Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a fellow professional’s query about a qualifying interest in possession (QIIP), assets comprising shares and part-appointment of those shares to a discretionary settlement.
The tax query
‘A qualifying interest in possession (QIIP) was settled in 2001; the assets comprise 100 shares in a former trading company containing cash of £1m. The beneficiaries of the trust are: the settlor, their spouse and their descendants. The income of the trust fund is to be paid to the settlor during their lifetime; devolving to the children following the death of both spouses. The trust deed includes powers to appoint assets to either the beneficiaries or a new settlement (including a discretionary settlement).
The settlor is concerned about their IHT exposure and it has been proposed that 40 of the shares (having a value of, say, £325,000) are appointed to a discretionary settlement in favour of the settlor’s children and descendants. It appears that a charge will arise under IHTA 1984, s 52; the exemptions under s 53 do not appear to apply; and that holdover relief would be available under TCGA 1992, s 260.
Can readers offer any alternatives?’ Query 20,393 – Untrusting.
Terry Jordan’s reply: Change the nature of the company’s activities.
‘The settlor of the trust created in 2001 enjoys an ‘estate’ interest in possession and I infer from the query that the settlor’s spouse would take a succeeding interest in the event of the settlor’s death. Accordingly, the settlor is treated as owning the underlying assets by IHTA 1984, s 49 and the IHT spouse exemption would apply if the spouse survived. He or she would take a transitional serial interest (a TSI) under s 49D (nowadays the only way a TSI can arise) and the value would then form part of their estate.
It is proposed that 40 out of 100 shares should be appointed away from the settlor to a new discretionary settlement for the benefit of the settlor’s children and remoter issue. We are told that the company is one of investment in nature (so there is no prospect of IHT business property relief (BPR) applying) and that it holds cash of £1m. Such a lifetime termination of the settlor’s interest in possession would require a before and after calculation to determine the loss to the settlor’s estate. The current holding might benefit from a discount to net assets of 5-10% (although the Share and Asset Valuation Division might resist any discount for a 100% holding) and the retained holding of 60% a discount of 10-20%. Accordingly, the settlor’s nil rate band would be exceeded with 20% IHT on the difference and the possibility of a further charge in the event of death within seven years. An outright appointment to the children would be a deemed potentially exempt transfer with no immediate charge.
If a discretionary trust is desirable, it may well be possible to create it from the existing settlement so that there is no disposal by the trustees for CGT purposes (Roome v Edwards 54 TC 359; HMRC CG Manual at CG37840 et seq). In any event it would be essential that the settlor was excluded from any future possible benefit in view of FA 1986, s 102ZA which treats the interest in possession beneficiary as making a gift.
Under current rules, if the settlor’s interest continues to death there would be a CGT-free uplift and the surviving spouse’s interest could then be terminated in whole or in part to start the seven-year clock running. However, there is current speculation that the uplift may be abolished as part of the Budget on 30 October this year (perhaps to be replaced by a no gain/no loss treatment).
An alternative strategy would be to change the nature of the company’s activities so that the shares once again benefited from BPR.’
The full article was published in Taxation magazine (issue 4954) and is available to subscribers here on the Taxation website.
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