A major update of the TRS Manual (TRSM) on 2 August 2022 provided crucial, and controversial, long awaited new HMRC guidance on estates. Frustratingly released in peak holiday season, this may not get the attention needed. Some of this will seem very “techy stuff” for lawyers, or others dealing with estates, but all advisers may have opportunities to raise queries on these points for their clients.
Wills and Estates
The TRSM updates on trusts arising in estates, by a Will or variation, clarify that you may now need to register on TRS trusts arising from estates in two everyday situations:
The two year exclusion will not apply for most Will trusts arising from a variation of an estate
In most cases a Will trust will need to be registered where the estate administration lasts more than two years.
This affects any bare trust, for example where a legacy or the whole or a share of a residuary estate is held on trust for a beneficiary absolutely; as well as an Immediate Post Death Interest (IPDI) trust or any form of discretionary or relevant property trust (see appendix 1
). The two year exclusion that many assume will apply to all these trusts in estates will not save you from needing to register.
One change, for variations of estates, is frustrating but understandable, but the second on estates that run for more than two years make very technical distinctions which will be tricky to identify in practice. There is a third issue, on appropriations of assets within an estate, where there is a helpful (if unexpected) way out (see appendix 2).
Deeds of Variation of an Estate
Where this changes the entitlement under a Will, or varies the terms of an intestacy (where there is no Will), a new trust arises – even if only a bare trust for the new beneficiary now entitled (see appendix 3). So if you vary an estate, you have to register the trust that arises from that variation within 90 days of the variation date.
Estates That Continue For More Than Two Years
TRSM 23020 makes clear the para seven exclusion (appendix 3) only applies for two years from the date of death. That period is not flexible, whatever good reason there may be for an estate running on. After that it depends on the terms of the Will. A surprising new technical distinction is drawn, as to what is (or is not) an express trust, and when the trust arises, and thus when the obligation to register arises, now typically at the expiry of that two years post-death.
If the Will leaves the estate, or the residue of the estate, to the Executors and Trustees “upon trust” or “on trust” for a beneficiary or beneficiaries, then HMRC treat that as an express trust, and after two years you need to register the trust - e.g. any bare trust for the beneficiaries absolutely entitled. (This assumes there is no other exclusion that applies to your situation.) The same result applies where you have a legacy of a sum of money or an asset left in trust under the Will, e.g. £100,000 in trust to give X an income and after X’s death for Y absolutely.
Wills creating two forms of trust that will not need to register at the end of two years:
a) No express trust arises, and thus no TRS obligation, if the Will does not use the words “Upon trust” or “on trust” at all. If it is not an express trust, you don’t have to register in the first place
b) In limited cases, a trust only arises when assets are transferred to trustees: a third variety of estate/trust, according to TRSM 23020 is where the specific wording of the Will means that a trust of residue only takes effect when assets are appropriated or transferred to the trustees. For example, if there are separate executors and trustees to whom assets are later transferred upon trust, the express trust does not come into effect until that transfer. If after two years, you will have longer than that period in such a case, not being required to register until the assets are transferred.
This will not be on the radar of many practitioners and may come as a nasty surprise. There will be some clients with Wills using precedent wording that creates express trusts, and others with a different precedent not creating a trust, with simpler compliance obligations.
The application of the TRS rules feels very random and involves technical niceties that many lawyers may find hard to get their heads round, yet alone non-lawyers. Many will need to refer to the TRSM as it is so technical, many fellow practitioners (including accountants who might register trusts with HMRC) may be inclined to disbelieve this.
Registering on TRS is not a disaster, but it does involve some initial compliance cost and ongoing obligations. If an estate can be wound up within two years, so much the better. To complete the administration, TRSM 23020 makes it clear a trust of a residuary estate continues until all the assets are paid outright to the beneficiaries. Beware small sums of money held back on client account while e.g. a final income tax liability is finalised.
Be aware that after two years, most trusts of residuary estates will need to be registered on TRS
With long running estates, consider if anything can be done to wind up the estate before the second anniversary of death. This normally means paying out all the final cash due to beneficiaries
Practitioners dealing with Wills and variations need to consider their precedents, to be aware of the TRS consequences, and to consider any warning that might be given to clients, either on making Wills or when an estate arises on death
The “TRS tail should not wag the dog” So don’t necessarily change precedents just for TRS, if there are good reasons for drafting a will as it is
Note the interaction with complex estates for TRS (appendix 4).
1. Forms of Will trust: BMTs & 18-25 Trusts: Under the complex TRS provisions, which categorise trusts by reference to their IHT treatment, special rules apply to exclude bereaved minors trusts and 18-25 trusts in any event from the need to register – not just for two years. This also applies to disabled persons trusts. Three forms of trust are potentially caught: bare trusts, IPDIs and relevant property trusts (of which discretionary trusts are the main form).
Appropriations of assets to beneficiaries: When an asset is appropriated to a beneficiary to satisfy all or part of an inheritance, whether a cash legacy or a share of the residuary estate, it’s then held by the Executors as bare trustees for that beneficiary. Meaning it’s no longer within the para 7 exclusion from TRS registration, but HMRC have indicated that if the appropriation was to facilitate a sale of a property, it could be covered by the para 14 exclusion for “commercial transactions”. This was dealt with in the HMRC Agents Forum. It’s slightly bizarre that such an exclusion saves this situation, but it’s helpful that it does! It means appropriations ahead of a sale of a property, e.g. for CGT mitigation or to maximise loss relief for IHT, may now have an added value.
3. Para 7 of Sch 3A of the TRS regulations gives the exclusion for estates for two years from the date of death, provided the trust is “effected by Will”, whereas it will not be if the variation has changed the Will and brought into effect a new trust.
4. Complex estates needing to register on TRS: In any event, the possible need to register a Will trust is separate from the question whether the estate needs to register on TRS as a complex estate – see new guidance in TRSM 27030.
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