Private Client winter seminars IHT and death: A tax update

November 2014 – March 2015 CPD Code: ZZZ/CELS

Principal sponsor

Associate sponsors

08/01/2015

1

Welcome to

Private Client Section winter seminar –

Tax and death: A tax update

13 January 2015

Principal sponsor:

Associate sponsors:

Overview

• Our brand new Private Client Section web site - exclusive

• More Private Client Section Seminars (free to members)

• Section members expired 31 Dec 2014 – renew now

• Your Private Client Section Seminar - IHT and death: A tax

update

Your new Section web sites

Launched

Nov

2014

08/01/2015

2

Winter Seminars 2014 -2015 topics

IHT and death: A tax update

Speaker: Jeremy Woolf Topic examples include: maximising business

property and agricultural property reliefs,

maximising other relief, drafting wills and trusts, minimising reservation of benefit

problems

Recent developments in private

client practice

Speaker: Professor Lesley King Topic examples will likely include: implications of the Jimmy Savile estate litigation for PRs,

secret and half-secret trusts after the Lucien

Freud litigation (2014), drafting implications of Inheritance and Trustees’ Powers Act 2014

Mediation in resolving contentious

probate disputes (ADR)

Speakers: Miranda Allardice & Barbara Rich This seminar will provide a comprehensive guide to the

use of mediation in resolving contentious probate disputes, including an update on the latest case law. It is

aimed at both litigators and private client practitioners

Elderly client update

Speaker: Helen Clarke Topic examples will likely include: an overview of the

impact of the Care Act 2014 – what you need to know,

Mental Capacity Act - roundup of recent case law and decisions

Winter Seminars 2014-2015 dates

Topic Speaker Locations Date

Mediation in

resolving

contentious probate

disputes (ADR)

Miranda Allardice &

Barbara Rich Birmingham Circa May 2015

IHT and death:

a tax update Jeremy Woolf

Birmingham Tues 13 Jan 2015

London Thurs 15 Jan 2015

Manchester Thurs 22 Jan 2015

Private client Lesley King

Manchester Thurs 5 Feb 2015

London Wed 11 Feb 2015

Birmingham Thurs 12 Feb

Elderly care Helen Clarke

London Thurs 22 Jan 2015

Manchester Thurs 19 Mar 2015

Birmingham Tues 24 Mar 2015

Section members expired 31 Dec 2014

• Benefits for 2015 include:

– Up to 20.8 CPD points earned using your:

• Bi-monthly specialist PS magazine

• Regional seminars on Tax & IHT, Elderly client & Private client issues

• 4 topical webinars available live and on download

– Market tailored e-newsletters & specialist Spotlight publications

with feature updates and case commentaries from Lesley King

– Discounts off the Private Client Section’s:

• (New) Back to Basics regional workshops

• Cross Border conference (March 2015)

• Annual Conference (May 2015)

• Elderly Care conference – (Oct 2015)

• linked Law Society Publishing books, events and webinars

• Renew at www.lawsociety.org.uk/sectionrenewal

Click

here to

renew

08/01/2015

3

Principal sponsor:

Associate sponsors:

Jeremy Woolf Pump Court Tax Chambers

16 Bedford Row

London WC1R 4EF

Tel: 0207-414-8080

E-mail: jwoolf@pumptax.com or clerks@pumptax.com

IHT AND DEATH: A TAX UPDATE

OVERVIEW • Finance Act 2013

– GAAR

– Restrictions in deduction of debts

– election for UK domiciled status for non-dom spouses

– ATED and related CGT charge

• Finance Act 2014

– Follower notices and accelerated payment notices

– Relevant property charge on income that is not accumulated or

distributed for 5 years

• Finance Bill 2015

– Anti-Rysaffe provisions

– Other relatively minor changes to the relevant property

regime, e.g. on quantification + s 144 IHTA, s 80 IHTA

– CGT charge on UK residential property

MERITS OF LIFE TIME GIFTS

• With a PET provided no reservation of benefit avoids tax if the

donor survives 7 years

• But note:

– CGT. May be possible to avoid by making a bequest to spouse:

see para D19 of Part D of the GAAR guidance and with shares

note the share pooling rules in s 104 TCGA 1992 if donee owns

shares (may be better to make a settled gift). Note also the

possibility of borrowing money to prevent a CGT charge

– Investing in business assets or agricultural property may secure

relief after 2 years: note also s 106-108 IHTA 1984, Vinton v

HMRC. Have a shell company? AIM shares are not listed for this

purpose

08/01/2015

4

AGRICULTURAL AND BUSINESS

PROPERTY RELIEF

• Clearly merit in investing in assets eligible for relief. Note equity is

better than debt

• If the business is predominantly non-investment it may be possible

to secure relief on related investment assets provided they are

assets of the business: see Farmer v IRC and Bramber v HMRC

• With companies need to look at its dominant business. With

holding companies see ss 105(4) + 111 IHTA 1984. Note s 112 IHTA

1984 and American Leaf Blending Co v Director General

• Possible claw-back of relief if ceases to be owned by the donee or

to be eligible for relief within 7 years and the donor dies: s 113A

and 124A 1984

AGRICULTURAL AND BUSINESS

PROPERTY RELIEF(2)

– On a PET the claw-back impacts on the cumulative total of

transfers. Subject to disposition by associated operations

issues, this is not the position with chargeable transfers. Note

the GAAR and para D26 of the GAAR Guidance

– With shares change in the company’s business does not result in

loss of relief: see s 113A(3)(b) and (3A). But unquoted company

becoming quoted does result in possible loss of relief

– On a sale roll-over provisions in s 113B and s 134B

• Relief not available if unconditional contract of sale: ss 113 and

124 IHTA 1984

• PRs could sell to surviving spouse

LIABILITIES

• FA 2013 and FA 2014 introduce new provisions restricting ability to

claim deductions for liabilities:

– S 162A and s 162AA restricts a deduction for liabilities to

acquire, maintain or enhance excluded property or s 157

foreign currency bank accounts. Note applies to liabilities

whenever incurred and may apply even if gift otherwise spouse

exempt

– S 162B imposes similar restrictions on liabilities to acquire

business property or agricultural property. But only in relation

to liabilities incurred after 6 April 2013

– S 175A IHTA 1984 prevents a deduction for liabilities that are

not discharged on death unless there are commercial reasons

for not discharging the debt and the main purpose is not tax

avoidance

08/01/2015

5

LIABILITIES 2

• Para D31 of Part D of GAAR Guidance suggests that GAAR will apply

to non-UK situs debt structures unless the company or trusts

already exists.

• S 103 FA 1986 may also disallow liabilities or incumbrances if the

borrower has transferred property to the lender. Where the sums

lent do not directly represent the assets transferred, no restriction

occurs if it can be established that the transfer was not to

facilitate the loan

OTHER EXEMPTIONS

• Spouse exemption: s 18 IHTA 1984;

• Annual exemption: s 19 IHTA 1984;

• Normal expenditure out of income: s 21 IHTA 1984 and Bennett v

IRC;

• Gifts to charities: s 23 and Sched 1A IHTA 1984;

• Transfers of shares to an EBT if within a year the trustees own over

50% of the ordinary shares and voting rights and persons connected

with participators cannot benefit except from payments subject to

income tax: s 28 IHTA 1984.

THE FAMILY HOME

The reservation of benefit, POAT, SDLT and employment income tax and ATED (if owned by a company) all complicate planning with the family home. But note:

•S 102B(4) FA 1986 and para 11(5)(c) Sched 15 FA 2004 may prevent any reservation of benefit or POAT issues on a gift of an undivided share that is jointly occupied.

– If not the donee’s main residence note loss of PPR relief;

– HMRC consider it provocative if the donor just retains a small unequal share;

– May be necessary to pay rent if the donee ceases occupation.

•Reversionary leases:

– S 102A does not apply if freehold has been owned more than seven years or if acquired it was acquired for full consideration (but a surviving spouse who acquires an interest in the freehold on death will not immediately satisfy either of these exceptions. It may also cause problems if spouse gifts them or a trust confers a right to occupy after they have both granted the lease);

08/01/2015

6

FAMILY HOME (2)

– Note s 149(3) LPA 1925 (lease must commence in possession within 21 years if granted for rent or a fine) and s 153 LPA 1925 (right to enfranchise leases of more than 300 years);

– Care must be taken to ensure that covenants do not result in reservation of benefit issues: see Buzzoni v HMRC;

– Will result in POAT charge. But in calculating the charge no account is taken of the loss of merger value;

– May cause funding problems on a move. Any arrangements with the donee would have to be for full consideration to prevent reservation of benefit or POAT issues.

• Gift and pay a market rent:

– no reservation of benefit or POAT charge if in actual occupation: para 6(1)(a) of Sched 20 FA 1986 and paras 11(3)-(5) Sched 15 FA 2004

– income tax on rent (may not generate a significant charge if recipients have no other income;

– rent also needs to be funded. Rent reviews will be required (with resulting professional expenses);

– Note also possible SDLT liabilities.

FAMILY HOME(3)

• Sale of property subject to a lease or sale of part of the property:

– If arm’s length, no reservation of benefit issues since no “gift”;

– However, possible POAT issues unless reliance can be placed on

para 10(1) of Sched 15 FA 2004 (sale of entire property subject

to reserved rights) or para 5 of SI 2005/724 (disposal of part for

consideration that is not cash or readily convertible). Must also

be arm’s length. Note IHTM440131:

“There will be a 'marriage' value for the two interests and a truly

arm's length transaction must reflect this. In practice, this is likely to

be difficult for the taxpayer to show since an independent purchaser

would not normally want to pay for marriage value unless he was

certain of getting the leasehold interest”;

FAMILY HOME (4)

– S 43(3) IHTA 1984 treats a lease for life as being a settlement

unless granted for full consideration. No issue if fixed term.

– On SDLT note relief in s 57A FA 2003 and SDLTM 16041-2;

– Is there a lease premium charge?

• For non-doms it was traditional for property to be owned by non-

resident companies. But note now ATED, CGT (no PPR relief

available), increased SDLT and possible employment tax charges.

• If a person is a beneficiary of an IIP trust note s 102ZA FA 2006

does not incorporate s 102A-C FA 1986. If the beneficiary is not a

trustee and does not give any consent, also difficult to see how he

can be making a disposal for POAT purposes.

08/01/2015

7

FAMILY HOME (5)

• Note the GAAR. Paras 27.4.3-27.4.5 suggests carve-out

arrangements not generally caught.

• Note also possible disposition by associated operations issues. Try

and ensure that any interest given by the testator by his Will is not

given to the transferee of any earlier disposition (for example by

bequeathing the remaining interest to a new discretionary trust)

• Note also possible loss of PPR relief (Finance Bill also contains

clauses restricting the relief). But note possible use of trusts and

Crowe v Appleby to minimise any chargeable transfer.

SETTLEMENT TO OBTAIN

PPR RELIEF

Children 90%

Absolutely

10% children for life

then to grandchildren

Fund 1

Freehold

Fund 2

Reversionary lease

Settlement

90% Settlor

Absolutely

10% Settlor for life then

to children’s Spouses

DISCOUNTED GIFT SCHEMES

AND LOAN TRUSTS

• Discounted gift scheme

– usually undertaken with life policies

– HMRC accept with care no reservation of benefit, GAAR or

POAT charge related to intangibles provided the settlor’s rights

are not settled

• Loan trusts

– settlor makes a loan to trust from which he is excluded from

benefiting

– HMRC accept no reservation of benefit or POAT charge relating

to intangibles

– note income tax settlor issues if any income

08/01/2015

8

DEFERRED SHARES

• Is there a charge under s 98 IHTA 1984? Applies to “an alteration in

any rights attaching to unquoted shares or unquoted debentures of

a close company” or alterations in its share capital

• Law Society Gazette article 11 September 1991 and IHTM14855

states that HMRC consider that an alteration occurs when deferred

shares start to ranking equally with other shares or when new

rights fructify, e.g. to vote after a fixed period of say 5 years.

TRUSTS

• Paying 6% every 10 years may be better than paying 40% on death.

May be much lower charge on nil-rate band settlements.

• No charge if non-doms settle excluded property which remains

excluded.

• The mere existence of an interest in possession probably does not

result in a reservation of benefit: but note para 5 Sched 20 FA

1986. But subject to exemptions will be a POAT charge with

intangables. Should not be a POAT issue with let land and note the

para 13 Sched 15 FA 2004 exemption for transactions where the

aggregate annual value is less than £5000. With land also note s

102A may cause reservation of benefit issues with any

reversionary interests. But may not be significant issue if

reversionary interests do not have much value.

TRUSTS(2)

• Draft Finance Bill clauses propose changes to the relevant

property regime:

– Anti-Rysaffe provisions. Now necessary to take account of value

of a same day addition.

– On a ten year anniversary, no longer any need to take account

of property that has never been relevant property in the

settlement. However, still necessary to take account of value

when settled of property in a related settlement.

– S 144 IHTA 1984 will be amended so that it applies to

appointments within 3 months of death. Note subject to s 144,

may be merit in appointing beneficiaries interests in

possession. This will have no impact on IHT status but should

reduce any need to account for tax at the settlement rate

under s 479 ITA 2007.

08/01/2015

9

TRUSTS (3)

– Amends s 80 IHTA 1984. If the settlor or spouse have an initial

interest in possession, this treats property as being settled, for

the purposes of relevant property regime, when the interest

ends. Subject to transitional provisions, the amendments make

it clear that s 80 only applies if the interest in possession is

qualifying. This provision can be a trap if a spouse becomes

domiciled or deemed domiciled, because the property will then

not benefit from excluded property status after the interest is

terminated.

– Introduces an ability to claim heritage exemption after a ten

year charge.

• May be preferable to give surviving spouse an immediate post-

death interest rather than making an absolute gift: note

– S 102ZA FA 1986 does not incorporate s 102A-C;

TRUSTS (4)

– Exercise of overriding powers may avoid a disposal for CGT and

POAT purposes and avoids income tax settlor issues;

– On a lifetime transfer, s 52 quantifies the charge by reference

to the value of the property in which the interest terminates

rather than the fall in the estate.

• On drafting note:

– Re Woodland Trust v Loring. If spouse has the potential benefit

of transferred nil-rate band may be prudent to make express

provision for the transferred nil-rate band

– May also be prudent to either have two powers of appointment

one of which cannot override the immediate post death

interest or to make it clear that the power can be exercised

subject to such an interest which continues to exist unaffected

by the exercise of the power.

– Make sure you have powers to do carve-outs

TRUSTS (5)

– Consider whether to draft trusts as one settlement or separate

settlements, since this may have an impact on any relevant

property charges

• Note possibility of varying settlements, including under the

Variation of Trust Act. In Wyndham v Egremont the variation

extended the perpetuity period. The variation was held not to

create a new settlement or (slightly less clearly) terminate the

interest in possession.

08/01/2015

10

Private Client Section seminars

IHT and death: A tax update

Q & A

Section members expired 31 Dec 2014

• Benefits for 2015 include:

– Up to 20.8 CPD points earned using your:

• Bi-monthly specialist PS magazine

• Regional seminars on Tax & IHT, Elderly client & Private client issues

• 4 topical webinars available live and on download

– Market tailored e-newsletters & specialist Spotlight publications

with feature updates and case commentaries from Lesley King

– Discounts off the Private Client Section’s:

• (New) Back to Basics regional workshops

• Cross Border conference (March 2015)

• Annual Conference (May 2015)

• Elderly Care conference – (Oct 2015)

• linked Law Society Publishing books, events and webinars

• Renew at www.lawsociety.org.uk/sectionrenewal

Click

here to

renew

1

IHT AND DEATH: A TAX UPDATE

JEREMY WOOLF

PUMP COURT TAX CHAMBERS

16 BEDFORD ROW

LONDON WC1R 4EF

Tel 0207-414-8080

e-mail: jwoolf@pumptax.com

A: General overview

1 No major substantive inheritance tax changes in the Finance Act 2014.

However, inheritance tax is a relevant tax for the purposes of follower notices

and accelerated payment notices. Also restrictions in deductions on liabilities

for foreign property bank accounts which are left out of account under s 157

IHTA 1984 and imposes a relevant property charge on income which arose

more than 5 years before the ten year anniversary.

2 The Finance Act 2013 introduced more significant changes in relation to the

deduction of liabilities and the ability of a spouse to elect for UK domiciled

status. It also introduced the GAAR and ATED (Annual Tax On Enveloped

Dwellings) and related CGT charges.

3 The draft clauses for the Finance Bill 2015 indicate proposed changes to the

relevant property regime, although these are more modest that the earlier

2

consultation documents suggested. It will still be possible to create multiple

nil-rate band settlements. However, there are anti-Rysaffe provisions and other

relatively minor changes to the relevant property regime: see paras 17-18

below. Capital gains tax is also being applied more generally to non-residents

disposing of interests in UK residential land.

B: Merits of making lifetime gifts

4 Subject to the reservation of benefit provisions, it therefore remains the

position that it may be possible to save inheritance tax by making gifts that are

potentially exempt transfers and surviving seven year (gifts to trusts and

companies and transfers falling within s 96 and 98 IHTA are immediately

chargeable). However it is not automatically advisable to make gifts. In this

regard it is to be noted that:

(i) the main benefit of a gift is the possible avoidance of IHT if the donor

survives seven years and the transfer is a PET and there is no

reservation of benefit;

(ii) however, lifetime gifts may be counterproductive if the donor dies

within seven years because they may crystallise a capital gains tax

charge at 18 or 28% and an inheritance tax charge. This is particularly

true if the death is within three years of the gift, when there will be no

reduction in the 40% charge, or if the gift is within the nil-rate band

when there will be no saving unless the donor survives seven years. If

the individual is survived by a spouse/civil partner it should generally

be possible to secure a capital gains tax uplift on the first death plus no

3

immediate IHT charge by making a spouse exempt gift. The surviving

spouse can then make a PET without a capital gains tax charge: note

para D19 p 70 of Part D of the GAAR Guidance. If the surviving

spouse owns shares of the same class there may be merit in making a

gift to a settlement as a way of avoiding the share pooling rules: s 104

TCGA 1992. Borrowings to fund a gift may be another way of

avoiding crystallising a capital gains tax charge (subject to the points

made at para 6 below);

(iii) business property relief and agricultural property relief may prevent a

charge if the asset is owned two years or possibly immediately if the

individual already owns shares and there is a rights issue: s 106-108

IHTA 1984 and Vinton v HMRC [2008] STC SCD 592. This compares

with seven years required to avoid tax on gifts. May be merit in having

a shell company, since on the literal wording s 106 just focuses on the

length of the period of ownership and not the use of the asset. But note

the GAAR. Also note that HMRC accept that AIM shares are not listed

for this purpose: see IHTM18336 (they therefore potentially fall within

s 105(1)(bb) which does not require a controlling holding).

C: Agricultural property and business property relief

5 There is clear merit in maximising claims for business/agricultural reliefs:

(i) Consider investing in assets subject to agricultural property and

business property relief. Note shares or partnership interests may be

eligible for relief while debt is not: note IHTM25153. Securities only

4

qualify for relief if they assist in conferring control: s 105(b). So

consider capitalising debt.

(ii) With an individual relief may be available on let properties if they can

be regarded as an asset of a business and the business is predominately

a non-investment business, for example of farming: Farmer v IRC

[1999] STC (SCD) 321 and Brander v HMRC [2010] STC 2666. But

note that agricultural property relief takes precedence: s 114 IHTA

1984.

(iii) When looking at a company it is necessary to look at all its activities.

Provided it is mainly carrying on non-investment business activity

some minor letting activities may therefore not be fatal provided it

constitutes a business: see SVM111220 and American Leaf Blending

Co v Director General [1979] AC 676 and HMRC v Salaried Persons

Postal Loans Ltd [2006] STC 1315. If not a business asset it will be an

excepted asset: see s 112 IHTA 1984. With holding companies, the

question is whether the main business is that of being a holding

company of companies mainly carrying on eligible businesses: s

105(4) IHTA 1984. Strictly this does not entail looking at the group’s

activities as a whole, but note SVM111190 possibly suggests that

HMRC may in practice adopt a more holistic approach. S 111 IHTA

1984 may exclude some subsidiaries: There will clearly be merit in

reviewing group structures to ensure they qualify. It may be possible to

secure relief by moving assets or activities to different members of the

group.

5

(iv) It is sufficient to claim the relief that the transfer of value is

attributable to a business, the assets do not also need to continue to

function as part of a business to satisfy the initial conditions for

claiming the relief: see Nelson Dance v HMRC [2009] STC 802.

However, s 113A IHTA 1984 may result in the claw-back of relief if

donor dies within seven years (see para (v) below).

(v) S 113A IHTA 1984 (business property relief) and s 124A 1984

(agricultural property relief) may result in a claw-back of reliefs if the

property ceases to be used by the donee for business purposes or as

agricultural property within seven years of a lifetime transfer and the

donor dies. Subject to roll-over provisions in s 113B and s 124B, any

disposal of the asset or deemed change in its ownership can trigger a

claw-back of the relief. So can a change in its use. Note

(a) on a PET the failure to comply with the conditions impacts on

the cumulative total of transfers. On a gift that is immediately

chargeable the failure just impacts on the tax payable on the

gift and not the cumulative total of transfers. So making a

number of chargeable transfers on different days within the nil-

rate band may result in no charge provided they are not

dispositions by associated operations: see s 113A(2) and s

124A(2) note IHTM25368 and the GAAR (but is this any

different from Rysaffe planning which para D26 of Part D of

the GAAR Guidance suggests is not subject to the GAAR);

(b) with unquoted shares or quoted shares eligible for relief a

change in the nature of the company does not result in a loss of

6

business property relief: see s 113A(3)(b) and 113(3A). So if

the nature of a company may change, make a gift before the

nature of the company changes since the relief will not be

clawed back on account of the subsequent change (this is

assuming no gift with reservation issues). But note that with

unquoted shares, relief will be lost if the shares become quoted.

(vi) Reliefs restricted if there are unconditional contracts of sale, but not

options: ss 113 and 124 IHTA 1984 and SP 12/80 and ICAEW

Memorandum TR 557.

(vii) If relieved property is bequeathed to a discretionary trust then the

Trustees can sell it to the surviving spouse who may then be able to

claim the relief a second time if they survive two years.

D: Liabilities

6 Particularly given the FA 2013 and FA 2014, it is important to ensure that

liabilities are structured and used in a way that minimises any charges. In this

regard note:

(i) For a non-domiciled individual it is a good idea to finance UK assets

with debt charged on UK assets and to use debt charged on UK assets

for other general expenses not related to excluded property and foreign

currency bank accounts left out of account as a result of s 157 IHTA

1984. Ss 162A and 162AA IHTA 1984 restrict deductions for

liabilities to acquire, maintain or enhance exclude property and s 157

accounts. Note applies whenever debt incurred. Could impose a charge

7

if estate left to spouse. No equivalent of s 175A(4) IHTA which

prevents s 175A restricting a deduction when a liability is charged on

property given to a surviving spouse.

(ii) S 162B IHTA 1984 provides similar restrictions for liabilities to

acquire property subject to agricultural or business property relief if

deducted from other property. However, it only applies in relation to

liabilities incurred after 6 April 2013. So it will not be a good idea to

repay pre-6 April loans. Note the transitional provisions in para 5,

Sched 36 FA 2013 do not suggest that the new provisions should apply

because the existing loan is allowed to remain outstanding provided

this does not result in a new liability. It only applies if the “agreement

was varied so that the liability could be incurred under it”.

(iii) S 175A IHTA 1984 prevents a deduction if the loan is not discharged

after death unless there is a real commercial reason for not discharging

the debt and seeking a tax advantage is not the main purpose of leaving

it undischarged.

(iv) The GAAR Guidance suggests that creating a non-UK situs debt

structure to reduce IHT is likely to be subject to the GAAR. The

position may be different if there is an existing trust or company to

make the loan or that the loan is made to: see example D 31 on p 108

of Part D of the GAAR Guidance, in particular options 7-9. Difficult to

see why it should be regarded as materially more aggressive than

ownership by a non-resident company.

(v) S 103 FA 1986 may disallow debts if consideration for the debt derives

from the individual borrowing the money or if the lender’s estate

8

includes property derived from the borrower unless it can be shown

that the transfer from the borrower was not made to facilitate the

borrowing.

E: Other exemptions

7 There is clearly merit in considering other exemptions. Note in particular:

(i) spouse exemption: s 18 IHTA 1984;

(ii) annual exemption of £ 3000 (or £ 6000 if previous year’s not utilised):

s 19 IHTA 1984;

(iii) normal expenditure out of income: s 21 IHTA 1984. This is very

valuable if individual has a large income. Need to show pattern of

giving, but a single payment may qualify if there is evidence of a

resolution to make further payments: see Bennett v IRC [1995] STC

54. May be better to make a series of smaller gifts within the

exemption than one large one outside it. May be used as a way of

funding trusts if the relevant conditions are satisfied;

(iv) gifts to charities: s 23 IHTA 1984. Note a gift of more than 10% of a

component part of the estate may result in a reduction in the tax on the

balance to 36%: see Schedule 1A IHTA 1984.

(v) transfers of shares to an EBT provided that within a year the trustees

own 50% of the shares and participators and persons connected with

them cannot benefit apart from benefits that are “payments” that are

income for the purpose of income tax: s 28 IHTA 1984. But note

connection ceases on death, so family members who have less than 5%

9

shareholdings may be more generally able to benefit thereafter. Para

D29 of Part D of the GAAR Guidance highlights this as a form of

planning where the GAAR might apply. But note in the example a

company is set-up and specifically to exploit the exemption and carries

on investment management business with no full time employees.

F: The family home

8 The reservation of benefit provisions, POAT (Pre-Owned Asset Tax), SDLT

and possible ATED and employment benefit in kind charges, if owned by a

company, complicate planning with residential property. However:

(i) S 102B(4) FA 1986 and para 11(5)(c) Sched 15 FA 2004 may prevent

reservation of benefit and POAT issues with a gift of an undivided

share of an interest in land, provided the donee is in occupation and the

donor does not receive any benefit, other than a negligible one, at the

expense of the donee. A person may be in occupation even though not

physically present: note IHTM44003 concerned with POAT (there

might conceivably be arguments that a more restrictive approach

should be taken with the reservation of benefit provisions). Note:

(a) having keys and storing possessions may be evidence of

occupation. Clearly not helpful if council tax is just paid on

the basis that there is just one occupant;

(b) if the gift is absolute note loss of CGT PPR relief if the

property is not the donee’s principal residence. If the gift is to

a settlement who is the donee?

10

(c) HMRC clearly consider it provocative if the donor just retains

a small unequal share. IHTM14332 states that such cases

should be referred to Technical although it does not highlight

any grounds of challenge.

(d) may be necessary to pay rent to prevent reservation of benefit

issues if donee ceases to occupy.

(ii) Subject to any issues with covenants, HMRC accept that no reservation

of benefit issues arise on the grant of a reversionary lease if the lease

was granted more than seven years after the property was acquired: see

s 102A(5) FA 1986. HMRC also accept that the provision does not

apply where the donor can be considered to have provided full

consideration so s 102A(3) applies: see IHTM14360. Ideally the lease

should commence in possession within 21 years to avoid any possible

issues with s 149(3) Law of Property Act 1925, although this on its

literal wording only applies to leases granted for a rent or a premium.

Consideration will need to be given to what will happen after 21 years

if the lease commences within 21 years. May also be prudent if the

lease is less than 300 years so that s 153 LPA 1925 does not confer a

right to acquire the freehold. Care must be taken to ensure that

covenants do not cause any problems: note Buzzoni v HMRC [2013]

EWCA Civ 1684. If a surviving spouse inherits an interest on death,

then there will be difficulties in adopting this planning for seven years.

There may also be difficulties in also relying on the exemptions if one

spouse leaves their interest in the freehold to the other after the lease

has been granted or leaves their interest to a trust that confers the right

11

because the acquired interest or right will not fall within the

exemptions. Also it may mean that the donor does not have much

funding for an alternative property. If an arrangement is to be made

with the donees it would need to be entirely commercial so the donor

can be said to be occupying for full consideration. This is also likely to

result in a POAT charge. But note that under para 4 of Schedule 15 the

charge is on the proportion of the value of the land that is represented

by the gifted interest (so no account is taken of the loss of merger

value). So while the interest is not worth much (or until the next

revaluation date after five years) the charge may be relatively small.

(iii) Gift the property or a share and pay a market rent: this should result in

no POAT or reservation of benefit issues provided the donor is in

actual occupation: see para 6(1)(a) of Sched 20 FA 1986 and paras

11(3)-(5) Sched 15 FA 2004. However, the rent will be subject to

income tax, although this may be less of an issue if the rent is income

of individuals such as grandchildren who have little income. There

may also be issues as to how any rent is to be funded. Could also be

SDLT on the grant of the lease but not the gift of the freehold if there

is no consideration for the gift and note also relief in s 57A FA 2003

and SDLTM16041 and 16042 if there is an obligation to grant the

lease. There will also be professional expenses in determining the rent

both initially and on appropriate reviews.

(iv) Sell the freehold subject to a lease on arm’s length terms or possibly

part of the property: this should not give rise to any reservation of

benefit problems since there will be no disposal of property by way of

12

gift. However, it does give rise to POAT issues unless reliance can be

placed on para 10(1) of Sched 15 FA 2004 (if a sale of the entire

property subject to rights reserved) or para 5 of SI 2005/724 (disposal

of part of an interest for consideration that is not money or a readily

convertible asset) and which requires the transaction to be one that

could be expected between parties acting at arm’s length or . Note

IHTM440131 states that:

“There will be a 'marriage' value for the two interests and a truly

arm's length transaction must reflect this. In practice, this is likely

to be difficult for the taxpayer to show since an independent

purchaser would not normally want to pay for marriage value

unless he was certain of getting the leasehold interest”.

Note also s 43(3) IHTA 1984 treats a lease for life as being a

settlement unless granted for full consideration. Is the obligation to

grant the lease “consideration”? Could clearly be expressed as such.

No issue under s 43(3) if the lease is fixed term. On SDLT note the

relief in s 57A FA 2003 and SDLTM16041 and 16042. If the

obligation to grant a lease back is consideration is there a lease

premium issue for the purposes of s 277 ITTOIA 2005 if the likely

length of the lease is less than 50 years? To avoid any issue on grant

the lease could be carved out prior to the sale, but there may then be

income tax issues on a future assignment if it could be said to be at an

undervalue: see s 282 ITTOIA 2005.

(v) In the past non-doms would place properties in non-resident

companies. ATED issues if the non-dom or other non-qualifying

individual occupies the property and increased SDLT and possibly

capital gains tax liabilities (because no principal private residence

13

relief can be claimed) plus possible employment tax issues make this

less attractive.

(vi) If a beneficiary has a s 49 IHTA 1984 interest in possession then s

102ZA FA 2006 states that s 102 FA 1986 applies to the termination as

if the beneficiary had made a gift of the property. However, it does not

incorporate s 102A-C. So there is a strong argument that carve out

schemes should work in this context. If the interest has subsisted for

seven years a reversionary lease scheme may in any event be effective:

see para (ii). Especially if the beneficiary is not a trustee and his

consent is not required, the termination of his interest should not

trigger the disposal condition in para 3(2) of Sched 15 FA 2004, so no

POAT charge should arise for that reason or at all assuming the

contribution condition is also not breached.

• Note paras 27.4.3 – 27.4.5 of Part D of the GAAR Guidance suggest that most

of the ideas outlined above should not be subject to the GAAR. Conceivably

there might be slightly more debate about (vi) because it has not been

specifically addressed by HMRC. But why should it be regarded as any more

unreasonable than granting a reversionary lease? Also note risks of a

disposition by associated operations. Try and ensure that any interest retained

by the donor is transferred to a different person (eg possibly a new

discretionary trust).

9 One possible disadvantage in any planning may be the loss of capital gains tax

principal private residence relief on the interest acquired by the transferee

going forward (the Finance Bill also contains clauses restricting the relief).

14

Consider creating a settlement under which the existing occupant continues to

occupy the property under the terms of the settlement so that all the interests

owned by the trustees of the settlement for capital gains tax purposes are

eligible for relief. For example if a reversionary lease is granted the freehold

and lease could be owned by different funds of the same settlement. The

freehold would be owned on trusts that gave the settlor a 90% share absolutely

with 10% being held on life interest trusts. The lease would be held on trusts

that gave the children a 90% share absolutely with 10% being held on life

interest trusts for the children remainder to the grandchildren. Note this will

give rise to an immediately chargeable transfer in relation to the 10% shares,

There will also be potential reservation of benefit issues in relation to the 10%

share of the freehold: but note comments at para 12 below. However, no

chargeable transfer should arise in relation to the balance. Despite that fact, for

capital gains tax purposes with English land the entire fund should be settled

property: see Crowe v Appleby [1975] STC 502 and [1976] STC 301 and

CG37543-37552.

G: Discounted gift schemes

10 Individual takes out an insurance policy which gives a package of contractual

rights. He then gifts some of the rights from this which he is excluded from

benefiting from and retains the other rights. HMRC accept that with care the

reservation of benefit provisions do not apply and the GAAR Guidance

accepts the GAAR does not apply: see IHTM20424 and para 27 of Part D of

the GAAR Guidance. Note also the special provisions in para 7 of Schedule 20

15

FA 1986. Provided the settlor’s retained rights are not settled, they also accept

that there is no POAT charge: see IHTM44000.

H: Loan trusts

11 Provided the settlor is excluded from benefit from the settlement, HMRC also

accept that no reservation of benefit or POAT issues in relation to intangibles s

where an individual makes a loan to a trust, which is used to acquire policies

and which is repaid using the trust fund: see IHTM14317, 14401, 201513,

44113 (in relation to POAT and policies) and para 44005 (in relation to the

contribution condition and land). Note that there may be income tax settlor

issues.

I: Investment companies and deferred shares

12 With investment companies consideration could be given to a share

reorganisation, so that for example the donor obtains preference shares with

low growth rights, which have most of the current value of the company,

which he retains, and gifts away shares with most of the growth rights. It

would be surprising if there were any issue with such shares. A possibly more

provocative alternative may be to gift shares that have minimal rights at

present but where the rights fructify at a future date, so that they for example

come to rank equally to ordinary shares. In such cases the concern is that there

could be said to be “an alternation in any right attaching to unquoted shares or

unquoted debentures of a close company” or an alteration of its share capital

for the purposes of s 98 IHTA 1984. S 98(2) states that an alternation included

16

an “extinguishment”. This provision results in an immediate chargeable

transfer (and note not a PET). An article in the Law Society Gazette on 11

September 1991 states that HMRC considered that an alternation did occur

when deferred shares started ranking equally with other shares. IHTM14855

also suggests HMRC consider that s 98 applies when shares acquire voting

rights at a fixed date in the future.

J: Trusts

13 Consider making gifts by Will to discretionary trusts for children rather than

absolute gifts. Paying a maximum of 6% tax every 10 years may be better than

paying a 40% charge on death (the 40% charge on death is the equivalent of

just over 6.5 periodic charges). Indeed if nil rate band settlements are created

every seven years the funds in the settlement may be subject to no charge.

Settlements may be created more frequently with relieved property: note para

3(v) above. Non-doms and non-deemed doms can settle excluded property

without a charge. The security of knowing that an individual is a beneficiary

of a trust may make it easier for the individual to make other gifts. For non-

doms it may also have the benefit of securing excluded property status on their

non-UK assets even if they subsequently become UK domiciled or deemed

domiciled. With property settled when the individual was non-domiciled,

HMRC accept that the settlement excluded property provisions apply when

determining whether there is a reservation of benefit charge: see IHTM14396.

14 It is also possibly worth observing that while reservation of benefit issues will

arise if the settlor can benefit from overriding or discretionary power, no

17

reservation of benefit issues probably arise because the settlor has a fixed

interest in the trust for example an initial interest in possession: see Ingram v

IRC [1997] STC 37 but note para 5 Sched 20 FA 1986. Note with property

other than land or chattels that is not occupied by the settlor this will give rise

to a POAT charge unless it is within the para 13 Sched 15 FA 2004 exemption

for transactions where the aggregate annual value is less than £ 5000. With

land s 102A FA 1986 probably gives rise to a reservation of benefit over the

reversionary interest, but this may not be material if the reversionary interest

does not have much value.

15 The government has announced that it is no longer proposing to make major

changes to the taxation of relevant property trusts. Draft clauses have been

introduced directed at Rysaffe planning. These contain one beneficial change.

When calculating the 10 year anniversary charge, when valuing the property

subject to the notional transfer it is no longer necessary to take any account of

the value of property that is at no time relevant property. It is possibly

anomalous that account is taken of the value when settled of any property in a

related settlement. Similar changes made when calculating the charge on

property before the first ten year anniversary and to charges between 10 year

anniversaries.

16 To counter Rysaffe planning it is now necessary to take account of the value of

any same day addition. This term is defined in s 62A and applies to property

that is added to other settlements by a settlor on the same day as property is

added to the settlement in question. However, it does not apply if one of the

trusts is charitable or if one of the settlements is a s 62B Protected Settlement,

18

which is a settlement created before 10 December 2014 which has had no

property added since that date (with an exception for dispositions made by

Will where the testator died before 10 December 2014 and the property is

added before 6 April 2016). It is also necessary to take account of the value of

any other relevant property in that settlement on the date of the addition.

Similar amendments are made to the provisions charging property before the

first 10-year anniversary and to charges between 10-year anniversaries.

17 S 144 IHTA 1984 is being amended so that from 10 December 2014 it applies

to transfers occurring within the first quarter of death. Note (subject to s 144

IHTA 1984) it may be desirable to appoint property held on relevant property

trusts onto interest in possession trusts. While this will not impact on the

inheritance tax treatment of the trust, it should reduce the need to account for

tax at the trust rate under s 479 ITA 2007.

18 Draft clauses also amends s 80 IHTA 1984. If the settlor or spouse have an

initial interest in possession, this treats property as being settled, for the

purposes of relevant property regime, when the interest ends. Subject to

transitional provisions, the amendment makes it clear that s 80 only applies if

the interest in possession is qualifying. This provision can be a trap if spouse

become domiciled or deemed domiciled, because the property will then not

benefit from excluded property status after the interest is terminated and the

property becomes subject to the relevant property regime. Draft clauses also

introduces an ability to claim heritage exemption after a ten year charge.

19

19 There may also be merit in giving a surviving spouse an immediate post death

interest rather than making an absolute gift to them. These include the

following:

(i) may enable carve-out planning that is countered by s 102A-C FA 1986

since s 102ZA FA 1986 just incorporate s 102 FA 1986 and makes no

reference to s 102A-C;

(ii) it may also have benefits that it is possible to terminate their interest

without triggering a “disposal” for CGT or POAT purposes and

income tax settlor issues by exercising an overriding power without

any consent requirements. The CGT benefit is probably not material at

present since an IHT charge will arise if the property is worth more

than the nil-rate band and hold-over relief is currently available on

gifts that constitute a chargeable transfer.

(iii) subsequent lifetime transfers of value may be smaller because s 52

IHTA 1984 just focuses on the value of the settled property rather than

the individual’s estate as a whole: see IHTM0493 (which accept that

subject to the Ramsay and associated operations no account should be

taken of non-settled property owned by the individual). This may be

particularly valuable if the disposition is of a controlling shareholding

partly owned by the individual and partly in which he has an interest in

possession. This is because, assuming there are no Ramsay and

associated operations issues, the charge will just be on the value of the

trust’s holding or a fraction of its value if there is just a partial

termination: note also s 54A IHTA 1984 if the creation of the

settlement was a PET.

20

But note not all exemptions apply or they may be subject to additional

conditions: for example small gifts exemption and note s 56 IHTA 1984.

Annual exemption and gift on marriage exemption just only apply if the

individual gives the trustees notice within six months: see s 57 IHTA 1984.

CGT rates could be higher and exemptions may be more restricted. May also

impact on rates of IHT on trusts created by the surviving spouse’s Will: see

para 20(iv) below.

20 Drafting issues:

(i) The significance of making a nil-rate band legacy has been reduced by

the ability to transfer any unutilised nil rate band to the surviving

spouse. However, the fact that the nil rate band has not been increased

recently may still make the legacy attractive because any increases in

the fund will be sheltered from tax (the reverse may prove to be the

position if the band were significantly increase). Woodland Trust v

Loring [2014] EWCA Civ 1314 highlights the possibility of disputes if

the spouse can benefit from the transfer of a spouse’s nil-rate band.

The gift in that case was of “such sum as is at the date of my death the

amount of my unused nil rate band”. The Court of Appeal considered

that it was increased by the transferred nil-rate band (but different

considerations may apply with other wording). Especially in a case

where such a transfer is available it would be prudent to explicitly state

whether or not the transferred nil-rate band is to be included.

(ii) It would be prudent if it is made clear that overriding powers can be

exercised subject to the immediate post death interest in which case the

21

original immediate post death interest continues and any new trusts are

subject to that interest. Another alternative might be to have two

powers one of which can override the interest while the other cannot.

(iii) It would also be prudent to ensure that there are powers to do carve-

out planning.

(iv) Consider whether it is better to draft trusts as one settlement or

different settlements since this may impact on charges under the

relevant property regime. The draft clauses for the Finance Bill mean

that when calculating relevant property charges no account has to be

taken of property within a settlement if it never becomes relevant

property when account would need to be taken of it if it was in a

related settlement. So it may be better to draft funds as one settlement

if IPDI (immediate post death interest property) property never goes

into the relevant property regime. The position may be different if it

does, since it may then be preferable to be looking at the value of the

other funds when settled, rather than its actual value which is the value

that will be used if all the funds are in one relevant property settlement.

But note that funds in an IPDI for a surviving spouse are probably only

treated as settled when the interest terminates: s 80 IHTA 1984. If this

is on death the trust will be related with any trusts created by the

surviving spouse’s Will: see IHTM42231

21 It may be desirable to extend the life of a settlement to avoid tax charges: eg

capital gains tax that would arise on its termination. If consent is required on

behalf of minors or unborn children an application might be made under the

22

Variation of Trusts Act. In Wyndham v Egremont [2009] EWHC 2076 (Ch)

the Court accepted that such a variation could extend the perpetuity period. By

parity of reasoning it should be able to extend the accumulation period (which

may be another possible benefit of a variation). Although it accepted that

HMRC were not bound by the conclusion Blackburn J also considered that the

variations in that case, and the issue is probably fact specific, did not result in

a new settlement and less clearly did not terminate the existing interest in

possession (George in that case had an interest in possession during his life

and an entitlement to the capital if he was alive on the vesting day). The

reasoning suggests similar considerations may apply to an agreed variation.

HMRC’s guidance certainly does not suggest that they view all variations as

resulting in a new settlement: see CG37882-37884.

Disclaimer: These notes are not intended to be comprehensive advice and should not

be regarded as advice. No liability is accepted by the author to any person in relation

to any act of failure to act in reliance on these notes.

Introducing  Finders  

Principal  Sponsors  of  the  Law  Society’s    Private  Client  Seminar  Series  

Since opening for business in 1997 Finders has grown to become one of the leading firms of international probate genealogists worldwide. The company works with solicitors, public sector services and others to identify and locate missing or unknown beneficiaries to a deceased person’s estates both in the UK and globally. Finders also offer a wide range of additional services including: bankruptcy searches, missing will and missing asset searches, probate property sales and services, a missing document service and estate distribution schedules. The company is also authorized to provide Aviva insurance policies for a number of risks.   Finders success is attributed to providing a fresh and dynamic approach to its work and a commitment to provide a no-nonsense, fast and friendly service whilst at the same time ensuring that the highest standards are maintained. Last year Finders traced heirs and next of kin to over 1,000 estates and its success rate is close to 100%. The company is also a main firm on the popular BBC 1 documentary series ‘Heir Hunters’. Along with numerous credentials and accreditations Finders is your best practice choice. For further information telephone (freephone) 0800 085 8796 or email contact@findersuk.com. www.findersuk.com

PERSONAL MOTOR INSURANCE

MADE TO MEASURE FOR LAW SOCIETY MEMBERS

Our cover• A‘madetomeasure’productforLawprofessionals• UnderwrittenbyAviva,oneoftheUK’slargestinsurers• Fornofaultclaims,wherewecanidentifytheotherinsurer,weprovideanearequivalent courtesycar• Evenifyouareatfaultorthevehicleisstolenoratotalloss,wegiveanenhanced*1 courtesyvehicle• Youarecoveredifyouaccidentallyfillupwiththewrongfuel,unlikemanypolicies• ExceptionalvalueandoptionalUKandEuropeanbreakdowncoverwiththeRAC, includinghomestart

Our credentials• ‘UKPrivateClientBrokeroftheYear’2013&2014and‘UKBrokeroftheYear’2013*2

• Establishedforover65years• A‘Top50Broker’byrevenue,andinthe‘Top10IndependentBrokers’*3

*1 Termsandconditionsapply*2InsuranceTimesUKBrokerAwards*3InsuranceTimes

SteveHarris01252359079steve.harris@larkinsurance.co.ukwww.larkinsurance.co.uk/law-society