Settlor interested trust and holdover relief on exit

I am looking at a settlor interested discretionary trust and considering the implications of an absolute distribution to another beneficiary.

The distribution would cause an IHT exit charge under Pt III and ordinarily that would allow holdover relief under s.260(2)(a) but I was just concerned whether relief was still available where the distribution will also be a deemed PET under s.102(4).

s.260(2)(a) allows holdover relief where the disposal:

“is a chargeable transfer within the meaning of the Inheritance Tax Act 1984 (or would be but for section 19 of that Act) and is not a potentially exempt transfer (within the meaning of that Act)”.

I think the main reason for the limitation is so that PETs which become chargeable on death are ineligible but I am not sure if they also apply to these deemed PETs. I suspect not as the deemed PET comes from FA '86 rather than the IHTA.

All assistance gratefully received.

Andrew Goodman
Osborne Clarke LLP

The problem stems from the fact the draftsman would have been better to use the word ‘that’ (or possibly ‘which’) instead of ‘and’ in the section you quote. However I think the meaning of the words you quote is made clear when you also consider the words that precede them. Paraphrasing, the legislation provides:

If … the trustees of a settlement … make a disposal … and [this] is a chargeable transfer … and is not a potentially exempt transfer [then holdover relief is available].

I would say it is reasonably clear that it is only the position of the trustees that needs to be considered in the scenario you describe. The fact the settlor is deemed to make a PET at the same time is not relevant to the nature of the transfer of value made by the trustees.

Paul Davies

I tend to agree with Paul Davies.

The issue is to identify whether the disposal by the trustees is a chargeable transfer and not a potentially exempt transfer (PET).

The fact that the settlor may be treated as making a PET is, I would suggest, irrelevant to the hold-over relief issue.

Malcolm Finney