S.8J IHTA 1984 – “inherited” and revocable IPDI

Trusts Discussion
1

I have an estate whereby the deceased’s will leaves the residuary estate on discretionary trust. As it stands the property would not be treated as inherited by direct descendants for the purposes of the RNRB. The executors/ trustees intend to apply for the RNRB by appointing interests to direct descendants within two years of death.

My issues are that the beneficiaries (all direct descendants) do not yet know how the estate will ultimately be distributed owing to uncertainty as to the total estate value and application of a foreign Will. We have urgent time pressure in relation to a property sale, so an absolute appointment cannot yet be agreed.

My approach:-

  • Within two years of death, the trustees appoint a life interest intended to qualify as an IPDI in favour of one or more direct descendants.

  • That life interest is revocable to give flexibility.

  • It is contemplated that:

    • the IPDI may later be revoked, and

    • the property (or sale proceeds) may then be appointed absolutely to direct descendants (potentially different beneficiaries), also within two years of death.

Questions

1. For the purposes of s.8J IHTA 1984, does a direct descendant “inherit” the property where they become beneficially entitled owing to an IPDI which is subject to a power of revocation?

2. Moreover, would s.8J(4) apply in these circumstances so that the “inherited” condition for the RNRB is met, notwithstanding the revocable nature of the interest?

3. Does a later appointment change anything even if the RNRB has already been secured?

4. Is the position affected where, at the time the IPDI is created:

  • there is an expectation or intention that it will be revoked, and

  • the property will ultimately pass to other direct descendants?

Any other guidance or suggestions would be highly appreciated.

2

My answers:

1 Yes

2 Yes

3 No

  1. My view on 1-3 indicate that I also think that only the GAAR could strike down the plan. So would it be reasonably regarded as a reasonable course of action? If not, is there a defence.

Revocable life interests in a DT, particularly as it is an RPT for IHT, are often employed for income tax purposes to channel income to an IIP beneficiary on a temporary basis and so avoid the 45% charge, pool, and repayment claims fandango. Crucially the creation and termination of such a NQIIP involve no IHT exit charge.

HMRC have long accepted the efficacy of this for both taxes. I consider it is doubly reasonable and that it would be hard for HMRC to challenge a defence based on their settled practice just because a different aspect of IHT was germane, although it does confer a tax advantage rather than avoiding a tax disadvantage.

It is something the deceased could have done by Will and the statutory purpose of s.144 and s.142 is precisely to allow a testator the flexibility of delegating a range of decisions in the light of post-mortem circumstances within a limited timeframe.

The taxpayer cannot be blamed for the Legislature’s entirely arbitrary 2 year limit in s.144. The trustees here seem to face the prospect of being out of time if the other uncertainties relevant to their decision-making turn out not to have been resolved before the expiry of the 2 year period and when that later occurs to be then unable to act with the same IHT treatment.

Nor is the appointment a free lunch. If the trustees revoke the IIP there will be substantive tax consequences: termination of an IPDI. This is so regardless of the probability of that occurring or the current state of the trustees’ subjective expectations of that. It helps that trustees should not fetter their future discretionary powers and so they must not agree to do so.

It is not a plan as provocative to HMRC as creating an IPDI for a surviving spouse, which reduces the taxable estate of the deceased and on termination after a “decent interval” triggers a PET which may never become chargeable in the event.

The length of a decent interval is always elastic and a matter of judgment. However short, it will help if it is, as it should be, a proper decision of the trustees alone, untrammelled by irrelevant reasons or ignoring relevant reasons and not pursuant to a bargain with one or more beneficiaries. It is reasonable to canvass the intended appointee, to ensure they will not disclaim, as a short QIIP is not without detriment to them given the PET/CLT consequence of a later revocation disproportionate to any net income benefit. Ideally some income will actually be paid to the appointee to seal off disclaimer and with it any sham accusation. Furthermore any decision to revoke should be a proper trustee decision evaluated afresh at the time of contemplation on the basis that it is genuinely not a foregone conclusion.

I would not expect HMRC to challenge the essential legal validity or GAAR consequences of the strategy provided the QIIP owner receives some income and the interval until revocation is not so short as to appear to the tax officer on the Clapham omnibus a urine extraction project.

Jack Harper