On 16 February 2000 Mr Chugtai signed two Trust Deeds, one concerning funds in an Abbey National bank account (which was later transferred to Santander Bank (“the Santander Account” and “the Santander Trust”) and the second concerning property at Henley Road, Caversham (“the Henley Road property” and “the Property Trust”), says Gerry Brown, of QB Partners.
He died in February 2017.
The deceased was both settler and sole trustee of the Trusts. He was specifically excluded from benefiting from the trust funds and income derived therefrom, which “are not, and must not become, payable to or applicable for the benefit of the Settlor”.
The beneficiaries were Mr Chugtai’s children.
His executor claimed that since these transfers were made more than seven years before the date of death, the value of the assets in the Trusts did not form part of Mr Chugtai’s IHT estate.
HMRC’s argued that the deceased had reserved a benefit in both Trusts during the seven years prior to his death, and consequently the value of the assets in the Trusts, at the date of his death, must be taken into account when calculating IHT on his estate.
The legislation states;
“where, an individual disposes of any property by way of gift and –
… at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by control or otherwise; and … “the relevant period” means a period ending on the date of the donor’s death and beginning seven years before that date or, if it is later, on the date of the gift.
… any property is not enjoyed as mentioned … above … is referred to (in relation to the gift and the donor) as property subject to a reservation.
If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, … that property shall be treated as property to which he was beneficially entitled immediately before his death”.
In other words if the settlor benefits from assets which he has gifted, those assets are treated as being in his IHT estate.
Mr Chugtai vacated the Henley Road property shortly after the Deed was signed. However, one of his children suffered from mental health issues and could not leave that property where she felt safe, secure and comfortable. Initially she was looked after by carers, but this was unsatisfactory and she asked that the deceased return to the property to care for her, which he did. He continued to live at the property, and care for his daughter, for the rest of his life
The deceased used that address when completing his self-assessment tax returns and when opening bank accounts with Halifax, Barclays, and Santander.
That address was also used in the IHT 400 return, in the deceased’s Will, and in a tenancy agreement which the deceased entered into on or around 21 October 2011 in respect of the shop premises which formed part of the property.
Payments of a personal nature made into and out of the Santander account (for example charitable donations and a personal tax liability of the deceased). Payments of the outgoings of the Henley Road property (for example council tax and utility bills) were also paid out of the account.
The executor’s barrister argued that the ‘reservation of benefits’ provisions did not apply since the deceased did not enjoy the Henley Road property nor the Santander Account. He occupied the former to care for his daughter and used the latter to exclusively benefit his daughter by paying the outgoings on that property.
The Tax Tribunal concluded that “in this case our view is that, as a matter of fact, there was a clear benefit to the deceased from both Trusts.”
It should be noted that the legislation relaxes the ‘reservation of benefits’ provisions where the donor, having retained a benefit, has subsequently become incapable of managing their affairs due to unforeseen physical or mental infirmity, and is then looked after by the donee.
This clearly didn’t apply to the facts in this case – as the Tribunal pointed out. The donee (the daughter who was a beneficiary of the trust) suffered the infirmity – not the donor (Mr Chugtai).
By Gerry Brown, technical expert at QB Partners
