CAPITAL TAX UPDATE. Chris Whitehouse 5 Stone Buildings Lincoln s Inn WC2A 3XT Tel Fax

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1 CAPITAL TAX UPDATE Chris Whitehouse 5 Stone Buildings Lincoln s Inn WC2A 3XT Tel Fax vibbett@5sblaw.com These notes are intended as an aid to stimulate debate: delegates must take expert advice before taking or refraining from any action on the basis of these notes and the speaker can accept no responsibility or liability for any action or omission taken by delegates based on the information in these notes or the lectures. Law Society July 2016

2 CONTENTS I CURRENT (AND FUTURE) TRENDS 1 1. The Future of IHT 2. Cutting down on reliefs 3. Deeds of Variation 4. Home Loan Schemes 5. ISAs 6. CGT rates II CHANGES ON THE WAY 4 A. Extension of DOTAS to IHT planning B. The Residential Nil Rate Band C. Extending the IHT charge to all residential property in the UK D. Domicile changes E. Other changes that affect trusts and settlements III PLANNING 13 A B C Reversionary Leases; recent cases and let property Taking advantage of the 2006 settlement legislation The Main Residence APPENDIX 19 Precedent 1 Precedent 2

3 I CURRENT (AND FUTURE) TRENDS 1. The Future of IHT For the year to February 2016 IHT receipts were 4.6bn up by 21% from 3.8bn in See also the Report of the National Audit Office (7 April 2014) and note: a. value of reliefs 22.4bn (NRB being 18.4bn of that); b. the cost of APR to the Exchequer up from 195m in 2008/09 to 370m in 2012/13 and BPR up in the same period from 150m to 385m. 2. Cutting down on reliefs HMRC are looking to restrict the scope of widely used exemptions, eg: a. main residence relief: see the multiplicity of recent cases and notably cases on the meaning of residence: see especially Dutton-Forshaw v RCC [2015] UKFTT 0478 (TC); b. business property relief: see especially recent cases dealing with when the business mainly involves the holding of an investment (see, for instance, Green v RCC [2015] UKFTT 236 on furnished holiday lettings); c. sharing arrangements under s102b: is the donee in occupation or merely a visitor? 3. Deeds of Variation The review of the use of deeds of variation (announced in the first 2015 Budget) concluded that no changes should be made although the position will be kept under review! In Vaughan Jones [2015] EWHC 1086 (Ch) the Deceased (who died in 2007) left his residuary estate to his widow and three sons in equal shares. The deed of variation provided for the residue to pass to the surviving spouse absolutely and said that the parties shall, if called upon to do so, give the notice required under the relevant Finance Acts for capital transfer tax purposes. 1

4 a. The deed was rectified to include the necessary reading-back statement. b. It appears from the solicitor s attendance note that the plan is to pay as little IHT as possible at this stage and for [the widow] to transfer as much as she can and survive seven years. She subsequently made gifts of 20,000 each to two of the sons and over 73,000 to one of the sons. What of s142(3)? Not decided, but see Lau v RCC [2009] STC (SCD) 352 for similar facts. 4. Home loan schemes: a. No sign of a test case. b. Evidence of new HMRC approach? i. Tax on first death in joint schemes with no spouse exemption but with a credit if the property passes to the spouse; ii. iii. Issuing notices of determination and taxpayers giving in! Repay POAT if IHT is paid or the scheme is unscrambled before death. 5. ISAs For deaths on or after 3 December 2014, a surviving spouse / civil partner has the benefit of an additional ISA allowance based on the value of the ISA investments of the deceased at the time of death: see the Individual Savings Account (Amendment) (No 2) Regs 2015 (SI 2015/869) and ISA Bulletin of 27 March At present the tax advantages of ISAs end on the death of the ISA account holder. The Finance Bill 2016 allows the Treasury, via regulations, to provide for ISAs to retain their tax advantaged status during the administration of the estate: see the clauses which amend ITTOIA 2005 s694a ( deceased investors ); TCGA 1992 s151(2) and s62(4a). From young peoples ISAs are to be introduced. Up to 4000pa will attract a 25% bonus from HMRC. The fund must either be used to purchase a first property or as a pension. 2

5 6. CGT rates New rates for : (i) basic rate taxpayers (up to 32,000) 10% (was 18%) (ii) higher rate 20% (was 28%): this rate applies to PRs and trustees. BUT not to gains on disposals of residential properties (e.g. buy to let; second homes). (iii) an extension of entrepreneurs relief to long term (at least three years) investment in qualifying companies by individuals. Query whether trustees with a qualifying beneficiary (who is entitled to an interest in possession) may also benefit. Applies to investments acquired from 17 March 2016 (the three year period starting to run from 6 April 2016). Note that this is a wholly new relief with its own 10m ceiling. 3

6 II CHANGES ON THE WAY A. Extension of DOTAS to IHT planning The intention is to extend the DOTAS regime to IHT generally. Until recently, disclosure has only been required in the case of arrangements creating relevant property trusts which avoid an entry charge. 1. A 2014 Consultation document 1 commented: 2.38 HMRC is aware of a variety of schemes that seek to avoid IHT which would not be detected by the current hallmark because of its focus on a very specific area of IHT avoidance. These include: schemes entered into during a person s lifetime which are designed to reduce the value of their estate, thereby avoiding IHT on death arrangements which seek to avoid IHT on lifetime transfers or charges other than entry charges on relevant property trusts The potential tax lost as a result of such schemes and arrangements may be substantial. The Government believes these should be brought within DOTAS in order to provide adequate safeguards for the Exchequer 2.43 A key element of any change would be to ensure that any new disclosure requirements applicable to IHT remain tightly targeted, describe the avoidance which HMRC is interested in, and do not catch IHT planning that involves the straightforward use of reliefs and exemptions 2.44 So that the application of DOTAS to IHT does not pick up what would be regarded as acceptable tax planning, it is proposed, as a further safeguard, that only arrangements which an informed observer could reasonably conclude are an IHT avoidance scheme or arrangement would be disclosable. Straightforward use of the existing generous IHT reliefs and exemptions would not be disclosable For example, the spouse and civil partner exemption is designed to ensure that transfers between spouses and civil partners are exempt from IHT, recognising the unique legal commitment entered into. The exemption means that, for example, on the death of the first spouse the survivor does not have to sell the family home in which they have both been living. Where an individual person uses a standard Will to 1 See Strengthening the Tax Avoidance Disclosure Regimes (31 July 2014) and the Summary of Responses (December 2014). 4

7 make use of the exemption in a straightforward way, the Government would not want sight of this transaction under DOTAS Equally, arrangements which are permitted by the fundamental structure of inheritance tax would not necessarily have to be disclosed. For example, where after the death of his first wife the deceased remarried, he may wish to ensure that the assets from his first marriage pass to the children of that marriage. He can achieve this by leaving that part of his estate on revocable interest in possession trusts for his second wife, with remainders to his children. If the life interest is brought to an end whilst the second wife is still alive, she will be treated as making a potentially exempt transfer which will be an exempt transfer on her surviving seven years. The assets pass down a generation free of inheritance tax because of the structure of the tax. However, if the surviving spouse s interest in possession was terminated after the first spouse s death but in a way that circumvented the reservation of benefit rules so that the surviving spouse obtained continuing access to the property she shared with the deceased, such a scheme would be disclosable Similarly, business property relief and agricultural property relief are designed to ensure that businesses do not have to be broken up and sold to pay IHT and to encourage entrepreneurs to invest in businesses and take the associated risks. Investing in AIM shares with the intention of qualifying for business property relief having owned them for two years and then giving them into a trust which immediately sold them would not be disclosable. This is simply the natural consequence of a relief which does not require the donee to hold the business property for any minimum period. However, doing so, but in such a way that what is effectively a double deduction is obtained by circumventing the liability provisions in Finance Act 2013, would be disclosable The Inheritance Tax Avoidance Scheme (Prescribed Description of Arrangements) Regulations 2015 (draft 16 July 2015). This was withdrawn. 3. The amendment of tax avoidance schemes (Prescribed Description of Arrangements) (Amendments) Regulations: SI 2016/99. With effect from 23 February 2016 IHT is included within the confidentiality and premium fee hallmarks. 2 This refers to Ingram and reversionary lease schemes that may be used when the residence is settled. 3 In a case where the taxpayer borrowed to buy the AIM shares and charged the debt on (say) his main residence, it may still be deductible if the shares are subject to a PET. 5

8 4. Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax: a further consultation document was published on 20 April The draft SI requires two conditions to be met: (i) (ii) a main purpose of the arrangements is obtaining a tax advantage; they must be contrived or abnormal. There are specific exclusions for 4 typical insurance based schemes. Note also: a. No grandfathering: i.e. does not matter that the scheme is longstanding (eg the Family Debt Scheme) and includes life and death arrangements. b. In the Summary of Responses to the Consultation Document (December 2014), HMRC commented that: An Accelerated Payment notice can only charge tax from the date IHT would have been payable if someone had not entered into an avoidance scheme. Where someone enters a scheme to avoid IHT on death, a notice cannot accelerate the tax payment to before death. IHT can arise on certain limited events during a person s lifetime. Only in those situations would an Accelerated Payment be due before death ; B. The Residential Nil Rate Band (see also Lesley s lecture) 1. The basic idea is to give an additional NRB (a RNRB ) in respect of a residential property which is left on death to direct descendants ( closely inherited ). The legislation is in F(No 2)A 2015 with further legislation to be included in FA Nine extra sections (s8d-s8m) have been inserted into IHTA The legislation comes into effect in respect of deaths on and after 6 April Immediate significance a. Downsizing : in order not to discourage the sales of residential property, the relief will apply if the proceeds of sale (or value of the 6

9 property)are closely inherited. This will apply in respect of disposals on and after 8 July 2015 and covers the situation: i. where the taxpayer downsizes; ii. where the property is sold (or given away) and not replaced e.g. because the taxpayer moves into residential care. See Technical Note on downsizing proposals dated 18 September 2015 and the legislation in FB b. There are similar rules to those already in force permitting an unused RNRB to be carried forward and used on the death of a surviving spouse / civil partner: the first spouse can die any time but the survivor must die after 5 April c. Wills drafted today need to consider the effect of the RNRB (and what of existing wills?). 4. Amount of the relief a. The maximum amount will increase as follows: 100,000 for 2017/18 125,000 for 2018/19 150,000 for 2019/ ,000 for 2020/21 But this maximum is reduced if: (i) the value of the property (after deducting charges) is less; (ii) if the taxpayer s estate at death (before deducting exemptions and reliefs) exceeds 2m. 5. What is a qualifying residential interest? a. Whether the property is a residence will be decided on the basis of the CGT main residence relief case law (see especially Goodwin v 7

10 Curtis [1998] STC 475 CA and Dutton-Forshaw v RCC [2015 UKFTT0478 (TC)). BUT: b. the RNRB is not restricted to the main residence (the PRs are given an election to select which residence of the deceased is to be taken when there is more than one owned at death); 6. The property must be closely inherited a. Closely means that it must be left on death to: i. children / grandchildren etc (issue). But note that this includes step children; adopted children (treated as children of both the natural parent and adoptive parent) and foster children; ii. spouses and civil partners of children etc and widows / widowers who have not remarried in the case of pre-deceasing children. b. When is property inherited? If left by will; on intestacy; passing by survivorship and also if it is settled provided that the lineal descendant: i. is the IPDI beneficiary of the trust; or ii. iii. if the trust is disabled he is the disabled person; or if he is a child of the deceased the trusts must fall under either s71a (BMT) or s71d (18-25 trust) IHTA The relief is not available if property is left in a discretionary trust. But the requirements may be met if reading-back occurs: eg under a deed of variation (s142) or, in the case of a discretionary trust, under s How the RNRB is applied The RNRB is not set against the gift of the residential property but applies generally to the death charge on the estate (i.e. it is not focused on the property so that there may still be a tax charge on it!). 8

11 Example 1 Doris dies in January Her husband died in 2015 and left her his entire estate. Doris had made a PET of 500,000 to her sister in 2018 and established a discretionary trust of 150,000 shortly before her death. Her death estate is worth 1.9m and includes her Sloane Square flat (value 1m) which she leaves (subject to tax) to her step-daughter with the residue passing to her brother. The IHT calculation is as follows: 1. Doris nil rate band will be set against the 2018 PET leaving a chargeable amount of 175, Her husband s unused NRB may be claimed and will be set against: a. the balance of the PET ( 175,000); b. the remaining 150,000 will then be set against the tax due on the creation of the trust. 3. So far as Doris estate at death is concerned, the RNRB of 350,000 will be available (that of her predeceasing husband must be claimed by her PRs) and so the tax payable is 1.9m - 350,000 = 1,550,000 x 40% = 620,000 and the share attributable to the flat is therefore 326,306. C. Extending the IHT charge to all residential property in the UK From 6 April 2017 all UK residential property (whether or not commercially let) which is owned directly or indirectly by non-uk domiciliaries is to be within the IHT charge. At present, IHT is only charged if the property is directly owned by the nondomiciliary. The proposed change will therefore typically affect property owned in a non-uk company either by the non-domiciliary or via an (excluded property) trust. In the July 2015 Budget it was announced that there would be a consultation on the proposal after the summer recess. 9

12 D. Domicile changes 4 Long term residents 4. From 6 April 2017 persons resident in the UK for more than 15 out of the last 20 years will be treated as UK deemed domiciled for all tax purposes. This change is not that significant for IHT purposes because of the 17 out of 20 deemed domicile rule. Note that: a. split years of residence may count; b. it does not matter when the individual became UK resident: the rules will apply from 2017 to a person who is then UK resident: i.e. there can be a retroactive effect; c. the change does not affect domicile as a matter of general law nor the domicile status of minor children; d. on ceasing to be UK resident, there will be a five year period when they remain deemed domiciled: i.e. they only lose the deemed domicile in the fifth year of non-residence (currently under the IHT rules it is four years). 5. UK domiciliaries who leave the UK and acquire a foreign domicile will only lose their UK domicile five years after acquiring that foreign domicile (instead of the current three years) if they have been resident for over 15 years (otherwise the period remains three years). If a UK domicile of origin 6. An individual was born in the UK with a UK domicile of origin who leaves the UK and acquires a foreign domicile but then becomes resident in the UK again is deemed to resume his UK domicile from that time. This will affect trusts set up while foreign domiciled which would normally be excluded property settlements ( the IHT treatment of such trusts will be the same as for UK taxpayers who have never lost a UK domicile ). E. Other changes that affect trusts and settlements 4 See the Consultation paper Reforms to the taxation of non-domiciles published 30 September 2015; draft legislation making changes to IHTA 1984 published on 9 December 2015 and legislation on income tax and CGT in FB

13 1. Dividends and trusts (from 6 April 2016) a. Interest in possession trusts The basic principle is that trustees pay basic rate tax on trust income which is credited to the beneficiary. He may (a) obtain a refund; (b) suffer no further tax or (c) be liable for additional or higher rates. To date in the case of dividend income the tax credit has covered the basic rate liability of the trustees. From 6 April 2016: (i) (ii) the trustees will have to pay the dividend ordinary rate on the dividend income (they have no 5000 dividend nil rate). this tax will be credited to a beneficiary who may therefore be entitled to a refund (e.g. if the dividend income falls within his dividend nil rate). Exceptionally trustees will not need to submit a return if they have an agreement with HMRC with the income being mandated directly to a beneficiary (TSEM 3040). b. Discretionary and accumulation trusts: These trusts will not benefit from the dividend nil rate and so will suffer tax (from 6 April) at the rate of 38.1%. It is intended that this will be credited to the tax pool and so will be available to frank payments to the beneficiary (note the current clause is deficient in not allowing the dividend basic rate to be credited). This is a new source of income for the beneficiary (an annual payment). Note therefore that the current disadvantages of channelling dividends through these trusts remain: viz. (i) the beneficiary cannot benefit from the tax credit / 5000 allowance; (ii) in making the payment the trustees must deduct tax at the trust rate (45%) and so may have to pay an additional 6.9%. It therefore may be attractive to appoint an interest in possession to a beneficiary with the added attraction that he may then benefit from the 5000 nil rate band. 11

14 2. Restrictions on the deduction of interest charges in calculating the profit from rental properties. Effective (phased in) over four years from April Note revisions to the Bill to apply the new rules to discretionary trusts. 12

15 III A PLANNING REVERSIONARY LEASES; RECENT CASES AND LET PROPERTY 1. Using reversionary leases in IHT planning Silus has owned a substantial let property in Cambridge since He grants a 199 year reversionary lease (taking effect in 20 years time) to a trust for his daughter. There are two issues to consider: (i) (ii) is the grant of the lease (which is a shearing operation) caught as a reservation of benefit by the 1999 anti-avoidance legislation in s102a and has a benefit been reserved in the gifted property (viz. the lease)? FA 1986 s102a: (1) This section applies where an individual disposes of an interest in land by way of gift on or after 9th March (2) At any time in the relevant period when the donor or his spouse or civil partner 2 enjoys a significant right or interest, or is party to a significant arrangement, in relation to the land (a) the interest disposed of is referred to (in relation to the gift and the donor) as property subject to a reservation; and (b) section 102(3) and (4) above shall apply. Let out 1 (3) Subject to subsections (4) and (5) below, a right, interest or arrangement in relation to land is significant for the purposes of subsection (2) above if (and only if) it entitles or enables the donor to occupy all or part of the land, or to enjoy some right in relation to all or part of the land, otherwise than for full consideration in money or money's worth. (4) A right, interest or arrangement is not significant for the purposes of subsection (2) above if (a) (b) it does not and cannot prevent the enjoyment of the land to the entire exclusion, or virtually to the entire exclusion, of the donor; or it does not entitle or enable the donor to occupy all or part of the land immediately after the disposal, but would do so were it not for the interest disposed of. 13

16 Let out 2 (5) A right or interest is not significant for the purposes of subsection (2) above if it was granted or acquired before the period of seven years ending with the date of the gift. (6) Where an individual disposes of more than one interest in land by way of gift, whether or not at the same time or to the same donee, this section shall apply separately in relation to each interest. a. CGT hold-over relief; b. the size of the IHT chargeable transfer; c. future 10 year charges; d. take care drafting the terms of the lease: do not confer benefits on the donor which are a detriment to the donee. 2. Case Law Buzzoni and beyond The case of Buzzoni v RCC 5 eventually resulted in a victory for the taxpayer in the Court of Appeal. The recent First Tier Tribunal decision in the Hood case 6 considers an argument that was left unresolved in Buzzoni. The facts Lady Hood died on 15 March She owned a long lease on a property in Chelsea Square London SW3 and in 1997 had granted a reversionary sublease over it to her sons. The creation of the sub lease involved a PET by Lady Hood which she had survived by 7 years (so that it had become an exempt transfer). The term granted by the sublease commenced on 25 March 2012 and ended shortly before the termination of Lady Hood s head lease. The sublease was made subject to the same terms, covenants, provisos and conditions as were contained in the Head Lease. The covenants were in standard form and included an obligation to pay rent and repair. Lady Hood s head lease contained a covenant not to sublet without the previous consent in writing of the freeholder. Accordingly a licence to sublet was duly obtained. The sons (the sub-lessees) were not party to the licence and did not enter into covenants with the freeholder. Finally it will be noted that Lady Hood remained in occupation of the property at the time of her death by virtue of the head lease: the reversionary lease was only to take effect some 4 years later. 5 6 Buzzoni v RCC [2012] UKUT 360 (TCC) revs d [2013] EWCA 1684 (Civ). Hood v RCC [2016] UKFTT59(TC). 14

17 The Revenue s claim As a result of the covenants for her benefit in the sub-lease Lady Hood had reserved a benefit within the second limb of FA 1986 s102(1)(b): viz. that during the relevant period the property was not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor and of any benefit to the donor by contract or otherwise. In effect, the Revenue argued, Lady Hood was provided with an indemnity from the sub-lessees for the performance of her covenants as lessee under the head lease. The decision of the Tribunal First, the Tribunal rejected the so-called trenching argument which had been the reason for the taxpayer s success in Buzzoni. In that case the entering into the covenants had not involved the donee (the sublessee) in acting to his detriment since he was already bound by similar covenants to the head landlord. Hence it could not be said that his enjoyment of the property was adversely affected. In the Hood case, by contrast, the sub-lessees gave no direct covenants to the head lessor: the only positive covenants were given to the sublessor and therefore adversely affected their enjoyment of the property. Whilst accepting that regard must be had to the substance and not to conveyancing form the Tribunal did not accept that the case was economically equivalent to that in Buzzoni. Second, the Tribunal had to decide what it was that Lady Hood had gifted: was it a gift of a leasehold interest out of which the benefit of the covenants was reserved (so that there was a reservation of benefit) or was the gift of an interest already shorn of the covenants (so that by a species of shearing arrangement there was no reservation). In Buzzoni Moses LJ had rejected the shearing argument although his decision on this point did not form part of the ratio decidendi of the case. The other members of Court (Black and Gloster LJJ) were careful not to express any view on this interesting question. The Tribunal accepted the reasoning of Moses LJ: Judge Berner concluded that: There is in my view no scope for, and certainly no authority for the proposition that a proprietary interest gifted by way of sub-lease must be dissected, and the donated property regarded as being what is left after carving out the burdens on the sub-lessee which are inherent in the sub-lease. 7 7 It is not clear in what sense the burdens are inherent in the sublease. It did not, presumably, have to include them. 15

18 Undoubtedly this is a difficult case and the practitioner should be advised to avoid the inclusion of (most) positive covenants in a sublease. 8 And yet it is hard not to feel sympathy for the taxpayer s argument and there is a suspicion that, whatever the Tribunal says, form has prevailed over substance. If I give my property to my daughter subject to her paying off my mortgage then the gift may be viewed as being of the equity of redemption (in economic terms that is certainly the position). It may also be seen as it is for SDLT as a sale in consideration for the discharge of the mortgage (in effect a sale at undervalue). Revenue practice in such cases is to treat the gift for reservation of benefit purposes as being equal to the net value of the property. The examples given in the IHT Manual at para (business liabilities assumed by the donee) and (sales at undervalue) make interesting reading in this context. B TAKING ADVANTAGE OF THE 2006 SETTLEMENT LEGISLATION 1. All settlements established on or after 22 March 2006 are taxed under the relevant property regime (i.e. 10 year anniversary/exit charges). Their creation will normally involve an immediately chargeable transfer by the settlor. Note: (a) (b) (c) many pre-march 2006 settlements (notably A+M Trusts) are also now taxed under the relevant property regime; the only exception for new settlements is for disabled settlements (as defined) which are treated as giving the disabled beneficiary a qualifying life interest and can be set up by a PET; there are special rules for certain will trusts (IPDIs; 18-25; BMT). 2. An important result of the changes is that the form of the settlement (i.e. whether it is iip; A+M; or discretionary) no longer determines its tax treatment. As a result: (a) a settlement can be switched from being discretionary to iip without attracting IHT (or indeed CGT) charges; 8 The inclusion of covenants not to commit nuisance and to pay council tax, being obligations to which a lessee is already subject are presumably unobjectionable. 16

19 (b) one iip can be replaced by another, again without attracting charges. Reasons for modifying a settlement 3. Switching from discretionary to iip may be attractive: (a) (b) for income tax reasons: especially if the settlement receives dividend income; for CGT purposes if the settlement contains business assets which might benefit from entrepreneurs relief (this can only be given on a trustee disposal by reference to the circumstances of an interest in possession beneficiary: in effect it is his allowance which is used); (c) for the new 3% additional SDLT charge (effective from 1 April 2016); (d) to meet the control requirement in IHTA 1984 s269 (note that surely by an oversight the iip does not have to be qualifying ). 4. Switching from iip to discretionary might be attractive (a) (b) to use the tax pool; to obtain CGT hold-over relief if the iip is qualifying (BUT NB an immediately chargeable transfer by the iip beneficiary). 5. Precedents (a) (b) discretionary to revocable iip; replacing one iip with another. C THE MAIN RESIDENCE 1. The current climate Are planning arrangements still attractive given: (a) (b) (c) the introduction of the RNRB; the painful lesson from Home Loan Schemes; the current hostility of the courts to anything smacking of tax avoidance? 2. Consider safe planning 17

20 (a) (b) Bill gives his house to his daughter Dotty and continues to live there paying a full market rent (outside GWR and POAT); Bill sells his house for its open market value to his wealthy son Jasper who permits him to continue to live there rent free (no gift so no POAT or GWR). Bill must not gift the sale proceeds back to Jasper! 3. Using flexible IPDIs on the death of the first spouse/civil partner Bill dies owning the family home. He leaves it on a flexible IPDI trust for his wife Jenny. The trustees carve out a rent free 20 year lease which they retain on an IPDI trust for Jenny and appoint the encumbered freehold to the children. Note: (a) (b) (c) (d) Bill must own the house not just a share in it (Jenny could give him her share before he dies!); The arrangement is outside the restrictively drafted GWR provisions in FA 1986 s102za but will (apparently!) be reportable under DOTAS; What is to happen to the house after Jenny s death? If to be sold, consider CGT. Is 20 years long enough for Jenny? If she continues to occupy the property after the lease runs out there is a reservation of benefit. 4. Sharing arrangements under FA 1986 s102b This is commonly used planning. Typically widowed Mum gives a half share in the house to her daughter and they continue to live together until Mum s death. Note: (a) (b) (c) (d) (e) It appears that the gift to the daughter must be as tenants in common not joint tenants; The daughter must occupy the property and (the Revenue say) as an owner rather than a guest. Consider therefore legal title; house insurance; possessions; time spent. Beware daughter dying first! Not matter Mum subsequently goes into nursing home. The share retained may attract RNRB (and the share given downsizing!). 18

21 APENDIX: PRECEDENTS Precedent 1: Exercise of a power of appointment to convert a discretionary trust into an interest in possession 9 THIS DEED OF APPOINTMENT is made the [ ] day of [ ] 20[ ] by [ ] ( the Appointors ). SUPPLEMENTAL to a deed of settlement dated [ ] and made between [ ] ( the Settlement ) WHEREAS A. By clause [ ] of the Settlement the Trustees have power to appoint capital and income of the Trust Fund amongst such of the Beneficiaries as they may see fit. The power is exercisable and any exercise may be made revocable during the Trust Period. B. B is a member of the class of Beneficiaries. C. The Appointors are the present Trustees of the Settlement and the Trust Period has not expired. NOW THIS DEED WITNESSES 1. Definitions In this Deed the Trustees, the Trust Period, the Trust Fund and the Beneficiaries shall have the meaning given to these terms in the Settlement. 2. Exercise of power of appointment In exercise of the power of appointment conferred on them by clause [ ] of the Settlement and of all other relevant powers the Appointors hereby appoint that from 9 The deed may be used to convert a discretionary trust into an interest in possession trust. The interest in possession so created is not qualifying for IHT purposes and so for the purposes of this tax the deed is a nothing. However, it will change the income tax treatment of the trust. The appointment may be over the entire trust fund or selected assets (eg all stocks and shares or shares in X plc ). It is common in the latter case to refer to an Appointed Fund and list the assets in a Schedule. The appointment has no CGT consequences: it has the effect of modifying the existing settlement, not creating a new one. Whilst the trust is interest in possession, the tax pool cannot be used: ie it is in abeyance. However, if in the future the trust becomes discretionary it can then be used to frank distributions in the usual way. Whilst the interest in possession subsists, the trustees suffer only basic rate income tax (or equivalent) leaving the beneficiary to pay any higher or additional rate tax for which he is liable. 19

22 and after the date of this deed the Trust Fund shall be held on trust to pay the income thereof to B for his life. 3. Power of revocation reserved 10 The Trustees may at any time or times during the Trust Period by deed or deeds revoke or vary either wholly or in part the appointment contained in clause 2 above. 4. Exclusion of apportionment of income 11 All income of the Trust Fund received by or on behalf of the Trustees from and after the date of this Deed shall be treated as if it had arisen wholly after such date. IN WITNESS etc 10 The deed is revocable during the Trust Period. This enables the trustees to switch the income to another beneficiary. Note that if nothing is said about the power being exercised revocably then it is irrevocable. For a deed of revocation and new appointment see Precedent 2 11 This clause is strictly unnecessary since the Trusts (Capital and Income) Act

23 Precedent 2: Exercise of a power of revocation and new appointment to change the interest in possession beneficiary 12 THIS DEED OF REVOCATION AND APPOINTMENT is made the [ [ ] 20[ ] by [ ] ( the Appointors ). ] day of SUPPLEMENTAL to: 1. a deed of settlement dated [ ] and made between [ ] ( the Settlement ) 2. a revocable deed of appointment dated [] and made by the Appointors ( the Revocable Deed ). WHEREAS A. By clause [ ] of the Settlement the Trustees have power to appoint capital and income of the Trust Fund amongst such of the Beneficiaries as they may see fit. The power is exercisable and any exercise may be made revocable during the Trust Period. B. By the Revocable Deed B a member of the class of Beneficiaries was appointed a life interest in the income of the Trust Fund. C. The Appointors are the present Trustees of the Settlement and are desirous of revoking the Revocable Deed and making such new appointment as is set out below. D. The Trust Period has not expired. NOW THIS DEED WITNESSES 1. Definitions In this Deed the Trustees, the Trust Period, the Trust Fund and the Beneficiaries shall have the meaning given to these terms in the Settlement. 2. Revocation of Revocable Deed In exercise of the power reserved to them the Appointors hereby revoke in its entirety the Revocable Deed. 3. Exercise of power of appointment 12 Similar comments to those made in relation to Precedent 1 apply to this deed: for IHT purposes it is a nothing and, for CGT, does not lead to a deemed disposal of the trust property. Retain flexibility by making the appointment revocable. 21

24 In exercise of the power of appointment conferred on them by clause [ ] of the Settlement and of all other relevant powers the Appointors hereby appoint that from and after the date hereof the Trust Fund shall be held on trust to pay the income thereof to C for his life. 4. Power of revocation reserved The Trustees may at any time or times during the Trust Period by deed or deeds revoke or vary either wholly or in part the appointment contained in clause 3 above. 5. Exclusion of apportionment of income All income of the Trust Fund received by or on behalf of the Trustees from and after the date of this Deed shall be treated as if it had arisen wholly after such date. IN WITNESS etc 22