Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Needful things

09 March 2010
Issue: 4246 / Categories: Forum & Feedback , Inheritance Tax
A trust receives no income and it is assumed that, in such circumstances, HMRC do not need to be informed of its existence. However, what is the position for inheritance tax purposes?

I’ve always understood that if there is no prospect of income then it is not necessary to inform HMRC of the creation of a trust and, indeed, the HMRC website itself gives this guidance.

However, what is the reporting requirement on the inheritance tax side of things?

The online guidance also says that the HMRC Inheritance Tax office only wants to know when a trust incurs an inheritance tax charge, and then outlines the various circumstances when that may arise and when it will, therefore, be necessary to submit forms IHT100, etc.

However, I have seen reference (in previous readers’ queries) to the fact that the IHT forms are only necessary when the value in question exceeds 80% of the IHT threshold (SI 2008 No 605 and SI 2008 No 606).

One of my elderly clients died recently. His own estate was negligible, but he was the liferenter of a small trust, the assets of which were the modest home in which he lived and a very small sum on deposit.

The combined total of his and the trust assets will not exceed the IHT limit so there will be no tax due, but the solicitors dealing with the trust are insisting that I complete and submit IHT forms for the free estate.

They have apparently sent in IHT100 forms for the trust and wish HMRC to agree that there is no tax liability due so that they can finally distribute the trust assets.

Is this entirely necessary or is it a belt and braces approach? I’d like to be sure of my position before I suggest to them they might have done work they didn’t have to do.

Query 17,563 – Bachman

Reply from Terry ‘Lacuna’ Jordan, BKL Tax

The regulations referred to by Bachman in his query relate to immediately chargeable lifetime transfers, to certain terminations of interests in possession and to inheritance tax charges under the ‘relevant property’ regime.

The concern of the solicitors acting for the trust (apparently a Scottish one in view of the term ‘liferenter’) is that the inheritance tax nil-rate band would be apportioned between the deceased’s ‘free estate’ (those assets passing under the terms of the will or under the intestacy rules) and those in which he enjoyed an ‘estate’ interest in possession.

Indeed, were the deceased to have made substantial lifetime gifts that became chargeable on death it might be that there would be no nil-rate band left available to set against the assets comprised in the trust passing on death. Accordingly, their concern is a genuine one.

It is not clear from the query whether a grant of representation is to be obtained, but in any event reference could usefully be made to the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations SI 2004 No 2543. The information that is provided under these regulations is fast tracked and, so the writer understands, is subject only to random checking by HMRC Inheritance Tax.

Reply from Goldstone

In Scotland, the expression ‘liferent’ is used to describe the situation where the income from particular property is to be paid to a person, the liferenter, for a specified period, generally his or her lifetime.

In the rest of the UK the term used is ‘life tenant’. At the end of the period the property will generally pass to a person, known as the fiar, (TCGA 1992, s 63) at market value. A proper liferent does not make the relevant property settled property. IHTA 1984, s 43(4) provides that it is settled property for inheritance tax (IHT) purposes.

TCGA 1992 does not go so far, but s 63 provides that the person entitled to possession on the death of a proper liferenter shall be deemed to have acquired all the assets forming part of the property at their market value at death.

IHTA 1984, s 46 (‘Interest in possession: Scotland’) states that ‘in the application of this Act to Scotland, any reference to an interest in possession in settled property is a reference to an interest of any kind under a settlement by virtue of which the person in right of that interest is entitled to the enjoyment of the property or would be so entitled if the property were capable of enjoyment, including an interest of an assignee under an assignation of an interest of any kind (other than a reversionary interest) in property subject to a proper liferent; and the person in right of such an interest at any time shall be deemed to be entitled to a corresponding interest in the whole or any part of the property comprised in the settlement’.

As far as whether a form IHT100 is required, on page 5 the guide IHT110 (How to fill in form IHT100) advises that ‘the IHT100 should be used to tell us about… the termination of an interest in possession in settled property arising as the result of the life tenant’s death…’. The relevant section of the form is 100b: ‘Termination of an interest in possession’. The introductory notes advise that: ‘if you are telling us about the ending of an interest in possession on the death of a life tenant do not work out the tax. We will do that for you’.

It appears that in this case HMRC are not discouraging the submission of the form IHT100.

Issue: 4246 / Categories: Forum & Feedback , Inheritance Tax
back to top icon