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Matthew Hutton MA, CTA (fellow), AIIT, TEP, considers a potential application for reverter to settlor trusts for inheritance tax and capital gains tax purposes.

Matthew Hutton

Context

Reverter to settlor relief (IHTA 1984, s 53(3)) under the 2006 Inheritance Tax (IHT) regime for trusts depends upon the trust property reverting outright, rather than on a continuing trust, which would (unless a transitional serial interest, or TSI) fall into the relevant property regime.  But the Capital Gains Tax (CGT) free uplift to market value on death can be obtained only if there is a continuing trust (TCGA 1992, s 73(1)(b)).  So, failing the TSI analysis with death of the life tenant before 6 April 2008, one must generally decide (while the life tenant is alive) between the balance of advantage as between IHT and CGT.  If, as is likely, the IHT advantage is preferable, the terms of the trust should be changed on 6 April 2008 to provide for an outright reverter.

IHTA 1984, s 53(4) to the rescue

However, if on the death of the life tenant, the property reverts absolutely to either the UK domiciled spouse of the settlor or, where the settlor has died within the last 2 years, the UK domiciled widow or widower, there is still freedom from IHT.  But the CGT-free uplift is secured, as TCGA 1992 s 73(1)(b) refers only to the settlor.

While the TSI point remains should the life tenant die before 6 April 2008, it is suggested that on 6 April 2008 the trusts are changed to provide (other things being equal, as between the spouses) for an outright reverter to the named spouse.  If the settlor dies more than 2 years before the life tenant, the tax position is no worse than it would have been otherwise.

(Suggestion made by Mary Black of Currey & Co)

Comment

Obviously, where the trust fund comprises a dwelling, this mechanism would be unnecessary if it was possible to obtain main residence relief on a sale of the house 36 months after it had ceased to be used as such by the beneficiary, typically on his death.  (Note that this would presuppose a sale by the trustees either before the life tenant’s death or in the event of continuing trusts following it.  If the trust came to an end on the death, it would be the settlor who made the disposal, ie with no uplift in base cost to market value on the life tenant’s death and with no main residence relief.) 

However, in any other case, eg where the trust fund is comprised of property not attracting main residence relief or was stocks and shares, the suggestion is a good one.  Bear in mind, in the case of settled intangible property, the issue of a pre-owned assets (POA) income tax liability for the settlor, which would be excluded if it was only the spouse who could benefit.

Might the idea be vulnerable to attack under general avoidance principles?  The answer should be no.  First, because no IHT was being avoided, nor indeed CGT: rather, one was simply ensuring a higher base cost than might otherwise have been available.  More generally, however, there is no reference to tax avoidance in the relevant sections and so the point should not arise.

There would of course be a problem with the suggestion if the spouse were to predecease the settlor.  However, one could then, subject perhaps to a remarriage(!), reintroduce the settlor as the absolute beneficiary on termination of the life interest – and one would be no worse off.

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php

Inheritance Tax 2007/08: Practical Solutions

New Connaught Rooms, London WC2

Wednesday 20th June 2007

Only £350 plus VAT per delegate (with 10% discount for those coming to one of Matthew Hutton’s Estate Planning Conferences in Autumn 2007) 

Inheritance Tax Mitigation continues to be at the forefront of the priorities of many individuals and families. And, especially following the FA 2006 'Alignment of IHT for Trusts', the issues do not get any easier. At least Budget 2007 has given us all some respite from last year’s pace of change.  This full-day Conference has been designed to give an up-to-date and cutting edge analysis of the options open to your clients and the practical steps they should take - or indeed avoid. To this end Matthew Hutton has assembled a first class panel of Speakers. This Conference is designed as a prelude to Matthew’s more general Estate Planning Conferences to be held (this year, only) in the Autumn.

• Business Property Relief - John Tallon QC, Pump Court Tax Chambers
• Trusts - Chris Jarman, Thirteen Old Square
• The Family Home - Nick Hughes, Director of Estate Planning & Trusts, Chiltern plc
• Agricultural Property Relief- Adrian Baird, Chief Taxation Adviser, CLA
• The Use of Insurance Products in IHT Mitigation - Penny Bates, Partner, Menzies & Co
• Wills and Post-Death Arrangements - Matthew Hutton, Chartered Tax Adviser

Matthew Hutton Conferences 2007

On 20 June Matthew has organised an all-day Conference in London on Inheritance Tax Planning 2007/08 at which the Speakers will be John Tallon QC (Pump Court Tax Chambers), Chris Jarman (Thirteen Old Square), Nick Hughes (Director of Estate Planning & Trusts, Chiltern plc), Adrian Baird (Chief Taxation Adviser CLA), Penny Bates (Partner, Menzies & Co) and Matthew himself.

The cost is £350 plus VAT per delegate or, for those coming to one of Matthew’s Estate Planning Conferences in the Autumn, £315 plus VAT per delegate.

Matthew’s six round the country Estate Planning Conferences in September and October 2007 will be held on the following dates and at the following venues:

East - Thursday 6 September: Cambridge Belfry Hotel, Cambourne CB3 6BW           

North - Wednesday 19 September: Tankersley Manor, South Yorkshire S75 3DQ          

Midlands - Tuesday 25 September: Woodland Grange, Leamington Spa CV32 6RN

West - Thursday 4 October: Hilton Bristol Hotel BS32 4JF                   

South - Wednesday 17 October: Norton Manor Hotel, Sutton Scotney, nr Winchester SO21 3NB

London - Wednesday 31 October: New Connaught Rooms, London WC2               

The subject matter has yet to be finalised, although brochures will be available in June.  The cost is £295 plus VAT per delegate or for those who have attended a previous Matthew Hutton Estate Planning Conference £270 plus VAT per delegate.

Enquiries for all these Conferences should be made to Matthew on mhutton@paston.co.uk.