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Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of Monthly Tax Review, highlights potential trust tax planning points and traps from a recent IBC Private Client Tax Conference.  

{mosimage}Reversionary interests: adding to value of estate IIP without a transfer of value

Exempt transfers, such as the normal expenditure out of income, can be used to add to a qualifying (or ‘estate’) interest in possession without a chargeable transfer.  The same point obviously applies to a relevant property settlement, though it will increase the value to be subject to a ten-yearly charge. 

[Another idea in the past (from William Massey QC) has been the redemption by the settlor of a mortgage charged on the trust property, by writing a cheque direct to the mortgagee: the value of the trust fund is enhanced, the settlor makes a PET (on an estate before less estate after basis) and there is no chargeable transfer at that point under the relevant property regime.]

A further idea might be a reversionary interest not acquired for value and not one to which the settlor or his spouse/civil partner is or has been entitled and not expectant on the determination of a lease which is a deemed settlement under IHTA 1984, s43(3), which is excluded property under s48(1).  There may therefore be a planning opportunity presented by the transfer of a reversionary interest to a qualifying interest in possession settlement. 

What is an IPDI?

Among the four conditions in IHTA 1984, s49A, the settlement must be effected by a Will or an intestacy.  HMRC say that this condition is satisfied by a trust created under a s142 deed of variation (or order under IPFDA 1975, s146), when the gift being varied is made by a Will or intestacy, but not if it is made by survivorship (see the Law Society Guidance of 3 October 2007 para 2).  However, should the nature of the gift make any difference?

Why create an IPDI?

If there is no requirement for consent, the termination of an IPDI has the following benefits over an absolute gift:

• the termination is not expressly treated as a gift for purposes of FA 1986 s102A-C.  HMRC now accept that s102A does not apply to reversionary leases if the entire freehold has been owned for seven years; however, note s102B and problems with a move;
• by itself it should not result in a POA charge;
• it does not result in a CGT disposal, provided the property remains within the same settlement;
• the termination can result in a s71A trust.

There are two traps:

1. Generally a termination of an IPDI in favour of a s71A trust is a PET, unless it is a disabled interest (since there is no IPDI (as required by s3A)(3B)(b)), or there is assignment since the interest is not terminated (as required by s3A(3B)(c)). 

2. Termination can result in a s71D trust (but not by a PET).

A requirement for consent gives rise to POA issues.

IPDIs and trust powers

It is not possible to appoint a new IPDI.  It is therefore important to ensure that an IPDI is not accidentally terminated, which could happen even if the beneficiary obtains a new interest in possession.  Consider therefore having two powers of appointment, one just relating to the reversionary interest(s) and the other which can be used to override the IPDI.  Accordingly, if the first one is exercised, there is no question of bringing the IPDI to an end. 

Transferable nil-rate band: Will drafting

It is important to ensure that the nil-rate band in any Will refers not just to IHTA 1984 Sch 1 but also to the enhanced nil-rate band under s8A.  The familiar phrase to the effect that ‘the maximum amount which can be given without attracting a charge to IHT at more than the nil rate’ should be OK. 

(Jeremy Woolf of Pump Court Tax Chambers speaking at the IBC’s Private Client Tax Conference in London on 2 July 2008).

The 7th Estate Planning Conference: Current Issues 2008

 For the seventh successive year Matthew is running a series of full-day Conferences in 6 venues round the country, in the course of September and October 2008.   

Audience:  Solicitors  Accountants  Tax Advisers  Private Bankers   

Estate Planning continues to be an intriguing and interesting subject.  But it is no mere intellectual exercise.  For our clients, the advice we give and the decisions they make, if not exactly 'life or death', can have far-reaching consequences over a long period of time.  Decided cases and developing HMRC attitudes (with reference to the Manuals, especially) must both be taken into account.  Flexibility is essential in structuring the family assets.   This series of Conferences will major on developments over the last year or so, putting them into context and drawing out the practical planning aspects.  There will be plenty of time for delegate questions and discussion. 

Price: £295 plus VAT (Concessions: £25 discount for 2007 delegates OR '5 delegates for the price of 4'). 

Dates and Venues: