Thursday, 28 Aug 2014

Life Interest Trusts, Inheritance Tax (“IHT”) bills and burying one’s head in the sand

Life Interest Trusts, Inheritance Tax (“IHT”) bills and burying one’s head in the sand


I have just read the case of HMRC v Evans, 2014 UKFTT 628 TC with interest. This involved an “old style” pre- March 2006 life interest trust. For those not in the know a life interest trust arises when an individual, through a trust, has the right to enjoyment of assets but cannot dispose of those assets themselves. If this was a shareholding the beneficiary would be entitled to the dividends, if a house, the beneficiary could live in the house free of rent.


Under an “old style” arrangement, when the beneficiary concerned (usually called the “life tenant”) dies, they are deemed for IHT purposes to have disposed of the assets in the trust. In other words the life tenant’s own assets and those in the trust are lumped together for calculating the IHT charge arising on their death.

The Evans case looked at the clear failings of the trustee of such a trust. Usually, the personal representatives (“PR’s”) of the life tenant (those charged with administering the life tenant’s estate) will file an IHT account declaring the assets of the estate and those of the trust. The trustees should not under any circumstances assume that the PR’s will do this properly, if at all. What trustees should do is try to obtain a copy of the IHT account submitted by the PR’s and evidence of receipt of it by HMRC. If that cannot be obtained because the PR’s cannot be traced or are uncooperative the trustees should make all reasonable enquiries to determine the value of the life tenant’s estate and file their own IHT account. The IHT payment is due from the expiration from 6 months after the end of the month in which the life tenant dies. Strangely, the IHT account is not due until 6 months after that but that is an oddity which I believe is being looked at. Whilst the figures submitted by the trustees are unlikely to be exact they protect themselves from penalties, interest (possibly not all) and the daily penalties of up to £60 per day which can be levied as they have done their very best to comply with their filing requirements.

The trustee in Evans ignored HMRC correspondence and, despite it being established that he had been served with proceedings, failed to attend the hearing. The amounts now due to HMRC when compared with what would have been payable had the matter been dealt with properly are truly eye watering.

In a nutshell:

    • If choosing trustees, choose wisely

    • File IHT accounts on time and unless absolutely confident, get advice

    • Don’t rely on PR’s to file IHT accounts when there is an obligation upon you as a trustee to file an IHT return.

 

Liam O’Neill
Partner: Partners, Wills & Probate

 

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