Trust powers of appointment - tax planning

Trusts Discussion
1

We act for the trustees of a discretionary trust created in the 1960s. An overriding power of appointment was exercised in 1976 for the benefit of a single beneficiary (B).

This 1976 appointment gives an IIP to B on a Protective Trust with power for the trustees to advance capital to her. It additionally gives B the power to make an appointment of her remainder interest by deed or will for the benefit of her issue, with a default provision for her sole (now adult) child. The trust is still within the perpetuity period, this has been checked by Counsel.

B is not entirely neurotypical (hence the protective trust) and is in her 80s but has the capacity to make a will. Her existing will appoints her remainder interest for the benefit of her adult child absolutely. There are two very young grandchildren.

The trust assets are (i) a house which is the deceased’s sole residence and (ii) a share portfolio.

We are considering tax planning options. There are a couple of points I am having difficulty with, as follows:

(a) B’s existing will appoints her remainder interest absolutely for her adult child on her death. Will the RNRB be available? – it appears so under s8J (5) IHTA but this is not a straightforward IIP.
(b) If a RPT arises on B’s death (for example because she amends the existing appointment to provide for her grandchildren), how will the periodic and exit charges be calculated? (Who will be treated as settlor and from what starting point will the TYA be calculated)?

I appreciate it may be hard to comment without sight of the deeds, but I am grateful for any guidance.

2

Hi Tessa,

I agree with you that s.8J(5) IHTA applies. I can’t see any reason it would not as a protective trust clearly contains an IIP unless and until a divesting act occurs.

Regarding the creation of a RPT, one could leave the assets to the grandchildren on bare trust and this avoid the creation of a RPT. Likewise, you could give them a life interest and also avoid the RPT regime. Of course, if you do wish to create an interest contingent on the grandchildren reaching a certain age, then it will be an RPT. I can’t see any reason why the TYA charge would not be calculated from the date of Bs death nor can I see any reason why she would not be the settlor? Is there a particular reason you thought the answers may be different?

Yours,
The Legal Beagle

3

Thank you for this.

In relation to your second point, the beneficiary has a power of appointment exercisable in her will. This power of appointment derives from the 1976 appointment, which in turn derives from the original trust created in the 1960s. Having revisited the point today, I believe it is the original 1960s trust which will be the starting point for calculating the TYA charges and anniversary dates. The 1976 resettlement will be ignored for these purposes (s81 IHTA84). I cannot see that B will be the settlor, although of course your analysis would be correct if she was creating a new trust in her will.