Trust liabilities reduce estate value without reducing IHT charge

In James Charles Pride as Trustee of the Estate of the Late Geraldine Jill Pride v HMRC [2022] TC08776, the First Tier Tribunal (FTT) found that loan notes issued by a trust of which the deceased was life tenant, were a liability of her death estate. Their value was reduced to nil as she had provided the consideration for the note so there was no reduction in the Inheritance Tax due.

Geraldine Pride died in October 2016.

• Prior to her death, she was the principal beneficiary of a family property trust (the property trust) established in 2002. She was entitled to the income of the trust and the trustees could provide her with trust capital.
• The property trust held a flat rented to a third party acquired for £535,000 and investment bonds of £800,000. The property had been transferred to the trust by Mrs Pride by way of a complex set of transactions involving a sub-sale. The bond was funded by cash from the sale of Mrs Pride’s house, again this came through a complex set of transactions which purported to ensure that the house sale was made by the trustees with the cash then invested in the bonds.
• As part of these transactions, Mrs Pride made a loan to the property trust with loan notes being created by a third-party nominee which were indemnified by the property trust. The loan notes had an issue price of £1,335,000 and a 2025 redemption amount of £5,099,366. Mrs Pride then transferred the loan notes to another family trust, for the benefit of her children, ‘the children’s trust’.
• The principal beneficiaries of the children’s trust were Mrs Pride's children. The capital and income of the children’s trust was to be held for the principal beneficiaries in equal shares.
• HMRC raised determinations to IHT on the basis that:
  
  • The value of the loan notes as a Liability of the property trust was to be left out of account in determining the value of Mrs Pride's estate immediately before death.
  • The gifts by Mrs Pride to the property trust of the flat and house, or to the children’s trust of the loan notes, were subject to a Reservation of benefit and their value was therefore part of her estate on death.
• The determinations were Appealed.

The FTT found that:

• The loan notes did fail to be taken into account as a liability of Mrs Pride on death as they were a debt incurred by the property trust and by virtue of her life interest were therefore also a debt of Mrs Pride.
• The value of this liability had to be abated to nil because the whole of the consideration for the loan note debt (the flat and house) consisted of property which came from Mrs Pride.

The tribunal further found that there was no reservation of benefit:

• Possession and enjoyment of the loan notes were bona fide assumed by the children’s trust and the loan notes were enjoyed by the children’s trust to the entire exclusion of Mrs Pride.
• As Mrs Pride had a life interest in the property trust the value of the flat and house already fell to be included in her estate on death.

As a result, Inheritance Tax was due by Mrs Pride’s estate on the value of the assets in the property trust with no reduction for the loan note liabilities.

Useful guides on this topic

IHT: Gifts with reservation
What are the Gift With Reservation (GWR) rules? When do they apply?

IHT: Loans and restrictions on liabilities against the estate
When are loans deductible from the estate on death? What restrictions are there? What anti-avoidance rules do I need to consider? 

Client Briefing: Making gifts & IHT
What gifts can you make without triggering Inheritance Tax (IHT)? What are the rules on making tax-effective gifts for IHT purposes?

Trusts & Tax planning 
What is a trust? How can trusts be used in tax planning? What are the advantages and what are the pitfalls?

IHT: Estate planning checklist
This checklist covers some of the essential planning points that taxpayers should know when planning for their estate and Inheritance Tax (IHT).

External link

James Charles Pride as Trustee of the Estate of the Late Geraldine Jill Pride v HMRC [2022] TC08776