Interests in possession: addition of settled property or value: difficult cases and examples
Once a disposition has been made it can be difficult to establish the extent to which the property comprised in the settlement is relevant and non-relevant property. Each case must be considered on its facts, but the following examples are intended to provide an outline of the issues to consider.
Assume that James has had an interest in possession under his mother Sheila’s settlement that was created in 2004. The original fund comprises James’ home, some investments and capital cash.
Assume that in 2007, Sheila transfers cash net of reliefs and exemptions of £50,000 (‘the New Fund’) to the trustees, to hold on the trusts of her settlement.
Is this a chargeable transfer of property which will immediately be relevant property in the trustees’ hands?
Yes - property has been added to the settlement and James’ interest in possession in that property did not exist before 22 March 2006.
If the transferor were someone other than Sheila the relevant property would be treated for IHT purposes as if it were comprised in a separate settlement made by that person (IHTM42243).
And remember that the value of an asset as relevant property in the trustees’ hands will not necessarily be the same as its value transferred. The value of a brand new car might be worth less once transferred. The last piece needed to complete a collection of items might be worth more.
Some trusts are not able to borrow to meet running costs. What would be the position if the New Fund is used to pay income or capital expenses of Sheila’s settlement?
The transfer of the New Fund to the trustees would be a chargeable transfer. But, where it is used to meet immediate trust expenses there will be little in the way of Inheritance Tax charges as the funds will not be settled property for very long.
If the settlement included appropriate powers, and the New Fund was kept separate from the original fund, then payment of trust expenses would not give rise to exit charges (IHTM42110) by virtue of IHTA84/S65(5)(a). No ten year anniversary charge (IHTM42081) would arise under IHTA84/S64 if the whole of the New Fund had by then been depleted and the original fund would be left intact. No apportionment would be necessary.
Would the position be different if the £50,000 added was merged with the original funds?
If the New Fund had been merged with the original fund, it would be necessary to value each fund at the date of the addition of the New Fund to apportion the merged funds between relevant and non-relevant property.
What if the trustees had spent the New Fund on acquiring a capital asset?
As long as the acquired asset was segregated from the original fund then that asset alone would constitute relevant property. Otherwise an apportionment of the merged fund would be necessary.
What if the trustees had spent the New Fund on an extension to James’ home?
In these circumstances, the New Fund would be relevant property represented as an appropriate proportion of James’ (extended) home.
If it was possible to administer the extension as a separate fund then it alone would be relevant property. If not there would be a mixed fund and apportionment would be necessary.
What if the New Fund had merged with the capital cash element of the original funds?
If the New Fund were distinguishable from all but certain assets of the original funds then the New Fund would be the appropriate proportion of those merged assets. No further apportionment of the fund in general would be necessary.
What if the trustees had segregated but invested the New Fund?
In that case the New Fund and the property representing it would alone constitute the relevant property. No apportionment would be necessary.
What would be the case if instead of transferring the £50,000 to the trustees Sheila had loaned the money to the trustees at arm’s length?
The question of whether loans made after 22 March 2006 to a settlement in which an interest in possession subsists before that date may give rise to relevant property is complex. Any case where this applies should be referred to Technical.