CheckLists.Tax (beta)
i1: Creating and adding to a trust
FORMALITIES
- Creation of a trust by disposition of an equitable interest
- Must be in writing signed by the person disposing of the interest, or authorised agent, otherwise void.
- Does not apply to a direction to the trustee to transfer property absolutely to a third party, where direction given by beneficiary(ies) absolutely entitled as against trustee (Vandervell v. IRC).
Legislation: LPA 1925, s.53(1)(c);
Cases: Vandervell v. IRC [1967] 2 AC 291;
HMRC manuals:
Commentary:
See also:
- Declaration of a trust of land or interest in land
- Trust must be manifested and proved by some writing by some person able to declare such a trust.
- Failure to satisfy rule makes it unenforceable, not void. If writing is later produced, this is evidence of the trust having existed from the time of the declaration.
Legislation: LPA 1925, s.53(1)(b);
Cases:
HMRC manuals:
Commentary:
See also:
- Trust deed
- Deed must make clear on its face that it is intended to be a deed by the person(s) making it (LPMA s.1(2)).
- "[50]...As in the case of Quinn , there are indications that the document was intended to be a formal one and to have formal legal effect, but this does not amount to showing that the parties intended the document to have the extra status of being a deed. The fact that the powers of attorney are signed and sealed by the attesting witness would satisfy the requirements of subsection 1(3) for it to be validly executed as a deed (provided it is delivered as a deed) but that in itself does not “make it clear on its face” as required by subsection 1(2)(a) that it is intended to be a deed. As the Law Commission noted, the requirement that it should be clear on the face of the document was felt to be desirable in order to make it easy to distinguish in practice deeds from other documents which have similar provisions for witnessing and signing." (Katara Hospitality v. Guez).
- Every party must objectively intend it to be a deed (MacDonald Hotels §243)
- Deed is executed by an individual where it is:
(1) Signed by him/her in presence of a witness who attests the signature; or
(2) Signed at his/her direction in his/her presence in the presence of two witnesses who each attest signature.
+ in either cases, delivered as a deed (LPMA s.1(3), 4(A)).
- If a lawyer, in the course of a transaction, purports to deliver an instrument as a deed on behalf of a party, it is conclusively presumed in favour of purchaser that lawyer was authorised to do so (s.1(5)).
Witness
- Witness must actually observe the signature (Euro Securities, §54.1).
- Witnesses must be present at time of signing, but (probably) need not attest at the same time/in presence of person executing deed: "Overall, given what seems to me to be the clear wording of section 1(3) , I find that the proper interpretation is that while there is a requirement for the person executing the deed to sign in the presence of a witness, it is not a requirement for the witness to sign in the presence of the person executing the deed (or indeed of anybody else)." (Wood v. Commercial First Business Limited, §48; See also Euro Securities, §79).
- Query whether witness can be another party to the deed (Euro Securities & Finance Ltd, §55.3).
- Witness need not be independent: "The first reason is that there is a requirement that a deed is witnessed. The witness does not have to be independent under statute: it is simply that if the witness is not independent, then there might be problems thereafter in proving that she did in fact sign the document." (Copeland; §56).
- Attestation must be part of same physical document as signature (Mercury, §40).
Virtual execution
- See Law Society Guidance.
Legislation: LPMA 1989, s.1;
Cases:
R (oao Mercury Tax Group Limited) v. HMRC [2008] EWHC 2721 (Admin), Underhill J;
Wood v. Commercial first Business Limited [2019] EWHC 2205 (Ch), Deputy Judge James Pickering;
Katara Hospitality v. Guez [2018] EWHC 3063 (Comm), Moulder J;
Copeland v. Bank of Scotland Plc [2020] EWHC 1441 (QB), Freedman J;
Euro Securities & Finance Ltd [2023] EWHC 51 (Ch), HHJ Tindal;
Macdonald Hotels Limited v. Bank of Scotland Plc [2025] EWHC 32 (Comm), HHJ Pelling KC;
HMRC manuals:
Commentary:
See also:
- Constructive trust
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
GENERAL
Who is the settlor/transferor?
- General rule
General
- Realistic view taken of who provided funds where third party is involved as mere functionary in plan arranged by someone else (Dunsby UT, §100 - 102).
Historical source of funds not sufficient
- Must be some conscious association between the alleged settlor and the settlement: "The words 'for the purpose or in connection with' connote that there must at least be a conscious association of the provider of the funds with the settlement in question. It is clearly not sufficient that the settled funds should historically have been derived from the provider of them. If it were otherwise anyone who gave funds unconditionally to another which that other later settled would fall to be treated as the settlor or as a settlor of the funds." (Fitzwilliam at 733).
- E.g. where a will creates a trust and beneficiaries settle their interests under the will trust.
- There can be such conscious association where the further settlement is created in exercise of powers granted under the original settlement, even if the settlor had no intention as regards such an exercise of power.
Settlements legislation
- Settlor is any person by whom the settlement was made, directly or indirectly (s.620).
- Includes indirect provision of funds, undertaking to provide funds.
- Includes entering into a reciprocal arrangement (s.620(3)).
- Funds provided presumed to be provided for the purpose of the settlement unless shown they were provided for another purpose.
- "Where it is shown that funds have been provided for a settlement, a very strong inference is to be drawn that they were provided for that purpose, an inference which will be rebutted if it is established that they were provided for another purpose. In this case there is not a shred of evidence that the funds were provided for any other purpose." (Mills)
Transfer of assets abroad
- Irrelevant whether the transferor was UK resident or not when the relevant transfer was made (s.721(5)).
- Reversing the previous position that transferor had to be ordinarily resident at the time of the transfer - see Willoughby.
- If transferred assets are used to pay debts of transferee, query whether any income becomes payable to the person abroad as a result (see Kessler Ch.48).
Inheritance tax
- Includes any person who directly or indirectly makes the settlement (IHTA s.44).
- This specifically included "any person who has provided funds directly or indirectly for the purposes of or in connection with the settlement".
- Also includes a person who has made with another person "a reciprocal arrangement for that other person to make the settlement".
-
Legislation:
ITTOIA s.620; s.644;
Cases:
IRC v. Mills [1974] STC 130, HoL;
Hatton v. IRC [1992] STC 140, Chadwick J;
Fitzwilliam v. IRC (1993) 67 TC 614;
Dunsby v. HMRC [2021] UKUT 289 (TCC), Bacon J and Judge Herrington;
HMRC manuals: TSEM4555;
Commentary: Chamberlain Ch 11;
See also:
- Providing funds to company owned by trust
- Providing funds to a company owned by a transfer did not make the individual a settlor in Coombes.
- T provided £700,000 to a company owned by a trust, which was used to buy land.
- Company later sold the land, realising a gain.
- HMRC wanted to rely on TCGA s.86 to tax T as settlor, which required settled property to have originated from T.
- Held: T was not a settlor because the property owned by the company was not settled property and the shares did not represent the funds provided by T.
- "[29] I accept the appellant's submission that the land disposed of by [the Company] was not settled property originating from the appellant as settlor, because it was not at any stage held on the trust of the Sagittarius Settlement and did not represent property ever held on those trusts. It follows that (in my judgement) there was no disposal within section 86(1)(e) of the 1992 Act, so that the assessment was made on a false basis."
Legislation:
Cases:
Coombes v. HMRC [2007] EWHC 3160 (Ch), Sir Donald Rattee;
HMRC manuals:
Commentary:
See also:
- Using the legal framework of a company to make a settlement: controlling shareholder(s) settlor
Interposition of a company does not avoid becoming indirect settlor
- Using the 'legal framework of a company' which the individual controlled made the person an indirect settlor in Copeman (causing company to issue shares to shareholder's children).
- "I am also of opinion that the Respondent was a 'settlor within the meaning of Sub-section (9) (c). I am unable to see how the word "indirectly" can be limited in the way which is suggested so as to exclude the settlements which are made through the interposition of a company."
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Transactions for full consideration
Transfer of assets abroad
- A disposal is still a transfer even if it is full consideration: "The fact that an individual may receive a payment or consideration in full for a movement of some form of property from one person to another does not prevent that action from being a transfer for the purposes of the transfer of assets rules." (INTM600240).
- Query whether income "becomes payable" to the person abroad if the result of the transaction is that the person abroad replaces one income stream (from old asset) with a new income stream (from the transferred asset). Kessler argues not (Ch 48).
Legislation:
Cases:
HMRC manuals:
INTM600240 - Transfer of assets abroad: General conditions: What is a transfer?;
Commentary:
See also: Kessler, Chapter 48;
- Non-commercial loan to trust making lender settlor
- See i2. Loan to trust.
- May also mean interest is retained.
- Trust part of wider arrangements (steps with no economic logic of there own)
Prior steps having economic logic of their own: not part of settlement
- Who the settlor of particular assets is may depends upon an analysis of all the steps of the settlement (Dunsby UT, §90).
- In some cases, steps prior to the contribution to the trust may be preparatory and not part of the settlement whereas in others they will be part of the settlement.
- If the prior step has an economic logic that is freestanding and severable from the trust, that is a strong indication that it is not part of the settlement (Dunsby Ut, §96).
- In Chamberlain, the creation of a company had its own economic logic independent of the steps taken to give cash to trustees to allow them to buy shares in the company (Dunsby UT §97).
Prior steps with no economic logic of their own part of settlement: person who put them in place is a settlor.
- In Dunsby the creation of a new class of shares for a third party followed by the settlement of those shares into trust by the third party had no independent economic logic (Dunsby UT, §98).
- If earlier steps do form part of settlement, the person who put the arrangement in place is the settlor (Dunsby UT, §100).
- On facts of Dunsby, same result even if narrower view of settlement taken (§102).
Successive trusts as part of composite transaction: settlor of first is settlor of second
- In Hatton, T settled Trust 1 which gave T's daughter a reversionary interest, T's daughter then settled the reversionary interest on a very short IIP for T. Aim was for T's daughter to be settlor of 2nd trust so as to benefit from reversion to settlor relief.
- Held: single composite transaction, with T as settlor of 2nd trust.
- "In the present case, when viewed as a single transaction having a single legal result, the composite transaction is a settlement by Mrs Cole under which she was entitled to a beneficial interest in possession of the settled property until midnight on 12/13 August 1978."
Legislation: ITTOIA s.620; s.644;
Cases:
Hatton v. IRC [1992] STC 140, Chadwick J;
Dunsby v. HMRC [2021] UKUT 289 (TCC), Bacon J and Judge Herrington;
HMRC manuals: TSEM4555;
Commentary:
See also:
- Indirect provision of funds
Generally try to identify the true settlor
- See above on the need for conscious association rather than mere historical source.
- If funds are provided directly by Person 1 and indirectly by Person 2, it may be that, on a true analysis, the funds were only provided by Person 2, if the steps were part of a plan devised by Person 2 (Dunsby UT, §102).
Person in reality providing the property settlor, not the conduit
- In Dunsby, "The only property provided for the purposes of the settlement was, in reality, provided by Mr Dunsby: it was Mr Dunsby who was
responsible for the creation of the S share and its allotment to Ms Gower, and accordingly he provided the property “indirectly for the purposes of the settlement”, as referred to in s 645(1)(a)..." and, accordingly, Mr Dunsby was treated as settlor of the whole and taxable on the whole income (§105).
- HMRC's manuals suggest such an approach where a father essentially provides shares to his mother who gifts them to the grandchildren: "The true settlor here is Mr J rather than the children’s grandmother. ITTOIA/S629 therefore applies and attributes the dividends received by the children to Mr J for tax purposes" (TSEM4300).
Possibility of both direct and indirect provider being settlors
- In Clipperton, the UT countenanced that there might be double taxation where Person 1 provided property directly and Person 2 provided it indirectly (§165). CoA said that this issue raised "questions of some difficulty" and declined to consider it as it was unnecessary (§69).
- See also Hatton where the High Court suggested that each settlor would treated as settlor of a separate settlement comprising the whole property (at 160).
- From 2025/26, ITTOIA s.645(2A) deals with such a situation with a just and reasonable apportionment.
Legislation: ITTOIA s.620; s.644; s.645;
Cases:
Dunsby v. HMRC [2021] UKUT 289 (TCC), Bacon J and Judge Herrington;
Clipperton v. HMRC [2022] UKUT 351 (TCC);
HMRC manuals: TSEM4300;
Commentary: Kessler, Chapter 105;
See also:
- Grandparent estate apparently funding acquisition of shares by children: parent the settlor
- In Bird, the parents arranged for their minor daughters to take 60% of the shares in a company. Held to be a settlement.
- Further, father was settlor even though he used his position as executor of father's will to direct funds 'on behalf' of the children to the company by way of loan (§25).
- "[25] The minor daughters did not take part in any commercial transaction. The reality of the arrangements by which money was transferred from Mr Bird's father's estate to Cargoitem is that Mr Bird, while still executor of his father's will, arranged for monies owned prospectively by the three daughters (and contingent on reaching the age of 18) to be paid by way of a "loan" to Cargoitem. The risk involved in that transaction accrued to Mr Bird personally rather than to the children. Mr and Mrs Bird then arranged for the children to take a 60% share in Cargoitem to enable 60% of the profits to flow to the three daughters. That arrangement was at the expense of their existing equity interest in Cargoitem. That transaction cannot in my view by regarded as an arms length arrangement. There was, therefore, the necessary element of bounty to bring the arrangements within the scope of the expression "settlement"." (Bird)
Legislation:
Cases:
Bird v. HMRC [2008] UKSPC 720;
HMRC manuals:
Commentary:
See also:
- Multiple settlors
Settlements legislation
- If more than one settlor, apply to income from each settlor's share as if they were the only one who made the settlement (ITTOIA s.644; TSEM4555).
- But see above on:
- Historical source of the funds not sufficient to be settlor.
- Person who is mere conduit not also a settlor.
- Based on property "originating from the settlor", which includes property provided directly or indirectly and property representing such property (s.644 and s.645).
Inheritance tax
- If more than one person is settlor in relation to a settlement + circumstances "so require", Part III has effect in relation to the settlement as if the settled property were comprised in separate settlements (s.44(2)).
- In Hatton, where the settlement was made by A directly and B indirectly, the Revenue argued that B was the "dominant" single settlor, but HC held that both A and B were settlor of deemed separate settlements (with the relief sought to be used to avoid tax applying to A's settlement but not B's).
- "I think that the correct approach is that required by para 1(8) of Sch 5; that is to say, where the circumstances so require, to apply the provisions of Sch 5 to settlement A as if the property comprised in that settlement were comprised in two separate settlements—say, settlement A1 of which A is settlor, and settlement A2 of which B is settlor. On that basis, when applied to settlement A1, the provisions of para 4(5) will be satisfied; but when applied to settlement A2 those provisions will not be satisfied. Accordingly, by treating the settled property as comprised in separate settlements—one of which is settlement A2 of which B is the settlor—tax will be chargeable under the provisions of para 4(2) of the Schedule. This, as it appears to me, gives effect to the legislative intention which is to be derived from the extended meaning given to the concept 'settlor' by para 1(6) of the Schedule."
Legislation:
ITTOIA s.620; s.644; s.645;
Cases:
HMRC manuals:
Commentary:
See also:
- Funds from a joint account
Husband and wife
- In the absence of facts or circumstances indicating that the account was intended, or was kept, for some specific or limited purpose, each spouse can draw on the account for his/her own benefit.
- In such a case, each spouse drawing money out of the account is treated as doing so with the authority of the author and assets purchased with the money are treated as purchased for his/her own benefit, rather than as a joint asset (see Fox at §§44 -45 and the cases cited therein).
- If the contribution is the independent decision of one spouse, he/she will be settlor.
- If it is a joint decision, they may both be direct settlors.
- If it is a joint decision but the funds into the account were provided solely by one spouse with a view to facilitating the contribution, the spouse that provided the funds may be the single true settlor (as the indirect provider from whom the property originated).
Others
- Same principle subject to any agreement/terms to the contrary.
- "[57] We see no reason why these principles should not apply to an account held by any two persons, whether or not they are husband and wife. If HMRC are right, and the joint tenancy in the Isle of Man Account has not been severed, it appears to us that the funds held in such account where there is no restriction on the ability of either holder to draw on them, are available to either party and any asset acquired with them will belong to the party making the relevant withdrawal. The essence of joint ownership of a bank account where withdrawals can be made without restriction by either party is that the sums belong to the party who withdraws them, and this principle underlies the decision in Re Bishop." (Pflum).
Legislation:
Cases:
Pflum v. HMRC [2012] UKFTT 365 (TC;
Fox v. HMRC [2022] UKUT 310 (TCC);
HMRC manuals:
Commentary: Kessler, Chapter 100;
See also:
Settled property
- Assets held by company owned by trust are not settled property
- Coombes:
- T provided £700,000 to a company owned by a trust, which was used to buy land.
- Company later sold the land, realising a gain.
- HMRC wanted to rely on TCGA s.86 to tax T as settlor, which required settled property to have originated from T.
- Held: T was not a settlor because the property owned by the company was not settled property and the shares did not represent the funds provided by T.
- "[29] I accept the appellant's submission that the land disposed of by [the Company] was not settled property originating from the appellant as settlor, because it was not at any stage held on the trust of the Sagittarius Settlement and did not represent property ever held on those trusts. It follows that (in my judgement) there was no disposal within section 86(1)(e) of the 1992 Act, so that the assessment was made on a false basis."
Legislation:
Cases:
Coombes v. HMRC [2007] EWHC 3160 (Ch), Sir Donald Rattee;
HMRC manuals:
Commentary:
See also:
SETTLOR INTERESTED
Income tax settlements (attribution of income to settlor who retains interest)
- Settlor retains an interest where property is, will or may become payable to settlor/spouse
General rule
- Interest in property is retained if there are any circumstances in which the property or any related property is, will or may become payable to or applied to or for the benefit of the settlor or their spouse/civil partner (s.625).
- If settlor is or could be added as a discretionary beneficiary, interest is retained.
- If trust is revocable, interest is retained.
- Does not matter whether settlor or other person has the power to revoke.
- Or whether revocation depends on an event.
- Possibility of gift to settlor by the independent act of a beneficiary (including via will) not sufficient.
- Fiduciary power held by settlor does not give settlor an interest (Vestey at 114).
- Where settlor is trustee, trustee right of indemnity (e.g. in relation to money borrowed 'by' the trust) not sufficient (West v. Trennery [2003] EWHC 676 (Ch), §43).
- Power to enter into arm's length transactions with settlor does not give settlor an interest (Vestey at 114; but see capital sum rule, below).
- Loan is not money payable to the settlor or property applied for the benefit of the settlor (Vestey at 114, 121).
- "The possibility of even a small benefit may have severely adverse consequences. That is well understood by those who advise settlors." (West v. Trennery, Lord Walker, §44).
Spouse (or civil partner)
- Spouse does not include potential future spouse or widow/widower of settlor.
- Spouse does not include former spouse or separate spouses where separation likely to be permanent (s.625(4)).
- Note that the spousal rule for settlements is different to the rule for TOAA and TCGA s.86.
- Query whether a pre-2014 trust excluding a spouse would be construed as excluding a same sex spouse (see Chamberlain §11.15).
Related property
- Means income from the property or any other property directly or indirectly representing proceeds of, or income from, that property (s.625(5)).
- Not limited to 'income' from the property or other property representing it etc., includes property representing the proceeds (West v. Trennery HoL, §38).
- Related property does not have to part of the settlement to be related property (West v. Trennery, HoL).
Excluded circumstances (bankruptcy, death, security, assignment)
Leave out of account the following possibilities for settlor/spouse benefitting (s.625(2)):
- (1) Bankruptcy of person who is or may become beneficially entitled.
- (2) Assignment by person who is or may become beneficially entitled.
- (3) Charging of the property as security by a person who is or may become beneficially entitled.
- (4) Death of child of the settlor who became beneficially entitled to the property at not more than 25 years old.
- (5) Death of both parties to a marriage (or civil partnership) settlement + all or any of the children of the family of the parties to the marriage.
Exclusion: only possibility of benefit is if person who is under 25 years old dies etc.
- Settlor does not retain an interest if the only circumstances in which property/related property can be applied for the benefit of the settlor/spouse is if a person who is alive and under 25 years old: dies, is bankrupted or assigns/charges the property (s.625(3)).
- Not limited to child of the settlor.
Legislation: ITTOIA s.625;
Cases:
West v. Trennery [2003] EWHC 676 (Ch);
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
- Spouse does not include potential future spouse/civil partner
- Spouse/civil partner does not include potential future spouse or civil partner (ITTOIA s.625(4)).
- IRC v. Tennant does not apply (held that even thought settlor excluded the possibility of the trust being revoked and resettled on trust for her hsuband should she re-marry gave rise to an interest).
- In TOAA and CGT rules, possibility of future spouse/civil partner benefiting engages the rules.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Benefit provided in breach of trust
- Lord Walker appeared to accept that the reference to enjoying a benefit from property in the settlement could cover benefits provided in breach of trust (West v. Trennery, §37).
Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
- Non-commercial loan giving lender retained interest
- Lender of non-commercial loan is settlor.
- See i2. Loan to trust.
- Proceeds of an asset (related property) includes money borrowed on security of that asset
General rule
- "The final question is whether the Revenue are correct in contending that the moneys comprised in the trust funds of the second settlement during the relevant year and the income therefrom which was payable to the settlor constituted derived property within the meaning of Section 77(8) in relation to the Einkorn shares. There can be only one answer to this: of course they do. The moneys comprised in the trust fund of the second settlement directly represented the proceeds of a mortgage of the Einkorn shares and the income payable to the settlor during the relevant year represented the income therefrom. If the trustees of the second settlement had invested the moneys in stocks and shares, these would have indirectly represented those proceeds. It will be observed that I have equated the proceeds of a mortgage of property with the proceeds of the property itself. But the Subsection does not refer to "the proceeds of a sale of that property", but to "the proceeds of that property"; and this covers any process, whether sale or mortgage or otherwise howsoever, by which value is extracted from one property and transferred to another." (West v. Trennery HoL)
Query the effect of selling the original assets
- "[18] The taxpayer submitted that this was an extravagant application of the statutory provisions, since whatever assets were comprised from time to time in the trust funds of the second settlement they would never cease to represent, directly or indirectly, the proceeds of the mortgage of the Einkorn shares. That is true, but once the Einkorn shares were sold the assets in the second settlement and the income therefrom would cease to constitute derived property in relation to any property for the time being comprised in the first settlement." (West v. Trennery HoL, Lord Millett)
Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
- Possibility of transfer to a new trust which could add settlor as beneficiary not sufficient unless planned
Possibility of benefit in circular way through independent actions of third parties not sufficient
- In relation the TOAA approach
- In relation to the CGT definition:
"[50]...However, [Morritt LJ in Botnar] said that the power could be properly exercised to transfer capital to another settlement in which he was not then interested but under which he might subsequently obtain an interest therein for example by being added to the class of potential appointees and there is nothing in the clauses to prevent it happening. Aldous LJ delivered a Judgment in similar terms.
[51] I have some difficulty in applying this case. Obviously on the wording of the clauses there the theoretical possibility of Mr Botnar achieving indirect benefits was open. If one applies that to the present deed then [HMRC] is right to submit that under the wording of the present deed there is nothing to stop the same potential thing happening. I cannot believe that as a matter of construction section 77 TGA was intended to have such a wide effect in respect of derivative property. It seems to me there must be necessarily some limit on it and if the settlor receives property through such a circular way it has happened as a result of the action of a third party and not the trust and I do not see how such involuntary actions could possibly have been intended to give rise to a tax liability. Of course if artificial transactions are entered into designed to achieve that illusion there is no difficulty in the Inland Revenue challenging those transactions. It seems to me therefore that the effect of the deed is the best that a settlor can do to prevent him being interested in the settlement." (West v. Trennery [2003] EWHC 676 (Ch) - this aspect was not appealed by HMRC)
- HoL in West v. Trennery relied on the property in Trust 2 being "derived"/related property of Trust 1 (and that the settlor could potentially benefit from Trust 2), which would only be necessary if the possibility of transfer from Trust 1 to Trust 2 did not itself satisfy the "may become payable...in any circumstances whatsoever" test.
Legislation:
Cases:
West v. Trennery [2003] EWHC 676 (Ch);
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
- Transfer from Trust 1 to Trust 2 giving settlor retained interest in Trust 1 even though excluded
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).
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).
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)
Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
- Settlor/spouse not formally excluded but no intention to benefit
- The trust should be draft to exhaustively exclude settlor/spouse from benefitting under the immediate trust and as a result of any exercise of discretions/powers by the trustees or trustees of any transferred/resettled funds.
- If that is not done, potential argument that no interest retained if demonstrably no intention to benefit from any such exercise of powers/discretions based on West v. Trennery [2003] EWHC 676 (Ch)
- See Chamberlain §18.14.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Unintended resulting trust giving settlor interest
- If the settlor fails to fully dispose of all beneficial interests in the trust property, there will be a resulting trust in favour of the settlor, giving him/her an interest.
- To seek to avoid this, the settlor should dispose of any interest he/she may have in the remainder at the same time.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Capital gains tax: attribution of gains to settlor who retains interest
- Spouse and potential future spouse
Potential future spouse
- In IRC v. Tennant, it was held that a widow retained an interest in a revocable settlement from which she was excluded because she might revoke the settlement and resettle it on trust for a future husband, if she remarried.
- A specific rule excludes potential future spouses for the purposes of the income tax settlements legislation (see above).
- There is no equivalent rule for s.86
Same sex spouse/potential spouse
- Query whether a pre-2014 trust excluding a spouse would be construed as excluding a same sex spouse (see Chamberlain §11.15).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
POWER TO ENJOY INCOME (TOAA)
- References to transferor include transferor's spouse (and potential future spouse)
Spouse
- "(4) In this Chapter references to individuals include their spouses or civil partners." (ITA s.714).
Potential future spouse
- In IRC v. Tennant, it was held that a widow retained an interest in a revocable settlement from which she was excluded because she might revoke the settlement and resettle it on trust for a future husband, if she remarried.
- A specific rule excludes potential future spouses for the purposes of the income tax settlements legislation (see above).
- There is no equivalent rule for TOAA.
Same sex spouse/potential spouse
- Query whether a pre-2014 trust excluding a spouse would be construed as excluding a same sex spouse (see Chamberlain §11.15).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Power to enjoy must be as a result of relevant transactions (including associated operations)
General
- The power to enjoy income of the person abroad must be as a result of the relevant transfer + associated operations (s.721).
- This was logically accepted in Bambridge where the argument was about whether T's power to enjoy could be attributed to associated operations (death, making a will).
- See below on what amounts to an associated operation.
Take account of substantial result + effect
- Have regard to the "substantial result and effect of all the relevant transactions" (s.722(3)).
- Take account of all benefits that may accrue, at any time, irrespective of nature/form and whether individual has legal/equitable right to benefit (s.722(4)).
- Note that the focus of the condition is on the income, not the original capital.
Legislation:
Cases:
Bambridge v. IRC [1955] 3 All ER 812 (HoL);
HMRC manuals:
Commentary:
See also:
- (A) Income dealt with in way calculated to enure for the benefit of the transferor
General rule
- "Condition A is that the income is in fact so dealt with by any person as to be calculated at some time to enure for the benefit of the individual, whether in the form of income or not." (ITA s.723(1)).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- (B) Receipt of income increases value of asset to individual
General rule
- "Condition B is that the receipt or accrual of the income operates to increase the value to the individual—
(a) of any assets the individual holds, or
(b) of any assets held for the individual's benefit." (ITA s.723(2)).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Unintended resulting trust
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- (C) Transferor receives/entitled to receive benefit to provided out of income/related money
General rule
- "Condition C is that the individual receives or is entitled to receive at any time any benefit provided or to be provided out of the income or related money." (ITA s.723(3)).
Related money (assets available as a result of income)
- Means money which is/will be available for the purpose of providing the benefit as a result of the effect of associated operations on the income or assets representing the income (ITA s.723(4)).
Limit on income charged
- If this power to enjoy is satisfied, T is taxed on the value of the benefit in the year in which it is received (s.724).
- However, the benefit may well mean that the transferor capital sum charge applies (s.728, see i4. Trust income), leading to attribution of all the income.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- (D) Transferor may become entitled to beneficial enjoyment of income if one or more powers are exercised
General rule
- Power to enjoy includes a case where "the individual may become entitled to the beneficial enjoyment of the income if one or more powers are exercised or successively exercised" (ITA s.723(5)).
Does not matter who has control of the powers
- It does not matter who may exercise the powers or whether they require another person's consent (ITA s.723(6)).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- (E) Transferor able to control (directly or indirectly) application of the income
- "Condition E is that the individual is able in any manner to control directly or indirectly the application of the income." (ITA s.723(5)).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
INCOME TAX
Transfer of assets abroad
- Transfer/addition to non-resident trust by an individual as a relevant transfer
Pre-condition: relevant transfer
- TOAA rules are only in point if a 'relevant transfer occurs' (ITA 2007 s.714).
- A relevant transfer is a transfer of assets as a result of which (alone or in combination with associated operations), income becomes payable to a person abroad (s.716).
- Accordingly a transfer of assets to a non-resident trust is a relevant transfer.
Assets
- Includes property or rights of any kind (s.717).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Transfer by closely held company as a relevant transfer for individual participators
General rule
- Where (s.720A, S.727A):
(1) A closely-held company makes a relevant transfer.
(2) The individual has a qualifying interest in the company.
(3) The individual is involved in the company.
- Assumed to be the case unless the individual shows that they had no involvement in decision making (s.720A(4)).
- Disregard attempts to manipulate this condition (s.720A(7)).
(4) The avoidance condition is met (s.720A(5)):
(i) it would be reasonable to infer that a consequence of the transfer would be avoidance of tax +
(ii) individual was aware/should have been aware of the transfer +
(iii) individual did not object.
- Disregard attempts to manipulate this condition (s.720A(8)).
Then: the transferor charge applies to that individual (those individuals) in respect of the relevant transfer by the company.
Closely-held company
- Close company or company that would be close if UK resident (ITA s.719A).
Qualifying interest
- An individual has a qualifying interest if they (or their nominee) is a participator in:
(1) the closely-held company that made the transfer; or
(2) another closely-held company that is a direct or indirect participator in the company making the transfer (s.720A(3)).
- Meaning of participator: see CTA 2010, s.454 (s.719A).
Only income from April 2024 onwards
- Only applies to income arising on or after 6 April 2024 (irrespective of when the transfer by the company was) (FA 2024, s.22(10)).
- For the period prior to that, an individual was not regarded as making a relevant transfer by virtue of a company transfer (see Fisher).
Legislation:
Cases:
Fisher v. HMRC [2023] UKSC 44;
HMRC manuals:
Commentary:
See also:
- Transfer for consideration
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Creation of rights in favour of non-resident trust is a relevant transfer
- Transfer is defined as including the creation of rights (s.716(2)).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Income must arise to person abroad "as a result" of the transfer/associated operations: not sufficient that they are necessary preconditions
- For a transfer to be a relevant transfer, the income of the person abroad must arise as a result of the transfer and one or more associated operations (s.716).
- It is not sufficient that the transfer + associated operations were "necessary preconditions" to the income arising to the person abroad (Rialas, §52).
- In Rialas:
- T contributed £10 to Cyprus trust.
- Trustees used the £10 to acquire BVI Co.
- BVI Co borrowed $15m (T facilitated this loan).
- BVI Co used the $15m to purchase the shares of a co-owner in a company T also held shares in.
- BVI Co received dividends on the shares acquired.
Held:
- The establishment of the trust + acquisition of shares in BVI Co did not enable BVI Co to receive the dividend.
- "Put another way, the establishment of the Rialco Trust, and the acquisition of the subscriber shares in Farkland, did not themselves enable Farkland to receive dividends on the Argo shares. The receipt of such dividends could only be guaranteed once Mr Cressman had, additionally, agreed to sell those shares and Farkland had funds to pay the purchase price due." (§52).
- Borrowing the money and acquiring the co-owner shares were not an associated operation with T's transfer of £10 because they were not "in relation" to the £10 transferred:
- "Perhaps with an eye on that objection, [HMRC] sought, in passages in her submission, to expand the scope of the relevant “associated operations” to include Farkland’s borrowing of $15.3m from Magnetic and its acquisition of the Argo shares themselves. However, the FTT was correct to note, at [70], that these transactions could not be relevant in the context of HMRC’s second argument since they were not operations “in relation to”, the transfer of the C£10 as required by s742(1)." (§53)
- But see Moran:
- "[150] In my view, it is a mistake to read "as a result of" too restrictively. Whilst it definitely connotes a causal link between the "transfer" and the "associated operation", it does not stipulate that the causality should be direct (as opposed to indirect), or immediate (in the sense of without any intermediate or intervening cause), or should be solely and exclusive (in the sense that there cannot be any other contributory cause), or should happen within a particular timescale."
Legislation: ITA 2007, s.716;
Cases:
Rialas v. HMRC [2020] UKUT 367 (TCC), Meade J and Judge Jonathan Richards;
Moran v. HMRC [2025] UKFTT 540 (TC), Judge McNall;
HMRC manuals:
Commentary:
See also:
- Associated operations
General
Operations
- Automatic events such as birth, death and reaching a certain age are not operations.
- But where, e.g., a trust grants an interest contingent on an automatic event, the operation giving rise to the interest is the trust (Bambridge).
- A will is an operation and is made in relation to the assets of which it disposes (Bambridge).
- Accumulating income is an operation: an argument that accumulating income is not an operation was "bound to perish" in Herdman (Lord MacDermott CJ, at 505).
Requirement for actual association
- Case law indicates a requirement for actual conjunction/association:
- “The interval during which the beneficiaries were thinking out their “associated operations” could not make any difference to the legal conclusion, unless the Special Commissioners had found as a fact that it negatived the “conjuction” or association between the two operations—the transfer to and the transfer by Woodgate. They did not so find.” (Executrices of Corbett v. IRC at 221)
Operations must be in relation to assets transferred etc.
- Simply because T has historically made transfers to an overseas entity does not mean that a subsequent operation is necessarily "in relation to" the assets transferred/assets representing those assets/income etc.
- Making a loan to an offshore company that T caused to be incorporated (and previously funded) was not in relation to the assets previously transferred in Fynn v. IRC:
-“It was an unsecured loan made on the facts of this case, not for the purpose of reducing the overdraft because the bank were pressing for payment; nor for the purpose of freeing the assets from the charge. It was made to Crescent as an interest-free unsecured loan and Crescent could have used it in any way that it pleased. I cannot see that it bears any relation to any of the transferred assets or to the charge.”
- Passage quoted without disagreement in Fisher CoA.
- In Carvill, T transferred shares to Bermuda Co as part of a share for share exchange.
- Bermuda Co subsequently made arrangements to remunerate T in a tax efficient manner.
- Not associated operations because did not relate to the old shares (asset transferred) or new shares (asset representing asset transferred).
- "On the ordinary use of language, and, indeed, however wide a meaning one gives to the expression 'in relation to', it is difficult to see how any of these transactions are operations which relate to either the old or the new majority shares. They either relate to different shares (such as the repurchase of the new minority shares or the purchase of Mr Bassett's shares) or they do not relate to any shares at all (such as the employment arrangements or the brokerage sharing agreement)."
Assets representing assets
- Shares/rights in a company represent the assets of the company.
- "The assets transferred are the taxpayer's shares in Holdings (the old majority shares); the assets representing them are the taxpayer's shares in International Holdings (the new majority shares)" (Carvill re a share for share exchange).
- It is considered that the assets of a company do not represent the shares in the company.
- Supported by Rialas (noted above).
- If the assets of the BVI Co represented the shares in the BVI Co, then the use of the loaned money would have been an associated operation (because the shares undoubtedly represented the £10 transferred by T).
- UT held that operations in relation to the assets of the company (loaned money) were not associated operations with T transferring the £10 to the trust and the trust acquiring the shares with that £10.
- Equally, in Carvill, operations undertaken by the Bermudan company (to whom T had transferred shares) to remunerate T, did not relate to either the old shares or the new shares.
Relevance
Legislation:
Cases:
Executrices of Corbett v. IRC [1943] 2 All ER 218 (CoA);
Bambridge v. IRC [1955] 3 All ER 812 (HoL);
Fynn v. IRC [1958] 1 WLR 585;
IRC v. Herdman [1969] 1 All ER 495;
Carvill v. IRC [2000] STC (SCD) 143;
Rialas v. HMRC [2020] UKUT 367 (TCC), Meade J and Judge Jonathan Richards;
HMRC manuals:
Commentary:
See also:
CAPITAL GAINS TAX
Holdover relief
- No holdover relief on gift to settlor-interested trust
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
INHERITANCE TAX
Lifetime creation of trust
- Transfer of value to trust
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Creation of trust by associated operations
General
- Disposition includes disposition effected by associated operations (s.272).
- On the meaning of associated operations see C1. Gifts (general).
Identity of settlor where trust created by associated operations
-
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Trust created on death
- Qualifying IIP
- IIP holder deemed to own the assets but those assets are to be treated as reduced in value by reference to the trust liabilities (Elborne).
Legislation:
Cases: Elborne v. HMRC [2025] UKUT 59 (TCC);
HMRC manuals:
Commentary:
See also:
Gift with reservation of benefit
- Settlor needs to be irrevocably excluded from actual or potential benefit
Settlor
- Right to be considered as a discretionary beneficiary of a trust leading to possibility of benefit is a reservation of a benefit (Eversden HC §17, Lyon §32).
- Does not depend on actual receipt of benefit.
- Query the position if the evidence shows it is virtually certain the donor will not receive anything from the trust.
- Power for trustees to add donor as beneficiary will mean benefit reserved - HMRC say donor must be irrevocably excluded (IHTM14393).
- A power to revoke the trust held by the donor is not property (IHTA 1984, s.272) but will mean the donor is not excluded from potential benefit.
- Query whether retention of a reversionary interest may not amount to a reservation of benefit (McCutcheon 7-82).
- Right of settlor to be reimbursed for CGT paid under TCGA 1992, Sch 5, para 6 is not a reservation of benefit (SP5/92).
Settlor's Spouse
- Does not necessarily need to be excluded for this IHT purpose.
- Unless s.102A may apply.
Legislation:
Cases:
IRC v. Eversden [2002] EWHC 1360;
IRC v. Eversden [2003] EWCA Civ 668;
Lyon v. HMRC [2008] STC (SCD) 675;
HMRC manuals: IHTM14393;
Commentary: McCutcheon 7-62 onwards;
See also: Statement of Practice 5/92;
- Beware of the situations where the settlor ends up with an unintended resulting trust
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Being a discretionary beneficiary is not a significant arrangement for the purposes of s.102A
- If T disposes of land by way of gift and later there is a right, interest or arrangement, to which T/T's spouse is a party, that allows the donor to occupy all or part of the land or enjoy some right in relation to it, gift is treated as subject to a reservation (s.102A).
- Gift to trust of which donor is a potential discretionary beneficiary not within this rule as being a discretionary beneficiary does not, of itself, enable the donor to occupy the land/enjoy some right (IHTM14360). Apply the ordinary GWR rules instead.
Legislation: FA 1986, s.102A;
Cases:
HMRC manuals: IHTM14360;
Commentary:
See also:
- Tainting
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Additions to excluded property trust after becoming UK domiciled not excluded property
XX
Legislation: FA 2020, s.73.
Cases:
HMRC manuals:
Commentary:
See also:
PRE-OWNED ASSET TAX
Income tax charge where trust is settlor-interested and no GWR
- XX
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also: