Summer mix of topical estate planning tips

Having spent the last four months on relatively “heavy” technical matters, and whilst waiting for HMRC to announce the deadline and the finer details of the extension to the Trust Registration Service (TRS) (once that happens we will cover it in detail), and, as it’s Summer, this month we will consider some interesting planning questions that have been put to us at Technical Connection over the last few months. Topics which sometimes get forgotten, but whose details can often prove very useful for advisers and their clients.

 

The ongoing attraction of pre 2006 “pilot” trusts

Pilot trusts have recently been topical in the context of the TRS, namely that all such trusts created after 5 October 2020 will have to register with HMRC even if no substantial assets are ever added to them (while such trusts created before 6 October 2020 which hold not more than £100 do not have to register). However, there is something else about pre-22 March 2006 pilot (and not only pilot) trusts that is not generally appreciated. This concerns additions to such trusts occurring on death of a person. There has been much publicity given to the “same day additions” (SDAs) rules introduced in 2015 which mean that adding assets under your will to several pilot trusts will no longer mean the reduction in the subsequent relevant property charges for each trust, but there is sometimes a benefit of making an addition to such a trust via a will (or a Deed of Variation). And it’s not just a question of adding property to a pilot trust but to any qualifying interest in possession (IIP) trust created before 22 March 2006.

A recent question concerned “waiving” of a loan on death of a settlor in favour of a pre-22 March 2006 IIP loan trust where the settlor has recently died .Would such an addition to this trust mean that the trust will now be a relevant property trust (i.e. lose its qualifying IIP status)?

Assuming there is a provision in the will that deals with the outstanding loan due to the settlor, or, alternatively, that the beneficiary of the loan under the will (or the beneficiary of the residue if the will does not deal specifically with the loan) uses a Deed of Variation to redirect his or her legacy to the loan trust, then, if the benefit of the outstanding loan passes to a pre-22 March 2006 trust (which has not been tainted) then it will be an immediate post-death interest (IPDI), so the pre-22 March 2006 trust status will not be affected.

Although the legislation is not totally clear on this, the point was addressed by the CIOT and STEP back in 2006 and answered by HMRC in the set of Qs and As on FA2006 Sch 20. HMRC’s answer to Question 18 confirmed that:

‘The interest in possession (IIP) [when a will leaves property to an existing settlement, whether funded or unfunded, and under that settlement a beneficiary takes an immediate IIP] would qualify as an IPDI. HMRC agree that “settlement” in this context relates to the contribution of property into the settlement rather than the document under which it will become held.’

The above will not apply if a beneficiary becomes entitled to the outstanding loan and then waives it, i.e. the gift is from the beneficiary, not from the deceased.

Whether to keep the legacy of the loan as an IPDI (i.e. added to the estate of the IIP beneficiary under the pre-22 March 2006 trust, but avoiding the relevant property regime) or not, will, of course, depend on the circumstances. If the sum involved is relatively small, a separate relevant property trust may, in fact, be a more tax efficient option. Clearly, all the options should be considered before any action is taken by a client.

 

Deeds of Variation – can you change ANY will provision?

One of the more interesting questions we have had related to a proposed variation of a will. The will in question contained a provision specifying the names of the remaindermen of an existing trust (created by the testator during his lifetime). The question was whether that provision, specifically the names of the remaindermen, could be altered by Deed of Variation? We have had questions in a similar vein, for example, can additional powers be granted to the trustees by such a deed? Can the vesting age under a will trust be changed by a variation?

As usual, the answer lies in the words of the legislation, namely section 142 of the IHT Act 1984. A variation within these provisions must be a variation of a disposition of property comprised in the estate of the testator immediately before their death by the person entitled to the property under the will.

As is often the case, the trust created by the testator during his lifetime allowed the settlor to nominate a beneficiary (of that trust) by his will and this is what occurred. Such a situation will not fall within section 142. So, in this case, the proposed variation did not relate to any disposition of property in the testator’s estate, so could not be changed by a Deed of Variation.

 

Pre-1974 trusts – special inheritance tax (IHT) treatment

Occasionally an adviser will come across a trust that was settled many years ago and the question will then arise: are there any special rules for such trusts as far as IHT is concerned? You may recall that there are some special rules, but what are they? And by “many years ago” I mean not just prior to 22 March 2006.

A recent question we had related to a pre-1974 family settlement created by a settlor during lifetime. Was the trust fund in the estate of the life tenant or not? There was after all no IHT in 1974 and before that date there was no spouse exemption, so, even if a spouse was the life tenant there may have been tax paid when the trust was made. There is in fact a special provision for pre-1974 IIP trusts (IHTA 1984, Sch 6 para 2) which exists to provide relief against the double charge to tax that would otherwise arise from the changes made to the operation of spouse relief in 1974 following the introduction of capital transfer tax. This means that the trust funds in such a trust are not subject to IHT in the estate of the life tenant (as is the case for post-1974 trusts).

However, this is only relevant to trusts created on death where the first spouse died before 13th November 1974, i.e. it is not relevant to trusts which were created during lifetime.

 

Gifting “old” qualifying policies into trusts

Getting to grips with the taxation rules for life policies is not an easy task, even more so when it comes to the rues for qualifying policies, given the changes introduced in 2012, namely the £3,600 annual premium limit imposed on certain qualifying life assurance policies from 6 April 2013.  

The general rule is that if a qualifying policy is assigned to someone else, on or after 6 April 2013, the policy will automatically become non-qualifying unless it is an excluded assignment. Then there follow a number of categories of “excluded” assignments (which includes a transfer to a trust) followed by a more limited list of “exempt assignments” which does not mention a trust.

So, an assignment of a pre-21 March 2012 whole of life qualifying policy into a trust is apparently an “excluded” event and should not therefore make the policy automatically non-qualifying, but at the same time it is not an “exempt” event which means that tax implications will depend on whether the £3,600 limit is breached. What is required is a statement from the “beneficiary”.

The general rule when there is an assignment of a pre-21 March 2012 qualifying policy into trust is that the premiums payable under the assigned policy are aggregated with all the other premiums paid under similar policies by the assignee as the “beneficiary”. If the trust is a bare trust, the “beneficiary”, is the beneficiary under the trust. However, where the assignment is to a discretionary trust the “beneficiary” for the purposes of the £3,600 rule is the settlor.

So, in the case of a gift of such policy to a discretionary trust, if the premiums payable under the assigned policy, when aggregated with the settlor’s other relevant qualifying policies, do not cause the settlor to breach the annual premium limit of £3,600, the assigned policy will remain a qualifying policy in the hands of the trustees provided the settlor makes a statement to this effect to the insurance company (the provider) within three months of the assignment. It is essential that this statement is submitted as the policy’s status is not decided until the required statement is submitted. If it is not submitted, then it is confirmed as non-qualifying on the date the deadline for submitting the statement expires. The policy then becomes wholly non-qualifying with no relief for periods during which it was a qualifying policy.

 

Charitable donations post-Brexit

It is generally well known that donating to charity has tax benefits; in particular, gifts to charities will reduce your income tax, are exempt from IHT, and, if legacies on death are sufficiently large, the IHT rate on the rest the estate is reduced from 40% to 36%. But does it matter where any particular charity is located?

Finance Act 2010 made some changes to the law relating to charity exemption and the definition of ‘charity’ was extended to include charities established in the EU and other specified countries. This took effect from 1 April 2010 for Gift Aid and from 1 April 2012 for IHT and other taxes.

So, has this been affected by Brexit? Strictly, there has been no change in the law so the above still applies. However, the current definition was based on EU reciprocity arrangements (i.e. free flow of capital) and it refers to” other EU members”. There are no “other members” anymore as the UK is no longer a member. Some EU countries do not allow deductions for donations to non-EU countries’ charities and since, post-Brexit, the arrangements are to be based on an equivalency regime, who knows what will happen in relation to particular countries when the UK Government gets round to this.

Clearly, this is one of the post-Brexit areas that the Government has not got around to yet, but it is reasonable to expect that a change is likely. So, if a client is contemplating making a donation to a non-UK charity, we should suggest caution as it cannot be guaranteed that that tax relief will be allowed at the time of any claim.

 

And finally: TRS the latest

At the time of writing we are still waiting for the new date for the extension of the TRS to all non-taxable trusts other than those that have been specifically excluded by the legislation. HMRC has promised to name the date during the Summer of 2021, with the deadline to register being 12 months later. It seems that, at present, HMRC is more concerned with the existing system for taxable trusts which is still undergoing tweaks, especially in relation to updating the Register where a trust is already registered and making it simpler for trustees to authorise an agent. HMRC is also running a pilot testing the new service for non-taxable trusts, by invitation only.

 

Comment

 

Hopefully the above examples of planning tips are useful for advisers. It is also hoped that by next month we will have more information from HMRC on the TRS extension to be able to cover it in detail.