Enter Your E-mail

Monthly Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author and presenter of Monthly Tax Review, highlights some important considerations for settlors who retain an interest in a trust.

Context: what is the value of a gift to yourself?

At first sight the concept of a gift to yourself is a nonsense and does not appear to have troubled the draftsman of IHTA. But such is the world of the POA rules that we are now required to consider this question.

Avoiding the para 8 charge on settlor-interested intangibles

Where a settlor retains an interest in a trust and is not the life tenant of the trust, then the trust income is assessed on the settlor under ITTOIA 2005 s 624. If the settlor's interest is not a GWR under FA 1986 s 102, for example because a spouse is or was the first life tenant, then under FA 2004 Sch 15 para 8 rules the settlor has deemed income equal to 5% (or whatever is the current rate under the regulations) of the value of the intangible property in the trust, less the actual income assessed on the settlor under ITTOIA 2005 s 624 [no: it’s the income tax paid!].

The simple solution to avoid the para 8 income tax charge was to terminate the settlor's interest in the trust prior to 6 April 2005, the commencement date for the pre-owned assets income tax charge. Assuming that this was not done, how can the situation now be rectified?

Electing into GWR and then terminating the trust

Para 22 of Sch 15 allows the settlor to make a GWR election. If this is done there is no deemed income under the pre-owned assets income tax rules. The drawback to making a GWR election is that the settlor is now exposed to a potential IHT charge on the value of the trust assets. Thus, the same value can be exposed to IHT twice; first, as part of the life tenant's estate under IHTA 1984 s 49 (if the trust is an interest in possession trust) or under the IHT rules for discretionary trusts (if the trust is a discretionary trust); and second, as part of the settlor's estate as an elected GWR.

A solution to this potential double exposure to IHT would be to terminate the trust.

If the trust is terminated the settlor's elected GWR will cease; but the potential double exposure to IHT will continue for seven years, as the settlor is then deemed to make a potentially exempt transfer (PET).

If the trust is terminated by appointing the trust capital back to the settlor, then the termination of the settlor's elected GWR results in the settlor making a deemed PET to him or herself, while at the same time the value of his or her estate is increased by the value of the trust capital appointed to him or her.

What is the value of the deemed PET in these circumstances?

How do you value a deemed gift to yourself? HMRC Capital Taxes Technical Group has confirmed to The TACS Partnership in writing that in these circumstances the value of the deemed PET is nil.

If the trust is a life interest trust for AN Other, then on the termination of the trust the life tenant will make a PET to the settlor. If the life tenant is the settlor's spouse, then the PET will be an exempt transfer under IHTA 1984 s 18. If the trust is a discretionary trust, then it will be necessary to consider the potential exposure to an IHT exit charge.

If, alternatively, a life interest trust is terminated by appointing the trust capital to the life tenant, then there will be no PET made by the life tenant. The trust assets are part of the life tenant's estate for IHT purposes both before and after the termination of the trust.
Appointing the trust capital to the life tenant will, however, mean that the settlor's elected GWR comes to an end and that the settlor therefore makes a deemed PET. The trust assets have, however, not become part of the settlor's estate, and therefore the value of the deemed PET is equal to the value of the trust's assets.

Potential exposure where the beneficiary is the settlor’s spouse

In the opinion of the Technical Group, if the life tenant is the settlor's spouse, the settlor's deemed PET will not be an exempt transfer under IHTA 1984 s 18 as the conditions of IHTA 1984 s 18(1) are not satisfied, because there is no change to the value of the life tenant spouse's estate when the trust capital is appointed to the life tenant.

It is important therefore that, if a settlor-interested trust is terminated after a GWR election has been made, the trust is terminated by appointing the trust capital to the settlor and not to some other beneficiary. Note that under the 2006 Budget proposals there is no IHT exit charge when assets leave a pre-Budget life interest trust and are appointed to an individual, although there will be an IHT charge if there is a new life tenant or the trust becomes a discretionary trust.

(TAXline April 2006 – Issue 4 p 13, Briefing by Peter de la Wyche of The TACS Partnreship)

May 2006

Matthew Hutton MA, CTA (fellow), AIIT, TEP

About Monthly Tax Review (MTR)

MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work. Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items. The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work.

Who should come to MTR? Does it attract CPD?

MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice. Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT. For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.

How is MTR circulated?

The Notes are emailed to each delegate in the week before the presentations (and thus can easily be circulated around the office), with a follow-up page or two of practical points arising during the various sessions (whether in London, Ipswich or Norwich).

How do I find out more?
For further details, and for those whose firms unable to make the monthly seminars but wishing to order MTR as 'Notes Only' (at £180 per annum for the 12 issues, invoiced six-monthly in advance), click here.