NRBDT Reduction in IHT of 12.5%

Trusts Discussion
1

From reviewing the ‘Inheritance Tax Planning Handbook’, I see a proposed method of reducing inheritance tax, which involves the following:

  • the first spouse dies and leaves a legacy to a NRBDT
  • part of their half share of their home is then appropriated to the NRBDT
  • the executors when appropriating can discount the value by 15% because the surviving spouse, who is co-owner with the NRBDT trustees is occupying the property
  • when the surviving spouse dies, the remaining interest in the property is valued with a 10% discount because there is a co-owner but he is no longer in occupation
  • The combined effect is IHT on the property is reduced by 12.5%

Is this an arrangement that is still effective? It seems too good to be true. Are there any downsides to this?

Yours,
The Legal Beagle

2

It works because property held in a DT is not related property for IHT and the discounts cited are those officially accepted by VOA.

Does it pass the GAAR’s double reasonableness test?

" the ‘double reasonableness’ test sets a high threshold by asking whether it would be reasonable to hold the view that the arrangement was a reasonable course of action - the arrangement is treated as abusive only if it would not be reasonable to hold such a view " : GAAR B12.1;

and " C3.2 Tax arrangements are defined in s207(1), which focuses on whether it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

I don’t accept that the appropriation is any kind of purpose of the testator unless he can be shown to have admitted that. The PRs might be more at risk. The GAAR is not a recipe for HMG to fill apparent gaps in their legislation, here s161 IHTA, and the taxpayer is entitled to rely on it as drafted. The remedy is for HMG to change the law.

Originally only some RPT property was related, so the intention of Parliament has been clear since the introduction of the tax. s161 brought in only property of certain charitable trusts.

As originally enacted para 7(2( Sch 10 of FA1975 read:

"For the purposes of this paragraph, property is related to the property comprised in a person’s estate if—

(a) it is comprised in the estate of his spouse ; or

(b) it is, or is part of, the property comprised in a settlement made by him or his spouse before 27th March 1974, and no interest in possession subsists in that property or part.

(Repealed by S277 and Schedules 9 and 10 Inheritance Act 1984 and s161 substituted from 1 January 1985))

Far from being “abusive” per C5.3 " having regard to all the circumstances including—-

a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions

b) whether the means of achieving those results involves one or more contrived or abnormal steps

c) whether the arrangements are intended to exploit any shortcomings in those provisions ",

they are squarely within Parliament’s self-evident consistent intentions based on the legislative history.

Any downside would presumably be loss of the discount. The arrangements might be hard to defend if they were instituted only 5 minutes before signature of a contract for sale; although such an appropriation among legatees to maximise CGT annual exemptions has not been challenged as far as I know.

Jack Harper

3

Thanks, Jack. That is a very thorough and briliant answer. The one thing I do not follow is what discount they would be losing?

Yours,
The Legal Beagle

4

It would be up to HMRC to suggest a counteracting measure which was “just and reasonable”. Presumably that would be to deny the discount. The tax advantage of this follows merely from either the creation of the NRBDT or, much more or solely vulnerable, the later appropriation. I think it is likely that neither triggers the GAAR in the first place if the appropriation is a reasonable course of action viewed objectively. The elastic “decent interval” after death and/or before any sale may make the appropriation appear so.

HMRC’s psychopathology includes an addiction to “Post hoc ergo propter hoc” or “after this, therefore because of this”. A logical fallacy that occurs when someone assumes that one event caused another because the first event happened before the second. But a judge will not fall into the trap of assuming that because a tax advantage followed from an action that this was its objective.

Jack Harper

LegalBeagle:

  • alue by 15% because the surviving spouse, who is co-owner with the NRBDT trustees is occupying the property
  • when the surviving spouse dies, the remaining interest in the property is valued with a 10% discount because there is a co-owner but he is no longer in occupation
  • The combined effect is IHT on the property is reduced by 12.5%

Thanks, Jack. That is a very thorough and briliant answer. The one thing I do not follow is what discount they would be losing?

Yours,
The Legal Beagle

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Previous Replies
It works because property held in a DT is not related property for IHT and the discounts cited are those officially accepted by VOA.

Does it pass the GAAR’s double reasonableness test?

" the ‘double reasonableness’ test sets a high threshold by asking whether it would be reasonable to hold the view that the arrangement was a reasonable course of action - the arrangement is treated as abusive only if it would not be reasonable to hold such a view " : GAAR B12.1;

and " C3.2 Tax arrangements are defined in s207(1), which focuses on whether it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

I don’t accept that the appropriation is any kind of purpose of the testator unless he can be shown to have admitted that. The PRs might be more at risk. The GAAR is not a recipe for HMG to fill apparent gaps in their legislation, here s161 IHTA, and the taxpayer is entitled to rely on it as drafted. The remedy is for HMG to change the law.

Originally only some RPT property was related, so the intention of Parliament has been clear since the introduction of the tax. s161 brought in only property of certain charitable trusts.

As originally enacted para 7(2( Sch 10 of FA1975 read:

"For the purposes of this paragraph, property is related to the property comprised in a person’s estate if—

(a) it is comprised in the estate of his spouse ; or

(b) it is, or is part of, the property comprised in a settlement made by him or his spouse before 27th March 1974, and no interest in possession subsists in that property or part.

(Repealed by S277 and Schedules 9 and 10 Inheritance Act 1984 and s161 substituted from 1 January 1985))

Far from being “abusive” per C5.3 " having regard to all the circumstances including—-

a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions

b) whether the means of achieving those results involves one or more contrived or abnormal steps

c) whether the arrangements are intended to exploit any shortcomings in those provisions ",

they are squarely within Parliament’s self-evident consistent intentions based on the legislative history.

Any downside would presumably be loss of the discount. The arrangements might be hard to defend if they were instituted only 5 minutes before signature of a contract for sale; although such an appropriation among legatees to maximise CGT annual exemptions has not been challenged as far as I know.

Jack Harper