Release of IPDI

Trusts Discussion
1

I’ve taken on a new trust and been asked to comment on a potential exit charge but the chargeable transfer IHT form from release of the IPDI has confused me.

The original IPDI gave the life interest to the wife on the husband’s death - so no IHT payable on creation of the IPDI and the residuary was left as a discretionary trust. The legals created show this as a release of the IPDI by the widow in favour of the discretionary beneficiaries not a deed of variation on the original will. The IHT return on release of the IPDI calculated the release as a CLT on the widow. All understood from that.

The IHT comp for the CLT however removes the nil rate band on the basis of gifts to individuals the couple made in the four years before the husband died. This is the bit I find confusing. For the widow releasing their IPDI, these original gifts were a PET, so on the CLT computation, given they were still alive, I would have expected their nil rate band would be available. The PET is still a PET for the widow. The only way I would see the gifts as affecting the CLT would be if this was a deed of variation therefore the discretionary trust creation being chargeable on the deceased. Can anyone comment on whether they would also expect the nil rate band to be available on the CLT comp in the circumstances described.

Also my understanding is that the exit charge and ten year charge looks at the CLT calculation when the Trust entered the RPT regime - i.e. the date of the release of the IPDI but the actual ten year charge DATE is back to when the Trust was originally set up with a proportion of the period it not being RP. My predecessors disagreed with this and told the client the ten year charge is based on the IPDI release.

2

s3A(5) IHTA provides that while the 7 years is still running a PET is to be regarded as exempt. So CLTs made in that period are unaffected by such a prior PET and if the PET later fails there is no retrospective cumulation which would affect the CLT or the chargeable events in a RPT created by it. So the liability for tax of the transferor and transferees of the CLT is fixed at the date it is made and will not be revised by the earlier PET becoming chargeable after the CLT has been made.

Jack Harper

3

Anniversaries are calculated from the date of creation of the trust; it is not calculated from the date the trust becomes a relevant property trust [IHTA 1984 s 61(1)]. However, any charge is calculated by reference to the time period during which the trust qualified as a relevant property trust.

The release of the IPDI (the trust continuing in discretionary form thereafter) is a CLT by the widow. As no earlier CLTs have been made (only PETs) then, prima facie, the NRB is available.

Jack, the CLTs made by a settlor in the 7 years preceding creation of the settlement form part of the trust’s cumulative total; however, if during this 7 year period a number of PETs had been made and the settlor dies within 7 years, this would then necessitate a recalculation of IHT on creation of the settlement (and, presumably, also re any exit charges occurring).

Malcolm Finney

4

So assume an individual makes a PET of £1 million on Day 1 and a CLT into a DT on Day 2 followed by a chargeable event in the DT just over 3 months later. The CLT and the DT charge are within the NRB. He dies 6 years 9 months later making the PET chargeable. Does s240 (2) have any application? Would it make any difference if the CLT and the RPT charge had resulted in a positive tax charge to tax which was duly paid?

Jack Harper

5

Jack, I fear I may be missing something re your last post.

Prior to death no IHT liabilities arise wrt the PET of £1m; the CLT; and the chargeable event in the DT.

The consequence of death is that the £1m PET becomes chargeable and it is also then necessary to recompute the IHT on the creation of the DT and indeed on the DT chargeable event.

IHT attributable to the PET is primarily the donee’s liability. The trustees being liable for the increased IHT on the CLT and DT chargeable event.

I don’t see how s240(2) is relevant whether or not a tax charge arose on the CLT and chargeable event in the DT.

Malcolm Finney

6

In my example the CLT is treated as the first transfer made because the earlier transfer is a PET. If it is of £325k it is taxable at a nil rate. On death the PET becomes chargeable. Is it taxed at 40% or does it attract the NRB because it preceded the CLT so that retrospectively the CLT is then chargeable at 20% plus another 20% and the DT chargeable event at 6%? The recalculation of those two liabilities makes them collectible more than 4 years after they occurred? Is that your view Malcolm?

My view is that there is no retrospection because of s3A(5) so that, purely for applying the rate of tax the PET is not to be treated as the first transfer under s7(1)(a) but as a later transfer within s 7(1)(b) and deemed to follow the CLT as the first chargeable transfer. which thus cumulates being within 7 years of the death making the PET chargeable at 40% with taper relief. This conclusion follows from the words in s3A(5) which require us to assume that at the time the CLT was made the PET was an exempt transfer making the CLT in consequence the “first transfer” for s7(1)(a). s226(3)(A) makes the tax on the PET payable 6 months after the end of the month in which death occurs, however long ago the PET was actually made rather than under s226(1) by reference to the date it was made. “Additional” tax on a CLT is also made payable by reference to the death and not the time of the actual transfer under s226(3) and (3B).

On my view there is no retrospective visitation of liability or additional liability to tax, so no retrospective shifting of the NRB from one lifetime transfer to another, and no retrospective alteration of any due and payable date with consequential absurd interest charge implications. I accept of course that statutes are not to be interpreted primarily by reference to logic or fairness but if there are two possible interpretations, one of which is such and one of which is not, the former is to be preferred. The sections in IHTM14502 to 14517 do not set out my analysis in terms but they certainly do not indicate that this monstrous extent of retrospection is enjoined by the law.

Jack Harper

7

Yes that is my view. I don’t have any problem re retrospectivity as prescribed in the legislation.

The death within 7 years brings the PET into charge and as there are no earlier CLTs there is a full NRB to offset against the PET. This in turn means that there is no availability of NRB to offset against the CLT (charged at 40%) following death.

S3A merely provides that when calculating IHT on a chargeable transfer any PET made within (ie prior to) 7 years thereof is simply ignored; but such PET is not to be ignored if death occurs within 7 years and it then (in your example) becomes the first transfer (the CLT then becoming the second transfer).

On a PET becoming chargeable the provisional exemption initially granted to it is in fact then lost retrospectively. Any IHT due on the failed PET is due within 6 months of the date of death (s226(3A)); similarly re additional tax on a CLT where death occurs within 7 years (226(3)(a)).

Malcolm Finney

8

Malcolm’s comments reflect HMRC’s view at IHTM14573 (IHTM14573 - Lifetime transfers: the charge to tax: additional charges: cumulation - HMRC internal manual - GOV.UK (www.gov.uk))

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

9

The example is not the same as mine. In my example the failed PET preceded the CLT. In IHTM14573 the CLT precedes both failed PETs. Although a PET precedes the CLT it is successful so does not cumulate.

Jack Harper

Malcolm’s comments reflect HMRC’s view at IHTM14573 (IHTM14573 - Lifetime transfers: the charge to tax: additional charges: cumulation - HMRC internal manual - GOV.UK (www.gov.uk))

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

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Previous Replies

jack:

Is that your view Malcolm?

Yes that is my view. I don’t have any problem re retrospectivity as prescribed in the legislation.

The death within 7 years brings the PET into charge and as there are no earlier CLTs there is a full NRB to offset against the PET. This in turn means that there is no availability of NRB to offset against the CLT (charged at 40%) following death.

S3A merely provides that when calculating IHT on a chargeable transfer any PET made within (ie prior to) 7 years thereof is simply ignored; but such PET is not to be ignored if death occurs within 7 years and it then (in your example) becomes the first transfer (the CLT then becoming the second transfer).

On a PET becoming chargeable the provisional exemption initially granted to it is in fact then lost retrospectively. Any IHT due on the failed PET is due within 6 months of the date of death (s226(3A)); similarly re additional tax on a CLT where death occurs within 7 years (226(3)(a)).

Malcolm Finney

10

I do have difficulty with retrospectivity. In my example, on your analysis, the transferees of the CLT and the DT trustees become liable after nearly 7 years to pay tax by reference to an earlier transfer by the deceased which they may not know about, seemingly have no right to know about unless actually informed, and which HMRC do not know about either until after the death.

Jack Harper

11

The “not knowing” to which you refer would apply to a simple PET where the donor dies 7 years later; the donee who has primary responsibility to discharge any IHT on the PET due to death may be totally unaware that the deceased had died. The donee of a CLT may also not know the deceased subsequently died despite the primary liability falling on the donee due to death.

Where a PET has been made by a settlor who dies within 7 years, as I state above, recalculation of IHT on creation of the settlement (and trust charges) is necessary. It is because of this risk of recalculations that the trustees should seek to protect themselves from any consequent IHT charges which may fall on them due to the recalculations.

Malcolm Finney

12

My interest in this thread is linked to friends and former clients who have made huge PETs and now wish to use BPR to transfer assets to RPTs, while stocks last!
.
The Counsel of Perfection has always been: make your CLTs (with or without BPR) before you make your PETs. This thread and these actual situations have caused me to question the thinking behind this strategy.

Malcolm, while I do not dispute that you may be right, and that it is certainly prudent to follow your opinion on a worst view analysis, I have offered a careful alternative analysis based on a literal interpretation of the statute, reinforced by a prayer in aid of its avoiding retrospectivity. Do transferees, especially trustees, make provision to protect themselves from supervening IHT charges caused by failed PETs by withholding funds or taking indemnities from beneficiaries on making capital distributions? Do they routinely interrogate settlors as to their PET history before accepting office? My experience indicates that this simply does not happen. Of course, that does not refute your view. But an a priori repugnance to genuinely retrospective tax charges (not merely retroactive) is surely to be given at least some credence if an alternative construction is tenable.

You have not however either challenged the specific flaws in my argument, or advanced your statutory basis for your own view, nor even drawn attention to any HMRC pronouncement indicating what their view is, which would be a high water mark whether one agreed with it or not. Paul did make reference to IHTM but I do not see an example there of my precise factual matrix.

Just because my analysis runs counter to received wisdom (if it be so) or that my posited facts are at the extreme end of the spectrum of 6 years and 364 days, my analysis is surely not to be dismissed merely by contrary assertion, or recourse to what everyone has always thought hitherto, or that it would have been better for the client to have ordered his transactions in a different sequence. The correct analysis of the statute must serve with equal efficacy whether the transactions are spread over the maximum period before death or just a few initial days.

The key issue to my mind is a practical one for all forum members who do or might find themselves in this position. Has anyone had a client who has made a big failed PET before a CLT or is at risk of doing so? I have not and I am uncomfortable with the potentially retrospective effect of a PET that may fail in due course on a later CLT, especially where BPR will be available on entry into a DT but may then cease to be available, due to changed facts or legislative action, by the time a future chargeable event occurs.

Jack Harper

The “not knowing” to which you refer would apply to a simple PET where the donor dies 7 years later; the donee who has primary responsibility to discharge any IHT on the PET due to death may be totally unaware that the deceased had died. The donee of a CLT may also not know the deceased subsequently died despite the primary liability falling on the donee due to death.

Where a PET has been made by a settlor who dies within 7 years, as I state above, recalculation of IHT on creation of the settlement (and trust charges) is necessary. It is because of this risk of recalculations that the trustees should seek to protect themselves from any consequent IHT charges which may fall on them due to the recalculations.

Malcolm Finney

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Previous Replies
I do have difficulty with retrospectivity. In my example, on your analysis, the transferees of the CLT and the DT trustees become liable after nearly 7 years to pay tax by reference to an earlier transfer by the deceased which they may not know about, seemingly have no right to know about unless actually informed, and which HMRC do not know about either until after the death.

Jack Harper

The example is not the same as mine. In my example the failed PET preceded the CLT. In IHTM14573 the CLT precedes both failed PETs. Although a PET precedes the CLT it is successful so does not cumulate.

Jack Harper

Malcolm’s comments reflect HMRC’s view at IHTM14573 (IHTM14573 - Lifetime transfers: the charge to tax: additional charges: cumulation - HMRC internal manual - GOV.UK (www.gov.uk))

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

–
Previous Replies

jack:

Is that your view Malcolm?

Yes that is my view. I don’t have any problem re retrospectivity as prescribed in the legislation.

The death within 7 years brings the PET into charge and as there are no earlier CLTs there is a full NRB to offset against the PET. This in turn means that there is no availability of NRB to offset against the CLT (charged at 40%) following death.

S3A merely provides that when calculating IHT on a chargeable transfer any PET made within (ie prior to) 7 years thereof is simply ignored; but such PET is not to be ignored if death occurs within 7 years and it then (in your example) becomes the first transfer (the CLT then becoming the second transfer).

On a PET becoming chargeable the provisional exemption initially granted to it is in fact then lost retrospectively. Any IHT due on the failed PET is due within 6 months of the date of death (s226(3A)); similarly re additional tax on a CLT where death occurs within 7 years (226(3)(a)).

Malcolm Finney

Malcolm’s comments reflect HMRC’s view at IHTM14573 (IHTM14573 - Lifetime transfers: the charge to tax: additional charges: cumulation - HMRC internal manual - GOV.UK (www.gov.uk))

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

13

I cannot agree with your interpretation and inter-action of ss3A and 7, in particular you state “My view is that there is no retrospection because of s3A(5)”. All that s3A(5) does is to state that initially a PET is assumed to be an exempt transfer at the date it is made; no more no less.

If, however, death occurs within 7 years the initial exemption granted no longer applies as the transfer then falls to be chargeable. It would seem to
naturally follow that the transfer becomes chargeable on the date it was originally made (in a sense is reclassified at that time); or, to put it another way, the initial treatment as exempt is retrospectively lost. There is no logic that in your example once the PET becomes chargeable it no longer is the first transfer as that, you suggest, becomes the CLT.

The term “potentially exempt” would suggest that the transfer at date X may not, in the event, retain its exempt status and may thus be reclassified as chargeable at date X.

Malcolm Finney

14

I just find it hard to see how a CLT can be the “first chargeable transfer” in s7(1)(a) for up to 6 years and 364 days, and be initially returned as such and any tax paid, for it to later cease to be the first because the transferor dies.

There is a statutory provision which indirectly supports your view, namely s199(2). This makes the deceased’s PRs a liable person for the tax not only on the failed PET itself but for that additional tax becoming chargeable on later CLTs of the deceased made within 7 years of it. I regret that this operation of the charge to tax is not spelt out in terms in the statute, logically in s3A, and even more that IHTM does not appear to include an example of a PET failing with the consequent charge or additional charge on one or more CLTs; and an indication of how an amended return is to be made as forms IHT100 and the relevant event form will already have been submitted, reporting the wrong liability but not carelessly or deliberately.

You dismissed my earlier reference to s240(2) but it may well be that the earlier return (“account”) was submitted (“delivered”) precisely in the circumstances there contemplated. I do not have direct knowledge one way or the other but I have never heard anecdotally that HMRC has accepted a form IHT100a c or d, and the tax agreed to be chargeable on the event. on the specific proviso that an earlier PET (which they themselves choose not to be told about until it becomes chargeable) might yet fail.

It is the duty of PRs to enquire about past PETS but they will invariably be covered by s204(1). See IHTM30044. Not so trustees under s204(2); indeed they will invariably be caught red-handed. Presumably HMRC may have to issue a notice of determination and collect from others within s199(1). S204(8) makes PRs the ultimate default target fot tax on a PET but the subject-matter of a PET and even of a CLT is unlikely to have ever been received by them or to have been properly receivable but for their neglect or default. s204 gives HMRC a right of recovery against (broadly) recipients of the taxable property regardless of fault: IHTM30042. Given that HMRC regard it as their duty to collect every last penny, this is hard and query a bankruptcy petition? You will not find much guidance at https://www.gov.uk/hmrc-internal-manuals/debt-management-and-banking/dmbm685210. Timeo Danaos et dona ferentes, PET lovers!

Jack Harper

The “not knowing” to which you refer would apply to a simple PET where the donor dies 7 years later; the donee who has primary responsibility to discharge any IHT on the PET due to death may be totally unaware that the deceased had died. The donee of a CLT may also not know the deceased subsequently died despite the primary liability falling on the donee due to death.

Where a PET has been made by a settlor who dies within 7 years, as I state above, recalculation of IHT on creation of the settlement (and trust charges) is necessary. It is because of this risk of recalculations that the trustees should seek to protect themselves from any consequent IHT charges which may fall on them due to the recalculations.

Malcolm Finney

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Previous Replies
I do have difficulty with retrospectivity. In my example, on your analysis, the transferees of the CLT and the DT trustees become liable after nearly 7 years to pay tax by reference to an earlier transfer by the deceased which they may not know about, seemingly have no right to know about unless actually informed, and which HMRC do not know about either until after the death.

Jack Harper

The example is not the same as mine. In my example the failed PET preceded the CLT. In IHTM14573 the CLT precedes both failed PETs. Although a PET precedes the CLT it is successful so does not cumulate.

Jack Harper

Malcolm’s comments reflect HMRC’s view at IHTM14573 (IHTM14573 - Lifetime transfers: the charge to tax: additional charges: cumulation - HMRC internal manual - GOV.UK (www.gov.uk))

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

–
Previous Replies

jack:

Is that your view Malcolm?

Yes that is my view. I don’t have any problem re retrospectivity as prescribed in the legislation.

The death within 7 years brings the PET into charge and as there are no earlier CLTs there is a full NRB to offset against the PET. This in turn means that there is no availability of NRB to offset against the CLT (charged at 40%) following death.

S3A merely provides that when calculating IHT on a chargeable transfer any PET made within (ie prior to) 7 years thereof is simply ignored; but such PET is not to be ignored if death occurs within 7 years and it then (in your example) becomes the first transfer (the CLT then becoming the second transfer).

On a PET becoming chargeable the provisional exemption initially granted to it is in fact then lost retrospectively. Any IHT due on the failed PET is due within 6 months of the date of death (s226(3A)); similarly re additional tax on a CLT where death occurs within 7 years (226(3)(a)).

Malcolm Finney

Malcolm’s comments reflect HMRC’s view at IHTM14573 (IHTM14573 - Lifetime transfers: the charge to tax: additional charges: cumulation - HMRC internal manual - GOV.UK (www.gov.uk))

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals