Let go – Properly! Mark McLaughlin highlights a potential beartrap when setting up a trust for family members as part of their lifetime inheritance tax planning. Many individuals set up trusts for family members as part of their lifetime inheritance tax (IHT) planning. The intention is that assets gifted into trust fall outside their estate and the individual (the ‘settlor’) escapes IHT completely if they survive at least seven years following the gift.
Not so Fast!
This might seem straightforward. However, the ‘gifts with reservation’ (GWR) anti-avoidance rules are a potential beartrap. The GWR rules are designed to prevent ‘cake and eat it’ situations whereby an individual makes a lifetime gift of an asset (which they hope to survive by at least seven years, so that the gift becomes an IHT exempt transfer) but continues to have the use or enjoyment of that asset. If the GWR rules apply until the donor’s death, that asset is treated as forming part of their estate for IHT purposes.
As the GWR anti-avoidance rules can ‘bite’ where an individual gifts property but continues to enjoy or benefit from the gifted property, in the above example of a settlor gifting assets into trust for family members, if the settlor is one of the trust beneficiaries, the gift will generally be subject to the GWR rules.
Thus, most trusts created with IHT planning in mind include a clause in the trust deed specifically prohibiting the settlor from being a trust beneficiary, or from benefitting from the trust in any way. However, is this enough to prevent a GWR?
Genuinely Excluded?
In Chugtai v Revenue and Customs [2025] UKFTT 458 (TC), in February 2000, an individual (who died on 26 February 2017) had signed two trust deeds, which concerned: (1) funds in an Abbey National account, which was later transferred to Santander (the Santander trust); and (2) property (HR) comprising a semidetached house, and a detached shop which generated rental income. The trust beneficiaries were the deceased’s children. The deceased was the settlor and sole trustee of both trusts. He was specifically excluded from benefiting from the trust funds and income derived therefrom. HM Revenue and Customs (HMRC) issued an IHT determination on the basis that the deceased had reserved a benefit in the subject matter of both trusts during the seven years prior to his death, and consequently, the value of the trust’s assets at the date of his death fell to be taken into account when calculating IHT on his death estate. The appellant (the deceased’s executrix) appealed.
The First-tier Tribunal (FTT) was not persuaded that the ‘exclusion of benefit’ clauses in the trust deeds carried any weight. There was no evidence that the deceased paid any rent for the occupation of HR, but there was considerable evidence of payments of outgoings for the property (e.g., telephone bills, gas bills, council tax) from the Santander account. The FTT considered that the deceased had carried on using the Santander account after the establishment of the Santander trust, in exactly the same way as before the trust was established. He simply treated it as his own account and carried on making payments from it (e.g., personal expenses) and into it, as if it were his own. The appeal was unsuccessful.
Practical Tip
A trust deed clause excluding the settlor from benefit must reflect reality. It is unlikely to save the settlor from a possible GWR and a possible IHT charge unless the exclusion from benefit clause is reflected by the facts and evidence.