I have a query relating to both IHT and Income tax on the termination of an IIP last January 2020
Income tax – does a return need to be made to for the tax year to the date of death or for the whole of the tax year in which the death occurred? If the former how does the remainder of the tax year need to be disclosed? Moving forward as the trust is still in the process of being wound up how is the income disclosed in the tax returns? Clearly the income belongs to the remaindermen and I need to prepare appropriate R185Ts for each of them
As an aside does the portfolio need to now be switched from a Discretionary Managed basis to an Instructions only basis or are the trustees able to continue on a Discretionary Basis until the trust is fully wound up?
Inheritance tax – IHT has been calculated by reference to the deceased’s free estate and cumulated with the value of the trust and then apportioned accordingly between the estate and the trust assets. If there are any losses on sales during the year on the shares within the portfolio of each of the free estate and the assets in trust is it only the free estate executors who can claim loss relief for losses within the free estate or can the trustees also claim loss relief for losses within the trust? If the latter, is the respective loss apportioned according to the loss for each of the trust and the free estate or is the overall loss across both elements established and then apportioned pro rata across both?
With regards to the free estate there is a property which is being sold at a gain and as HMRC have accepted dod values this has been appropriated to the residuary beneficiaries. There is also a house and various pieces of land within the trust and these are going for sale by auction next month. I am trying to determine if these should be appropriated to prevent a gain. However, I may be being stupid here as I need to know whether this would be a gain for the trustees and taxable as such or whether in fact because the trustees hold absolutely for the remaindermen they do not need to do this? Do the trustees continue to have the annual allowance for CGT of one half of the individual allowance or, because the trust is effectively at an end, what do they have?
I have picked up a somewhat complex file and am trying to ascertain if things need sorting out before we finalise the IHT and the encashment of funds and also how to go about the Income tax returns moving forward.
Unless the trust income was mandated to the interest in possession beneficiary the trustees are obliged to file a return re the trust income up to the date of death. On the beneficiary’s death, the trustees then hold the trust property on bare trust for the remaindermen in which case it is for the remaindermen to file on their own behalf’s re income post beneficiary’s death.
As the remaindermen are absolutely entitled as against the trustees from the beneficiary’s death it would seem the trustees must take instructions from the remainderman re the portfolio management.
Prior to the beneficiary’s death, any capital losses arising from share disposals held by the beneficiary are allowable capital losses for use against capital gains made by the beneficiary in the tax year of death and where necessary can be carried back for offset against gains arising in the three tax years prior to death.
Capital losses arising post death would prima facie be those of the executors.
With respect to capital losses made by the trustees (ie made prior to the beneficiary’s death) these are offsettable against trust gains of the same tax year (but not further tax years as there will be no such trustee gains). Unrelieved losses are not transferable for use by the remaindermen unless such losses arise on the deemed sale and re-acquisition of the trust assets on the beneficiary’s death (but are restricted as to use by the remaindermen).
I would have thought that the portfolio would have been split so as to be in a position to clearly identify whether a sale was made by the deceased (when alive) or by the trustees. It should be a matter of record as to the base cost of the shares purchased for CGT purposes, the number of shares so purchased and whether those shares were purchased by the deceased or the trustees. Any share sale would then be that of the deceased (prior to death) or the trustees depending upon who gave the instruction to sell.
If all the shares whether purchased by deceased or trustees were simply lumped together and managed on a discretionary basis did not the managers still not know when a sale took place whether the sale was made on behalf of the deceased or trustees?
If the records are that bad so sales cannot and were not allocated then presumably one approach might be as follows: shares purchased by deceased, say, 100. shares purchase by trustees 200. Say then 60 shares were sold. 100/200ths of 60 allocated to deceased and 200/300ths of 60 then allocated to trustees. The shares sold would then be allocated against shares purchased on a FIFO basis, the respective base costs then be allocated.
As indicated above, on the beneficiary’s death the trust property is held by the trustees qua bare trustees for the remandermen. In which case any gain/loss on future disposals are this of the remandermen not the trustees.
In the tax year of death of the beneficiary, the trustees are entitled for that tax year to 50% of the annual exempt amount available to individuals. This available for offset only against trust gains not against gains made post the beneficiary’s death (when the trustees are only bare trustees).
If, upon termination of the IIP, the trust fund is absolutely distributable HMRC will deem the trustees to be holding upon bare trusts for the remaindermen immediately upon the death. If there are any legacies payable on termination of the IIP, if it is necessary to realise any of the trust assets, any gain will be taxable on the trustees, and not the remaindermen.
With regard to the 4 questions raised:
Income tax – the trustees are responsible only for the income to the date of termination of the IIP, so that they only need to make a return for that period. As they will receive the post-termination income as bare trustees for the remaindermen, they will need to provide the remaindermen with a statement of income for inclusion in their personal income tax returns.
Investment management – as the trust has terminated, the discretionary mandate should also have been terminated. The investments are no longer held for the trustees but instead for the remaindermen. Ongoing investment management cannot be provided until the investment managers have complied with their regulatory requirements, including understanding the individual needs of the remaindermen. If any investment changes have taken place since the termination of the IIP, these will be disposals and acquisitions by the beneficiaries, not the trustees.
Loss on sale relief (s.179 IHTA 1984) can be claimed in both (or either) of the trust fund and the estate. Any gain on sales within the estate will not impact the loss claimed within the trust, and vice versa. The relief reduces the total IHT payable before apportionment between the taxable titles.
As identified in the opening words, above, the trust fund is deemed to be held upon bare trusts for the remaindermen upon the termination of the IIP. Accordingly, any gain arising on a post termination sale, whether of land or investments, is assessable to CGT on the beneficiaries, not on the trustees. The beneficiaries will need to be aware of their reporting obligations under Schedule 2, Finance Act 2019.
The above comments are based on the IIP being either a pre-22 March 2006 IIP or an IPDI (if post 21 March 2006). If any other form of IIP, the comments at 3 and 4 may not apply.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals