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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, reports some interesting suggestions from IBC’s fifth Private Client Tax Conference in London following the FA 2006, Schedule 20 changes regarding trusts.

Context

IBC’s 5th Private Client Tax Conference in London on 26 September 2006 threw up a number of interesting suggestions.

Interest in possession trusts: creating Transitional Serial Interests (TSIs)

Assume that Father is the life tenant at 22 March 2006. His life interest could be replaced before 6 April 2008 by successive life interests to his children within IHTA 1984, s 49C. If so, however, one should ensure that Father is excluded from benefiting from the ongoing trusts. This is because from 22 March 2006 the termination of an Interest in Possession (IIP) constitutes a gift for Gift with Reservation (GWR) purposes, whether the IIP arose on or before that date (FA 1986, s 102ZA).

Reverter to settlor trusts: an idea

Example: In 1996 John established a reverter to settlor trust which acquired a property for £500,000 which his widowed Father has occupied throughout as his main residence. The house is now worth £1 million. Under the trust John takes an interest in possession on his Father’s death.

Consider giving John a TSI on 5 April 2008 (Father having moved out of the property to avoid FA 1986, s 102ZA) with a view to distributing the property to him on 5 April 2011. In this way:

• the property is removed from Father’s estate free of Inheritance Tax (IHT);

• the trustees’ accrued entitlement to main residence relief from Capital Gains Tax (CGT) is preserved;

• the trustees will get main residence relief on a disposal up to 5 April 2011;

• on 5 April 2011 John will receive the property with a base cost equal to its market value at that date. Note that, because the property does not revert to him on Father’s death, TCGA 1992, s 73(1)(b) will not apply;

• the tax planning is unaffected by the timing of Father’s death.

Excluded property trusts – action points

Identify all settlor-interested trusts which were established as IIP trusts.

• If the settlor (or spouse) is actually or deemed UK domiciled or may become deemed UK domiciled, then consider:

- establishing TSIs for the heirs before 6.4.08 in all or part of the trust fund; and/or

- establishing a TSI for the settlor’s spouse on the death of the settlor in all or part of the trust fund; and/or

- the possibility of the settlor or spouse ceasing to be actually or deemed UK domiciled;

- the need to identify all other settlor-interested trusts to which additional property was settled whilst IIP trusts subsisted and to trace affected trust assets with a view to partitioning the trust fund and taking appropriate action in relation to the affected fund.

The future

Discretionary trusts are unaffected. Therefore:

- create a new nil-rate band trust (whether discretionary or IIP) every seven years;

- one trust or two (IHTA 1984, s 44(2))? Note that the survivor can safely benefit from a trust made by a deceased spouse.

- Possibly create settlor-interested trusts. No CGT hold-over is possible. Although there is a GWR, there will be a potentially exempt transfer (PET) on subsequent exclusion of the settlor, to become exempt on his survival for seven years.

• Nil-rate band IIP trust offer some benefits:

- income tax treatment is straightforward;

- unaffected by ITTOIA 2005, s 633 (old TA 1988 s 677), which affects discretionary but not IIP trusts (capital sums paid by way of loan or repayment of loan). Therefore one could sell assets into trust on the strength of an IOU from the trustees;

- the attraction of bare trusts;

- consider share reorganisations with different classes of shares to retain voting control;

- continued use of IIP and discretionary trusts for traditional reasons, eg to benefit children and/or grandchildren;

- to crystallise main residence relief;

- to secure main residence relief etc for a second property.

However, the value of the trust must now be limited to the nil-rate band if an immediate charge to IHT is to be avoided.

(Lecture by Nicholas Hughes of Chiltern plc)

Matthew Hutton MA, CTA (fellow), AIIT, TEP
November 2006

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