Declaration of trust and IHT403 and IHT404

carryingon

My mom passed away and I'm executor for her estate. She's survived by her husband and three adult children.
I have 3 questions.
1. My parents jointly purchased a property in 2010. In 2012 they established a declaration of trust for that property. There are 5 tenants in common-- my parents and us 3 children, each has a 20% share.

The trust allows my parents to live in the house (making it a Gift with Reservation of Benefit), and we would only share in proceeds, if/when the house is sold before or after their deaths. Our shares are absolute and there's a restriction on the property citing this trust. My mother's will indicates that all her estate goes to her husband.
I am filling out the IHT403, and need assistance with section 12.
I am identifying the 3 children and that each has a 20% share. For the value at death: for each child I am indicating 20% of half the property value as her surviving husband (my dad) owns the other 50%. From my understanding there would be no exemptions or reliefs even though my father continues to live in the property and there is no intention to sell. Is this correct?

2) this is the only part of her estate that is not paased on to my father, the remainder has spousal exemption. Can I complete a reduced IHT 400 In this case?

3) Should the property also be included in IHT404 as a joint asset and would the value at death be 20% of the value of the property?

Keep_pedalling

I really find it so hard to understand why so many people complicate the lives of their loved ones by setting up these type of trust, however it’s too late to undo what has been done so long back.

There is a strong chance here that you do not need to complete an IHT return as her gifting may be covered by the NRB. What is the value of the house?

poseidon1

You should cease trying to complete IHT 403 for the time being. What your parents did in 2012 may have IHT consequences they did not understand at the time and you are now grappling with in retrospect. I would advise at this stage that where GROB is in point, there will have been no effective potentially exempt gifts for you to report. The so called 20% gifts to you and siblings will have had no effect for IHT purposes.

To establish what you do need to report, you will need to provide an exact ( redacted ) wording of the trust document to determine if your parents ( unwisely ) created a lifetime trust for themselves that provided for their joint continued occupation of the property for life with reversion to children only in circumstances where they have both died or after first death the survivor moves into a care home and the property is then sold to terminate the trust.

What you described as absolute 20% shares to children cannot be the case if you have any restrictions preventing you and siblings from selling or otherwise dealing with the property whilst your parents are alive.

If your parents did create what was in effect a lifetime settlement in 2012, you may have considerably more problems to deal with than just the present IHT 403.

A lifetime settlement deemed to have been created in 2012 would have been a chargeable lifetime transfer ( CLT) for IHT purposes at that time. It would potentially have been a reportable IHT transfer if the property was worth at least 80% of your parents joint nil rate bands at that time. If the property value exceeded their nil rate bands, the lifetime IHT charge would have been at 20% of the house value exceeding £650k

In view of the above have to ask did your parents get any legal advice at the time when they did this, or did they do this out of some misguided DIY attempt at IHT/nursing home fees avoidance ?

If you would rather not share the wording of the declaration of trust on this forum, then strongly suggest you consult a STEP qualified lawyer to decipher the IHT effect of what your parents did in 2012 to ensure you make no incorrect disclosures to HMRC now.

carryingon

https://forums.moneysavingexpert.com/discussion/comment/82170725#Comment_82170725

Thank you for this fulsome response:

At the time of the declaration the property value was £650K. The current value is approximately £900K.

At least one of the children wanted assurances regarding future inheritance and so legal advice was sought and this declaration was drafted.

Here is the declaration text, names and locations removed:

This Declaration of Trust is made the 21st day of December 2012.
Between (1) xxwife name and xxhusband name both of xxxAddress (“the Trustees” which expression shall mean the Trustee or Trustees for the time being hereof)
And (2) xxchild1
And (3) xxchild2
And (4) xxchild3
WHEREAS
(A) By a Transfer dated the 16th June 2010 (“the Transfer”) the property, details of which are set out in the Schedule hereto (“the Property”), was transferred to the Trustees as joint tenants.(B) This Declaration is made and is supplemental to an Order of District Judge(C) The Trustees make this Declaration to set out the respective interests of the parties hereto in the Property (and any substitute property as hereinafter appearing) its proceeds of sale and net rents and profits hereof until sale and xxchild1, xxchild2 and xx child3 have joined in this Declaration to confirm their respective interests hereunder.
(D) The entirety of the purchase monies referred to in the Transfer and the costs relating to the acquisition of the Property were provided by the Trustees.

(E) The Trustees have agreed their joint tenancy shall be severed and that henceforth their interests in the Property and its proceeds of sale and net rents and profits thereof shall be held as hereinafter mentioned.
NOW THIS DEED WITNESSES as follows:

1.The following expressions shall have the following meanings:-
(a) “the home” shall mean the Property and any house, bungalow, flat or maisonette which shall be purchased by the Trustees in accordance with and subject to the provisions set out hereunder in substitution for the Property.
(b) “the residing party” shall mean xxwife and xxhusband the survivor of them.
(c) “the specified event” shall mean the death of the survivor of xxwife and xxhusband

2.The Trustees hereby declare that they hold the Home on a trust of land.

3.The Trustees declare that they hold the Home and its proceed of sale (after deducting the costs of sale) and the net rents and profits until sale and if applicable any surplus money following the purchase of a substitute home pursuant to clause 5 UPON TRUST for themselves and the parties hereto as tenants in common:-
(a) as to 20% to xxwife absolutely.
(b) as to 20% to xxhusband absolutely.
(c) as to 20% to xxchild1 absolutely.
(d) as to 20% to xxchild2 absolutely.
(e) as to 20% to xxchild3 absolutely.

4.The Residing Party shall be permitted to reside in the Home until the Specified Event provided that they shall keep the Home insured and in good repair and pay all outgoings relating to it.
5.1 The Trustees or in the alternative the Residing Party shall be entitled in their absolute discretion to sell the Home and with the net proceeds of sale purchase any freehold or leasehold house, bungalow, flat or maisonette (provided that any leasehold property has an unexpired term exceeding 60 years at the date of purchase) the total cost of which shall not exceed (including any associated costs, fees and taxes of any description relating to the sale and purchase) the proceeds.
5.2 The Trustees shall pay at their own expense all legal and other costs, fees and taxes associated with the sale of the Home and purchase of any replacement property effected under clause 5.1.

6. If at the time of purchase of any substitute home there should remain any surplus money in the hands of the Trustees they shall hold such surplus money upon the trusts of clause 3.
7. With the written consent of the Trustees or the Residing Party or the happening of the Specified Event the Home shall be sold and the Trustees for the time being shall stand possessed of the net proceeds of sale in accordance with the shares specified in clause 3 of this Declaration.

8. The power of appointing a Trustee in substitution for xxwife shall vest in xxwife during her lifetime and after her death in her personal representatives and the power of appointing a Trustee in substitution for xxhusband shall vest in xxhusband during his lifetime and after his death in his personal representatives.

9.It is hereby agreed that restrictions in standard forms A and N as set out in Schedule 2 will be registered at H M Land Registry against the Home and the parties shall take such steps as are reasonably necessary to ensure the entry of such restrictions.

10. It is agreed between the parties hereto that this Declaration shall be binding on their respective personal representatives.

carryingon

https://forums.moneysavingexpert.com/discussion/comment/82170715#Comment_82170715

The current value is approximately £900K.

I agree that these trusts do indeed complicate things for those left behind. Professional help is now being considered for what otherwise would have been a DIY exercise as all estate passes to dad.

Keep_pedalling

I will let poseidon1 comment on the terms of the trust and the tax implications of it, but I will say I think the solicitor they went to gave pretty rubbish advice, severing the tenancy holding 50% each combined with wills creating an immediate post death interest trust on the first death would be the normal approach here.

poseidon1

OP appreciate your efforts in transcribing the essential elements of the declaration of trust. Sadly the negative IHT implications identified in my intial post would seem to apply.

At first sight this seems to be a relevatively straightforward voluntary interest in possession trust with your parents by virtue of clause 4 entitled to occupy the property ( or replacement) indefinitely, or until the occurrence of the Specified Event. However I can see no clause defining the Specified Event, although the nature of that event probably does not change the analysis at this stage.

The important point is that clause 3 does not give you and your siblings an absolute interest in anything other than future proceeds of sale, and therefore cannot be construed as a gift covered by the GROB rules for the purposes of IHT403. At best you have a contingent interest in future proceeds of sale subject to your parents overriding occupation rights , so in that regard you are considered to be the Remaindermen of your parents settlement.

The consequences of this settlement would be as follows :

1. As a trust created in you parents lifetime, it was reportable to HMRC within 6 months of its creation in 2012.
2. At a declared value of £650k it was just within both NRBs. However it would have been open to HMRC's valuation arm to challenge that value if they thought it was understated. Therefore no gurantee that a zero IHT trust entry charge would have been agreed.
3. The IHT exposure worsens. Every 10 years there is an decennial IHT charge based on the market value of the property at that point. On the assumption the property was worth far more than £650k in 2022 then there is a charge at 6% of the excess above £650k. This 10 year charge regime is recurring with the next event being 2032 unless trust terminated prior to.

The above potentially disastrous IHT outcome is surprising for a Solicitor drawn up trust arrangement. Therefore the aspect that gives me pause is that in preamble A of the deed the trust seems to result from a Order made by a District Court Judge, which is highly unusual in the case of a plain vanilla family trust arrangement.

This suggests there is far more here than initially meets the eye, and the nature of those court proceedings may provide a clue as to why the trust was mandated to be created pursuant to a court order ( if indeed thats what occurred) despite it being wholly tax inefficient to do so. Therefore what if any were the special factors at play here that would negate the operation of the IHT compliance rules I have outlined above?

Again if sharing this information here maybe too sensitive a matter, than armed with my analysis of adverse tax outcomes you really need to return to law firm responsible for the trust to clarify whether this trust really was necessary for the purposes the original court order was trying to achieve. If tax implications were ignored/ overlooked there maybe issues of professional negligence to consider. In any event, suggest you put completion of your mother's IHT return on hold pending further enquires. This is not something you can pursue unaided at this time.

carryingon

https://forums.moneysavingexpert.com/discussion/comment/82171062#Comment_82171062

Thank you for your very informative and practical response. Indeed there is a backstory and for that reason I am taking your initial advice and leaving this to the experts.

All I can offer is my gratitude and 🫶 for the time that you give this forum and to my inquiry in particular. Be well poseidon1

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82171110#Comment_82171110

Glad to have helped. Hope you get satisfaction from the professionals involved in setting this up.