Although currently I don’t have a client in this situation I can see the following as being likely to occur. I would appreciate comments as to the tax situation when it does:
Married couple (A & B). “A” has died leaving estate in Trust A. Trust A provides an immediate post-death interest for surviving spouse “B” and after the subsequent death Trust A continues as discretionary.
At the 2nd death, the Will of spouse “B” creates Trust B, which is discretionary from the outset.
It is clear that Trust A is settled by the Will of spouse A, but only enters the RPT regime on death of spouse B which is at the same date as Trust B is created. Hence Trust A and Trust B are aggregated for purposes of assessing initial IHT and for calculating 10-yearly periodic charges – albeit the two trusts have different settlement dates and therefore the 10-year anniversary calculations occur on different dates.
Appointments from Trust B that occur within the first 2-years of death B are read back into the Will by virtue of S144 of IHTA84. In particular, this could allow the application of (T)RNRB which otherwise would be unavailable. In contrast appointments from Trust A cannot benefit from reading back.
Question: Am I right in thinking that any reading back for Trust B does also propagate through to Trust A? That is, does it apply to all elements:
any IHT applicable to Trust A by virtue of the death of B
any future exit/periodic charges that Trust A might face after the read back event with Trust B
any exit/periodic charge that Trust A might have already paid ahead of Trust B’s reading back event, therefore possibly allowing a refund to be claimed.
I believe the effect of s144(2) is narrower than you suspect. It nullifies the appointment as a chargeable event, so no tax is due that would otherwise be chargeable, and in relation to that event and any similar event in the period " this Act shall have effect as if the will had provided that on the testator’s death the property should be held as it is held after the event." What kind of trust, if any, survives the event will depend on the terms of the appointment.
HMRC draw attention to some consequential effects of reading back in IHTM42227 but do not suggest that the deeming operation of s144 could result in a payment of tax generally, based on the statutory fiction. The most radical appointment would be an exhaustive absolute distribution to living adults or to a spouse or to charity. It seems clear that “this Act” will then entitle the spouse or the charity to exemption.
I think that s144 does not affect s80 so that, on the death of B, the settlor of both Trust A and Trust B for subsequent RPT charges is B; and the two trusts are related settlements within s62 as commencing on the same day.
The effect of s80 is to create a separate settlement of Trust A with B as settlor but does not prevent the charge under s52 on B’s death or disturb the spouse exemption on A’s prior death. Trust A property will be aggregable with B’s free estate unless an exemption applies to that.
If the appointment from Trust B is on RPT trusts the future RPT charges on Trust A will reflect that Trust B is deemed to be a related settlement under s66(4)(c), s68(5)(b) and s69. Charges on Trust B will operate correspondingly.
s144 does not specifically relieve Trust A from past RPT charges but if its effect coupled with s80 is to create two related settlements made by B on B 's death, the result would be on the face of it to increase the tax charge on any chargeable event occurring in Trust A during the period between 3 months after A’s death and the appointment out of Trust B. I have no idea whether HMRC would seek to claim any additional tax or would have the right to do so based as it would be on a deeming provision.
But why would the Trustees of Trust B wish to make an appointment out of one RPT into a different RPT, especially given the complications of s81? An absolute or exempt appointment read back would not affect Trust A’s RPT charges. The likelihood is vanishingly small. First the Trust A chargeable event would have to occur in that 21 month period after A’s death. Secondly the appointment from Trust B would have to be to an RPT, presumably because a target beneficiary was omitted from it and it was a Pilkington advance or made under an express power to do so or a power to transfer to an existing trust. Given that CGT hold-over relief would not be available under s260 in a relevant case that would make it even less likely.
1 IHTM42231 says"This rule [sc. s80] may therefore alter the calculation of the rate of tax on future proportionate and anniversary charges". One hopes “future” means exactly that but just because an event increasing tax is out of the trustees’ control is not a lifeline. Most obviously where a settlor’s cumulation before settling is increased by a failed PET.
2 A related settlement is only taken into account in the RPT rate to the extent that it contains relevant property, so not while an IPDI subsists in it