Income tax as settlor of DGT

[caroline234]

Hi,

Thank you in advance for your help.

I am administering my mother in law's estate. She set up a DGT and I understand the IHT implications of this (gifted 3 years ago and within nil rate band). The trust is being fully surrendered and is being surrendered in the fiscal year of death and I understand therefore that income tax is charged to my mother in law (as the settlor) at her nominal rate. The DGT is a CLT, and a discretionary trust.

My question is, can I include the income tax from the chargeable event on the IHT400? Can I add this as income received and tax paid even though it became payable after death? Obviously this will have the effect of reducing the IHT liability.

Thanks.

[maths]

Under the typical DGT the structure is such that the settlor "carves out" certain rights for himself ie these rights are not settled.
The remaining rights are then settled for beneficiaries (excluding the settlor) so as to avoid any reservation of benefit for IHT purposes.

I assume the trust is UK resident.

Following the death of the settlor you indicate that the bond in the trust is to be sold precipitating a chargeable event gain. The trust is then to be terminated.

The gain is subject to income tax at the trust rate of 45% on the part of the trustees, not the settlor (who in fact is dead at the time the gain occurs).

[caroline234]

Hi

Thanks for your reply.

I think you are mistaken as the rules are different if the bond is surrendered in the fiscal year of death. I have had this verified by the provider of the bond, amongst others.

My question therefore is whether the tax on the growth can be included on the iht400 or not, as I believe the rules are different for certain types of policies?

Many thanks.

[maths]

I have had this verified by the provider of the bond, amongst others.

Did not the provider of the bond and/or the others to whom you have spoken not also advise on the point you now raise?

[caroline234]

Unfortunately not, hence my question here.

[maths]

Did mother in law on setting up the trust retain any interest under the trust (eg was she a discretionary beneficiary)?

[caroline234]

No she didn't.

[caroline234]

She only received the 5% withdrawal, which she didn't start taking for 3 years. She also did not receive any discount! The trust start date was April 2013

[maths]

At the date of death the bond had been previously settled.

The chargeable event gain is not the death but the surrender by the trustees. The taxable event thus occurs post death.

In which case, at the date of death the deceased's estate had incurred no liability in respect of the bond nor was it in receipt of any surrender proceeds.

[caroline234]

Thank you maths.

So the income tax cannot be deducted for IHT purposes but can be deducted from the estate post death (after probate and before distribution)?