GWR GIft Trust and Associated Operations

[EPS]

Hi All, hope you can offer some advice please for the following- we have a situation whereby husband and wife have been provided estate planning by us over 5 years including WIlls and Power's of Attorney etc, this planning also included us setting up a Gift Trust 3 years ago simultaneously. We advised they must not benefit from their own trust and have documented evidence regarding this, each are beneficiaries on the others Trust alongside and including their individual children and grandchildren, no children had together. I must inform you that they had not benefitted at all from each other’s Trusts, when we were last in communication with them. They have sought 3rd party advice following reading something online and the 3rd party claim is that the gift trust planning does not work under section 44(1) of the inheritance tax act 1984, due to the reciprocal nature of this gift planning. They further claim that this planning falls foul of hmrc’s rules concerning associated operations and they are relying on a Standard Life article which they say outlines this clients exact situation and highlights that their trusts should have said: that only each other can benefit as a widow/widower after the first death and NOT as a spouse from the others Trusts while they are both alive. Basically they claim our advice and implementation of these Gift Trusts has disadvantaged them as these Trusts do not work as each are named as spouses and so : 1. they have lost 3 years of time in IHT planning 2. the bonds individually owned outright and now in their individual gift trusts need to be unravelled and 3. this trust planning could create tax liabilities getting them back to the position they were in 3 years ago. They also claim that all the previous work completed for them pre and post the Gift trusts were associated operations within the terms of IHTA84/S268(1)(a) and (b) as it affected the same property address I,e their WIlls and Lasting Power's of Attorney deeds. All opinions on the above will be greatly appreciated Thank you. Sorry I have gone on a little . EPS

[maths]

I'm afraid you may have a problem.

It may be worth reading Hatton v IRC [1992] which involved reciprocal settlements which I suspect you may have fallen foul of.

[EPS]

Thank you for your response and I did read the case law you suggested. If I tell you MR & MRS each had a £300k investment bond and both their individual bonds were assigned to their individual Trusts. MR rationale to set up a trust was for his daughter and her issue, plus to gain potential tax savings on death, and MRS was set up for her 2 daughters and their issue, plus to gain potential tax savings. Each other are named as potential beneficiaries on the otherTrust however neither have benefited from each other's trust nor have they benefited from their own Trust. Does this additional information change your opinion?

[maths]

Hatton was a tax avoidance scheme which arguably is not the case here (other than thew normal attempt to legitimately mitigate IHT on death).

Presumably the issue is the GWR provisions?

There is no requirement under these provisions for the settlor's spouse to be excluded as a beneficiary from the settlor's trust and only included as a widow/widower. In practice, however, it is not uncommon to so provide.

I assume that each spouse's individual bond was taken out separately (separate proposal forms etc) and any premium payments, professional costs etc were each paid out of separate bank accounts of each spouse?

Just for clarification, H's children do not benefit under W's settlement and W's not under H's settlement? This, I think would help, as it would be normal on a remarriage for each spouse to separately provide for their own children.

I don't know off hand the definition of "reciprocal arrangement" for IHT purposes.

I must admit I'm struggling a bit.

Did you ask for a copy of the Standard Life article; if not, I think it aoudad be advisable to ask for it.

[EPS]

thanks again for your response it really is helpful.
All 3 daughters and each spouse are named as potential beneficiaries, in each of their trusts due to its discretionary nature - however, it was apparent that he wanted to look after his daughter, and her issue, and Mrs wanted to look after her bloodline.
With reference to each have a separate individual investment bond and therefore have individual proposal forms (an ifa dealt with that unconnected with us) but yes al this was individual.

Invoice and Payments were made by them to us as a single transaction per engagement unfortunately, They are also claiming other engagements of planning over the last 5 years are associated operations which I feel is totally wrong as that included Wills, Lasting Powers of Attorneys and advice and meeting fees etc.
The 3rd party they instructed has also referred to them as Laypersons and so loaded the problem by asking the question why would they have participated in this type of planning, Fortunately we can clearly evidence in emails from MR and his IFA, that the is very familiar with Tax and IHT, being a retired Accountant and has done his own tax calculations in the past.


I have pasted the STANDARD LIFE ARTICLE they are relying on - it is under the banner Associated Operations.

1. Mr Jones sets up an onshore investment bond subject to a discretionary trust. His wife is a potential beneficiary of the trust. Shortly afterward Mrs Jones takes out her own bond also subject to a discretionary trust. Under this trust Mr Jones is a potential beneficiary. Taken in isolation, neither of these trust arrangements is a gift with reservation. However, because of the reciprocal nature of the arrangement, these transactions could be treated as associated operations. When looked at as a single event the arrangement would become a gift with reservation. This is a problem not just for married couples but any reciprocal arrangements, whatever the nature of the relationship between the parties.The problem could have been avoided if the trusts allowed the widow/widower as a beneficiary but not the spouse.

Grateful for your time one last time if you don't mind please.

Many thanks again.

[maths]

Issues involving reciprocal arrangements, pre-ordained transactions depend very much upon the precise facts if suitable advice is to be given.

If the beneficiaries as I think you indicate are identical under each trust (ie wrt children), are set up on the same day by spouses and with identical amounts is at the very least provocative. It does have the hallmarks of reciprocity or preordained.

I think there comment to which you refer "They are also claiming other engagements of planning over the last 5 years are associated operations which I feel is totally wrong as that included Wills, Lasting Powers of Attorneys and advice and meeting fees etc." is I feel stretching a point and somewhat nonsensical.

The article to which they referred states "However, because of the reciprocal nature of the arrangement, these transactions could be treated as associated operations".

Couple of comments:
1. there is an automatic assumption of reciprocal arrangements.
2. it states there "could" associated operations.

I'm not particularly hopeful that you can clearly defeat their argument. However, I would be inclined to argue that the article is general in nature and does not necessarily reflect your exact facts. It is strongly arguable that there was no reciprocity and the associated operations is not in point. Certainly the above comment about their 5 years etc is simply irrelevant.

Perhaps the removal from the trusts of each spouse substituting "widow/widower" would cause the GWR issue to fall away after 7 years?

[EPS]

Thank you, much appreciated.

The purpose of a Gift Trust each rather than just one, was as they each had £300k in their individual bond at the time, and so wished to do IIHT planning it was advised and agreed to a trust each to avoid a CLT.
He is a retired Accountant and so knows all about tax and inheritance Tax which we have evidence, and so it wasn't a hard sell by any stretch of the imagination, however, he is now claiming to be a layperson and has suggested and referred to anyone that will listen, that we are negligent. Being branded negligent is the worse part of this whole scenario as in over 25 years of practice we have never experienced such lies and our concern is, he could be believed.

Anyways, have a great week, and thank you for all your responses.

Keep safe.

[maths]

You could write to him arguing the point quite vigorously but suggesting that to save time and on-going argument that some form of deal be struck. You could point out that it's not a matter that's black or white but in fact grey and that the article to which he referred is by no means applicable to your specific facts.

You might also add that you intend to instruct solicitors to write to him informing him that should he not desist in allegedly spreading rumours etc you will sue him for defamation; probably will frighten him to death.