My client has a life interest in an English settlement made before 2006. The sole material asset is a freehold property with a base cost of c£50k and a current value of c.£2.5m. The property is occupied by the life tenant’s daughter and has not been the life tenant’s PPR for many years-she has a separate property which is her PPR. On my client’s death her two children will receive interests in possession.
The concern is that if we extract the property from the trust a CGT liability will arise; if we do nothing there will be IHT on the life tenant’s death. She is now in her 70s but in good health.
The proposed solution is that the life tenant will transfer her interest to the two children. By virtue of s.76 TCGA there will be no CGT and it appears that HMRC accept that the transfer will be a PET so that if the life tenant survives 7 years there will be no IHT on the gift. As it will then cease to be in her estate there should be no charge on death either. Any comments?
You say “it appears that HMRC accept that the transfer will be a PET”, where does that “appear”?
Paul Davidoff
New Quadrant
I am surprised HMRC think the assignment of the life interest is a PET. The assignee acquires an interest for the life of the assignor (interest pur autre vie) which will terminate on the death of the assignor but because acquired after March 22 2006 does not then constitute a chargeable event: s 52(2A) IHTA.
That would seem to suggest that s3A(2) is not in point as the assignee’s estate is not increased by the acquisition of any property or increased in value. The life interest is arguably property acquired by the assignee and may be of significant value but the disposal by the assignor is treated “as if at that time he had made a transfer of value and the value transferred had been equal to the value of the property in which his interest subsisted” and the life interest itself is not “the property in which his interest subsisted” but a different property: ss. 51(1) and 52(1).
Jack Harper
It appears in IHTM 04084 where there is a reference to an “actual or potential” charge where a lifeinterest comes to an end.
No reference made here to a PET. Where a pre-2006 life interest terminates with the effect that one or more individuals then become entitled to the trust fund itself that is indeed a PET. That is not what happens when the life interest is assigned in the life tenant’s lifetime.
Jack Harper
They have two options:
- Make an irrevocable appointment to the new beneficiary.
This would convert the trust into a bare trust, with the original beneficiary making a PET. Therefore there would be no IHT periodic or exit charges in the future and there would be no issues of a gift with reservation (GWR). - Make a revocable appointment, excluding the original beneficiary which removes potential GWR. But this would bring the trust into the RPR, meaning that the original beneficiaries are making a CLT and the trust could suffer periodic and exit charges.
Francesca’s suggestion is based on the assumption that that the trustees have a suitable power of appointment or advancement or can use the power of advancement in s32 TA 1925. I have never seen the last used revocably and an express power will usually provide specifically that it may be so used.
An irrevocable appointment would trigger the capital gain. If revocable arguably not as the beneficiary would not apparently become absolutely entitled and if it was later made irrevocable hold-over relief under s260 would apply if as she says the trust was now in the relevant property regime. However a revocable appointment must satisfy the conditions for a PET namely that it must increase the recipient’s estate or increase its value. Arguably even a revocable appointment does that (though I very much doubt it) but passes to the transferee the risk of subsequent revocation .
If the true deal is to make a revocable appointment and then make it irrevocable later it raises difficult questions about whether associated operations or Ramsay or the GAAR would apply, even where the transferee runs a genuine risk, if in practice the two events are virtually certain to occur in sequence. The risk is that the trustees could revoke and as well as the obvious practical consequences there may be tax consequences.
For CGT revocation may be a non-event as the asset seems to remain settled property of the same settlement at all times. For IHT, if it is a correct analysis that the appointment caused the asset to become part of the transferee’s estate (in order to found the PET argument), it leaves that estate on revocation; but not apparently by a “disposition”, as it does so involuntarily, so bizarrely not by a transfer of value that could be a chargeable transfer. If the strange logic of that suspicious outcome is reverse engineered it must cast serious doubt on whether a revocable appointment really has the effect that it needs to qualify as a PET.
The dilemma here is that the CGT exposure is substantial unless either the asset comes out with hold-over relief or it remains in the same settlement until the life tenant dies and s72 TCGA washes the gain but IHT is chargeable. I am not able to to see a way of the life tenant making a certain PET which will not trigger the capital gain.
Jack Harper
I’m still mulling over Francesca’s very interesting note but I’ve looked again at the basic question as to whether we have a PET and despite the very high authority of those against it, I still think it is and think it worth setting out the statutory trail on which I rely.
S.51 deals with disposals of IIPs created pre 2006. It enacts that they are not as such transfers of value but are within s.52 and are taxed as if the IIP is brought to an end.
S.52 treats the bringing to an end of IIPs as effectively a deemed transfer of value.
S.3A defines PETs as transfers of value. 1(c) requires that the transfer is a gift to another person and 2(a) requires that the interest is in the estate of another person. That surely must be the case; if the transferee still owns the interest when they die and the transferor life tenant is still alive then surely the interest is part of the estate of the transferee.
S.3A 6 then excludes deemed transfers from being PETs except S.52 deemed transfers unless the interest is within S5(1B) which relates to interests not originally created with gratuitous effect-my case was one of an ordinary family settlement which was clearly gratuitous.
Thus it seems that I am within the clear exception from the normal rule that deemed transfers cannot be PETs.
Any further comments very gratefully received.
Francesca-thank you for your note. The first option is simple but would, I assume you agree, be a CGT disposal by the trustees as the property leaves the trust.
The second alternative is more interesting. I’m not sure why there would be a GWR on my version-if the original life tenant irrevocably assigns her interest to the children she doesn’t reserve any benefit unless all her children and grandchildren pre-decease her in which case there would be a reversion-but we could put in a long stop charity to deal with that unlikely event.
i wasn’t thinking of an appointment by the trustees at all but a simple deed of gift to the children of her interest by the life tenant; certainly the legislation seems to envisage that such transfers can be made and I don’t believe the trust deed in this case precludes the life tenant from alienating her interest, so that the property remains in the trust and the trust remains alive so that when the life tenant dies the children take the property as the remaindermen. I suppose that this brings forward the time when ten-yearly charges arise but that is likely to be much cheaper that a CGT charge.
My interpretation of s3A (6) and 6(A) is to preserve the possibility of a PET where the disposal (and deemed termination) results in the trust property then vesting in the estate of one or more individuals. The assignment of a life interest does not do that because although s51 creates the fiction that the disposal of it is the termination of it, so s52 imposes a charge, there is no PET unless that event also results in trust property vesting in an individual’s estate. The s51 fiction does not go that far.
Instead when the life tenant dies the assignee’s new interest in possession will come to an end but because acquired after 22 March 2006 will not result in a charge to tax: S52(2A). A chargeable event e.g. 10 year anniversary or interim distribution etc can then arise under the RPT regime at a maximum effective rate of 6%. So double economic taxation is possible because the assignment was not a PET and the later RPT charge will probably relate to some part of the value charged earlier.
Furthermore the CGT may be postponed because under s76(1) TCGA the assignment is not treated as a disposal by the life tenant and the settlement continues with no one becoming absolutely entitled at that point. But if later the interest pur autre vie ends on the life tenant’s death and someone then becomes absolutely entitled there will be a charge under s71 and arguably s72 will not wash the gain because the death is of the assignor and not of the person currently entitled to the interest in possession which terminates. S72 (2) makes it clear that even where there is a chargeable disposal by the assignee, because he acquired for consideration, this is without prejudice to any concurrent s71 deemed disposal by the trustees. CGM38040 says “The consideration for such a deemed disposal is the market value of the property received by the beneficiary less any CGT charge on the trustees under TCGA92/S71(1)”, a reasonable interpretation, but continues “The charge on the beneficiary is quite separate from the deemed disposal by the trustees”.
So the gain may be postponed because of the general rule that the termination of a life interest in a continuing settlement is a non-event. And when the pur autre vie interest terminates on the life tenant’s death there will be no charge unless either then or later absolute entitlement occurs but there will be no washout of gain under s72 as there would have been if no assignment had been made.
So no PET and a CGT own goal.
Jack Harper
Dougal,
There seems to be a bit of confusion over the precise nature of the children’s interests. In the initial post, you stated that the children would attain interests in possession on their mother’s death but this posting suggest that they are actually the remaindermen. Which is it?
If the children’s interest in remainder are contingent on them surviving their mother then the assignment by the mother to them of her life interest will be a chargeable lifetime transfer resulting in immediate IHT, periodic charges and exit charge on mother’s death for the reasons that have previously been set out.
If the children’s interest in remainder are vested, then the assignments will be PETs by mother as the life interest and remainder interests will merge.
Graeme Lindop
Probate Consultant
Coles Miller Solicitors LLP
I agree with Graeme’s last sentence about merger but we were told interests in possession followed the life interest. These could be released as a preparatory move without tax consequences. But even if a PET can be conjured up there will be a CGT charge under s71 on the trustees.
Jack Harpert