Is this double counting for IHT

For IHT are all assets and liabilities aggregated or counted separately when Trusts are there

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My client has passed away.

They had two trusts and two loans.

Trust A is an IIP and my client lent it money, that trust then onward invested in to other assets. My client was the life tenant.

Trust B is an IIP and it lent my client money, he invested in to other assets. My client was  the life tenant

The trusts both pass to the surviving spouse

s4(1) and s5(1) and 49 IHTA 1984 indicate that all property from the trusts is included in the estate. That estate is then taxed as a whole.

The conundrum is whether Trust A's position of having an asset and a liability are together assessed and the net value subect to spousal exemption, and the free estate is also assessed on the value of the loan to the trust or:

Does the aggregation of assets in the estate allow the loan debtor and creditor to be offset and aggregated leaving just the onward investment to be taxed (and exempted if appropriate)

In reverse for Trust B can we really exempt an asset in the Trust's list when it aggregates in the estate if the liability in the estate is reducing tax and the asset is subject to IHT.

Our preference is that the liability and asset (being the two halves of the loans) are offset, and the net nil is included in the estate as in effect the estate is lending to itself The onward investment would stay included. We do see the reverse position, that we include all three, but having never seen it before could do with a steer if anyone has seen this or a revenue view on it.

 

Any help much appreciated

 

 

 

 

Replies (14)

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Portia profile image
By Portia Nina Levin
15th Dec 2017 10:57

Yes, you deduct the liabilities.

Are you sure that the IIPs fall to be included in the deceased's estate, and are not relevant property. When and how where the settlements concerned created?

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Replying to Portia Nina Levin:
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By Tax Dragon
15th Dec 2017 11:57

Well, subject to them being deductible.

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Replying to Tax Dragon:
Portia profile image
By Portia Nina Levin
15th Dec 2017 12:09

Well if the debts aren't deductible, then in the creditor's hands the value of the corresponding asset must be nil.

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Replying to Portia Nina Levin:
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By Tax Dragon
15th Dec 2017 12:55

Utter tosh. But the OP sounds like half-thought-through planning, rather than a real situation. Were it one of them, the solicitor would be dealing with.

I've gotten allergic to half-thought-through planning being posted as queries in here, disguised as real situations.

I'm being generous with the "half", I feel. (Your RP point already sinks this one - how basic was that?)

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Replying to Tax Dragon:
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By Portia Nina Levin
15th Dec 2017 13:10

Utter tosh? If the liability isn't deductible, that can only be because it isn't going to be repaid. The only reason for not repaying it after the death, is if the funds to repay it aren't available. If the funds to repay it aren't available, then it isn't recoverable.

And, perhaps the OP has considered the RP point and perhaps the IIP is an IPDI or the settlement is pre-2006.

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Replying to Portia Nina Levin:
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By Tax Dragon
15th Dec 2017 13:45

"Can only be"? No. "The only reason"? What?
Are you feeling OK today?

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Replying to Tax Dragon:
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By Benbow
15th Dec 2017 23:58

Given I am the OP, I will make it plain for you.

This is a real situation set up by previous advisers. The solicitor's pack treats the bundle of assets and liabilities one way, and we prefer another. There is no clear guidance, comment or technical detail we can find that covers this. So genuinely and simply, we do need to know whether when an IIP and a regular estate that have a loan between them are assessed as three items in an estate or one:

Is it an Asset (loan) a liability (loan) and an asset (actual investment) or is it just an Asset (actual investment).

Neither route makes complete technical sense to us.

So if the Dragon would mind not breathing fire, and look at it technically that would be appreciated.

Oh and for the avoidance of doubt , Pre March 2006 by some way.

Thanks muchly

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Replying to Benbow:
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By Tax Dragon
16th Dec 2017 00:10

Loan has been used to acquire the investment. There is now one asset - the investment. The loan is not a separate asset.

Does that make it clearer?

Same as when I use a mortgage to buy a house. I don't have the proceeds of the mortgage and the house. I have the house.

I am still paying off the mortgage.

Why is this a conundrum?

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Replying to Tax Dragon:
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By Benbow
16th Dec 2017 10:02

Because the Investment is in the hands of the Trust before aggregation, the loan is to the trust from the individual.

If there were no IIP for the deceased it would be that their estate had an asset (loan) and that was it.

Because of the IIP, their estate includes the loan to the trust, and the IIP investment asset, and a liability from the trust to the individual. That is before any netting off.

As the trust and main estate are going in different directions to different beneficiaries, only the trust assets are exempt (spouse).

So if we treat it as Three items, the trust element is Investment, less liability, = broadly Nil value. And the loan to the trust is taxed at 40%.

If we say the loan is not to be counted on either side as that would be the estate lending to itself, then the only item to count is the investment, and it is spouse exempt.

Never seen it before!

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Replying to Benbow:
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By Tax Dragon
16th Dec 2017 12:31

Well as you say, the spouse gets the trust subject to a debt and the loan (as an asset) passes elsewhere. Just as in reality they do not "net off" (such that the widow gets the unincumbered investment and the free estate gets nothing), so too for tax.

I am assuming you/the solicitors have considered the anti avoidance (eg s175A, s162A and s102).

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Replying to Tax Dragon:
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By Portia Nina Levin
17th Dec 2017 10:53

Why's s 102 relevant? Do you suspect that there's some asset about which we haven't been told that has left the estate, but that the deceased still had enjoyment of?

And s 162A? That's only relevant if the debt is secured on an asset that is chargeable to IHT, but has been used to buy excluded property.

Here, we are not told that the debt is secured on any particular asset (such that it might reduce the value of that asset, rather than be a general liability. We are told though that it has been used to buy property, against which the liability is being deducted.

I can only see that s 175A is at all relevant.

Also, what's unincumbered please?

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Replying to Portia Nina Levin:
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By Tax Dragon
17th Dec 2017 12:21

It might not be. But it might (we are not told enough to know). Similarly s103, which is what I actually meant to say.

In my view, you value the trust subject to the debt liability (because the trust is subject to the debt liability) and you value the free estate with the debt asset.

If you disagree, do say.

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Replying to Tax Dragon:
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By Portia Nina Levin
17th Dec 2017 12:45

Tax Dragon wrote:

In my view, you value the trust subject to the debt liability (because the trust is subject to the debt liability) and you value the free estate with the debt asset.

Was that not the OP's question? To which I thought I had responded.

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Replying to Portia Nina Levin:
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By Tax Dragon
17th Dec 2017 21:44

My reading of the OP's question before and after the clarification) was: does the (trust's) debt liability net off against the (free estate's) debt asset [and vice versa for trust B]? To which the answer is simple: No.

Your response, starting as it did with "yes", was at best misleading. For me, at least. Others may (have) read it differently.

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