Readers’ forum: Concluding a trust

Writing for Taxation magazine’s readers’ forum, BKL tax adviser Terry Jordan answers a query on the trust tax implications of a bequeathed property increasing in value.

My client’s mother died in January 2016. Her will appointed my client and his sister as trustees with discretion to hold, dispose of or change assets and distribute income or capital to four beneficiaries, including themselves. I assume a discretionary trust came into being on the mother’s death.

Except for some minor savings, a life policy and a small occupational pension, the bulk of the estate’s value was the former family residence. After initially realising savings, investments and pension in 2016-17, the trustees disposed of the property in June 2017.

The property was professionally valued at £875,000 and probate was granted in January 2017. After deducting the joint nil-rate bands of his parents, inheritance tax of about £95,000 was paid. Although the property needed updating, it turned out that it was worth considerably more and was sold for £1,150,000.

Unfortunately, the trustees sold the property before learning that capital gains tax could have been mitigated by appropriating the property to the beneficiaries.

Although the trustees dealt with probate, paid tax, liquidated assets and distributed the net proceeds less anticipated capital gains tax, they did not register the trust or inform HMRC of its existence. I have advised this will need to be done and suspect HMRC may require an SA900 return to be filed from January 2016 to date.

Because the trust has, in effect, been liquidated, am I correct in assuming the administration started in January 2016 and continues until the capital gains tax on the sale of the property is paid?

Finally, I am not sure how the exit charge would be calculated. Given that inheritance tax of about £95,000 had been paid, is an additional 6% payable, calculated on the estate value in excess of nil-rate bands? I assume that the trust will end when HMRC accepts the exit charge.

Query 19,079 – Trustee.

Reply by Terry ‘Lacuna’ Jordan, BKL

Apparently, Trustee’s client’s late mother created a discretionary trust under the terms of her will. The family home was sold for £275,000 more than the value returned as at the date of death some 17 months later. It seems HMRC has not contended that the sale price reflected the value as at the date of death, which would have led to an increase in the inheritance tax liability.

The executors and trustees missed the opportunity to appropriate the property to the beneficiaries in advance of sale so that their individual annual exemptions might have been available together with the possibility of part of the gain being taxed at the lower 18% rate rather than at 28%. The capital gains tax payable will depend on whether the sale was made by the executors in that capacity (in which case an individual’s annual exemption would have been deductible) or by the trustees in that capacity (in which case the maximum annual exemption would be one-half of an individual’s).

Normally, the end of the administration period of an estate coincides with the final agreement of the inheritance tax liability. The good news in this case is that, because less than two years have elapsed since the date of death, absolute appointments out of the discretionary trust are read back under the provisions of IHTA 1984, s 144 and no inheritance tax proportionate or ‘exit’ charges arise under the relevant property regime.

This article is also available on the Taxation website.



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