In the previous two Private Law ‘PET’ blogs ( http://awbclaw.blogspot.co.uk/2015/05/do-some-pets-bite-part-1.html and http://awbclaw.blogspot.co.uk/2015/07/do-some-pets-bite-part-2.html)I looked at Potentially Exempt Transfers (“PETS”) and how a recipient of a gift can find themselves with an unforeseen Inheritance Tax (“IHT”) liability if a PET is made by someone who does not survive seven years from the gift. I have also looked at how a PET can be deemed to be made when ‘life interests’ are brought to an end in certain types of life interest trusts.
I now want to look at a more unusual situation where a PET could be made (or deemed by HMRC to have been made) by an individual without them even knowing.
I have recently come across a trust precedent used by a major UK insurance provider pre 2006 which directs the trustees to hold income for default beneficiaries (so gives them a right to income) but is subject to a flexible power of appointment allowing the trustees to ‘appoint’ (legal speak for transfer out of the trust) to a wider category of other beneficiaries. The investment in this trust was an investment bond and there was no money to distribute as income.
The default beneficiaries in this scenario may not be aware that they could benefit from the trust at some stage. However, crucially, if the power of appointment is exercised by the trustees the default beneficiaries would be treated as making a PET unbeknown to them.
Now the significance of this is important for two reasons;
1. The default beneficiary could be making other PET’s and be unable to advise the recipient as to the likelihood that they may have to pay IHT if the donor dies within seven years.
2. If the trustee of the trust exercises the power of appointment in favour of a beneficiary other than the default beneficiary, they could arguably be liable if tax became payable on the PET as a result of the default beneficiary dying within seven years of the power of appointment being exercised.
A trustee of this type of trust wishing to exercise the power of appointment in favour of a beneficiary other than the default beneficiary should consider taking an indemnity from the beneficiary receiving the assets to ensure that if IHT is payable as a result of a failed PET they are not left out of pocket but this is still not ideal.
Trustees would be well advised to take legal advice prior to making any distribution from any type of Trust as there may be unforeseen tax implications which could turn out to ‘bite’ them in the future.
If you have any questions regarding IHT and PET’s, wills, trusts or probate matters or would like to make or amend a will then please contact Mark Shaw on 01756 692 866 or email mark.shaw@awbclaw.co.uk
Mark Shaw
Solicitor
Wills, Trusts and Probate
Tel: (01756) 692 866
Email: mark.shaw@awbclaw.co.uk
