CheckLists.Tax (beta)
i5. Disposals & operations affecting trust assets
INCOME TAX
Settlements legislation: attribution of income to settlor
- Offshore income gains treated as income of settlor's child if child would be absolutely entitled but for being a minor
Legislation: ITTOIA s.632;
Cases:
HMRC manuals:
Commentary:
See also:
CAPITAL GAINS TAX
Reliefs
- Holdover relief on distribution of trading asset to beneficiary
Distribution by non-resident trustees can qualify
- "The transferor does not need to be resident in the UK. The relief is available for trustees of non-resident settlements, where the chargeable gain would, or might otherwise be, charged on UK residents." (HS295, §5).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also: HS295;
Attribution of non-resident trust gains to UK resident settlor (s.86)
- Trust is settlor interested leading to attribution to settlor (domicile irrelevant since 2025)
General rule
- Where:
(1) The trust was created on or after 19 March 1991 (so is a qualifying settlement - Schedule 5, para 9(1)).
(2) The trustees are non-resident throughout the tax year (or are treated as such under a treaty) (s.86(2)).
(3) The settlor is resident in the UK for the tax year.
- Until 2025, there was also a requirement that the settlor be UK domiciled in the tax year. Now deleted.
(4) At any time during the year, the settlor has an interest in the settlement.
(5) There is an amount on which the trustees would be chargeable of UK resident (and not treaty non-resident) (s.86(3)).
(6) That amount arises by virtue of disposals of settled property originating from the settlor.
- Then: chargeable gains equal to the amount on which the trustees would be chargeable are treated as accruing to the settlor (s.86(4)).
- Note, if the settlor is interested at any time during the year, gains for the whole year (even if arising when not settlor-interested) may be attributed.
Settlement
- Not defined, so extended income tax definition does not apply (contrast with s.87).
Settlor
- A person is a settlor if the settled property consists of or includes property originating from him (Schedule 5, para 7).
- Property originates from a person if it is provided by that person or (and to the extent that) it represents property provided (directly or indirectly) by that person (para 8).
- Providing assets to company owned by trust did not make the person a settlor of the trust in Coombes.
- Shares were settled property and assets of a company do not represent the shares in the company (§§24, 29).
Split year for settlor
- Gains are treated as accruing in the UK part of the year (s.86(4)).
Quantum
- Calculate the net sum on the basis that the trustees were resident, applying relevant reliefs etc.
- No annual exemption when calculating trustee amount (Schedule 5, para 1).
- Query whether business asset disposal relief can apply in the hands of the settlor.
- s.86(4) charges "an amount equal" to the trustee s.1(3) amount.
- "Section 86 does not deem the trustees’ gain to accrue to the settlor. Instead section 86(4) treats the settlor as accruing a gain equal to the gain that accrues to the trustees." (CG38545)
Gains taxable on non-resident trustees
- Exclude gains/losses on disposals that are within the charge to UK CGT for non-residents (s.86(4ZA)).
Double tax treaty relief
- Where the treaty allows the Contract States to tax their residents as if the treaty did not exist (usually in Article 1), no treaty relief.
- Even if no such clause, HMRC say no treaty protection based on non-residence of trustees because s.86 does not actually attribute trustee's gain to settlor (CG38545).
- Query whether treaty protection might be available based on treaty non-residence of (statutory UK resident) settlor.
- Credit relief may be given (CG38545).
Settlor right of reimbursement from trustees
- See Schedule 5, para 6.
Legislation: TCGA, s.86; Schedule 5;
Cases:
Coombes v. HMRC [2007] EWHC 3160 (Ch), Sir Donald Rattee;
HMRC manuals:
CG38545 - Double taxation relief - TCGA92/S86;
Commentary:
See also:
- Broad definition of settlor interested (spouse, children, grandchildren, controlled + associated companies)
General rule
- Trust is settlor interested if (Schedule 5, para 2):
- any relevant property comprised in the settlement (or relevant income arising under the settlement) is, will or may become applicable for the benefit of a defined person in any circumstances whatsoever; or
- any defined person enjoys a benefit directly or indirectly from any relevant property comprised in the settlement or relevant income arising under the settlement.
- Breadth of this wording is so wide as to be unworkable.
- "[48] In the course of argument Mr McCall QC was constrained to acknowledge there must be some limit on this submission because is would be absolutely impossible for any document to be drawn by a trustee which would cover every possibility (however faint) of funds deriving back to a settlor. Pursued to its logical conclusion it would mean every settlement would always have the possibility of the settlor having a beneficial interest in it. A settlor would then be faced with the difficulties posed to Mr Vandervell many years ago and his well known difficulties in removing any beneficial interest in a trust." (West v. Trennery, High Court)
- See Kessler's note of what HMRC told ICAEW in Tax 20/92, which is consistent with cutting it back.
Relevant property and income
- Property and income originating from the settlor (Schedule 5, para 2(2)).
Defined person (Schedule 5, para 2(3))
- Settlor + spouse/civil partner.
- Child (including stepchild) of either + spouse of such child.
- Grandchild of either + spouse of such grandchild.
- Company controlled by the above individuals.
- Controlled is determined in accordance with CTA 2010 s.450, s.451 with a modification in relation to attribution of rights of associates (see Schedule 5, para 2(8)).
- Company associated with a company controlled by the above individuals.
- Associated determined in accordance with CTA 2010, s.449 as modified by Schedule 5, para 2(9).
Excluded situations (Schedule 5, para 2(4), (6))
- Settlor does not have interest if only situations in which property/income can be applicable for benefit of a defined person is:
- bankruptcy of someone beneficially entitled to the property;
- assignment of or charge on the property by someone beneficially entitled to it;
- death of both parties to a marriage settlement and all or any of the children of the family;
- death under the age of 25 of some person who would be beneficially entitled to the property on attaining that age.
Legislation: TCGA, Schedule 5;
Cases:
West v. Trennery [2003] EWHC 676 (Ch), Peter Smith J;
HMRC manuals:
Commentary: Kessler Chapter 64;
See also:
- Closely held company settling trust making participators settlors
- Where a closely held company (directly or indirectly) provides property to a settlement, the property is treated as provided by each of the persons who alone or separately control the company (Schedule 5, para 8(4)).
- Conversely, property is not provided by company, so company is not a settlor.
- Depending on the nature of the control, the property is either treated as provided by one person, persons equally, or subject to a just apportionment.
- Control is based on a modified version of CTA s.450/451 (para 8(8)).
- Does not apply to a person who would be taken to provide less than 5% of the property.
Legislation: TCGA, Schedule 5;
Cases:
HMRC manuals:
Commentary:
See also:
- Reciprocal arrangements making a person settlor
- Where a person who is settlor in relation to a settlement makes reciprocal arrangements for the provision of property or income, the settlor is treated as providing the property/income provided by the other (and not providing the property/income they actually provided) (Schedule 5, para 8(3)).
Legislation: TCGA, Schedule 5;
Cases:
HMRC manuals:
Commentary:
See also:
Matching gains to benefits of non-resident trust (s.87)
- Gain arising to trustees matched to earlier capital payment/benefit
- A gain arising to a non-resident trust that has earlier unmatched capital payment/benefits will lead to matching under s.87.
- See i9. Benefits provided by trust.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
INHERITANCE TAX
Exit charge
- Disposition of trust assets by associated operations
General
- Disposition includes disposition effected by associated operations (s.272).
- On the meaning of associated operations see C1. Gifts (general).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Depreciatory transaction followed by distribution not benefitting from s.10 (arm's length exception)
- "If trustees in the circumstances envisaged in paragraph 6(3) took steps which devalued the settled property with the object of making subsequent distributions thereof why should the two events be considered as independent of one another? Neither law nor logic would suggest that they should." (Macpherson, 174)
Legislation:
Cases:
IRC v. Macpherson [1989] AC 159 (HoL);
HMRC manuals:
Commentary:
See also:
Gift with reservation of benefit
- Apply tracing rules to identify new assets for GWR purposes
- The GWR rules apply by reference to the property treated as comprised in the gift at that time (Sch 20, para 6(2)).
- See C2. Gift by an individual.
Legislation: FA 1986, Sch 20.
Cases:
HMRC manuals:
Commentary:
See also: