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