Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about a residuary estate left into a discretionary trust.
‘A chap has died leaving his residuary estate into a discretionary trust. The plan is to appoint out 75% of the trust to the children and his grandchildren but to keep 25% back for the one child. We will do this within two years of the date of death, while the estate is still being administered to secure reading back pursuant to IHTA 1984, s 144.
The estate includes a residence worth circa £600,000 and the total value of the estate is less than £2m and so the appointment will also assist with a claim for residence nil rate band (RNRB). His late wife left everything to him and so will claim her NRBs too.
The executors have already agreed a sale of the property, although we will not be able to exchange contracts until the grant of probate is issued. I had planned to date the deed of appointment when the grant comes in and then exchange contracts. I was of the view the appointment had to be made before there was a binding contract for sale. However, it is possible we will want to make a claim for loss relief for IHT on the property as a surveyor valued it at £650,000, so HMRC might say this is the probate value, but I do not think we can make that claim after an appointment.
There are other assets potentially liable to CGT/income tax and if we appoint out 75% of the estate now, it seems any subsequent tax liability then falls on the beneficiaries, as opposed to the estate, and we do not want that. I would, therefore, like to date the signed deed after the property has sold, when the estate administration is more advanced, but before its completion.
Will my plan compromise a claim to RNRB, or will the s 144 treatment mean the claim is sound?’ Bluecoat
Terry Jordan’s reply: I do not see a problem with Bluecoat’s proposal.
‘The residence nil-rate band (RNRB) applies for deaths from 6 April 2017, and which has now risen to a current figure of £175,000. The relevant legislation is contained in IHTA 1984, s 8D to s 8M; only by adding two ordinary nil-rate bands of £325,000 to two residence bands for married couples and civil partners do you get to the figure of £1m.
In simple terms, for the residence band(s) to be available a residence must be comprised in a deceased’s estate and the value must pass to a direct descendant. The latter term includes lineal descendants of the deceased, their spouses or civil partners, stepchildren, adopted children and (bizarrely in my opinion as they can number hundreds for an individual foster parent) foster children (s 8K). Recognising that the availability of the band(s) might deter people from moving, ‘downsizing’ provisions can apply where a residence was disposed of on or after 8 July 2015.
In this case the deceased left children and grandchildren, so there are direct descendants. HMRC’s ‘Work out and apply the residence nil rate band for inheritance tax’ guidance at tinyurl.com/y3yynw86 explains: ‘The actual home does not have to end up in the hands of the direct descendants. An estate could still be eligible for the residence nil-rate band if the estate’s personal representative sells the home as part of the administration of the estate and passes the sale proceeds to the direct descendants… The direct descendants can also inherit the home if it’s left to them as a result of amending the will by a deed of variation. The deed of variation replaces the terms of a will, so the outcome of the deed is considered, rather than the wording of the will.’ The reading back provisions of s 144 are similarly retrospective for IHT purposes in respect of appointments within two years of death, accordingly I do not see a problem with Bluecoat’s proposal.
The 75% to be taken by the children and grandchildren will exceed the combined RNRBs of £350,000 so they will be fully utilised. Had that not been the case an immediate post-death interest (IPDI) over the one child’s 25% share would have had the effect of putting the value into the estate.
Bluecoat makes the valid point that loss on sale relief under ss 190 et seq needs to be claimed by the person liable for the tax and that is usually the personal representatives.
There is currently speculation that changes to IHT will be announced in the Budget on 6 March and one possibility would be to abolish the RNRB and make the ordinary NRB £500,000 for everyone as that would arguably be fairer for those with no direct descendants and non-homeowners and would be a welcome simplification.’
The full article is also available on the Taxation website.
Our private client tax team can provide expert advice on IHT, trusts and tax-efficient planning. For more information, please get in touch with your usual BKL contact or use our enquiry form.