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Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Monthly Tax Review, highlights recent tax issues and planning points affecting trusts.

Matthew Hutton

Bare Trusts: What to do when the child reaches 18 

If a sole beneficiary attains 18, he can call for the fund to be transferred to him.  If a joint beneficiary attains 18, he can call for his share of the trust fund to be transferred to him if it is easily divisible.  But this does not apply to land (Crowe v Appleby 51 TC 457) or a majority holding (Lloyds Bank v Duker [1987] 1 WLR 1324) or a life policy.

However, the beneficiary may agree not to call for the property to be transferred to him.  On attaining the age of 18, a beneficiary may be invited to sign an agreement along the following lines:

Dear [trustees]

In return for your continuing to act as trustees, I agree not to call for my share of the [name of trust] bare trust to be transferred to me until I reach the age of 21, or I have given the trustees one month notice in writing, whichever shall be the later.

Signed……..

This could offer a good workable solution.

(IBC’s 6th Annual Private Client Tax Conference on 4 July 2007, James Kessler QC, p12)

Ensuring a PET: by transferring value, not property, to an ‘old’ interest in possession trust

If property is added to an ‘existing’ IIP settlement, the transfer of value will not be a PET.  But if value is added to an ‘existing’ IIP settlement, rather than property, the transfer of value will be a PET, for example the payment of a trust creditor or a discharge of another liability, eg paying off the mortgage.

The tests are:

(a) Does the IIP holder acquire an interest in possession in settled property on or after 22 March 2006? No.

(b) Does his estate increase in value by the amount of the transfer of value, without property becoming comprised in another person’s estate?  Yes.

Note the limitation presented by IHTA 1984, s 3A(2)(b): another person could include a company, so this suggestion would not work with gifts to companies held by trusts.

Will trusts, IPDI’s and a share in the matrimonial home

Standard form Will:

• discretionary trust of nil-rate band, plus any property qualifying for 100% APR and BPR;
• residue on IPDI to spouse for life, remainder for children.

Question:  Can the executors appropriate the deceased’s share in the house to the nil-rate band trust?  Yes in principle.  But note the problem that if a share in the house is appropriated to the trust within two years after death with an exclusive permanent right of residence for the surviving spouse, there is a risk that SP10/79 and IHTA 1984 s144 will deem her to have an IPDI.

The solution?

• consider making the spouse pay an occupation rent to the trustees in respect of the appropriated share – just for two years? Or
• appropriate only after the two year period.

Either course will involve some dilution of main residence relief for CGT (because the widow will not occupy under the terms of the settlement).

Alternatively, consider the debt or charge arrangement.

(IBC’s 6th Annual Private Client Tax Conference on 4.7.07, William Massey QC, pp2, 3 & 4)

Providing for cohabitees and children

This is a common problem.  The client usually wants to provide for the cohabitee, while making sure that some funds are available to the children and will want to minimise IHT.  The particular IHT issue is of course that there is no exemption for gifts to cohabitees.
The best structure is to set up a pilot trust during lifetime, leaving the nil-rate sum to the pilot trust, for the children (perhaps also for the cohabitee) with residue to the cohabitee for life.  While there is an IHT charge on death on the whole estate, the two Will trusts are not related under IHTA 1984, s 62.

Pros:

• control of residue;
• no future aggregation of property held on IPDI trust with NRB legacy held by pilot trust;
• no charges on NRB trust for the first ten years or thereafter if it remains within the NRB (given deceased made no lifetime gifts in seven years before death); and
• some funds available to children before the death of the cohabitee.

Cons:

• None, but obviously a liability to IHT at death given lack of spouse exemption.

(IBC’s 6th annual Private Client Tax Conference on 4 July 2007, Emma Chamberlain, pp 21-23)

Matthew Hutton Conferences 2007

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.