I am struggling to ascertain who is responsible for paying some of the inheritance tax due following the death of a life tenant and would welcome any views:
a) Miss X created a lifetime settlement in 1988 and gave herself a life interest, which was therefore a GROB. She also gave the trustees discretion to advance capital to her.
b) Miss X continued to receive an income from the trust until her death in 2021.
c) Due to the value of her personal assets and the assets in the trust, IHT was payable following Miss X’s death.
HMRC have issued the usual calculations advising that the IHT should be apportioned between the free estate and the trust.
However, I am wondering whether or not, on this occasion, the IHT should in fact all be paid from the life tenant’s estate, as the creation of the trust was a GROB.
I suspect it should be apportioned between the estate and the trust but, as the beneficiaries are different, I want to be absolutely sure and can’t seem to find the answer anywhere. I would appreciate any thoughts.
I think that HMRC are right because the property subject to the reservation is in fact comprised in the death estate by virtue of the deceased’s pre March 22 2006 interest in possession. The Trustees are liable to the tax under s200(1)(b) IHTA as trustees and would be under (c) as the GROB property is vested in them. But s 102 (3) FA 1986 contains the magic words and provides that GROB property is not deemed to be part of the estate if it actually forms part of it as it does here under s49(1). This prevents double taxation and in your case consequently ignores the GROB property as regards apportionment of the tax payable.
I note the life interest coupled with the power to advance capital to the life tenant. It makes me wonder whether the trust was valid in the first place; it certainly seems vulnerable to a trustee in bankruptcy. As the beneficiaries of the estate and the trust are different it could be at risk of the former arguing that the trust was a sham. HMRC are unlikely to raise the issue, as it does not affect the amount of tax, but it could affect property rights and the incidence of the tax. In the case of Hitch v Stone  EWCA Civ 63, where they did raise it, Crown Counsel submitted that “there is a crucial difference between an artificial transaction and a sham. In the former case, the parties intend to carry out the transaction (although it may be an unnecessarily complex way of achieving the desired result). In the case of a sham the parties do not intend to carry out the transaction at all”. Such a trust is surely not to be recommended as the evidence as to the settlor’s and trustees’ common intention may be borderline.
I agree with Jack’s analysis as to persons liable for IHT on death.
The key, as Jack points out, is FA 1986 s102(3) under which the assets subject to the ROB are not treated as part of the deceased’s estate if they already form part of it (as they do under s49).
Re his other interesting comments I would in principle be less concerned. My recollection, suspect as it often is, is that the facts would need to reveal some element of collusion between settlor and trustees at the beginning of any structuring for there to be a sham.