I have been approached by potential clients who put their home (value circa £1.2million) into lifetime trusts (50% each) with a will writing company a couple of years ago. They are only in their early 60’s and in good health.
Aside from all the usual deprivation issues, my immediate concern is the tax implications. They do not appear to have received any advice on the tax implications and I am awaiting sight of paperwork provided to them at the time.
I am obviously concerned about ongoing charges to IHT (periodic and exit) but was also wondering about the chargeable transfer on setting up the trust - would this be £0 on the basis that it is a GROB or should they have paid a 20% charge on the amount over their NRB’s?
If it is £0 - would this mean that they could wind up the trust by appointing the asset back to themselves with a zero rated exit charge
The original settlement of the 50% interest is a chargeable lifetime transfer (CLT) charged at 20% on excess of value above the settlor’s nil rate band (NRB).
If a reservation of benefit arises (eg settlor continues to live in the property) the 50% is still deemed to have been given away but, on death, is deemed to be clawed back into the settlor’s estate to calculate IHT on the deceased’s estate.
However, in addition on death, additional IHT may become payable on the CLT. Thus, a double tax charge may arise on death which is relievable under regulations (SI 1987/1130) Reg 5).
Thank you Malcolm. The lifetime and death charges were as I expected. I was just wondering if the CLT could be argued to be £0 on the basis that it is calculated on the loss in value to the estate of the settlor, which in this case due to the GROB would be £0.
If not, are there any other suggestions to help the clients undo something that they clearly should not have been advised to do in their circumstances.
I’m not aware of any argument that the ToV is reduced by a GROB. It’s a straightforward chargeable transfer of the full value and therefore (to my mind), a negligence claim.
The alternatives would be to try to invalidate the trust as a mistake (which requires a Court order- I forget the current state of the law on mistakes as to tax consequences) or, just possibly, an argument that the clients retained so many powers under the trust deed that it is a nullity. The last may be optimistic but I believe some of the trust deeds being sold are horrific. That would probably also require an Order.
A firm letter to the Will Writer and their insurer (if any) is likely to be order of the day.
Thank you Andrew - that is what I feared. I just didn’t want to wade in with the voice of doom if there was actually a better outcome that could be achieved.