The Inheritance Tax (Double Charges Relief) Regulations 1987

Trusts Discussion
1

1.1 In 2015-M makes a lifetime chargeable transfer (LCT) of a house into a Trust which is also a reservation of benefit, as although M is not a beneficiary, she continues to live in the house she has gifted to the Trust.

1.2 Early 2021-trustees appoint to D. M continues to have a GWROB, as the tracing rules trace the original gift into the hands of D.

1.3 Early 2021-D gifts the house to M. The GWROB ceases, as it is back in M’s estate and the tracing rules cease to apply. However, when the GWROB is released (ie ceases) M is treated as making a PET.

1.4 Late 2021 (or within 7 years after the original Gift) M dies owning the house.

  1. In the above scenario M dies within 7 years after the original LCT, which becomes chargeable (or at least uses the majority of the NRB on M’s death); within 7 years of the PET triggered by the release of the GWROB, so the PET becomes chargeable; and also owning the house, which is chargeable as an asset in M’s estate.

  2. Regulation 5 of the Inheritance Tax (Double Charges Relief) Regulations 1987 covers GWROB situations, and one situation covered is:

Reg 5c There has been a LCT;

5e which is a GWROB;

5f ii and a PET has arisen on the release of the GWROB; and

5gi the original property is back in the estate of the donor.

  1. The effect of the double charge relief is that HMRC does two calculations to see which gives the most tax, and ignores the one which gives less tax-taxing either the tax arising on death as a result of the original gift, or the tax arising on death as a result of the house being part of the estate on death.

  2. What I am not clear about is if, when making the comparison, the tax arising on death as a result of the original gift is based on the original LCT which is now chargeable, as well as tax on the PET, when the GWROB is released. I cannot find any examples of the situation of M dying within 7 years after both the LCT and the PET on the release of the GWROB, also owning the property. I assume there would only be a charge on either the LCT or on the PET-whichever is the higher for fairness sake, but I cannot see anything to confirm this.

  3. The problem is regulation 5g, which poses two alternatives; either the property is in the deceased’s estate (either actually or as there is a GWROB)), OR there is a failed PET, as the GWROB was released. There is no provision for the situation of the property being back in the estate (actually) AND there being a failed PET when the GWROB was released.

Has anyone got the answer?

2

I wonder if the answer is that either the original gift is taxed, or HMRC considers what tax they would get on a combination of the property both being in the estate, and being the subject of a failed PET. In the case of the latter, relief under regulation 4 would apply to the calculation-meaning only tax on the PET or the property within the estate could be charged and not both-whichever is the higher?

3

I recall seeing something around this issue a few years ago, and the outcome was that the double charge provisions applied only to avoid a potential triple charge. However, I cannot recall which elements remained subject to IHT, but there was an effective double charge. I have a feeling the charge was the higher of the LCT and the failed PET, with the property also being a chargeable asset within the estate.

D, of course, will also have made a PET and be liable for CGT on the gift to M, with a return and the CGT being payable within 30 days of the gift back

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

4

I do not believe there are any SIs or HMRC Guidance which deal with the position where more than one potential double tax charge arises.

SI 1987 only deals with where a single double tax charge arises.

Maybe one makes one comparison and whichever transaction produces the higher tax charge this is then compared with the third transaction and the higher again chosen.

Malcolm Finney

5

Thanks both-not to mention the potential fraud on the power by appointing to D, in the knowledge D is going to give to M!