CheckLists.Tax (beta)
i7. Appointments and powers
INCOME TAX
Settlements code
- Appointment by trustees as a continuation of settlor's settlement
- In Chinn: "If it be said that there must be an act of bounty of the settlor and that the latter had fully divested himself of his settled property when he made the settlement, I would reply that his bounty was at that point incomplete, and became completed only when an appointment was made - thereby, as it were, filling in the names of his intended beneficiaries."
- Concerning a scheme whereby the trustees appointed a contingent interest in shares, the beneficiary sold the contingent interest and simultaneously agreed to repurchase assets that would be received under the contingent interest.
Legislation:
Cases:
Chinn v. Collins [1981] AC 533 (HoL);
HMRC manuals:
Commentary:
See also:
- Query whether beneficiary consenting to termination of interest can make them settlor
- Releasing or assigning an interest/prior interest can make that person the settlor in relation to the subsequent interest (see i12. Disposing of a trust interest).
- Query whether consenting to a termination of the interest by the trustees is treated in the same way.
- Logically it should be if the person's consent is required but otherwise not unless there is some wider arrangement.
Legislation:
Cases:
HMRC manuals:
Commentary: Chamberlain, §11.83.
See also:
- Excluding the settlor/spouse
- Excluding the settlor/spouse will prevent the income of the trust being attributed to the settlor in subsequent years if done properly.
- But it will not stop the settlor being treated as receiving income insofar as such income is matched to a capital payment under ITTOIA s.633.
- Capital payment could include, e.g., a loan to the settlor or repaying a loan made by the settlor.
- Section 633 applies even where the capital sum was paid in a year in which the trust was settlor interested (but matching only occurs for 11 years).
- See i8. Distribution to beneficiary.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Transfer of assets abroad
- Conferral of interest in trust not itself a benefit from that trust
- The conferral of an interest in a trust (life interest, discretionary beneficiary) by the trustees of that trust is not considered a benefit "out of assets available for the purpose".
- Nothing leaves the trust.
- Receipt of something under the interest is the benefit.
- "Neither the giving of a life interest to a beneficiary, nor the receipt by a beneficiary of the proceeds of the sale of a life interest, constitute a benefit." (INTM601580 and see also RI 201)
- But if the conferral of the interest is part of a wider scheme (e.g. involving its sale), the effect might be looked at overall (see Chinn v. Collins re a scheme whereby a contingent interest in shares was granted, sold and the shares repurchased).
Legislation:
Cases:
Chinn v. Collins [1981] AC 533 (HoL);
HMRC manuals:
INTM601580 - Transfer of assets abroad: The benefits charge: What is a benefit?;
Commentary:
See also:
CAPITAL GAINS TAX
(Potential) interest to the settlor/partner/child
- Trust becomes settlor-interested within circa 6 years (clawback of holdover relief)
General
- If:
(1) A disposal is made to which s.165 or s.260 applied.
(2) The disposal was to the trustees of a settlement.
(3) The settlement subsequently becomes settlor-interested.
(4) The settlor-interest arises within the clawback period.
- Clawback period: ends 6 years after the end of the tax year in which the disposal was made.
- Then: the clawback provisions operate (s.169C).
Interest in a settlement
- Individual has an interest in a settlement if:
(1) Possible benefit - Any property which is/may in future be comprised in the settlement "is, or will or may" "in any circumstances whatsoever" become payable to or applicable for the benefit of the individual, spouse or civil partner (s.169F(2)).
- Ignore possibilities that depend on death in certain circumstances (s.169F(5)).
(2) Actual benefit - Individual (or spouse/civil partner) enjoys a benefit deriving directly or indirectly from any property comprised in the settlement or any derived property (s.169F(3)).
(3) Potential or actual benefit to dependent child - as above in (1) and (2), but by reference to a child of the individual (s.169F(3A)).
- Dependent child = child/step child under 18, unmarried, no civil partner (s.169F(4A)).
- Ignore at any time when individual has no dependent child (s.169F(4B)).
Clawback before the holdover claim is made
- If no claim for holdover relief has been made before the trust becomes settlor interested, holdover relief is disapplied and no claim can be made (s.169C(4)).
- The settlor is taxed on the original disposal and can claim any applicable reliefs (e.g. BADR).
Clawback after the holdover claim is made
- If: a claim for holdover relief has been made prior to the trust becoming settlor interested,
- Then:
(1) A chargeable gain equal to the held-over gain on the relevant disposal is treated as accruing to the transferor.
(2) It is treated as accruing at the time the trust becomes settlor-interested (s.169C(7)).
(3) Consequential adjustments for any subsequent disposals by the trustees or any person whose title derives directly/indirectly from them (s.169C(8)).
- Adjustments to be made without limit as to time (s.169C(9)).
- Disadvantage: this is a deemed gain, so cannot qualify for, e.g., BADR.
- Potential benefit: query whether this could be advantageous if the settlor is non-resident at the time the deemed gain arises - see below.
- Collection from donee if donor does not pay within 12 months (s.282(5)).
Settlor dies after holdover claim made but before trust becomes settlor-interested
- Clawback does not operate.
- Only provides protection if holdover relief already claimed before trust becomes settlor-interested (s.169C(6)).
Legislation: TCGA s.169C; s.169F; s.282;
Cases:
HMRC manuals:
CG66888 - Gifts and Capital Gains Tax: Relief for Gifts of Business Assets: Clawbacks;
Commentary:
See also:
- Settlor: person from whom property originates (directly/indirectly) or reciprocal arrangements
XX
Legislation: TCGA s.169E;
Cases:
HMRC manuals:
Commentary:
See also:
- Settlor's partner or dependent child has an interest within 6 years: clawback
- See above: spouse, civil partner or dependent child having/potentially having an interest can make the trust settlor-interested.
Legislation: TCGA s.169C;
Cases:
HMRC manuals:
Commentary:
See also:
- Arrangement under which interest will or may be acquired by a settlor, partner, dependent child: clawback
- Clawback also applies if, during the clawback period "an arrangement subsists under which such an interest will or may be acquired by a settlor" (s.169C(2)(b)).
- "“arrangement” or “arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable" (s.169G).
Legislation: TCGA s.169C;
Cases:
HMRC manuals:
Commentary:
See also:
- Settlor is non-resident at time of clawback
- If settlor is non-resident at the time of the clawback, subject to the charges on non-residents for certain assets, the gain is outside the UK net.
- Query how the settlement can only become settlor interested at this time given the wide definition of arrangement and settlor interested.
- Query whether this type of gain falls with the temporary non-residence rules.
Legislation: TCGA s.169C;
Cases:
HMRC manuals:
Commentary:
See also:
Grant of interest to prior-donor to settlor
- Prior donor to settlor has an interest/arrangement for interest within 6 years: clawback
- If:
(1)
- Then: the clawback provisions operate (s.169C(3)).
Legislation: TCGA s.169C;
Cases:
HMRC manuals:
Commentary:
See also:
INHERITANCE TAX
- Trust settled by will, within 2 years of death, granting interest that would have amounted to IPDI
- If:
(1) property is settled by a person's will; and
(2) within 2 years of death, there is an event causing the property to be held on trusts that would, if in the will, have given rise to an IPDI
then: IHT applies as if the will had so provided (IHTA 1984, s.144).
- Similarly where the event causes the property to be held on trusts within s.71A or s.71D.
- Trustee mistakenly was not aware of this and sought rescission in Payne v. Tyler.
Legislation: IHTA 1984, s.144;
Cases: Payne v. Tyler [2019] EWHC 2347 (Ch);
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
- Exercise of power by trustees to terminate interest is not a gift by the affected beneficiary
- The trustee decision to terminate an appointment is not a gift either by the trustees or the affected beneficiary. Accordingly GWR should not apply.
Legislation:
Cases:
HMRC manuals:
Commentary: McCutcheon 7-49;
See also:
- Deemed gift where qualifying IIP terminated
- Termination of a qualifying IIP during the lifetime of the beneficiary is treated as a gift of the property to which the IIP related before termination.
- Query whether this applies for the purposes of s.102A - C - the literal wording says not (s.102ZA(2)).
- Does not apply if the IIP-holder becomes absolutely entitled to the property.
- If the property remains settled following termination, trace into the settled property deriving from the gift (para 4A).
- If the settlement comes to an end, trace into the property leaving the settlement deriving from the gift (para 4A(4)).
- Settlement income is included in the tracing unless it arises after the material date (i.e. the date of death or deemed PET) (para 4A(5)).
- If the donor becomes absolutely entitled to property at this time, that is excluded from the gift, but any consideration the donor gives to become absolutely entitled is included (para 4A(4)).
Legislation: FA 1986, s.102ZA; FA 1986, Sch 20;
Cases:
HMRC manuals:
Commentary: McCutcheon 7-101;
See also: