Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about whether a specific trust set up in 2011 is liable to ten-year and exit charges.
‘I am dealing with a trust that was set up during 2011 (with £10 initial monies introduced). The key wording as to the term ‘beneficiaries’ is as follows: “Now this deed witnesses that the trustees shall hold the trust property on trust for such of the beneficiaries in section A below in such shares and in such manner as the trustees shall appoint by deed revocable or irrevocable and executed at any time within 125 years from the date of this settlement and in default of appointment or so far as no such appointment shall extend for the benefit of those named in section B below:
Section A – Potential beneficiaries:
- my son – Joe Smith;
- my civil partner – Jane Jones;
- the issue and remoter issue of my son Joe Smith;
- plus any other persons I during my lifetime later nominate in writing to the trustees and after my death other persons nominated by the trustees with the exception of myself. The settlor (Mary Williams).
Section B – Current beneficiaries: my civil partner Jane Jones.”
The rest of the deed is standard wording. The settlor died during 2011. Properties were transferred into the trust during 2013 at a total value of £1.3m.
Is the trust liable to the ten-year and exit charges? I have obtained advice from other advisers but these conflict (one of them suggested that with a surviving spouse holding the interest in possession, the trust would be exempt from inheritance tax and therefore there are no tax charges to pay on the trust). If liable, there is a substantial liability to the ten-year charge.’ Query 20,163 – Trusted adviser.
Terry Jordan’s reply: There might not have been a ten-year charge in 2021.
‘Trusted adviser is dealing with a trust set up in 2011 with the nominal sum of £10. It seems clear that it was more than a bare trust and constituted a settlement with IHTA 1984, s 43. The settlor’s civil partner Jane Jones was the original beneficiary, and the trustees were equipped with an overriding power of appointment. At inception it was a relevant property trust within the inheritance tax regime of ten-year and proportionate or ‘exit’ charges. Although the settlor was excluded from benefit, the trust was settlor-interested for income tax purposes as the civil partner was a beneficiary. Capital gains tax holdover relief would not have been available.
The existence or otherwise of an ‘estate’ interest in possession is key to the charge to inheritance tax. IHTA 1984, s 49 provides that a person beneficially entitled to an interest in possession in settled property shall be treated as beneficially entitled to the property in which the interest subsists. Where the interest arose on, or after, 22 March 2006, as here, that treatment applies only to an immediate post-death interest, a disabled person’s interest, or a transitional serial interest. (The last of those can nowadays arise only on the death of a spouse or civil partner who enjoyed a pre-22 March 2006 interest where the surviving spouse or civil partner takes a succeeding interest.)
We are told that the settlor died in 2011 and that properties worth £1.3m were transferred into the trust during 2013 with the crucial omission of the person or persons who added the properties. If they were lifetime transfers, they would have been immediately chargeable at 20% on the value transferred over the nil rate bands of the transferors.
However, I wonder if the deceased settlor left a discretionary trust in their will. Appointments out within two years of death would have been read back to the date of death under s 144 and it may be possible to argue that Jane Jones took an immediate post-death interest. In that case the civil partner exemption would have been available on the settlor’s death and the value would have become comprised in Jane Jones’s inheritance tax estate. If that interest subsists there would not have been a ten-year charge in 2021.’
The full article is also available on the Taxation website.
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