Trust tax single or multiple settlements

[Bill2]

Hi Group

Does this scenario produce single or multiple settlements for IHT, income and CGT?

X sets up a single discretionary trust in 2003
An initial settlement of £3000 is made by X in 2003. Therefore the first 10 yearly IHT/periodic charges become assessable in 2013.

X completes an expression of wishes for the death benefit for his Pension A worth £50,000 to be paid to his discretionary trust if he dies. He started contributing to Pension A in 1997.

X completes an expression of wishes for the death benefit from his Pension B worth £20,000 to be paid to his discretionary trust if he dies. He started contributing to Pension B in 2004

In 2010 X dies and the trustees of Pension A and Pension B pay the death benefits to the discretionary trust.

The HMRC IHT help line has inform me this scenario will create three separate settlements for IHT, all governed by one trust deed. The three settlements will all have their own Nil rate band entitlement when it comes to the IHT periodic assessments.

That is £3000 settlement made in 2003 with the periodic charge first assessable in 2013
That is Pension A settlement deemed to have been made in 1997 with the periodic charge first assessable in 2017
That is Pension B settlement deemed to have been made in 2004 with the periodic charge first assessable in 2014

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Questions

However will this scenario also create three separate settlements for the trustees to complete yearly self assessment for Income and CGT, each with their own HMRC trust reference?

Each settlement would have
Trust CGT allowance/3
Basic Income tax rate allowance of £1000/3

Therefore there seems to be no Tax benefit to be gained by using three separate trust deeds from the start?

As I understand, if a larger (unlike £3000) settlement of cash/assets that is near or above the Nil rate band had be made, it would be beneficial for the IHT periodic assessment to make two or more separate settlements initially.

Thanks
Iain

[Loza]

I don,t think there are seperate settlements, there is one with an initial amount and two additions.
When calculating the PC the actual rate is adjusted for the period of time for which each component has been in the trust, ie there are two actual rates.
Assuming the actual rate were 6% the current value of the original settlement is multipied by 40/40
The additions would be charged at the current capital value * 6% (say) * (40-28)/40

[Lee Young]

There are three separate settlements because the two pension funds will already be held on their own discretionary trusts (irrespective of the settlement you create) with their own start dates etc. Their transfer from one discretionary settlement to another does not change this from an IHT point of view. One of my more learned colleagues will undoubtedly know the specific section of the Inheritance Tax Act that states this. I would therefore respectifully contend that Loza's answer is not correct (it would of course be correct if straightforward additions to the original trust fund had been made on the dates you state).

As regards IT and CGT there is just one settlement.

[Loza]

Lee
Thanks for your comment, I do however still believe that there cannot be 3 settlements in respect of the tax treatment of a DT.
An exempt approved scheme is not relevant property (S58 (1)(d)) IHTA 1984, hence neither exit charges nor principal charges can apply to it,there would be no point measuring the duration or stating a 10 year anniversary since no charge could arise from it in any event.
Once it leaves the exempt status of the approved scheme (trust) and enters another DT my opinion would be that it becomes relevant property from that date,the charge would be applied as per my previous post.

[maths]

I’m struggling to agree completely with either Losa or Lee and tend (somewhat surprisingly) to agree with HMRC.

I would add that “pensions” are not an area of expertise on my part but for purposes of debate would comment as follows:

1. Approved pension schemes appear to receive very favourable IHT treatment (s58(1)(d)); thus, property held by such a scheme does not qualify as relevant property. Hence, no exit charges (for example) arise on appointment of death benefits out of the scheme.

2. The settlor of the settlement by a pension member of his death benefits payable under the scheme is the member.

3. On payment of the death benefits by the scheme to the discretionary trust the benefits then form relevant property; s81 dictates that the first ten year charge occurs ten years from the date the individual became a member of the pension scheme. This may mean that one or more ten year dates arise before the death of the member in which case no actual IHT arises at those times as the property at those times is not relevant property.

Thus, where death benefits are paid into the discretionary trust from two different pension schemes, joined at different times, the date of any ten year charges will be different with respect to the two death benefit amounts.

4. The settlement of the death benefit is a chargeable lifetime transfer by the member.

5. Prima facie, three nil rate band appear to be in point.

[Loza]

Maths
I note your point on S81, however,
If the member dies before securing the pension,the death benefit will be paid (less 55% tax under the new rules) to the nominated beneficiary, (the DT)
If the member had not annuitised at 75/77 and elected for ASP or scheme pension, the position would be the same,ie the fund is left to the DT less 55% tax,if the fund was left to an exempt beneficiary (spouse or dependent) there would be no charge on death, the IHT would be calculated by reference to the NRB appertaining on the members death,but charged on the death of the spouse/dependant.
In my view S81 is not in point since the property does not move from one fund to another, it loses its identity as a pension and becomes an amount of cash.
Surely on the members death the exempt approved scheme ends and the funds move into the relevant property regime, since during the currency of the pension scheme,it was not relevant property so none of the provisions relating to discretionary trusts apply to it.

[maths]

In my view S81 is not in point since the property does not move from one fund to another, it loses its identity as a pension and becomes an amount of cash.
Surely on the members death the exempt approved scheme ends and the funds move into the relevant property regime, since during the currency of the pension scheme,it was not relevant property so none of the provisions relating to discretionary trusts apply to it

.

As in my posting, and is you state, on the transfer of the death benefit to the discretionary trust the monies enter the relevant property regime at that time. However, there is (in my view) a clear transfer of monies (ie the death benefit) from one settlement to another and thus s81 applies.

[Loza]

Maths
It might help to review the rules on death payments from an exempt approved scheme.
If a member dies whilst in ASP or scheme pension then the death will constitute an unauthorised payment.
In either case if the fund is left to a spouse or dependent,no unauthorised payment charge will arise at that point,but it will on the death of the spouse/dependent.
The unauthorised payment can not be avoided by leaving the fund to a DT
The much quoted 82% was made up of a 70% total unauthorised payment charge and IHT of 12% on the remainder(40% *30%).
If the member died before reaching pension age a 35% charge applied.
Under the new rules a flat 55% charge applies,(I should correct my previous post in this regard),. the scheme administrator must account for the tax and distribute the residue of the fund to the nominated beneficiary,in this case a DT.
If the member had annuitised, then there would be no fund to transfer.
I cannot see any circumstances where an unvested fund can be transferred to a DT,except during lifetime where the recipient fund is itself exempt approved under FA2004.
So any funds paid out of the exempt approved scheme leave not as a pension but as cash paid from a former pension.
The scheme rules relating to the old pensions will have no relevance or bearing on the trust to which the funds are paid,the funds now become relevant property as cash (not pension rights).
If the scheme rules of the two schemes provided for funds to be placed on DT on death then the rules would not comply with FA2004 and the schemes. would fail as an exempt approved scheme.

[maths]

Loza

Thank you for your explanation in your last posting.

I think it is clear that your knowledge in this area is much greater than mine.

My responses are based on my IH/trust knowledge (little though that may be!) rather than pensions knowledge.

I have this morning tried to look at HMRC Manuals to see if i could find any guidance and found the following:

http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM17126.htm

There is other material but i don't have the time to go through it all.

We may have to agree to disagree; perhaps Lee may have an additional contribution to make as he's usually right.

Apologies to Bill2 but this is, as you can see, a bit of a tricky area.

[Lee Young]

Maths - usually right....too kind.

My (perhaps flawed) understanding had always been (and maybe this has changed recently) that death benefits payable under a pension contract are always payable at the discretion of the trustees of the pension fund and therefore are already on discretionary trusts. That being the case any direction that they be transferred to a pilot settlemnent on death, often another discretionary trust, could be accomodated (though not always) but that the transfer from one relevant property trust to another was a non event for IHT purposes, and therefore that for IHT purposes those transfers remained in the original pension trust. That was why I thought there are three settlements, not one (for IHT purposes) - the trusts that apply to each pension funsd, and the third, a pilot settlement.

It is of course always risky to display one's ignorance so publicly, but pensions (my ownn in particular!) have always been a blind spot for me.

Is my understanding (completely) wrong, or simply out of date....?