CheckLists.Tax (beta)
i3. Transfers between trusts
INCOME TAX
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Settlements legislation
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- Transfer from Trust 1 to Trust 2 giving settlor retained interest in Trust 1 even though excluded
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General rule
- Where property provided to Trust 1 by the settlor, or property related to that property, is transferred by Trust 1 to Trust 2, the fact that the settlor can benefit from Trust 2 will give him/her an interest in Trust 1, even if otherwise excluded (West v. Trennery HoL, in particular, §49).
- "[20] ... In my opinion there is no warrant whatever for such a construction, which emasculates the Section 77(2) and deprives the elaborate provisions relating to derived property of all effect. These are not aimed at property which remains in the relevant settlement, in regard to which they would be otiose, but at property held outside the settlement but which is derived property in relation to property comprised in it." (West v. Trennery HoL, Lord Millett).
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Query whether to regard Trust 2 as simply a continuation of the first settlement
- "[41]...(To state, as the respondents' printed case does, that it was an entirely separate settlement might be said to overlook the effect of the rule against perpetuities, as explained by this House in Pilkington v IRC [1962] AC 612; the trust law analysis is that the second settlement served as a vehicle to receive and continue the act of bounty effected by the first settlement, with the rule against perpetuities acting as a sort of umbilical cord between the two settlements; the fact remains, however, that it was a separate settlement for CGT purposes)..." (West v. Trennery HoL, Lord Walker).
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Money borrowed on security of assets is the proceeds of those assets transferred
- Where:
(1) Trust 1 borrows money on the security of assets provided by the settlor;​
(2) Trust 1 transfers the borrowed money to Trust 2.
(3) The settlor is excluded from Trust 1 but not Trust 2.
Then:
(1) The borrowed money is the 'proceeds' of the assets provided by the settlor
(2) And remains the proceeds even when transferred to Trust 2.
- "[17] ... The difficulty with this argument is that it does not deal with the relevant question: whether in relation to the proceeds of the mortgage of the Einkorn shares the moneys comprised in the second settlement constituted derived property. They plainly did when they were received by the trustees of the first settlement; they did not change their character when they were transferred to the trustees of the second settlement; and the settlor continued to enjoy the income from them during the relevant year. The fact that the settlor obtained his right to income under the trusts of the second settlement is immaterial if the income represented the income of the proceeds of property comprised in the first settlement." (West v. Trennery HoL)
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Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
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- Trust 1 makes capital payment to settlor, transfers to Trust 2 from which settlor excluded: matching to income of Trust 2
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General rule
- Where a capital sum is paid (directly or indirectly) by trustees to the settlor/spouse it is treated as income of the settlor up to the available income amount (ITTOIA s.633).
- If there is insufficient available income in year 1, it is matched to available income in future years (s.633(3)).
- Up to a maximum of 10 years after the tax year in which the capital payment was made (s.633(4)).
- References to settlor include references to spouse/civil partner (s.634(7)).
- See notes at i8. Distribution to beneficiary.
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Relevance to capital distributions
- If the trustees have power to make capital distributions to the settlor/settlor's spouse, the trust will be settlor interested in any event.
- However, it can apply to capital distributions where:
- The trust was not settlor interested when the income arose, even if it is when the capital payment is made. Historic income can be matched.
- Income arises after the trust ceases to be settlor interested and is matched with a capital distribution made when it was settlor interested.
Effect of transfer
- Settlor of Trust 1 will be settlor of Trust 2.
- Query the extent to which income in Trust 2 is 'income arising' under the settlement including Trust 1 and thus available income (ITTOIA s.635).
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Other capital payments
- The capital payments rule covers payments to the settlor by way of loan, repayment of loan and other sums paid otherwise than for full consideration.
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Legislation: ITTOIA s.633;
Cases:
HMRC manuals:
Commentary: Chamberlain, §11.49, §11.62;
See also:
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Transfer of assets abroad
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- Benefits charge: matching income of Trust 1 with benefits from Trust 2
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Transferor charge: taxing transferor to Trust 1 on income of Trust 2
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Legislation:
Cases:
HMRC manuals:
Commentary:
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CAPITAL GAINS TAX
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Matching gains to benefits (s.87 + s.89(2))
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- Gains from transferor trust added to transferee trust gains pool for matching (s.90)
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General rule
- If:
(1) The trustees transfer all or part of the settled property to the trustees of another settlement;
- Query whether trust income is settled property before it is accumulated.
(2) The transfer is not within Sch 4B
then, the relevant proportion of the gains pool from the transferor trust is added to the pool for the transferee trust (s.90(3)).
- Increase applies for the year of transfer and subsequent tax years (s.90(7)).
- Transferee trust gains pool is correspondingly reduced (s.90(5)).
- Reduction applies only for tax years after the year of transfer (s.90(8)).
- Pre-2008 transfer - see FA 2008, Sch 7, para 121.
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Transfer for consideration (excluded/reduced)
- If the transfer is for consideration equal to/in excess of MV of the property transferred, no gains are transferred.
- Query whether this applies to an interest-free loan repayable on demand.
- If the consideration is less than MV, the MV of the property transferred is reduced by the value of the consideration in calculating the relevant proportion of gains that are transferred (s.90A(4)).
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Relevant proportion of gains pool
- If all the settled property is transferred and there is no consideration for the transfer, the whole amount (s.90(3)(a), s.90A(3)).
- Otherwise the proportion equal to the MV of the property transferred (less any consideration) divided by the MV of all the property in the trust prior to transfer (s.90(4)).
- MV of property subject to a debt calculated on the basis of reducing the MV by the amount of the debt (s.90(9)).
- Exclude gains in a Sch 4C pool (s.90(10)).
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Transferee trust is UK resident
- Apply s.89(2) to the trust, so that benefits from the UK resident trust are matched to the transferred gains in the year of transfer onwards (s.90(6)).
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Legislation: TCGA 1992, s.90.
Cases:
HMRC manuals:
Commentary:
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- Transfer between trusts via company
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- If the transfer is from a company owned by a trust to another trust, query whether the company's property is settled property.
- Logically would be if the company's assets are considered part of the settlement.
- If the transfer is from a trust to a company owned by another trust, that receipt is probably of settled property for the company (given the wide meaning of settlement and trustee (s.97(7), (7A)).
- This issue is separate to whether a payment to/from a company is a capital payment for the purposes of matching.
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Legislation:
Cases:
HMRC manuals:
Commentary: Kessler, Chapter 61;
See also:
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- TCGA Sch 4B
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Legislation:
Cases:
HMRC manuals:
Commentary:
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- TCGA Sch 4C
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Legislation:
Cases:
HMRC manuals:
Commentary:
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INHERITANCE TAX
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Trust charges
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- Additions to excluded property trust after becoming UK domiciled not excluded property
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s.81 (treating the property as remaining in the original trust) only applies for the purposes of Chapter III, not Chapter I (i.e. s.48)
Legislation: FA 2020, s.73. IHTA s.82A.
Cases:
HMRC manuals:
Commentary: Clarke Chapter 53.
See also:
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