I am dealing with a pre 2006 Settlement which created a life interest for the Settlor. He died earlier this year and an IHT100 has been filed and IHT paid. Following his death, the trust fund is held as to capital and income for the benefit of such of a group of beneficiaries (including the children of the Settlor) as the Trustees may appoint and in default of appointment as to income for the children of the Settlor (A&B) during their lifetime. It has been agreed that an appointment of the capital of the trust fund will be made to the children of the Settlor (A&B).
What are the reporting requirements following that appointment? I am not sure whether this is a PET for IHT purposes and a disposal for CGT purposes based on the uplift from date of death of S to the date of the appointment?
Many thanks in anticipation.
Nicky Waldman
On the settlor’s death, the trust fund became subject to the IHT relevant property regime, so an exit charge will arise on the distribution (unless within 3 months after a 10 year anniversary). Whilst there will also be a disposal for CGT, this can usually be held over.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Depending on the availability of a nil rate band and the value of the capital distributed the effective rate of IHT could be lower than 6% and even nil. In the latter case it might be an excluded settlement with no reporting requirement for IHT.
Jack Harper
Many thanks for these replies.
May I ask in addition:
There have been no 10 year anniversary reports as this was a pre-2006 Settlement, which only became subject to the IHT relevant property regime following the death of the life tenant earlier this year, when IHT was paid. So how is the exit charge calculated? Is it with reference to the previous notional 10 year anniversary or death of the life tenant? Also, is QSR in point as IHT was paid on the death of the life tenant?
The value is more than the nil rate band, so there are reporting requirements.
Kind regards
Nicola Waldman | Partner | For Hodge Jones & Allen
As the settlement is pre-2006, the settlor would have had a qualifying interest in possession (QIIP). My understanding is that the effect of s.80 IHTA is that in these circumstances, the reference date for the 10 yearly charge will be the date the QIIP terminated – I.e. the date of death of the settlor.
I don’t believe QSR applies to reduce IHT on a subsequent transfer out of a relevant property trust, mindful that it is allowable only where “the value of a person’s estate” is increased by the first death (s.141(1) IHTA).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
At the risk of being contradicted, my understanding is that the exit charge rate is calculated by reference to the effective rate at the previous 10 year anniversary (albeit the trust was not relevant property then) and that rate is then reduced pro-rate for the period it was not relevant property. Finally the rate is reduced again in the normal way that an exit charge is reduced.
This was the way it was done with old A&M trusts that did not change their terms following the 2006 changes…
Maxine
TC Citroen Wells
The existence of a prior QIIP does not prevent the 10 year intervals commencing on the date property first became comprised in it: s43A or s83 IHTA. Of course in the QIIP extended to the entire trust property at a past 10 year anniversary no RPT charge could then arise.
QSR under s141 does not apply to RPTs. But the rate of tax will be determined by reference to the fact that the property has not always been RPT property.
If the appointment is made during a 10 year interval s.69(2)-(4) will apply. The trust property will be valued at the date of its becoming RPT property, the date of death, and with the benefit of the rate being reduced by reference to unexpired quarters since the date of the last TYA (even though at that date it was not a RPT). s65(2)(3) and (5)(d) give a similar result if it is made during the first 10 years.
If the appointment is not made before a TYA s66(2) gives a similar reduction at that event by reference to the number of quarters in the prior 10 years during which the property was not RPT property.
Jack Harper
We are told that the settlement created a life interest for the Settlor. Taken literally that means the Settlor settled the property on himself for a life interest. That would not have been a PET or CLT pre-2006 as not a TOV at all and not a GROB because of s102(3) FA1986 as it would have been part of his s.5 estate: s.49(1) original. No effect on my RPT analysis.
Paul has assumed s80 applied on the relevant death. Homer may have nodded here as I see no indication that the deceased’s spouse played a part. As Paul says, and as I have assumed anyway, the relevant cumulation for RPT charges will be that of the deceased prior to his death and the existence of any related settlements. These would not include settlements made by his Will as they would not have commenced on the same day: s.62(1).
If this was a settlement made by someone else, his spouse or a third party, on the deceased as LT he should not have been called the “Settlor” so I have assumed a self-settlement. Such devices are still being marketed as anti-avoidance devices today and of course they are no such thing. First they are now CLTs and CGT disposals without hold-over relief. They do avoid IHT on later death but incur RPT charges. As a consolation they still have a CGT uplift on death and PPRR on a lifetime disposal if available.
Jack Harper
I did not see Maxine’s contribution but I do not disagree with her. It is important that the actual wording of the sections be read and not paraphrased as I have done.
Jack Harper
I am a little confused by Jack’s statement: “Paul has assumed s80 applied on the relevant death. Homer may have nodded here as I see no indication that the deceased’s spouse played a part.”
Mindful that s.80 (1) IHTA starts “Where a settlor or his spouse or civil partner is beneficially entitled to a qualifying interest in possession”, I am unsure why a spouse might need to be involved for s.80 to apply.
If I have correctly understood s.80, it sees to me that the trust fund falls into the relevant property regime on the death of the settlor, which is the same day as any settlements made under his will are deemed by s.83 to come into effect.
Perhaps I’m just having a “moment”, but I am having difficulty in understanding why s.80 does not apply and, thereby bringing the trust into the relevant property regime on the day of the settlor’s death.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
s80 (1) requires that the owner of the initial IIP be the settlor, or his or her spouse, or his or her civil partner. “A special rule applies where the settlor or their spouse (or civil partner) had an immediate and qualifying interest in possession (QIIP) in the settled property and a later time the QIIP ends and property becomes relevant property”: IHTM42331.
All we were told was “I am dealing with a pre 2006 Settlement which created a life interest for the Settlor”. On the face of it this must be a self-settlement if the Settlor was the settlor and is also the LT. This may of course be inaccurate!
If made after 2006 it can only be a QIIP if it is a disabled person’s. Before 2006 it could be inter vivos. If anyone other than the settlor’s spouse or civil partner was the settlor s80 would not apply but it would if they were. But the Settlor is the LT so there was never any question of whether the mischief aimed at by s80 would be secured. That would be so if a spouse etc could make an exempt transfer to their spouse etc and facilitate the use of their own lower cumulation, rather than the higher one of the transferee spouse etc., when the trust turned RPT.
We then were awarded in 2006 s102ZA FA 1986 to prevent the arrangement dodging the GROB rules despite s80.
Jack Harper
Thank you to everyone for your contributions.
As Jack has said, this was a self-settlement as S was both the settlor and the LT (no spouse at all!).
I am not clear if I should be valuing at the date of death or a previous (notional) 10 year anniversary to do my calculation?
Nicola Waldman | Partner | For Hodge Jones & Allen
Thanks Nicola for that confirmation. I am now less confused than I might have been but not perhaps out of the woods altogether. So, to Paul, I do agree that s80 applies to a self-settlement in principle and apologise for my moment! I suspect that s80 was meant, and is more apt to catch, an initial exempt spouse entry transfer. After 2006 the cumulation for RPT charges will include the entry CLT if within the 7 years before the date of death (no longer a non-TOV) as well as any other CLTs or failed PETs during that period
Can you tell us Nicola the actual dates involved or at least the intervals? Is the date of death before a TYA or in between two? How long from it to the next TYA? This will at least indicate whether s68 or s69 will apply to an appointment of capital before the next TYA.
Jack Harper
Thanks Jack.
Initial settlement 22.03.2001
S died on 08.12.2023
Appointment out to the (adult) children of S – in the next few weeks.
S made no CLT’s nor PET’s after 2001.
Kind regards
Nicola Waldman | Partner | For Hodge Jones & Allen
Nicky Waldman says the property is held’ in default of appointment as to income for the children of the Settlor (A&B) during their lifetime’. Doesn’t this mean that the children (I’m assuming in precribed proportions) have immediate post-death interests in possession?
Ray Magill