This week’s piece sees the conclusion of my look at the new Dotas extension to certain inheritance tax planning arrangements based on the creation of relevant property but, importantly, excluding grandfathered arrangements. These are substantially arrangements that HM Revenue & Customs already knows about and which were available before April 6, 2011.
To help determine what is and what is not covered by the grandfathering provisions, HMRC published a list. Last week, I put forward the first part of a “TC-edited” list of arrangements from the HMRC list that we felt were likely to be of greatest interest to financial advisers, product providers and platforms.
Last week’s list included DGTs and excluded property trusts and pilot trusts. I got to letter G in my list so this week I will start with H.
H: Transfers on death into relevant property trusts
A transfer into a relevant property trust made under the terms of a person’s will (that is, a discretionary will trust) or paid into a relevant property trust on a person’s death will not require disclosure.
I: Changes in distribution of a deceased’s estate (for example, under a deed of variation or a disclaimer)
In addition, where distributions are made from property settled by will to which s144 relief applies that is, distributions made within two years of death), then disclosure will not be required.
J: Transfers of the nil-rate band every seven years
The transfer of the settlor’s nilrate band into a relevant property trust every seven years (provided there is no other step or steps to the arrangements which enable an advantage to be obtained in respect of the relevant property entry charge) will not be disclosable as the grandfathering provisions will apply.
K: Loan into trust
A transfer into a relevant property trust by way of loan where, other than the establishment of the trust, it is a single-step transaction, will not be disclosable as the grandfathering provisions will apply.
L: Insurance policy trusts
A transfer of the rights to the benefits payable on death into a relevant property trust will not be disclosable even where other benefits, for example critical illness benefits, are payable to the settlor as the grandfathering provisions will apply.
The payment of premiums on a policy settled into a relevant property trust paid by the settlor or other person will not be disclosable as the grandfathering provisions will apply.
M: Making a chargeable transfer followed by a potentially exempt transfer
Where a settlor makes a chargeable transfer prior to a potentially exempt transfer so as to ensure that their full nil-rate band is available for the chargeable transfer, the arrangements are not disclosable unless there are further arrangements so as to allow an advantage to be obtained in respect of the relevant property entry charge as the grandfathering provisions will apply.
P: Pension death benefits
The transfer of pension scheme death benefits into a relevant property trust where the scheme member retains the retirement benefits will not in itself require disclosure. However, where the transfer is part of arrangements which enable an advantage to be obtained in respect of the relevant property entry charge then disclosure may be required. This will depend on whether it can be shown that the arrangements are within the exceptions to disclosure outlined in Regulation 3 (the grandfathering rule).
Q: Reversionary interests
Where property is transferred into a relevant property trust and the settlor retains a reversionary interest then the transfer will not require disclosure as long as it can be shown the grandfathering rule applies.
R: Transfers of value
A disposition is not disclosable where:
- it is not a transfer of value, and
- it does not form part of wider arrangements, of which one of the main purposes is to avoid an entry charge.
Examples of arrangements which would not be excluded from disclosure include arrangements where property becomes relevant property and an advantage is obtained in respect of the relevant property entry charge:
- where the claim that there is no transfer of value relies on a series of transactions where, in the absence of all other intervening steps, there would have been a transfer of value and a relevant property entry charge;
- where reliefs and exemptions are used in such a way that the arrangements are not covered by the grandfathering rule;
- where an individual makes a potentially exempt transfer to another person and the arrangements are such that the subject matter of the transfer becomes relevant property then, unless the arrangements are covered by the grandfathering rule, disclosure will be required.
There is some understandable concern that the disclosure rules have been extended to inheritance tax schemes but, in practice, the grandfathering rules will mean that many existing arrangements will escape. In particular, loan trusts, discounted gift trusts, pilot trusts, discretionary will trusts, excluded property trusts and pension trusts are all examples of trusts that advisers will frequently use and that will be covered by the grandfathering rules.
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