mean?) leaving everyone else at their mercy of accepting or rejecting the outcome, and even relitigating the tax consequences. (I’d like to see their refusal to be joined as punishable by res judicata estoppel.)
That is why I think it worth a try to get HMRC on board to ignore what has actually happened and to tax what should have happened with all necessary re-working of liabilities. The more convincing the counterfactual case the better, especially if on the facts there is an argument for rectification or mistake, or restitution and tracing, given that the properties and H are still within the court’s (and HMRC’s) reach. It could be pitched as a win win situation and very cheap in HMRC time and effort. A quick and dirty from one of the junior Learned Ones on the putative rights of the parties in law (and the likely exercise by the court of any discretions) might be a worthwhile investment and if favourable to settle the letter of entreaty. H after all is an innocent abroad who has repented and wishes to put matters right and obtain fiscal absolution. Sometimes it is feasible to suggest re-computations of the liabilities and put them forward on a “sign here” basis.
HMRC’s Litigation and Settlement Strategy is largely tongue in cheek propaganda but significant passages can be often be cited back to them so that they are then hoist by their own petard. E.g. “The two key elements of HMRC’s approach to tax disputes are: 1. supporting customers to get their tax right first time, so preventing a dispute arising in the first place 2. resolving those disputes which do arise in a way which establishes the right tax due in accordance with the law at the least cost to HMRC and to its customers. In most instances, this can be achieved through working collaboratively.” I’d tackle Capital Taxes first as they will at least understand the issues.
Regardless of whether you are dealing with an unadministered estate (Graeme’s view) or a trust (everyone else’s view) there is an obligation to register with the TRS. If not already registered, take care when you do register as HMRC are using the TRS as if it was a section 7 TMA notification.
It is not a s7 notification. If a voluntary return is made s12D should save you although a condition is “HMRC treats the relevant return as a return made and delivered in pursuance of such a notice”. HMRC is not directed to do that so it is not clear whether there is an appeal or only JR. No doubt the necessary appeal would be against a penalty notice with the reasonable excuse defence. s12D does not affect return time limits.
HMRC have no authority to use TRS as a s7 notification for trusts or for any estate, not even a complex one. There is no authority in TMA 1970 nor even in CRAC 2005 which are only about taxes and the MLR 2017 and its enabling FSMA 2000 are only about money laundering etc. They are acting ultra vires in seeking to do so and it would be a lay down Grand Slam JR if anyone could be bothered. I am thinking about a letter before action (Pre-action Protocol for JR and Annex A).
Although TRSM27030 was updated on 17 November it still says that two years after death if the admin period is still in place the non-existent will trust must be registered. This is despite TSEM6045 which says: “The trust will commence when assets are transferred to the trustees or when the administration has been completed, whichever event happens first.” And see TSEM7360. Not only that but different parts of HMRC deal with estates in administration and trusts: TSEM1421 and 1472.
Surely, unless there has been any appropriation to the trustees of the wife’s NRB trust, the trustees of that trust are entitled to the NRB amount plus interest and have no entitlement to the properties.
I suggest that despite the husband including the property income as his own income, it was in reality income of his wife’s estate and, strictly, should have been disclosed to HMRC by her executors. However, as he was the sole residuary beneficiary, if he received that income then it would need to be shown on his tax return. On that basis, I see no need to amend his income tax returns.
The outstanding question, though, is the wife’s NRB trust which looks now to be possible to be satisfied in full as a result of the appreciation in value of the assets of her estate. Regardless of the value of her estate at the time of her death, it is the value of her estate when the legacy falls to be satisfied that is relevant (applying Re Charteris, 1917).
With regard to interest on the NRB legacy, I suggest that in these circumstances s.21(1)(b) Limitation Act 1980 would apply, so that a claim for interest for the entire period from the end of the executor’s year should not be time-barred.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
If an error is “trivial” no further action is required. It will very rarely be trivial. If not, there is ultimately going to be either a disclosure to HMRC authorised by the client or, if the client definitively refuses:
“33. Where the member had been dealing with HMRC on the client’s behalf or had been formally appointed as a tax agent, the member should notify HMRC that they have ceased to act for that client. Because of the obligation to maintain client confidentiality a member should not provide HMRC with an explanation as to the reasons for ceasing to act.”
I would not myself be willing to shelter behind not having been appointed agent or not yet having had direct contact with HMRC. Do you really want to go on acting for a client who forbids disclosure? “31. If HMRC were to realise that the member had continued to act after becoming aware of such undisclosed errors, the member’s relationship with HMRC could be damaged. HMRC might, in some circumstances, consider the member to be knowingly or carelessly involved in the commission of an offence or be engaged in dishonest conduct.”
Jack Harper
