We have a client who in 2002 set up a trust, and then transferred her residence into the trust.
She continued to live in the house, rent free, until it was sold in 2023. The proceeds were left in the trust and the interest from the savings arising paid to her.
She died in 2024.
The trust’s terms were:
While she was alive, she would be able to live in the house, rent free. If sold the income should be paid to her.
When she died, the funds should be held by the trustees for her 4 sons, as beneficial tenants, in equal shares.
I think not. As you say the gift into the trust was a GROB and the reservation subsisted until the death of the client, initially in the house and after its sale by reason of her entitlement to the income from the sale proceeds.
The sale is not the problem. It can be a former qualifying interest for a downsizing addition. The problem is that the FQRI cannot be “inherited” in the straightforward manner because it or rather its sale proceeds are GROB property at her death.
But GROB property is part of the death estate for IHT so the law is forced to come up with a way that someone might be treated as inheriting it. Unfortunately it only does that for certain types of GROB. It is only regarded as inherited if the original gift was made to a person who is a direct descendant: s8(J)(6). Here the original gift was made by the deceased to trustees of an RPT not to the four sons. If she had made such a gift to them and continued to reside they would have inherited for RNRB but that would not have entitled her to reside or to income for life. A good alternative where one starts with a clean sheet is for a client to give, say, 80% of the house to her sons and make s102(B) avoid the GROB altogether; but the difficulty is that either she must pay full consideration, if she occupies alone, or if they all occupy (which is often not difficult to contrive as the sons do not have to occupy full time), the sons have to contribute proportionately to the maintenance costs to avoid a benefit to her. And she would only be entitled to 20% of the income from the sale proceeds.
If the sale occurs because she moves in with a relative or into care this may be a good result provided the sons will help her financially, if need be, out of their 80% share of proceeds and provided the original gift was not a deprivation so that money will not be at risk from care fees. Though the family may well use it for that purpose if they wish. But IHT will have been avoided if she survives the original PET by 7 years.
I suggest that if, as you expect, your client has an interest in possession at the time of her death in a trust created in 2003, even if she has continued to pay no rent, her estate will treated as including the property, so S.102(3) (FA 1986 will not apply; Therefore S.8HA(6) IHTA 1984 would apply, to enable RNRB to be enjoyed.
Ray Magill is right. Mea Culpa. I was led astray by the OP’s assertion that “It is clear that the GWR provisions apply.” They don’t, for the reason Ray gives.
When in 2003 the settlor created a settlement in which she had an initial IIP that would not have been a TOV at all and as the trust fund would have remained in her estate under s49(1) IHTA then the GWR rules would not have applied per s102(3) FA 1986…to avoid double counting.
I do not follow Ray’s reference to s.8HA(6) IHTA. The authority for the client having a FQRI and so RNRB is indeed in s.8HA but by the following tortuous route through the subsections: (2)(a) then (7)(a) back to (3)(a)-(c)(i) and finally to (4). Without (4) no downsizing addition since in the real world it is the trustees who have disposed of the house not the IIP holder.
The Settlor has a beneficial interest in possession, so S.8HA(2) applies.
Subsection (5) and (6) are relevant, to treat the coming to an end of the settlor’s IIP or a disposal by the trustees as as a disposal by the settlor.
Subsection (6) applies where the owner of the IIP disposes of it or it terminates in her lifetime: subs(5). Here she owned it until she died and it endured after the trustees disposed of the property.
In this case the settlor had a beneficial iterest in possession as the trust was established before 22 March 2006 (see S.8HA(7). There is a ‘qualifying former residential interest’. If the trustees disposes of the interest in the dwelling house, the settlor is treated as making the disposal. Doesn’t this give scope for an RNRB?
S.8HA deals with 2 different series of events each of which gives the owner (P) a qualifying former residential interest. The reason for this is that any disposal of the property will be made by the trustees and so P must be deemed to make the disposal. In each case P must own a QIIP within subsection (7) or (8). The 2 different cases depend on when the QIIP terminates
1 Here the trustees make an actual disposal but the QIIP does not terminate: subsections (3) and (4).
2 Here it is the QIIP that terminates: subsections (5) and (6). The trustees need not make an actual disposal.
In the OP the Settlor had a QIIP per (7)(a) and retained that until death. So case 1 above applied and not case 2.