Tax Advisers’ Guide to Trusts 9781526511829, 9781526511799

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Preface

Many tax advisers seem to feel rather uncomfortable with the concept of trusts, and the purpose of this book is to try to demystify the subject and explain the tax rules and the way in which trusts can be used in practice as a flexible and effective means of wealth accumulation and protection in an uncertain world. A trust is not a separate legal entity, but a relationship which depends upon the concept of Anglo-Saxon common law recognising a distinction between the legal and beneficial ownership of a property. Common law has been developed over the years and much statute law is now involved in the regulation and taxation of trusts. It is assumed that, as this book is aimed at tax advisers, readers will have the taxing statutes readily to hand. However, many tax advisers may not have some of the non-tax legislation, which we feel is essential to consider in effective trust planning, and the appendices therefore reproduce the major trust legislation and extracts relating to trusts from a number of other relevant Acts. We hope that practitioners will find this useful. It is also assumed that readers will be familiar with the general tax rules relating to the computation of income and gains for self-assessment purposes, so this book concentrates on the UK tax rules applicable to trusts resident in the UK or abroad, and the resultant tax liabilities of the trustees, settlors and beneficiaries, and opportunities for reducing those liabilities where possible. The law is stated as at 30 September 2019. We would like to thank Sarah Styles for updating the manuscript with our many alterations and our colleagues within our respective firms and chambers. Nigel Eastaway OBE, Jacquelyn Kimber and Ian Richards January 2020 Nigel Eastaway OBE MHA MacIntyre Hudson Email: [email protected] Jacquelyn Kimber Newby Castleman LLP Email: [email protected] Ian Richards Pump Court Tax Chambers Email: [email protected] v

Table of Statutes [References are to paragraph numbers and Appendices] A Administration of Estates Act 1925............................... 2.30, App 1 s 1(2)........................................4.23  7.............................................1.50  32...........................................2.30  33............................. 1.27, 1.52, 2.18, 2.30, 4.45  34...........................................2.30 (3)......................................2.20  41...................................... 2.30, 2.31, App 7  42...........................................2.30  46...................................... 2.30, 2.33, 2.34, 13.18, 15.3  47............................... 1.27, 1.52, 2.4, 2.30, 13.18  47A........................................  2.30, 2.34  48, 49.....................................2.30 Sch 1.........................................2.18 para 2....................................2.30 Administration of Justice Act 1982 s 17...........................................15.1 Administration of Justice Act 1985 s 7.............................................2.25  9.............................................2.20 Adoption Act 1976 s 39(1), (5)................................5.37 Air Departure Tax (Scotland) Act 2016...............................1.85 Anti-avoidance of Devolved Taxes (Wales) Act 2017......1.87 Anti-terrorism, Crime and Secu­rity Act 2001................  1.95, 2.51 Apportionment Act 1870...........  2.21, App1 s 2.............................................4.74

B Bank of England and Financial Services Act 2016................2.50 Bankruptcy Act 1914.................2.43 s 42.............................2.43, 2.44, 14.14  122.........................................2.43 Borders, Citizenship and Immi­gration Act 2009........5.31 British Nationality Act 1981......5.31 C Capital Allowances Act 2001.....17.16 s 15–17.....................................17.16  39...........................................1.98  63(2)......................................11.38  85, 129, 130, 177, 198...........19.27 Pt 3 (ss 271–360).....................17.15 Pt 4 (ss 361–393)..................... 17.15 s 382.........................................19.27  437–451.................................1.108 Capital Gains Tax Act 1979 s 52(1)......................................6.100  54(1)......................................6.100 Charitable Trusts (Validation) Act 1954...............................2.47 Charitable Uses Act 1601...........2.45 Charities Act 1993........2.21, 4.102, 11.2 s 24, 25.....................................2.20 Charities Act 2006.................. 11.3, 11.4 s 1.............................................2.45 (3)........................................2.45  2(2)........................................11.10  15–18.....................................11.17 Charities Act 2011.........1.19, 2.45, 11.2, 11.14; App 1 s 1.............................................11.1  2.................................11.1, 11.3, 11.4 (1)(b)....................................11.10  3..........................................11.1, 11.2  4.............................................11.1  5.............................................11.2  61–68.....................................11.17

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Table of Statutes Charities Act 2011 – contd s 104A, 104B...........................2.21 130–192.................................2.46 Pt 10 (ss 193–203)...................11.76 Pt 11 (ss 204–250)...................11.78 s 206–250.................................11.78  267–272.................................11.17  282–286, 288–292.................4.102 Sch 7 para 1....................................2.45 Charities and Trustee Invest­ ment (Scotland) Act 2005....1.5 Charities (Protection and Social Investment) Act 2016..........11.14, App 2 Children and Families Act 2014............................. 15.13; App 1 Civil Jurisdiction and Judg­ ments Act 1982 s 45...........................................5.102 Civil Liability (Contributions) Act 1978...............................4.69 Civil Partnership Act 2004 s 1............................................. App 7  71...........................................15.37 Sch 4.........................................15.37 Commissioners for Revenue and Customs Act 2005 s 18(1)......................................1.130 Companies Act 1985 s 130.........................................4.75  208.........................................1.7  425.........................................4.75 Sch 8 para 15..................................16.58 Companies Act 2006 s 197–214.................................16.14  330(7)....................................16.14  382.........................................1.45  394.........................................16.58  395, 396......................... 16.50, 16.58  397–403.................................16.58  464.........................................16.50  641–653............................. 4.90, 4.93  682(2)(b)................................7.12  684–737.................................4.90  770, 772, 773.........................3.16 Companies (Audit, Investigations and Community Enterprise) Act 2004...............................11.79

Company Directors Disquali­ fication Act 1986.................2.46 Contracts (Rights of Third Parties) Act 1999................1.57 Copyright, Designs and Patents Act 1988 s 1(1), (2)..................................4.74 91...........................................1.35 Corporation Tax Act 2009.........10.53 s 2–4.........................................7.11  5........................................1.100, 7.11  6–8.........................................7.11  13......................................5.78, 12.23  14............................ 5.78, 5.80, 12.23  15............................. 5.78, 5.79, 5.80, 12.23  16, 17.....................................12.23  18............................. 5.79, 5.83, 5.84, 12.23  18 (1)–(4)...............................5.79  41...........................................5.85  46...........................................16.50  53........................................16.4, 16.7  54............................. 16.4, 16.7, 16.23  105–108..........................11.35, 11.38  162–170.................................5.85 Pt 4 (ss 202–291).....................17.50 s 289.........................................5.85  452.........................................6.161  485(3)....................................16.84 Pt 8 (ss 711–906).....................17.50 s 782A......................................1.101  965.........................................15.27  967.........................................15.28  977.........................................11.29 Pt 10 Ch 8 (ss 979–981)...........10.70 s 979.........................................11.29  1219.......................................18.30  1290........................12.13, 16.7, 16.9, 16.10, 16.12, 16.13, 16.15, 16.23, 16.24, 16.25, 16.60 (2)..................................16.7 (2AA).............................16.11 (3)..................................16.7  1291........................16.7, 16.9, 16.10, 16.12, 16.13, 16.15, 16.19, 16.23, 16.24, 16.25

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Table of Statutes Corporation Tax Act 2009 – contd s 1292–1296............. 16.7, 16.9, 16.10, 16.11, 16.12, 16.13, 16.15, 16.23, 16.24, 16.25, 16.60  1297........................16.7, 16.9, 16.10, 16.12, 16.13, 16.15, 16.23, 16.24, 16.25, 16.60 Sch 1.........................................5.80 Sch 2.........................................5.80 para 13..................................5.78 para 14..................................5.78 para 15..................................5.78 (1).............................5.80 Sch 5.........................................1.100 Corporation Tax Act 2010 s 189, 190.................................11.28 191–202..........................11.28, 11.30 202A–202C...........................11.19 203–217.................................11.28 Pt 6A (ss 217A–217D).............1.98 s 357GC–357GCZF.................1.98 438–449..........................10.85, 16.63  450, 451.........................10.85, 10.96, 10.102  452, 453..........................10.85, 16.63  454................................ 10.85, 16.63, 16.98 455......................................... App 10 455–459.................................6.223 469.........................................11.32 470.........................................11.32 Pt 13 Ch 9 (ss 658–671)...........11.19 s 658–660, 660A, 660C, 660D, 660E, 661, 661A, 661B, 662–671..........  11.19, 11.70 834–848.................................17.27 849–862.................................17.27 1000....................................4.90, 6.55 1001, 1002.............................4.90 1003–1017......................... 4.90, 4.92 1026–1028.............................4.74 1029–1034......................... 4.74, 4.90 1035–1043................ 4.74, 4.90, 4.91 1044.......................... 4.74, 4.90, 4.91 1045–1048......................... 4.74, 4.90 1049...................................4.74, 4.81 1050–1074.............................4.74 1075.......................... 4.74, 4.87, 4.88

Corporation Tax Act 2010 – contd s 1076–1078................2.21, 4.74, 4.87, 4.88 1079, 1080..........................4.87, 4.88 1109.......................................6.55 1154–1157.............................6.139 Corporation Tax (Northern Ireland) Act 2015................1.86 Crime and Courts Act 2013.......3.4 Criminal Finances Act 2017......1.95, 2.51 Pt 1 (ss 1–34)........................1.95, 2.51 17........................................1.95, 2.51 18........................................1.95, 2.51 (2)–(5).............................1.95, 2.51 19........................................1.95, 2.51 Pt 2 (ss 35–43)......................1.95, 2.51 Pt 3 (ss 44–520......................1.95, 2.51 Pt 4 (ss 53–59)......................1.95, 2.51 Sch 1......................................1.95, 2.51 Criminal Law Act 1977 s 1–4.........................................4.64  5.............................................4.64 (2)........................................14.7 Criminal Law (Consolidation) (Scotland) Act 1995 s 23A.....................................1.95, 2.51 Criminal Procedure (Scotland) Act 1995 s 307......................................1.95, 2.51 D Data Protection Act 1998...........1.144; App 10 s 7..........................................1.9, 1.144 Digital Economy Act 2017.........1.96 Domicile and Matrimonial Pro­ ceedings Act 1973.......... 2.26, 5.50, App 1 Pt 1 (ss 1–35)...........................5.33 s 3.............................................2.27 (1)........................................5.45  4................................ 2.27, 5.37, 5.48  17(5)......................................2.27 E Enduring Powers of Attorney Act 1985..................2.18, 2.19, 2.39, 2.41, App 1 s 1, 2.........................................2.39

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Table of Statutes Enduring Powers of Attorney Act 1985 – contd s 3.............................................2.39  4, 5.........................................2.39  6–9..................................... 2.19, 2.39  10–13.....................................2.39 Sch 1.........................................2.39 Sch 3.........................................2.39 European Communities Act 1972.....................................1.99 European Union (Withdrawal) Act 2018...............................1.99 F Factors Act 1889.........................1.47 Family Law Reform Act 1969 s 1.............................................3.53 (1)..............................2.27, 3.1, 5.45 Family Law (Scotland) Act 2006.....................................5.36 s 22...........................................2.27 Finance Act 1894 s 5(2)........................................8.26 Finance (1909–10) Act s 74...........................................6.10 Finance Act 1930 s 40(2)......................................12.60 Finance Act 1936 s 18...........................................6.319 Finance Act 1938........................6.200 Finance Act 1944 s 33(3)......................................6.319 Finance Act 1975 s 31–34.....................................12.60 Sch 5 para 1(3)....................... 6.243, 6.298 (8)...............................6.243  3(6)...............................6.243 Finance Act 1978 s 31................................... 6.319, 6.322 Finance Act 1982 s 108(1)(b)................................6.243  129.........................................11.20 Finance Act 1984 s 8A..........................................1.110 Finance Act 1985 s 82......................................6.10, 11.20  83...........................................6.10  84...........................................6.10  95...........................................12.50

Finance Act 1986 s 101.........................................9.33  102..................... 6.202, 6.203, 6.211, 6.294, 6.298, 6.299, 6.303, 12.22, 15.19 (1), (2)..............................6.286 (3).................6.286, 6.292, 6.293, 6.298 (4).................6.286, 6.292, 6.293, 6.303 (5)....................................6.286 (a)........................ 6.296, 6.298 (d)–(i)..........................6.203 (5A)–(5C)........................6.209 (6)–(8)..............................6.286  102A.................. 6.202, 6.213, 6.292, 6.294, 12.22 (2).................................6.292 (3)–(5)...........................6.292 (6).................................6.293  102B..................6.202, 6.213, 6.292, 6.293, 6.294, 12.22 (4)..................................6.203  102C.................. 6.202, 6.213, 6.292, 6.294, 12.22 (6), (7)...........................6.294  103..................... 6.203, 6.211, 6.295, 6.318, 6.326  104.........................................  6.203, 6.211 Sch 19.......................................9.33 Sch 20....................6.202, 6.203, 6.211, 12.22, 15.19 para 2–4................................  6.286, 6.289  5....................................6.289 (5)...............................6.287  6....................................6.203 (1)(a), (b)....................  6.287, 6.298, 6.303 (c)...........................6.298  7............................ 6.290, 6.298  8(1), (2)........................6.291 (3)–(5)........................6.292 Finance (No 2) Act 1987 s 96...........................................8.27 Finance Act 1989 s 42(11)....................................16.10  43...........................16.7, 16.10, 16.24 (11)(a)................................16.7

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Table of Statutes Finance Act 1989 – contd s 59...........................................11.21  69(3AA).................................16.79  75...........................................18.8  151....................................15.25, 19.1 (4)....................................6.66  178.........................1.98, 10.18, 19.46 (2)....................................1.98 Sch 6 para 1–17..............................18.8  19–22............................18.8  23............................. 18.8, 18.13  24–30............................18.8 Finance Act 1990 s 25...........................................11.21 (3A)...................................11.23 Finance Act 1991 s 53...........................................6.323 Finance (No 2) Act 1992 s 27...........................................11.21 Finance Act 1993 s 118.........................................8.10 Finance Act 1995 s 113(2)(a)................................6.169  145.........................................6.28 Finance Act 1996 s 154.........................................7.16 Finance Act 1997 s 30...........................................18.53  81...........................................10.26 Finance Act 1998 s 42...........................................17.8  46(1), (2)................................17.8  48...........................................11.21  142.........................................12.54  143.........................................12.49  161(2)(c)................................6.240  165.........................................4.52 Sch 18 para 51..................................12.54 Sch 25.......................................12.54 Finance Act 1999 s 64...........................................6.215 (5), (6)................................6.216  104................................. 6.213, 6.292  112.........................................6.10 Finance Act 2000 s 39...........................................11.21  41...........................................11.21 (8)......................................11.21

Finance Act 2000 – contd s 42...........................................11.21  90...........................................6.112  91(3)......................................6.181  92(5)......................................10.94  112.........................................6.13  114.........................................6.10 Finance Act 2002 s 51...........................................10.107  52...........................................6.170  84...........................................6.123  119................................. 6.119, 6.188  120.........................................6.264  134................................... 4.95, 14.24 Sch 11.......................................10.107 para 2....................................10.107  4....................................10.108  5....................................10.109  8....................................10.107 Sch 18 para 1–3.........................11.70, 11.39  9....................................11.39  10–16............................11.71 Sch 29.......................................6.123 Sch 39................................. 4.95, 14.24 Finance Act 2003 s 42–47.....................................17.31  48...........................................17.31 (1)(a)..................................6.10  49............................6.10, 6.13, 11.20, 17.31, 17.33  50....................................17.31, 17.33  51, 52.....................................17.31  53....................................17.31, 17.34  54....................................17.31, 17.34  55....................................17.31, 17.35  56...................................17.36, 17.38  57....................................17.31, 17.39  57A........................................17.39  58...........................................17.31  58A, 58D...............................17.31  59–61.....................................17.31  62....................................17.31, 17.39  63, 64.....................................17.31  64A........................................6.13  65....................................17.31, 17.39  66, 67.....................................17.31  68....................................17.31, 17.39  69–75.....................................17.31  75A–75C...............................17.39

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Table of Statutes Finance Act 2003 – contd s 76–92..............................17.31, 17.39  93–99.....................................17.31  100–104..........................17.31, 17.39  105........................ 6.11, 17.31, 17.39  106–124..........................17.31, 17.39  143.................................... 16.7, 16.10  185................................. 6.209, 6.296 Sch 3..................................17.31, 17.33 para 1.............................. 6.10, 11.20  3....................................6.10  4....................................15.30 Sch 4.........................................17.31 para 2....................................17.33 Sch 4ZA para 10I................................6.12  12..................................6.12 Sch 5...................... 17.31, 17.36, 17.38 para 3....................................17.38 Sch 6..................................17.31, 17.39 Sch 6B......................................17.39 Sch 7..................................17.31, 17.39 Sch 8..................................17.31, 17.39 Sch 9.........................................17.31 Sch 10.......................................17.31 Sch 11.......................................17.31 Sch 12.......................................17.31 Sch 13.......................................17.31 Sch 14.......................................17.31 Sch 15............................... 17.31, 17.39 Sch 16...................... 6.11, 17.31, 17.39 para 1, 2, 4–8........................17.40 Sch 17.......................................17.31 Sch 18.......................................17.31 Sch 19.......................................17.31 Sch 20.......................................17.31 Sch 23.......................................16.13 Sch 24....................... 16.7, 16.7, 16.10, 16.13, 16.20, 16.24, 16.28 Finance Act 2004........................18.1 s 29...........................................18.28 66(1)......................................1.125 84...........................................6.201  116.........................................15.19 Pt 4 (ss 149–284)............18.71, 18.122 s 150–152.................................18.71  153................................. 1.151, 18.72  154–156, 159.........................18.72  160–163.................................18.101

Finance Act 2004 – contd s 164, 165.................................18.92  166.........................................18.101  167, 168.................................18.102  169................................ 18.74, 18.121  170.........................................18.74  171.........................................18.101  172.........................................18.101  173.........................................18.101  174................................18.70, 18.100  174A......................................18.70  175–185.................................18.101  186, 187.................................18.72  188–195.................................18.74 196–201.................................18.89  202.........................................18.90  203..............................18.102, 18.117  204–213.................................18.101  208, 209.................................1.151  214–217...............18.82, 18.90, 18.94  218..................... 18.82, 18.84, 18.90, 18.94  219...................... 18.82, 18.90, 18.94  220......................18.82, 18.83, 18.90, 18.94  221–226............. 18.82, 18.83, 18.90, 18.94  227.........................................18.75  227ZA....................................1.98  227ZB....................................1.98  227ZD....................................1.98  228.........................................18.75  228A......................................18.73  229–238.................................18.81  239–241.................................18.101  242.........................................18.72  242C–242E............................1.97  243–244.................................18.90  245................................18.90, 18.117  246–249.................................18.117 Pt 4 Ch 7 (ss 250–274).............18.116 s 250–273.................................18.116  273B.............................18.95, 18.116  274.........................................18.116 Pt 4 Ch 8 (ss 275–284).............18.116 s 278.........................................18.116 306, 307.............. 6.327, 6.328, 17.31  308...................... 6.327, 6.329, 17.31  309–313.............. 6.327, 6.330, 17.31 313C......................................6.330

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Table of Statutes Finance Act 2004 – contd s 314...................... 6.327, 6.331, 17.31  315–319.............. 6.327, 6.332, 17.31 Sch 10.......................................15.19 para 11..................................6.203 Sch 15....................6.201, 6.202, 6.319, 15.19 para 1....................................6.211  2(b)...............................6.208  3....................................6.202 (2), (3)........................6.208  6....................................6.202 (2), (3)........................6.208  8................. 6.206, 6.211, 6.212 (1)(b)..........................6.211  9(1)...............................6.206 (2)...............................6.207  10.......................... 6.203, 6.207 (1)(c)................. 6.208, 6.209 (2)(c).........................6.211 (3).............................6.209  11.......................... 6.207, 6.210 (1), (2)......................6.211  12–17............................6.204  18, 19............................6.205  20..................................6.206  21–23.................... 6.204, 6.205 Sch 21.......................................15.19 Sch 22 para 5(5)...............................6.125  7(2)...............................6.125 Sch 28.......................................18.71 Pt 1 (paras 1–14E)................18.92 Pt 2 (paras 15–27K).............18.102 para 15..............................18.110 Sch 29.......................................18.71 Pt 1 (paras 1–12)..................18.101 para 3A.............................18.101  15(4).........................18.102  19..................... 18.86, 18.105 Sch 29A....................................18.66 para 1....................................18.2  2–5...........................18.2, 18.67  6–30..............................18.68  31–45............................18.70 Sch 30..............................18.71, 18.101 Sch 31..............................18.71, 18.101 Sch 32.....................18.71, 18.90, 18.94 Sch 33................................18.71, 18.90 Sch 34................................18.71, 18.90

Finance Act 2004 – contd Sch 35.......................................18.71 Sch 36..........................18.4, 18.5, 18.7, 18.8, 18.15, 18.16, 18.20, 18.71 para 2....................................18.117  7–17..............................18.83 18..................................18.87 Finance Act 2005 s 23–25.....................................13.12  26...........................................13.19  29...........................................13.12  31....................................13.16, 13.19  34–36.....................................13.18  37...........................................13.12  38...........................................13.8  39...........................................13.18  40...........................................13.19  41...........................................13.19 (2)......................................13.15  42, 43.....................................13.19  101.........................................18.71  102.........................................18.39  103.........................................15.37 Sch 1.........................................13.12 para 3....................................13.15 Sch 1A......................................13.8 Sch 10.......................................18.71 Finance Act 2006...... 6.147, 6.327, 7.20, 8.17, 9.1, 9.2, 9.15, 9.18, 9.22, 9.35, 9.37, App 5 s 26...........................................7.10  74...........................................10.124  76...........................................6.200  88...........................................6.89  121.........................................11.57  156..................................... 7.21, 7.25  158–161.................................18.71  173.........................................10.57 Sch 6.........................................6.200 Sch 12 para 2(1)...............................6.89 Sch 20 para 3(3)...............................9.15  20(2).............................7.21  23..................................7.25 Sch 21.......................................18.71 Sch 22.......................................18.71 Sch 23.......................................18.71

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Table of Statutes Finance Act 2007.........1.95, 2.51, 6.279, 18.86, 18.105 s 68–70.....................................18.71  84........................................1.95, 2.51 Sch 18.......................................18.71 Sch 19.......................................18.71 Sch 20.......................................18.71 Sch 24..................................1.89, 19.72 para 1A.................................19.70  3....................................19.66  3A, 3B..........................19.66  4............................... 1.89, 19.66  4A, 4AA.......................1.89  5–8........................... 1.98, 19.68  9–11..............................19.67  18, 21............................19.70 Sch 26 para 3, 4................................19.66 Finance Act 2008............ 4.52, 5.1, 5.43, 5.50, 5.74, 6.147, 6.179, 6.279 s 1..................................... 11.27, 11.52  8................................... 10.54, 10.108  13...........................................10.7  24...........................................5.15  25...........................................5.101  33...........................................11.52  36...........................................1.156  41...........................................1.98  53...........................................11.27  58...................................... 1.44, 6.318  84...........................................17.15  90–92.....................................18.71  113.........................................19.37 Sch 2 para 1....................................15.19  5....................................15.19  23..................................6.157  25..................................10.108  45........................ 6.157, 10.108 Sch 7.........................................10.115 para 46, 52............................5.101 Sch 18.......................................11.19 Sch 19.......................................11.27 para 3....................................11.52 Sch 28.......................................18.71 Sch 29.......................................18.71 Sch 36......................... 4.2, 6.95, 6.306, 10.122, 18.122, 18.123, 19.37, 19.51, 19.53

Finance Act 2008 – contd Sch 36 – contd para 1....................................19.51 para 2, 3................................19.52 para 6, 7, 23–28....................19.51 para 29–31............................19.52 Sch 39.......................................7.16 Sch 47.......................................19.37 Sch 48.......................................19.37 Sch 49.......................................19.37 Finance Act 2009 s 37.......................................5.78, 5.85  53...........................................1.90  72................................... 18.71, 18.76  73–75.....................................18.71  95–97.....................................19.37  122.........................................6.259 Sch 5 para 24..................................1.98 Sch 17................................... 5.78, 5.85 Sch 47................................. 6.95, 19.37 Sch 48............................... 6.306, 19.37 Sch 49.......................................19.37 Sch 35.......................................18.71 para 1, 2................................18.76 Sch 55.......................................19.58 para 1, 3, 4............................19.58 para 6....................................19.62 para 17..................................19.62 Sch 56.......................................19.46 para 4....................................19.46 Finance Act 2010.................. 6.14, 18.71 s 4.............................................6.132 s 30...................................5.104, 11.62 s 31...........................................11.36 s 32...........................................11.36 s 38...........................................6.14 Sch 6................................. 5.104, 11.62 Pt 1 (paras 1–7) para 1, 2............................11.4 Sch 7.........................................11.36 Sch 8.........................................11.36 Sch 12.......................................6.14 Finance (No 2) Act 2010 s 2..................................... 6.132, 15.26 Sch 1....................10.39, 10.54, 10.111, 15.26 para 2, 12..............................6.132 Sch 5 para 1, 5................................6.159

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Table of Statutes Finance Act 2011...............18.84, 18.118 s 9.............................................6.132  26...........................................16.30  87................................... 10.57, 10.58 Sch 2.................................... 1.97, 16.30 Sch 17.......................................18.73 Sch 18 para 2....................................18.84 Sch 25................................10.57, 10.58 Finance Act 2012 s 12...........................................6.187  49...........................................12.71  50(1)......................................11.26  207.........................................6.236 Sch 14................................12.71, 12.76 para 22..................................12.71 para 23..................................12.72 para 26–32............................12.74 para 34..................................12.78 Sch 32.......................................6.236 Sch 38.......................................19.61 Finance Act 2013............... 6.169, 6.340, 18.84, 19.33 s 46...........................................11.19  53...........................................18.122  55...........................................16.67  64...........................................16.15 Pt 3 (ss 94–174).......................17.41 s 94...........................................6.92 (4)......................................17.42  96, 97.....................................17.45  99...........................................6.92  102.........................................6.92  107.........................................17.60  108(6)....................................17.45  110(1)....................................17.44  112(4), (6)..............................17.44  133(1)....................................17.50  133–150.................................6.92  136.........................................17.50  138, 141.................................17.52  161.........................................17.53  178.........................................6.238 206.........................................6.341 207...................... 6.341, 6.342, 6.344 207(5)....................................6.342 208................................. 6.341, 6.342 209...................... 6.341, 6.343, 6.344 210–215.................................6.341 218.........................................5.1, 5.2

Finance Act 2013 – contd s 219........................................5.1, 5.27 Sch 2.........................................16.70 Sch 12.......................................17.56 Sch 21.......................................11.19 Sch 22.......................................18.85 Sch 24................................16.15, 17.58 Sch 33................................17.53, 17.58 Sch 34.......................................17.58 Sch 35.......................................17.53 Sch 36.......................................17.58 para 1–3........................ 6.240, 6.263 Sch 43.......................................6.344 para 3–8................................6.344 Sch 44..................................... 9.5, 9.10 Sch 45................................ 5.1, 5.2, 5.3 para 7....................................5.6  8....................................5.6  9....................................5.6  11..................................5.4  12..................................5.4  13..................................5.4  14..................................5.4  15..................................5.5  16..................................5.5  17..................................5.8  18–20............................5.10  21–31............................5.12  31..................................5.8  32..................................5.8  33..................................5.8  35..................................5.8  36..................................5.8  38..................................5.8  39–56............................5.11  57–159..........................5.12 Sch 46..................................5.27, 6.179 Finance Act 2014............... 6.330, 6.332, 6.333, 6.334, 16.1, 16.99, 18.86 s 35...........................................11.19 58...........................................6.127  113.........................................17.39 Pt 4 (ss 199–233)..............1.140, 17.39 s 199, 200.................................6.333 201.........................................6.333 201(2)....................................6.334 202.........................................6.333 203.........................................6.333 204.........................................6.333

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Table of Statutes Finance Act 2014 – contd s 204(1), (6)..............................6.334 205.........................................6.333 206, 207......................... 6.333, 6.334 208–213.................................6.333 214................................. 6.333, 6.335 215–218.................................6.333 219................................. 1.122, 6.333 220................................. 6.333, 6.335 221................................. 6.333, 6.335 221(2)(b)................................1.90 222................................. 6.333, 6.336 223....................................1.90, 6.333 223(6)....................................6.336 224, 225.................................6.333 226................................. 6.333, 6.338 227.........................................6.338 Pt 5 (ss 234–283).....................17.39 Pt 6 (ss 284–300).....................17.39 Pt 7 (ss 301–303).....................17.39 s 310A, 310B...........................6.330 Sch 6.........................................18.86 Sch 23.......................................17.39 Sch 32.......................................1.123 para 6....................................1.90 Sch 37.............................. 16.89, 16.96, 16.107 Finance Act 2015........................1.89 s 11...........................................7.28 41...........................................6.146 42, 43.....................................6.135 74, 75.....................................6.245 120.........................................19.59 Sch 1 para 1....................................7.28 Sch 7 para 11..................................6.169 43..................................19.45 51..................................19.45 Sch 9..................................... 1.89, 1.98 para 3....................................6.129 Sch 20.......................................1.89 para 1.............................19.59, 19.66 3....................................19.58 7............................ 19.59, 19.66 17A...............................19.60 23..................................19.60 25..................................19.61 Sch 21.........................1.89, 1.98, 19.65 para 2............................... 1.89, 19.65

Finance Act 2015 – contd Sch 21 – contd para 3.............................. 1.89, 19.65 4–8................................1.89 Finance (No 2) Act 2015.........1.90, 1.91, 7.28, 18.75 s 7.............................................1.97  12...........................................1.90  13........................................1.90, 7.26  14......................................1.90, 15.16  15...........................................1.90  51...........................................1.90 Sch 8.........................................1.90 Finance Act 2016............ 5.6, 6.15, 6.58, 6.339 s 33...........................................6.14 39...........................................6.40 46...........................................1.97 79...........................................10.74 (1)......................................6.57 (5)......................................17.25 87...........................................6.158 93...........................................1.91 Sch 6..................................... 1.91, 1.98 para 21..................................6.40 Sch 14.......................................6.158 Sch 15.......................................1.91 Sch 18..................................1.91, 6.339 Sch 20.......................................1.91 Sch 22................................... 1.91, 1.98 para 2....................................19.71 para 3....................................19.71 para 5....................................19.71 para 7....................................19.71 para 8....................................19.71 Finance Act 2017................ 7.20, 18.124 Pt 1 (ss 1–24 )..........................1.97 s 15...........................................1.45 Sch 1.........................................1.97 Sch 2.........................................1.97 Sch 3.........................................1.97 Sch 4.........................................1.97 Sch 5.........................................1.97 Sch 6.............................1.45, 1.96, 1.97 Finance (No 2) Act 2017.........1.98, 5.33, 5.57, 5.62, 6.319, 10.20, 16.8, 16.34 Pt 1 (ss 1–42)...........................1.98 s 15...........................................16.39  18...........................................1.98

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Table of Statutes Finance (No 2) Act 2017 – contd s 19...........................................1.98  20...........................................1.98  21...........................................1.98  22...........................................1.98  23...........................................1.98  24...........................................1.98  25...........................................1.98  26...........................................1.98  27...........................................1.98  28...........................................1.98  29...................................... 5.37, 5.57, 5.72, 10.7 (1)......................................5.58 (2)............................. 10.15, 10.28, 10.36  30...................................... 5.37, 5.57, 5.72, 10.7 (8)......................................7.20  31....................................10.20, 10.41  33...................................... 5.76, 7.24, 10.127  39...........................................17.25 Pt 4 (ss 60–69).........................1.98 Pt 5 (ss 70–72).........................1.98 Sch 2.........................................1.98 Sch 3.........................................1.98 Sch 4.........................................1.98 Sch 5.........................................1.98 Sch 6.........................................16.39 Sch 7.........................................1.98 Sch 8...................................10.7, 10.15, 10.28, 10.36 Pt 4.......................................5.72 Sch 9.........................................10.20 para 2....................................10.41 Sch 10............................... 7.24, 10.127 Sch 11............................... 6.326, 16.46 para 1–3................................16.46 6....................................16.46 20–22............................16.46 23, 24............................16.47 Sch 18..................................1.98, 19.72 para 3....................................19.72 14..................................19.72 16..................................19.72 24..................................19.72 25..................................19.72 26(2), (3)......................19.65 30..................................19.72

Finance Act 2018........................1.99 s 1.............................................1.99  2.............................................1.99  3.............................................1.99  11...........................................16.31  14...........................................1.99  15...........................................1.99  16...........................................1.99  17...........................................1.99  18...........................................1.99  35......................... 1.99, 10.19, 10.21, 10.50 (10)....................................10.49 Sch 1.........................................16.36 Sch 7.........................................1.99 Sch 8.........................................1.99 Sch 10......................1.99, 10.19, 10.21, 10.50 para 1....................................1.99 2....................................1.99 Sch 11.......................................16.31 Finance Act 2019........1.100, 7.20, 19.40 s 3–6.........................................1.100  13..........................1.100, 6.94, 6.115, 10.77, 10.78, 10.87, 10.128 (1)......................................10.77 (23)....................................10.77 (68)....................................10.77  14–23.....................................1.100  25...........................................1.100  27, 28.....................................1.100  39.........................1.100, 6.134, 6.137  42–70.....................................1.101  80....................................1.100, 19.40  81...........................................1.100  89–93.....................................1.100  95...........................................16.49 Sch 1......................1.100, 6.115, 10.78, 10.87, 10.128 para 1....................................6.115 para 2....................................6.92 para 10..................................10.75 Sch 2.........................................1.100 para 1(1)(a)...........................19.45 (b)..........................19.44 para 3.............................19.44, 19.45 para 4–6................................19.44 Sch 3.........................................1.100 Sch 4.........................................1.100

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Table of Statutes Finance Act 2019 – contd Sch 5.........................................1.100 Sch 6.........................................1.100 Sch 7.........................................1.100 Sch 8.........................................1.100 Sch 9.........................................1.100 Sch 10.......................................1.100 Sch 11.......................................1.100 Sch 12.......................................1.100 Sch 13.......................................1.100 Sch 14.......................................1.100 Sch 15.......................................1.100 Sch 16................................1.100, 6.134 para 4(2)...............................6.136 (3)...............................6.140 Sch 17................................1.100, 1.101 Sch 18................................1.100, 1.101 Sch 19.......................................1.100 Sch 20.......................................1.100 Finance (No 2) Act 2019...... 5.73, 6.127, 6.131, 7.41 s 1–39.......................................1.101 Sch 1.........................................1.101 Sch 2.........................................1.101 Sch 3.........................................1.101 Sch 6.........................................1.101 Sch 7.........................................1.101 Sch 8.........................................1.101 Sch 9.........................................1.101 Sch 10.......................................1.101 Sch 11.......................................1.101 Sch 12.......................................1.101 Sch 13.......................................1.101 Sch 14.......................................1.101 Sch 15.......................................1.101 Sch 16.......................................1.101 Finance Bill 2015...................7.41, 15.16 Finance Bill 2017........................5.56 Finance Act (Northern Ireland) 1931 s 2.............................................12.76 Financial Services Act 1986 s 78...........................................2.20 Financial Services Act 2012.......2.50 Financial Services and Markets Act 2000........................ 2.50, 10.69, 18.20 Fraud Act 2006....................... 14.9, 16.7 Fraudulent Conveyances Act 1571.....................................14.13

Freedom of Information Act 2000.....................................6.18 G Government of Wales Act 1998.....................................1.87 Government of Wales Act 2006.....................................1.87 H Human Rights Act 1998...... 4.4; App 10 Sch 1.........................................6.322 I Immigration Asylum and Nationality Act 2006...........5.48 Income and Corporation Taxes Act 1988 s 7–11.......................................7.11  19...........................................1.137  33...........................................19.34  43A–43G...............................6.200  59...........................................8.9  74...........................................16.28 (1)......................................1.107 (a), (f)............................16.7  76...........................................18.30  185, 187.................................16.60  209(2)(b)................................4.93  213(3)(a)................................4.87  214–217.................................4.87  266A......................................18.26  278.........................................7.16  339(3)(b)................................11.64 (4)....................................11.30  347(2)(b)................................11.21  348(3)....................................11.21  353.........................................1.140  362(i).....................................1.140  381..................................1.117, 1.134  384.........................................1.117  416................................ 1.159, 10.120  417.........................................10.120  419.........................................6.223  505(1)(c)................................5.104  587B...............................1.142, 11.65  589A......................................17.8 Pt XIV Ch I (ss 590–613).....18.8, 18.9 s 590.........................................18.9 (3)(a)................................18.10

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Table of Statutes Income and Corporation Taxes Act 1988 – contd s 590(3)(da)..............................18.11 (i)..........................18.13  590C.................... 18.10, 18.12, 18.15 (5), (5A), (6).................18.12  591.................................... 18.9, 18.13 (2)(d)................................18.13  591B, 591C............................18.14  592(1)(a)................................18.52  594.........................................18.15  595.........................................18.27  611, 611A..............................18.26  612(1)....................................18.26  615(3)....................................7.7  618.........................................18.16 (2)....................................18.19  619..................................18.15, 18.16  620..................................18.15, 18.17 (3)(a)................................18.19  621..................................18.15, 18.16  622..................................18.15, 18.17  623..................................18.15, 18.18  624.........................................18.15  625.........................................18.18  626.........................................18.16  630–631A..............................18.20  632(1), (1A)...........................18.20  632A(1)–(9)...........................18.22  632B(1)(e).............................18.21 (2)–(9)...........................18.23  633.........................................18.23  634, 634A..............................18.24  635.........................................18.25  660A......................1.55, 6.206, 19.42  660B............................. 10.56, 12.12  660C, 660D...........................12.12  660G(1).................................1.65  685E....................................... App 5  686.............................4.74, 7.9, 7.10, 7.16, 9.24, 10.13, 18.27 (2)(a)................................4.74  686(2)(c)(i)............................18.27  687..................................10.13, 16.18 (1)....................................7.16 (2)........................ 6.38, 7.9, 7.13, 7.16 (a), (b).........................7.9 (3)....................................7.16

Income and Corporation Taxes Act 1988 – contd s 687(3)(g)................................7.10 (4)....................................7.11  687A(1)–(4)...........................7.11  688, 689, 689A......................10.13  691(2)....................................6.180  703.........................................6.17  707.........................................6.17  730.................................... 1.55, 6.200  739.....................6.188, 6.200, 10.27, 16.7  740.........................................16.7 (1)(b)................................16.7  741(a), (b)..............................10.52 742(2)(e)................................10.44  759.........................................10.71  761(7).................................... App 6  762(2).................................... App 6  765............................ 5.78, 5.83, 5.85  774A–774G...........................6.200  776.........................................6.60 (5)(a)................................6.60  779, 780.................................17.27  788.........................................1.139 (3)....................................5.29  790.........................................5.29  809..................................... 7.13, 7.14  824.........................................19.49  831(1)(a)................................5.86  838.........................................6.139  840.........................................16.66 Sch 7AB...................................11.31 Sch 7AC...................................11.31 Sch 9.........................16.1, 16.70, 16.63 Sch 16 para 5(1)...............................7.11 Sch 23 para 1....................................18.6 Income Tax Act 2007..................6.192 s 6..........................................6.194, 7.5  7.............................................7.5  9............................................6.21, 7.5 (2).....................................4.83, 4.85  11......................................6.21, 12.19  12–14.....................................6.21  33–35.....................................6.20  38...........................................13.18  56...........................................7.16  64...........................................19.29

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Table of Statutes Income Tax Act 2007 – contd s 66...........................................1.134  74...........................................1.134  96...........................................11.62  117–123.................................17.17  124..................................17.17, 19.29  125, 126.................................17.17  127...........................17.5, 17.9, 17.17  152.........................................19.29 156–257.................................16.87 157A......................................1.99 257AA...................................1.99 286ZA....................................1.99 383–412.................................6.86 385, 392–396.........................16.15 403–405.................................6.86 Pt 8 Ch 2 (ss 413–430).............6.187 s 413................................. 11.21, 11.22  414, 415...............11.21, 11.22, 11.25  416.......................11.21, 11.22, 11.64 (2)....................................11.33  417..................................11.21, 11.22  418, 419...............11.21, 11.22, 11.24  420...................... 11.21, 11.22, 11.24 (8)(b)................................11.24  421.......................11.21, 11.22, 11.24  422, 423..........................11.21, 11.22  424.......................11.22, 11.24, 11.25  425................................. 11.21, 11.22  426, 427.............. 11.21, 11.22, 11.26  428..................................11.21, 11.22  429......................11.21, 11.22, 11.26, 11.60  430.......................11.21, 11.22, 11.32  431.......................11.35, 11.36, 11.65  432................................. 11.35, 11.36  433..................................11.35, 11.36  434.........................................11.35 (1), (2), (4).......................11.35  435.........................................11.36  436..................................11.35, 11.36  437.........................................11.36  438................................. 11.36, 11.37  439.........................................11.36  440.........................................11.36  441.........................................11.37 (2)–(7)..............................11.37  442, 443.................................11.37 444.........................................11.37 (2)–(7)..............................11.37

Income Tax Act 2007 – contd s 451.........................................10.35  463(1)....................................7.11  466(2)....................................12.19  470, 471.................................5.94  474.........................................5.93 (1)................................ 5.94, 6.20 (2), (3)..............................5.94  475............................1.88, 5.93, 5.94, App 6 (1), (2)..............................5.94 (3)................................ 5.94, 5.95 (4)....................................5.94 (6).................... 5.94, 5.95, App 5  476..........................5.93, 5.94, App 5  477.........................................6.103  479........................... 4.74, 4.86, 4.87, 6.192, 7.9, 7.10, 10.9, 10.10, 10.58, 12.12, 12.19, 15.26, 16.7; App 6 (1)(b)................................7.7 (3)....................................19.79 (5)....................................7.7  480........................ 6.80, 12.12, 15.26 (4)....................................7.7, 7.8 (b)................................7.8  481............................6.53, 6.55, 6.80, 7.8, 7.10, 10.66, 12.12, 15.26 (2)....................................4.83 (3).................................. 6.55, 7.8  482........................... 6.53, 6.55, 6.80, 7.8, 10.66, 12.12, 15.26  483................................... 6.80, 15.26  484............................ 6.76, 7.7, 19.77  485....................................6.77, 19.79  486.........................................19.79  486(1)....................................6.83 487.........................................6.8   (2), (5), (6).......................7.7  491............................7.9, 7.10; App 6  492(1)–(3), (5).......................7.6  493............................7.9, 7.16, 13.19, 16.20 (1)(b)................................6.33  494............................. 6.32, 6.38, 7.9, 7.13, 7.16, 11.53, 13.19, 16.20

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Table of Statutes Income Tax Act 2007 – contd s 494(1)....................................7.10 (3)....................................6.33  495.........................................  7.9, 13.19, 16.20, 19.76  496..............................7.9, 7.10, 7.16, 13.19, 16.20 (1)–(5)..............................7.16  496B...............................16.20, 16.62  497............................. 4.85, 6.65, 7.9, 7.16, 13.19, 16.20, 19.79 (1)....................................7.10  498............................7.9, 7.10, 13.19, 16.20  499........................ 6.85, 16.18, 17.20  502.........................................6.85  507.........................................12.41 (3)....................................12.43  508.......................12.41, 12.42, 19.29  509, 510.................................12.41  511................................... 6.85, 12.41  512–514................ 6.85, 12.41, 12.44  515..................................12.41, 12.44  516.........................................12.41 Pt 9A (ss 517A–517U).............10.74, 11.32, 11.49 s 517C, 517D, 517H, 517K......6.58 Pt 10 (ss 518–564)............11.32, 11.49 s 518.........................................11.49  519..................................11.49, 11.51  520.......................11.25, 11.49, 11.51  521......................11.25, 11.49, 11.52, 11.60, 11.61  522......................11.49, 11.52, 11.60, 11.61  523..................... 5.104, 11.49, 11.53, 11.60, 11.61  524.......................11.49, 11.60, 11.61  525......................11.49, 11.54, 11.60, 11.61  526..................... 11.49, 11.55, 11.60, 11.61, 11.62  527, 528..............11.49, 11.55, 11.60, 11.61  529–531..............11.49, 11.56, 11.60, 11.61, 11.62  532–537............. 11.49, 11.59, 11.60, 11.61

Income Tax Act 2007 – contd s 538..................................11.49, 11.60  539................................. 11.49, 11.61  540.......................11.49, 11.61, 11.67  541, 542..........................11.49, 11.61  543–548..........................11.49, 11.62  549–551..........................11.49, 11.63  552, 553..........................11.49, 11.64  554–557..........................11.49, 11.65  558–560..........................11.49, 11.66  561.........................................11.49  562..................................11.49, 11.67  563.........................................11.49  564..................................11.49, 11.67  615–619............................6.62, 10.33  616–677.................................10.46  620....................................6.62, 10.33 (1)....................................6.63  621–636............................6.62, 10.33  637....................................6.62, 10.33 (1)....................................6.63  638....................................6.62, 10.33  639–666...................6.62, 6.63, 10.33  641(1), (4)..............................6.63 666–679.................................6.62  667...........................6.62, 6.63, 10.33 (1)......................6.62, 6.63, 10.33  668–677...................6.62, 6.63, 10.33  680.........................................6.62 (1)....................................6.65  681.........................................6.62  681B–681BM........................17.27  682–686.................................6.14  687.........................................6.14 (3)(d)................................7.10  688–700.................................6.14  701........................... 6.14, 6.17, 6.18, 6.19  702.........................................6.14  703.........................................6.19  704–713.................................6.14 Pt 13 Ch 2 (ss 714–751)...........10.31, 10.52, 10.70, 16.19 s 714......................... 6.78, 6.193, 10.9, 10.25, 10.35, 10.46, 12.12, 12.19, 16.7 (4).............................10.32, 10.33  715......................10.25, 10.35, 10.46, 12.12, 12.19

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Table of Statutes Income Tax Act 2007 – contd s 716, 717..............10.25, 10.35, 10.46, 10.48, 12.12, 12.19  718......................10.25, 10.27, 10.35, 10.46, 10.47, 12.12, 12.19  719......................10.25, 10.33, 10.39, 10.46, 12.12, 12.19  720............................1.98, 6.65, 6.71, 6.188, 6.200, 6.206, 10.9, 10.15, 10.26, 10.27, 10.28, 10.29, 10.30, 10.31, 10.33, 10.35, 10.36, 10.37, 10.46, 10.47, 10.48, 10.54, 10.91, 12.12, 12.19, 16.7, 17.22, App 6  720–735.................................5.77  720–747.................................10.91  720–751................................. App 6  721....................... 10.9, 10.25, 10.27, 10.35, 10.40, 10.47, 12.12, 12.19 (3BA)...............................10.38 (5)....................................10.26  721A......................................10.36 (3)(a)–(d)......................10.37 (e).............................10.37 (5).................................10.37  721B(2)..................................10.37  722........................10.9, 10.25, 10.35, 10.36, 10.40, 10.46, 10.47, 10.49, 12.12, 12.19, 16.17  723........................10.9, 10.25, 10.35, 10.36, 10.40, 10.42, 12.12, 12.19 (4)–(6)..............................10.43 (7)....................................10.44  724......................10.25, 10.35, 10.40, 10.47, 12.12, 12.19  725......................10.25, 10.26, 10.35, 10.47, 12.12, 12.19  726..................... 10.25, 10.35, 10.36, 10.47, 12.12, 12.19, App 6  727........................ 1.98, 10.25, 10.35, 10.36, 12.12, 12.19; App 6

Income Tax Act 2007 – contd s 728......................10.25, 10.35, 10.47, 12.12, 12.19 (3)....................................10.26  729......................10.25, 10.35, 10.47, 12.12, 12.19 (2)–(4)..............................10.28  729A......................................10.28  730....................... 6.206, 7.36, 10.25, 10.35, 10.36, 10.47, 12.12, 12.19  731......................... 6.65, 6.71, 10.25, 10.33, 10.35, 10.47, 10.48, 10.49, 12.12, 12.19, 16.7, 12.20, 16.19, App 6  732......................10.25, 10.33, 10.35, 10.48, 10.49, 12.12, 12.19, 16.7, 16.19, 17.22 (1)(d)................................16.7  733......................10.25, 10.33, 10.35, 10.48, 10.49, 12.12, 12.19, 16.19; App 6  733A...............................10.38, 10.50  733B.................................10.8, 10.50 (1)(a)–(g).......................10.50 (6)..................................10.50  733C.................................10.8, 10.50 (3), (4)...........................10.51  733D......................10.8, 10.50, 10.51  733E................................10.50, 10.51  734......................10.15, 10.23, 10.35, 10.36, 10.71, 10.25, 10.47, 10.49, 10.91, 12.12, 12.19, 16.17, 16.19  735......................10.25, 10.33, 10.35, 10.47, 12.12, 12.19, 12.20, 16.19  735A......................................10.50  735B(1), (2), (4)....................10.38  736......................................... App 6  736–742............. 10.25, 10.26, 10.35, 10.47, 10.53, 12.12, 12.19, 16.19, App 6  739–742.................................10.52  742A...................................... App 6

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Table of Statutes Income Tax Act 2007 – contd s 742B–742E.............1.98, 6.71, 10.20, 10.41, 10.42  743........................ 1.98, 10.25, 10.35, 12.12, 12.19, App 6 (4)....................................10.36  744........................1.98, 10.25, 10.35, 12.12, 12.19  745........................1.98, 10.25, 10.35, 2.12, 12.19 (1)....................................10.35  746........................ 1.98, 10.25, 10.35, 12.12, 12.19  747......................... 1.98, 6.65, 10.25, 10.35, 10.49, 10.36, 12.12, 12.19  748........................1.98, 10.25, 10.35, 10.55, 10.121, 12.12, 12.19, App 6 (3)....................................10.56 (4)....................................10.55  749........................1.98, 10.25, 10.35, 10.121, 12.12, 12.19 (1)....................................10.55  750........................1.98, 10.25, 10.35, 10.121, 12.12, 12.19  751........................1.98, 10.25, 10.35, 12.12, 12.19  752....................................6.57, 17.25  752–772.................................10.74  753................................... 6.57, 17.25  754................................... 6.57, 17.25  755................................... 6.57, 17.25  756................................... 6.57, 17.25 (3)....................................6.57  757–764.................................6.57  765................................... 6.57, 17.25  766.........................................6.57  767................................... 6.57, 17.25  768................................... 6.57, 17.25  769................................... 6.57, 17.25  770................................... 6.57, 17.25  771................................... 6.57, 17.25  772................................... 6.57, 17.25  809A......................................12.20 809AZB.................................6.200  809B................... 5.61, 10.111, 12.20 809C...................... 5.62, 5.64, 6.195, 12.20  809D.................................5.61, 12.20

Income Tax Act 2007 – contd s 809E.....................5.61, 10.111, 12.20  809F, 809G............................12.20  809H.........................5.64, 5.65, 5.69, 12.20  809I...................................5.65, 12.20  809J.......................................12.20 809K................................ 5.69, 12.20 809L........................5.69, 5.75, 10.16, 12.20 809M...................... 5.69, 5.75, 12.20 809N....................... 5.69, 5.75, 12.20 709O....................... 5.69, 5.75, 12.20 809P......................... 5.69, 5.72, 5.75, 12.20  809Q........................ 5.69, 5.72, 5.75, 12.20 (4).................................10.59 809R........................ 5.69, 5.72, 5.75, 12.20 809S–809U............. 5.69, 5.75, 12.20 809V........................ 5.65, 5.69, 5.70, 12.20 809VC–809VN......................1.98  809W...................... 5.69, 5.70, 12.20  809X, 809Y............ 5.69, 5.70, 12.20 809Z......................... 5.61, 5.69, 5.70, 12.20 809Z1–809Z6......... 5.69, 5.70, 12.20 809Z7.....................................12.20  811............................. 5.21, 7.7, 7.17, 10.8, 10.10, 10.58, 16.7; App 6  812.............................. 7.7, 10.8, 10.9  813, 814.................................10.8  829.........................................5.23 831, 832.................................5.26  835A.................................10.7, 10.36  835BA...................1.98, 10.20, 10.24, 10.51, 10.98 (3)......................... 5.58, 10.15 (4)..............5.59, 10.15, 10.19, 10.99  851(2)....................................6.40  852–860.................................6.40  861..................................... 6.40, 6.41  862–870.................................6.40  873(1)....................................6.40  874.........................................16.7 899.........................................6.76

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Table of Statutes Income Tax Act 2007 – contd s 901.........................................6.68 925.........................................4.87  946–951.................................6.40  952..................................... 6.40, 7.11  953–962.................................6.40  971, 972.................................17.20  995.........................................2.20  1012.......................................6.194  1016.......................................11.55  1021(1)..................................11.36 Sch 2.........................................7.10 para 134–137........................10.25  138.........................10.25, 10.47  139–141........................10.25 Income Tax (Earnings and Pen­ sions) Act 2003........... 16.10, 18.118 s 6, 7.........................1.137, 5.68, 16.57  10..................................... 5.68, 16.57  16...........................................16.41  17................................... 16.41, 16.57 17(1)–(3)................................5.68 20, 21.....................................5.68  22.............................. 5.30, 5.61, 5.68 23–25.....................................5.68 26........................................5.61, 5.68 27...........................................5.68  28..................................... 5.68, 18.73 29...........................................5.68  30...........................................16.57 (1)–(3)................................5.68 31–41.....................................5.68 Pt 3 (ss 62–226).......................6.205 s 62...........................................1.137  67...........................................10.48  70...........................................16.57  71(2)......................................16.21  81...........................................1.97  87...........................................1.97  94...........................................1.97  97–113...................................10.48  102.........................................1.97  120.........................................1.97  149.........................................1.97  154.........................................1.97  160.........................................1.97  173.........................................16.14  175.........................................1.97  178.........................................1.98  181.........................................6.203

Income Tax (Earnings and Pen­ sions) Act 2003 – contd s 201–210.................................10.48  203.........................................1.97  205.........................................1.97  205A......................................1.97  205B......................................1.97  226A–226D..................... 1.97, 16.67 Pt 4 Ch 10A (ss 312A–312I)....16.89 s 312A...........................16.107, 16.119  312B......................................16.118  312D......................................16.109  312E.......................................16.117  312G......................................16.107  312H......................................16.119  346BA, 346BB......................1.98  386.......................18.26, 18.27, 18.29  392.........................................18.26  393.......................16.22, 18.27, 18.31 (1)....................................16.22  393B..................... 16.5, 16.22, 18.32  394.......................18.27, 18.31, 18.36  395.........................................18.31  396.......................18.27, 18.28, 18.31  397..................................18.29, 18.31  398...................... 18.29, 18.31, 18.36  399...................... 18.29, 18.31, 18.32  400..................................18.29, 18.31  402A–402E............................1.98  404B......................................1.98 Pt 7 (ss 417–554).....................16.29 s 422–432.................................16.80  423.........................................1.128  425.........................................1.128  437, 452.................................16.38  481.........................................16.60  488–492..........................16.68, 16.80  493..................................16.68, 16.82  494, 495.................................16.68  496................................. 16.68, 16.82  497–508...............16.68, 16.79, 16.81  498.........................................16.81  506.................................16.68, 16.73, 16.81  507, 508.................................16.68  509–514........................ 16.68, 16.79, 16.82  515.........................................16.68  516–526.................................16.67  527–541..........................16.67, 16.88

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Table of Statutes Income Tax (Earnings and Pen­ sions) Act 2003 – contd Pt 7A (ss 554A–554Z21).....1.45, 1.96, 6.326, 12.13, 16.8, 16.21, 16.30, 16.37, 16.41, 18.119 s 554A................................. 1.97, 16.31 (5A)–(5C).....................16.31  554AA............................16.36, 16.38  554AB...................................16.36  554B.................................1.97, 16.33 (2)..................................16.32  554C.................................1.97, 16.34  554D......................................16.35  554E..............................16.37, 18.119  554F.......................................16.37  554G......................................16.37  554H......................................16.37  554J–554O.............................16.37  554OA.....................1.96, 1.97, 16.37  554P................................16.34, 16.37  554RA..............................1.97, 16.37  554S..............................16.37, 18.119  554T, 554U............................16.37  554V–554X..................16.37, 18.119  554XA..............................1.97, 16.37  554Z.................................. 1.97, 16.32  554Z2.....................................16.38  554Z2A..................................16.38  554Z3.....................................16.38  554Z5................................1.97, 16.39  554Z6, 554Z8........................16.40  554Z9–554Z11......................16.41  554Z11B–554Z11G...............1.97  554Z12........................... 16.33, 16.43 Pt 9 (ss 565–654).....................18.32 s 605–608.................................18.19  687.........................................16.20 (1), (2)..............................16.20  713–715..........................11.22, 11.27  721(5).............................16.21, 16.57 Sch 2........................... 1.97, 7.7, 16.62 para 6–12..............................16.69  14–24............................16.70  25–33............................16.75  34–41............................16.71  42.......................... 16.71, 16.85  43..................................16.71  43–50............................16.72  51–57............................16.73

Income Tax (Earnings and Pen­ sions) Act 2003 – contd Sch 2 – contd para 58–61............................16.74  62–69............................16.75  70, 71.....................16.68, 16.76  71A...............................16.76  72–74..........16.68, 16.76, 16.78  75, 76..........16.68, 16.76, 16.77  77................16.68, 16.76, 16.79  78, 79.....................16.68, 16.76  80................16.68, 16.76, 16.79  81A...............................16.68 81B–81K......................16.68  83–85............................16.85  86–100..........................16.85 Sch 3................................. 16.67, 16.70 Sch 4.........................................16.67 para 13..................................16.67 Sch 5...................... 16.15, 16.67, 16.88 para 32..................................16.88 Income Tax (Trading and Other Income) Act 2005................1.100 Pt 2 (ss 3–259)..........5.73, 6.24, 6.211, 11.54, 11.57 Pt 2 Ch 2 (ss 5–23)...................5.68 s 9–11.......................................17.4  12.......................................6.27, 17.4  19...........................................17.4  23A–23H...............................1.98  25......................................16.50, 17.8  29...........................................17.12  33........................................16.7, 17.8  34............................16.7, 17.8, 17.11, 18.30 (2)......................................17.14  35...........................................17.8  38–44.....................................16.7  51...........................................17.8  52...........................................17.14  64...........................................6.24  68...........................................17.8  92–94.....................................17.21  106.........................................17.8  107.........................................19.28  108.......................11.35, 11.38, 19.28  109..................................11.38, 19.28  110.........................................19.28  130.........................................1.117  136–150.................................19.28

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Table of Statutes Income Tax (Trading and Other Income) Act 2005 – contd  138.........................................1.117  140.........................................1.117  151................................. 6.199, 19.28  152–156.................................19.28  157.......................... 6.26, 6.28, 19.28  158–220.................................19.28  221.........................................19.28  222–227.................................19.28  228................................. 11.54, 19.28  229–259.................................19.28 Pt 3 (ss 260–364)................ 5.73, 6.53, 11.57, 16.18, 17.3 s 260....................................17.3, 19.28  261........................ 11.57, 17.3, 19.28 (a).....................................17.2  262............................6.27, 17.3, 17.4, 19.28  263...........................17.2, 17.3, 19.28  264............................17.2, 17.3, 17.8, 19.28  265...........................17.2, 17.3, 19.28  266...........................17.2, 17.3, 19.28 (3)(a)–(c).........................17.3  267............................17.2, 17.3, 17.4, 19.28  268.........................................19.28  269.........................................19.28 (2)....................................17.21  270, 271.................................19.28  272................................. 17.14, 19.28 (2)....................................17.21  272A, 272B...........................6.72  273–275.................................19.28 Pt 3 Ch 4 (ss 276–307).............17.6 s 276.........................................19.28  277.........................6.53, 17.6, 19.12, 19.28  278–281.................. 6.53, 17.6, 19.28  282–286............................17.6, 19.28  287–290.................................19.28  291–294............................17.6, 19.28  295–302.................................19.28  302A–302C...........................17.6  303–305.................................19.28  306, 307..........................17.18, 19.28  308.........................................19.28 (1)....................................17.3 (2)................................ 17.3, 17.4

Income Tax (Trading and Other Income) Act 2005 – contd s 308(3)....................................17.3  309–318.................................19.28  319.......................... 6.26, 6.28, 19.28  320..................................17.18, 19.28  321.........................................19.28  322....................................17.5, 19.28  322–334............................17.5, 19.28  335–337.................. 6.27, 17.4, 19.28  338.........................................19.28  339....................................6.27, 19.28  340–342...................6.27, 6.28, 19.28  343.........................................19.28  344–346.................. 6.27, 17.4, 19.28  347, 348.................................19.28  349–356............................17.9, 19.28  357–364.................................19.28 Pt 4 (ss 365–573).....................5.73 s 365–381.................................19.28  382........................... 4.90, 4.92, 4.93, 19.28  383........................... 4.90, 4.92, 4.93, 19.28  384–388....................4.90, 4.92, 4.93, 19.28  389–396.................................19.28  396B......................................6.15  397.........................................19.28  397A...............................19.28, 19.79  397B, 397C............................19.79  398..................................... 7.8, 19.28  399......................... 6.194, 7.8, 10.35, 19.28  400................................. 6.194, 10.35  401–403.................................19.28  404.........................................19.28 (4), (5)..............................6.56  405–408.................................19.28  409........................... 4.85, 6.194, 7.8, 10.35, 19.28 (1)....................................4.81  410........................... 4.85, 6.194, 7.8, 10.35, 19.28 (3)......................4.83, 4.86, 10.35  411........................... 4.85, 6.194, 7.8, 19.28 (2)....................................4.82  412............................4.84, 4.85, 4.86, 6.194, 7.8, 10.35, 19.28

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Table of Statutes Income Tax (Trading and Other Income) Act 2005 – contd s 412(1)....................................4.82  413........................... 4.85, 6.194, 7.8, 10.35, 19.28  414......................... 4.85, 4.86, 6.194, 7.8, 10.35, 19.28 (1)....................................4.82  415....................................6.56, 19.28  415–421......................... 6.194, 6.223  415–423.................................6.309  416............................ 6.56, 7.8, 19.28  417–420............................6.56, 19.28  421................................... 6.56, 19.28 (1)....................................10.35  421C......................................6.56  422–425.................................19.28  426....................................8.12, 19.28  427–439........................... 6.42, 19.28  440............................ 6.42, 7.8, 19.28  441–456.................................6.42  457.........................................6.42 (4)....................................6.43  458.........................................6.42 (1)....................................6.43  459.........................................6.42  460.........................................6.42  461................................... 6.45, 6.206  462–464............................. 6.45, 6.47  465.........................................6.45  466..................................... 6.45, 6.96  467..................................... 6.45, 7.10  468–499.................................6.45  500..................................... 6.45, 6.47  501............................ 6.45, 6.47, 6.48  502..................................... 6.45, 6.47  503.....................................6.45, 6.47  504–525.................................6.45  515–526.................................6.48  526..................................... 6.45, 6.48  527.........................................6.45  528, 529............................. 6.45, 6.46  530..................................... 6.45, 7.10  531–537.................................6.45  538..................................... 6.45, 6.47  539–541.............................6.45, 6.47  542–546.................................6.45  551.........................................6.54  552..................................... 6.47, 6.54  552ZA....................................6.47

Income Tax (Trading and Other Income) Act 2005 – contd s 554.........................................6.54  568.........................................6.80 (4)....................................6.192 Pt 5 (ss 574–689)...........5.73, 6.7, 6.59 s 587–596.................................19.28  602.........................................8.12  608A–608Z............................1.100  618.........................................8.12 Pt 5 Ch 5 (ss 619–648)...... 6.78, 6.185, 6.198, 10.13, 10.25, 10.70, 16.19 s 619..................... 6.194, 6.224, 10.13, 12.12, 12.19  619–627.............. 6.185, 6.220, 6.222  619–648.........................6.220, 6.222 619A(1).................................6.194  620.......................1.61, 1.65, 6.2, 6.7, 6.8, 6.94, 10.13, 11.40, 12.12, 12.19, 12.21 (1)............................. 6.33, 6.218, 6.194, 6.219 (2), (3)..............................6.218  621..................... 6.194, 6.224, 10.13, 12.12, 12.19  622............................1.55, 6.186, 7.7, 8.11, 10.13, 11.40, 12.12, 12.19, 13.12  622–627............. 6.188, 6.189, 6.191, 6.195, 6.196, 6.198, 6.221, 13.12, 16.19  623........................ 1.55, 6.194, 6.224, 7.7, 8.11, 10.13, 11.40, 12.12, 12.19, 13.12  623–640.................................6.225  624.................. 1.55, 4.96, 6.40, 6.98, 6.186, 6.187, 6.192, 6.197, 6.206, 6.274, 6.299, 7.7, 8.11, 10.13, 10.15, 10.70, 11.40, 12.12, 12.19, 12.42, 13.12  625........................1.55, 6.186, 6.205, 6.206, 6.211, 7.7, 8.11, 10.13, 11.40, 12.12, 12.19, 12.42, 12.44, 13.12, 15.19

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Table of Statutes Income Tax (Trading and Other Income) Act 2005 – contd s 625(2), (3)...................... 6.186, 6.223 (4)............................ 6.186, 6.188 (5)....................................6.187  625A(3).................................6.197  626............................1.55, 6.186, 7.7, 10.13, 11.40, 12.12, 12.19, 13.12, 15.19 (5)....................................6.187 (6)....................................6.302  627............................1.55, 6.187, 7.7, 10.13, 11.40, 12.12, 12.19, 13.12 (1), (4)..............................6.187  628......................10.13, 11.40, 12.12, 12.19  628A.................. 10.15, 10.16, 10.20, 10.98 (3).................................10.16 (4).................................10.16 (5).................................10.16 (6).................................10.19 (7).................................10.16 (8)..........................10.16, 10.17 (10)...............................10.17  628B(2)..................................10.18 (3)..................................10.18 (4)..................................10.18 (5)..................................10.18 (6)..................................10.18 (7)..................................10.18 (8)(a), (b).......................10.18  628C......................................10.16  629....................... 4.96, 6.185, 6.195, 6.215, 6.218, 7.9, 9.21, 10.10, 10.13, 10.56, 12.12, 12.19, 12.44, 15.21 (1)....................................6.214 (a)................................6.217 (b)................................6.216 (c)................................8.11 (3), (4)..............................6.216 (7)....................................6.217  630..................... 6.185, 6.195, 6.215, 6.218, 7.9, 9.21, 10.10, 10.13, 10.56, 11.40, 12.12, 12.19, 15.21

Income Tax (Trading and Other Income) Act 2005 – contd s 631..................... 6.185, 6.195, 6.214, 6.215, 6.218, 7.9, 9.21, 10.10, 10.13, 10.56, 12.12, 12.19, 15.21 (2)....................................6.217 (4)....................................6.216 (5)............................ 6.214, 6.216 (6), (7)...................... 6.215, 6.216  632.....................6.185, 6.195, 6.217, 6.218, 9.21, 10.10, 10.13, 10.56, 12.12, 12.19, 15.21  633..................... 6.222, 10.13, 12.12, 12.19, 12.42  633–640......................... 6.185, 6.225  634.....................6.226, 10.13, 12.12, 12.19, 12.42 (1)............................ 6.223, 6.227 (4)....................................6.223 (b)................................6.227 (5), (6)..............................6.223 (7)(b)................................6.223  635..................... 6.223, 10.13, 12.12, 12.19, 12.42  636..................... 6.228, 10.13, 12.12, 12.19, 12.42  637..................... 6.228, 10.13, 12.12, 12.19, 12.42 (2)–(7)..............................6.228 (8)....................................6.226  638.....................6.226, 10.13, 12.12, 12.19 (1), (2)..............................6.223 (4), (5)..............................6.224  639...................... 10.13, 12.12, 12.19  640.....................6.224, 10.13, 12.12, 12.19  641.....................6.185, 10.13, 12.12, 12.19 (1)–(6)..............................6.226  642..................... 6.185, 6.227, 10.13, 12.12, 12.19  643..................... 6.185, 6.226, 10.13, 12.12, 12.19 (1)....................................6.227 (3), (4)..............................6.226

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Table of Statutes Income Tax (Trading and Other Income) Act 2005 – contd s 643A......................................  10.19, 10.20, 10.21, 10.38, 10.50  643B(1)..................................10.20 (6), (7)...........................10.20  643C(3)..................................10.20  643E.......................................10.19  643F.......................................10.20  643G......................................10.20  643H......................................10.19  643I................................... 10.8, 10.21 (1)(a)–(g)........................10.22 (6)...................................10.22  643J.................................. 10.8, 10.21 (3), (4)............................10.23  643K......................10.8, 10.21, 10.23  643L.......................10.8, 10.21, 10.24  643M................................10.8, 10.21 (1), (2), (5)...................10.24  643N................................. 10.8, 10.21  644..................... 6.219, 6.227, 12.12, 12.19  645.....................6.219, 6.227, 12.12, 12.19 (3), (4)..............................6.219  646....................... 4.96, 6.227, 12.12, 12.19 (1)....................................6.195 (a)........................ 6.196, 6.218 (2), (4)–(7).......................6.195 (8)..................... 6.192, 6.195, 8.9  647..................... 6.220, 6.227, 12.12, 15.29  648........................1.65, 6.227, 12.12, 15.29 (1)....................................6.198 (2)..................6.198, 6.218, 10.14 (3)................ 6.198, 6.218, 10.14, 10.16 (4)..................6.198, 6.218, 10.14 (5).................. 6.198, 6.218, 10.14  649........................ 6.52, 11.59, 15.29  650....................................6.52, 15.29 (1), (2)..............................15.29  651–653............................6.52, 15.29  654.........................6.52, 15.29, 15.32  655.................................... 6.52, 15.29  656.........................6.52, 15.29, 15.33

Income Tax (Trading and Other Income) Act 2005 – contd s 657–659............................6.52, 15.29  660........................ 6.52, 15.29, 15.33  661, 662............................6.52, 15.29  663.........................6.52, 15.29, 15.32  664.................................... 6.52, 15.29  665.........................6.52, 15.29, 15.33  666.........................6.52, 15.29, 15.34 (2)(b)................................15.34  667, 668.................6.52, 15.29, 15.34  669..................................15.29, 15.34  670........................ 6.52, 15.29, 15.32, 15.35  671–676................ 6.52, 15.29, 15.35  677, 678............................6.52, 15.29  679........................ 6.52, 15.29, 15.32  680, 681............................ 6.52, 15.29  682.........................6.52, 15.29, 19.28  684.........................................6.76  685A......................................6.197  686.........................................8.12 (2)(c)................................7.7 Pt 5 Ch 8 (ss 687–689)........6.50, 10.70 s 702–707.................................6.237 713–716.................................7.16  717–726.................................6.69  752.........................................7.12  784–802.................................17.18 Pt 8 (ss 829–845).................5.68, 5.92, 10.35, 16.18 s 829.........................................7.16  830..........................5.61, 7.16, 10.69, 10.70  831....................................5.101, 7.16 831–839.................................10.36 (3)....................................5.30 (5)....................................5.101  832................................ 5.101, 10.49, 7.16 832A.................................5.67, 10.49  832B......................................10.49  833..................................... 5.69, 7.16  834–845.................................7.16  849(3)....................................5.92  852(5), (6)..............................5.92  857.........................................5.68 (1)–(3)..............................5.92 858.................................... 1.44, 1.118  875, 878.................................17.3

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Table of Statutes Income Tax (Trading and Other Income) Act 2005 – contd Sch 1 para 197................................19.28 Sch 2 para 112................................6.46 Inheritance and Trustees’ Powers Act 2014..... 1.5, 2.30, 2.33, 2.34, 4.97, 9.29, 15.9 s 1(3), (4)..................................2.34 6, 7.........................................2.28 8........................................... 2.3, 4.97 9.............................................2.3 (3)(b)....................................4.97 10...........................................2.3 12...........................................2.30 Sch 2.........................................2.28 Sch 3.........................................2.28 Inheritance (Provision for Family and Dependants) Act 1975................... 2.33, 3.6, 15.8, 15.10, 19.49, App 1 s 1.............................................2.28 (1), (1A)...............................15.9 (e)....................................15.10 (2)(a)....................................15.9 (b)....................................15.10 (3)........................................15.10  2.............................................15.11  10–13.....................................2.28  14...........................................15.11 Inheritance Tax Act 1984......16.7, App 7 s 1.............................................6.234  2.............................................1.145 (1).................................6.233, 6.303 (2), (3)..................................6.233  3........................................ 12.11, 16.7 (1)......................1.141, 6.234, 6.311 (a), (b)...................... 6.16, 7.33 (2)........................................6.234 (3)..................... 1.141, 6.197, 6.234  3A.......................... 6.303, 7.19, 8.27, 12.11, 12.37, 12.55, 19.50 (1)................................6.234, 8.35 (c).....................8.27, 9.33, 19.5 (4), (5)...............................6.235 (6).....................................8.35  4...............................6.177, 8.35, 13.8

Inheritance Tax Act 1984 – contd s 5......................................1.145, 6.177 (1).................... 6.236, 6.298, 6.315, 8.30, 8.35, 8.37 (2)........................................6.236  6............................ 6.271, 7.24, 12.22 (1).......................6.237, 6.243, 7.24, 10.126 (1B)......................................6.245 (2)..........................5.53, 6.237, 7.24 (3).....................................5.53, 7.24 (4)........................................6.237  7............................. 6.255, 8.35, 9.33, 12.56, 16.44 (1)........................................8.29 (2).................................... 7.28, 7.35 (4)....................................8.35, 9.33  8.............................................8.35  8A..........................15.6, 15.18, 19.60  8B, 8C....................................15.6  8D–8M...................................1.91  8D–8X...................................1.91  8E...........................................1.91  8F...........................................1.91  8FA........................................1.91  8FB........................................1.91  8FC........................................1.91  8FD........................................1.91  8FE........................................1.91  8HA.......................................1.91  9.............................................8.35  10........................1.103, 1.145, 6.285, 7.33, 16.7 (1)......................................8.30  11.............................. 8.21, 8.36, 11.4  12.........................16.7, 18.28, 18.102 (1)......................................16.65  13.......................... 16.7, 16.63, 16.93, 18.28, 18.102 (1)......................................16.6 (2)..................................16.5, 16.6 (3).................................. 16.4, 16.6 (4).................................. 16.5, 16.6 (5)......................................16.6  13A........................................16.93  15...........................................6.218  16......................................7.33, 12.31  18........................... 5.30, 6.296, 8.31, 8.32, 12.53, 15.19 (1)......................................8.25

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Table of Statutes Inheritance Tax Act 1984 – contd s 18(2).................................. 5.45, 8.25 (4)......................................8.25  19.................................. 6.203, 6.303, 8.33  20...........................................6.203  22...........................................8.33  23............................1.127, 8.31, 8.32, 12.53 (1)......................................11.41 (2)–(5).........................11.41, 11.47 (6)......................................11.41  24........................... 8.31, 8.32, 11.43, 12.47 (1)–(3)................................12.47 (4)...............................12.47, 12.48  24A........................11.41, 8.31, 12.48  25............................8.31, 8.32, 12.48, 12.55 (2)......................................12.48 (3)......................................12.73  26.............................8.31, 8.32, 12.49  26A....................... 8.31, 12.50, 12.73  27..............................8.31, 8.32, 8.33, 12.25, 12.32, 12.33, 12.46 (2)......................................12.25  28...................................... 16.6, 16.63 (1)–(7)................................16.6  30...................................... 1.98, 12.62 (3), (3A)–(3C), (4).............12.53  31........................12.27, 12.50, 12.52, 12.61, 12.63, 12.68, 17.42 (1)(c)–(e)...........................12.69 (1A)...................................12.54 (2)......................................12.52 (b)..................................12.52 (3)......................................12.54 (4)–(4G).............................12.54  32........................1.145, 12.55, 12.69, 12.74  32A........................................12.55  33........................12.56, 12.58, 12.59, 12.75 (3)......................................12.57 (5)......................................12.62 (7)......................................12.77  34.........................12.59, 12.63, 12.75  35...........................................12.60

Inheritance Tax Act 1984 – contd s 35A.................... 12.52, 12.54, 12.66, 12.69  40...........................................12.34  43....................................6.206, 6.243 (1)......................................6.243 (2)...............................6.243, 12.22 (3)...................6.242, 6.243, 6.244, 6.317, 6.196, 6.269, 7.24, 8.20 (4), (5)................................6.243  44...........................................6.243 (1), (2)................................6.243  45...........................................6.243  46...........................................8.17  47...........................6.211, 6.242, 8.20  47A........................................7.4  48...........................5.30, 6.211, 6.243 (1)........................6.242, 8.20, 8.30 (2).................................6.242, 8.20 (3)...................6.242, 6.243, 6.271, 6.298, 6.300, 7.20, 7.24, 7.41, 8.23 (a), (b).............. 7.24, 7.33, 7.41, 8.23, 10.126 (3B), (3C)..........................6.242 (4).....................5.53, 6.242, 6.243, 6.195, 7.24 (b)..................................7.33 (5)......................................6.243 (6)......................................6.243 (a)..................................8.23  48A........................................7.41  49............................1.11, 4.52, 6.240, 9.40, 9.41, 10.126 (1)..................... 6.236, 6.315, 7.25, 8.17, 8.18, 8.20, 8.26, 8.34, 8.37 (1A)...................................6.236 (2)......................................6.236  49A........................... 1.12, 7.20, 7.22, 8.18  49B.....................................1.13, 8.18  49C........................... 1.13, 7.20, 7.23, 8.18  49D, 49E............................ 7.23, 8.18  50....................................... 4.52, 9.25 (1)–(4)...........................6.315, 8.19 (5).................................6.244, 8.20 (6).................................6.243, 8.20

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Table of Statutes Inheritance Tax Act 1984 – contd s 51.............................4.52, 6.313, 8.21 (2), (3)................................8.21  52..........................4.52, 6.247, 6.313, 8.26, 9.39, 13.5, 19.50 (1)–(3)................................8.22 (4)(b)..................................8.24  53........................... 4.52, 6.313, 8.22, 13.5, 19.50 (2)...................................8.24, 9.39 (3)................................ 6.247, 8.24 (4)(a), (b)...........................8.25 (5)–(8)................................8.25  54......................................4.52, 6.313 (1), (3), (4).........................8.27  54A........................... 8.27, 8.28, 8.29 (1), (2), (2A)...................8.28 (3)..............................8.28, 12.68 (4), (5)..........................8.28, 8.29 (6)................................8.28, 8.29 (c)...............................8.29  54B........................................8.27 (1)–(7).............................8.29  55..........................4.52, 6.243, 6.313, 8.30, 8.31  55A........................................8.31  56...........................................4.52 (1)......................................8.31 (2)–(4)................................8.32  57...........................................4.52 (2)–(5)................................8.33  57A....................... 4.52, 12.45, 12.46 (1A), (3)–(5)...................12.45 Pt III Ch III (ss 58–85)........6.233, 7.20 s 58..........................1.10, 6.233, 6.316, 7.1, 7.20, 7.32, 16.7, 18.102, 18.107, 18.125 (1).................................. 7.20, 7.27 (a)..................................11.41 (b).................. 9.22, 12.24, 13.4, 16.4 (c)..................................12.25 (e)–(eb).........................12.51 (f)..................................10.126  59....................... 6.147, 6.233, 6.316, 7.32 (1).................................6.247, 7.21 (a), (b)...........................7.21  60.............................6.316, 7.25, 7.32

Inheritance Tax Act 1984 – contd s 61......................................6.316, 7.32 (1)......................................7.25 (2)...................................7.25, 7.39 (3)......................................7.25  62......................... 6.316, 6.268, 7.27, 7.32, 7.36 62A........................................7.28 62C........................................7.28  63..........................6.316, 6.268, 7.27, 7.32, 12.64, 16.4  64..........................6.316, 6.328, 7.27, 7.32, 7.38, 7.41, 9.22, 10.126, 11.41, 12.25, 12.51, 12.62, 12.63, 16.2, 16.7, 19.50  65........................6.247, 6.316, 6.268, 6.328, 7.29, 7.31, 7.32, 7.35, 7.37, 7.38, 9.22, 9.25, 10.126, 11.41, 12.25, 12.38, 12.51, 12.61, 16.2, 16.6, 16.7, 19.50 (1)......................................7.33 (a)..................................7.34 (b)................... 6.243, 7.33, 7.34 (2)......................................6.119 (a).............................6.316, 7.33 (b)..................................7.33 (3)......................................7.33 (4)..................... 6.119, 7.33, 15.16 (5)......................................7.33 (b)..................................7.34 (6), (8), (9).........................7.33  66..........................6.233, 6.316, 7.27, 7.28, 7.32, 7.41, 10.126, 10.127, 11.41, 12.25, 12.51, 16.2 (1), (2)................................7.28 (3)......................................7.28 (4)................................. 6.243, 7.31 (a), (b)...........................7.28 (5)(a)...............................7.29, 7.30 (b)............................. 7.29, 12.65 (6)......................................7.29 (7)......................................7.33  67......................... 6.233, 6.316, 7.27, 7.32, 11.41, 12.25, 12.51, 16.2

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Table of Statutes Inheritance Tax Act 1984 – contd s 67(1), (2)................................7.30 (3)(a)..................................7.30 (4)–(7)................................7.31  68..........................6.233, 6.316, 7.28, 7.32, 7.33, 11.41, 12.25, 12.51, 16.2 (1)–(3)................................7.35 (4).................................6.195, 7.36 (5)..................... 6.206, 6.243, 7.36 (c)..................................1.114  69........................6.233, 6.316, 6.317, 7.28, 7.32, 7.33, 11.41, 12.25, 12.51, 16.2 (1), (2)................................7.37 (3).................................6.243, 7.37 (4)......................................7.37  70..........................6.233, 6.316, 7.32, 12.24, 12.25, 13.4, 16.4 (1), (2)................................11.45 (3)–(5)........................... 11.45, 13.7 (6)........................9.27, 11.46, 13.7 (7)–(10).........................11.46, 13.7  71......................... 1.14, 6.233, 6.316, 7.20, 7.32, 8.27, 9.8, 9.11, 9.15, 9.17, 9.22, 9.25, 12.68 (1)........................ 4.52, 9.22, 9.25, 9.33, 12.68, App 7 (a)..................... 9.23, 9.25, 9.31 (b).............................. 9.24, 9.25 (2)(a), (b)....................... 9.26, 9.36 (3)......................................9.27 (4)...................... 6.117, 9.28, 9.36, 12.70 (5)......................................9.28 (7), (8)................................9.23  71A.........................1.15, 6.233, 7.20, 8.21, 9.1, 9.3  71B........................... 1.15, 6.233, 9.1  71C...........................1.15, 6.233, 9.1, 9.4  71D........................ 1.16, 6.233, 7.20, 8.21, 9.1, 9.9, 9.10, 9.11, 9.12  71E..................................... 9.12, 9.13  71F.........................................9.13

Inheritance Tax Act 1984 – contd s 72....................... 6.233, 6.316, 6.328, 7.32, 12.24, 16.4, 16.7 (2)(a)..................................16.4 (b)...............................16.4, 16.7 (c)..................................16.4 (3)(a)–(c)...........................16.4 (4)–(6)................................16.4  73..........................6.233, 6.316, 7.20, 7.32, 12.68, 13.4, 13.5  74..........................6.233, 6.316, 7.20, 7.32 (1)–(4)................................13.7  75..........................6.233, 6.316, 7.32, 12.24 (1)......................................16.6 (2)......................................16.6 (a)..................................12.24  76.......................... 6.233, 6.316, 7.32 (1), (3), (4).........................11.43 (5)–(8)................................11.44  77.......................... 6.233, 7.32, 12.41  78..........................6.233, 7.32, 12.58, 12.61, 12.69 (1)...................12.61, 12.62, 12.63, 12.70 (1A), (2)......................12.61, 12.62 (3), (4)................................12.62 (5), (6)................................12.63  79..........................6.233, 7.32, 11.43, 12.62 (1), (2)................................12.63 (3)......................1.90, 12.63, 12.64 (4)–(7)................................12.64 (8)–(10)..............................12.65  79A(1)–(4).............................12.66  80............................1.90, 6.233, 7.25, 7.26, 7.32, 7.39, 7.41 (4)......................................7.26  81............................6.233, 7.32, 7.41, 16.7 (1)–(3)................................7.40  82..................................... 6.233, 7.32 (2), (3)................................7.41  82A........................................10.131  82B........................................7.41  83..................................... 6.233, 7.32

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Table of Statutes Inheritance Tax Act 1984 – contd s 84...........................6.233, 7.32, 11.46 (1), (2)................................7.24  85......................................6.233, 7.32  86........................... 7.20, 12.24, 16.2, 16.6, 16.7, 16.63, 16.96 (1)......................................16.6 (a), (b)...........................16.2 (2)......................................16.3 (3).................................. 16.4, 16.4 (a)..................................16.7 (d)..................................16.4 (3A), (4), (5)......................16.4  87...........................................12.24 (1)–(3)................................12.24  88...........................................13.5 (2)......................................13.5 (b)..................................9.23 (3)–(6)................................13.5  89.......................... 7.20, 13.10, 13.11 (1)–(3)................................13.8 89A........................................13.9  89B........................................13.9 89C........................................13.9  90...........................................6.244 91...........................................6.244 (2)......................................6.244  92, 93.....................................6.245  94....................... 6.246, 6.328, 12.22, 16.5, 16.6, 16.7  95–98.....................................6.246  99...................................... 12.22, 16.5 (2)......................................6.276 (a), (b)...........................6.247 (3)......................................6.247  101.........................................6.243 102................................. 6.328, 16.93 (1).............................. 6.248, 16.7 (b)................................6.303 (2)....................................6.248 (5A)–(5C)........................6.296  102A, 102B...........................6.328  102ZA............................6.288, 6.328 Pt V (ss 103–159)................12.11, 16.7 s 103(1)(b)................................6.250 (3)....................................6.249 104.........................................16.7 (1)(a)................................6.249 (b)................................6.250

Inheritance Tax Act 1984 – contd s 105(1)(a)...........................6.249, 16.7 (b), (bb).......................6.249 (cc), (d), (e).................6.250 (3)...............................6.250, 16.7 (4), (5)..............................6.250  106.......................6.251, 6.255, 6.291  107–109......................... 6.251, 6.291  110................................. 6.252, 6.291  111................................. 6.253, 6.243  112........................ 6.243, 12.25, 16.7 (1)–(4)..............................6.253  113................................. 6.254, 6.291  113A, 113B...........................6.256  114................................. 6.257, 6.291  115.................................6.111, 6.291 (1)(b)................................6.259 (2)....................................6.259  116...................... 1.104, 6.259, 6.291 (2)....................................6.259  117...................... 1.104, 6.260, 6.291  118, 119.................................6.260  120.........................................6.260  121–123.................................6.260  124, 124A–124C...................6.261  125–130.................................6.262  142..................... 6.264, 6.267, 6.268, 9.3, 9.9, 15.21 (1)...............................6.264, 9.21 (2), (3)..............................6.264 (4)....................................6.265 (5), (6)..............................6.264  143.........................................15.15  144....................................1.90, 15.16  146.........................................15.12 150.........................................3.89  151.....................7.20, 18.17, 18.102, 18.125  152................... 18.17, 18.102, 18.125  153.........................................18.125  155(1)....................................6.237  157................................6.238, 10.130  158...................... 6.238, 6.269, 10.58 (6)....................................5.53  159.........................................6.273  160........................6.177, 6.307, 8.37, 16.7  161....................................6.311, 8.37 (2)....................................6.311 (b)................................11.44

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Table of Statutes Inheritance Tax Act 1984 – contd s 162.........................................6.312 (5)....................................10.129 162A......................................6.240 162AA...................................6.238 162B......................................6.263 163–167.................................6.312  168................................... 6.312, 8.37  170....................................6.317, 8.20  199.......................6.191, 6.221, 6.278 (1)....................................6.274  200(1)(a)–(d).........................6.275 (1A).................................6.275  201.........................................19.47 (1)...............................6.276, 16.7 (c), (d)....................6.275, 16.7 (5)....................................6.276  202................................... 6.276, 16.7  203.........................................6.277  204(1).............................6.277, 6.279 (2)............................ 6.278, 19.47 (3), (5)–(8).......................6.278 (9)....................................6.279  205.........................................6.279  207(3)....................................12.67  216....................6.279, 6.280, 10.132, 19.6 (1)(bb)..............................9.27 (7)....................................12.67  218....................................6.280, 19.5 (1), (3)..............................10.132  218A......................................6.264  219...................... 6.281, 6.306, 19.51  220................................. 6.281, 6.306  220A......................................6.306  221...................... 6.279, 6.281, 6.306 (1)–(6)..............................19.54  222...................... 6.281, 19.55, 19.56 (1)................. 6.304, 19.55, 19.56 (2), (3)...................... 6.304, 19.55 (4)............................6.304, 19.55 (4A).................................6.304 (4B)...........................6.304, 19.55  223.......................6.281, 6.305, 19.56  223A–223C....................6.305, 19.57 223D–223F............................6.305 223G.............................. 6.305, 19.57 223H, 223I.............................6.305  224.....................6.281, 6.305, 6.306, 19.56

Inheritance Tax Act 1984 – contd s 225..................................6.281, 19.56  225A......................................6.281  226..................................6.281, 19.47 (4)............................ 12.63, 12.67  227..................................6.281, 19.49  228–228E...............................6.281  230.......................12.50, 12.55, 12.68 (3)(a)–(d).........................12.71  233.........................................19.49 (1)(c)................................12.67 (3).................................6.80, 6.86  234–236.................................19.49  237................................. 6.275, 19.49  238–244.................................19.49  245.........................................19.63  245A......................................19.63 (1).................................10.132  247–249.................................19.63  254, 255.................................19.56  256, 257............................19.6, 19.50  258.........................................19.6 (4)....................................12.63  259, 260.................................19.6 261......................................5.71, 19.6 261ZA, 261ZB.......................5.54  267............................3.80, 5.30, 5.52, 5.76, 6.241, 6.243, 6.271, 6.300, 7.41, 10.7, 10.131 (1)(a)................................5.52 (b)............................ 3.96, 5.52 (2)–(4)..............................5.53  268..................... 6.282, 6.283, 6.284, 6.285, 7.27, 8.29, 12.38, 15.16 (1), (2)..............................6.282  270..................................10.128, 16.7  272.......................... 6.119, 7.20, 8.23  277.........................................19.47 Sch A1........................ 5.76, 7.20, 7.24, 10.129 para 2....................................10.128 (2)...............................10.127 (3)...............................10.128 (4)...............................10.128 (5)...............................10.128  3....................................10.129  4(1)–(4), (6)..................10.129  5....................................10.130

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Table of Statutes Inheritance Tax Act 1984 – contd Sch A1 – contd para 6....................................10.130  7....................................10.130  9....................................10.128 Sch 2 para 3....................................7.38  6....................................12.37 Sch 3......................11.33, 12.48, 12.50, 12.55, 12.68 Sch 4......................... 7.20, 8.33, 12.25, 12.70 para 1.................12.25, 12.30, 12.41, 12.44, 12.45  2–4........................ 12.25, 12.26  5....................................12.28  7....................................12.30  8.................12.25, 12.28, 12.31, 12.35, 12.36, 12.37  9, 10.......................12.25, 12.32  11...............12.25, 12.31, 12.34, 12.35, 12.36  12–14......... 12.25, 12.31, 12.35  15................12.25, 12.31, 12.38  15A...............................12.38  16–18.....................12.25, 12.39  19–25............................12.25 Sch 5....................... 9.25, 12.60, 12.65, 12.69, 12.75 Sch 6 para 2....................................8.26 Sch 9.........................................1.98 Sch 10.......................................1.98 Insolvency Act 1985....................2.43 Insolvency Act 1986........1.90, 2.43, 2.44 s 265.........................................5.41  335A......................................2.18  339...........................2.43, 2.44, 14.10  340..................................... 2.43, 2.44 (4), (5)..............................14.11  341......................................2.43, 2.44  342.......................... 2.43, 2.44, 14.15  343–349.................................2.43  350.........................................2.43 (6)....................................14.7  351.........................................2.43  352......................................2.43, 14.7  353–356.................................2.43  357.........................................2.43 (1)....................................14.7

Insolvency Act 1986 – contd s 358–380.................................2.43  381......................................2.43, 13.2  382–422.................................2.43  423..........................1.102, 2.43, 2.44, 14.13, 14.14, 14.19 (2)....................................14.15 (3)....................................14.13  424, 425..................1.102, 2.43, 2.44, 14.15  426.........................................14.17 (5)....................................2.43  435.........................................14.11 Sch 6.........................................2.20 Intestates’ Estates Act 1952.......2.30, App 1 s 5.............................................2.31 Sch 2.........................................2.31 J Judicature Acts 1873–75............1.4 L Land and Buildings Transaction Tax (Scotland) Act 2013.....1.85, 6.10 Sch 2A para 3....................................6.12 Land Charges Act 1925.............2.36 Land Charges Act 1972.............2.36 Land Transaction Tax and AntiAvoidance of Devolved Taxes (Wales) Act 2017 Sch 5 para 27..................................6.12 Landfill Disposals Tax (Wales) Act 2017...............................1.87 Landfill Tax (Scotland) Act 2014.....................................1.85 Landlord and Tenant Act 1985 s 18(1)......................................17.23 Landlord and Tenant Act 1987 s 42...........................................17.23  58(1)......................................17.23 Law of Property Act 1925..... 2.41, 3.38, 17.1, App 1 s 1.............................................2.36 (7)........................................1.53  2......................................... 2.16, 2.36

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Table of Statutes Law of Property Act 1925 – contd s 2(1)(ii)...................................4.44 3, 4.........................................2.36  19...........................................1.26  20........................................2.36, 4.30  24...........................................2.36  27........................................2.16, 2.36 (2)......................... 2.16, 4.25, 4.44  31........................................2.18, 2.36  32...........................................2.18  33...........................................2.36  34..............................1.27, 2.14, 2.18, 2.36, 3.30  36.............................. 1.26, 2.14, 2.18, 2.36, 3.17 (2).................................. 3.28, 3.30  40...........................................15.14  52...........................................2.36 (1)......................................3.16  53..........................................2.36, 3.7 (1)(a)..................................3.8 (b).................................3.9, 3.37 (c)...............................3.10, 3.13 (2).................................. 3.12, 3.37  54(2)......................................3.16  60(3)......................................3.34  121, 122.................................2.6  130.........................................4.45 (5)....................................4.45  136..................................... 2.36, 3.18  137.........................................2.36  164................................2.6, 2.7, 2.36, 3.51, 9.37  165, 166.................................2.7  172.........................................14.14  175.........................................2.36  198.........................................2.36  205.........................................3.9 Sch 1.........................................2.18 Law of Property (Miscellaneous Provisions) Act 1989 s 1.............................................3.4  2.............................................15.14 Law of Property (Miscellaneous Provisions) Act 1994........... App 1 Law Reform (Parent and Child) (Scotland) Act 1986............2.35 Law Reform (Succession) Act 1995.....................................15.10 s 3.............................................2.23

Legal Capacity (Scotland) Act 1991.....................................1.83 Limitation Act 1980 s 21...........................................4.69 (1)(a), (b)...........................4.69 (2)......................................4.69  28, 32.....................................4.69 Limited Liability Partnerships Act 2000............................5.92, 6.25 Limited Partnerships Act 1907..................................5.92, 6.25 M Marriage (Same Sex Couples) Act 2013...............................15.37 Married Women’s Property Act 1882 s 11...........................................2.25  17...........................................2.25 Matrimonial Causes Act 1973....3.64 s 24(1)(1)..................................1.105 (c)..................................14.18  25(2)(a)..................................1.11  37....................................1.105, 14.18 Matrimonial Proceedings and Property Act 1970 s 37, 39........................ 2.25, 2.27, 2.29 Mental Capacity Act 2005.... 2.19, 2.39, 2.40, 2.41, 6.12, App 1, App 7 s 9–14.......................... 2.39, 2.40, 2.41 19–21.....................................3.2  66(1)(b)..................................2.40 Sch 1.....................................2.39, 2.41 Sch 4.........................................2.39 Mental Capacity Act (Northern Ireland) 2016.......................6.12 Mental Health Act 1983...........2.3, 3.64, 13.7, 13.8 Pt VII (ss 93–113)...........2.3, 2.4, 2.18, 2.39, 4.25 Mental Health Act 2007.............3.2 N National Health Service Acts.....18.18 P Partnership Act 1890.................5.92 s 13, 20, 29, 30.........................2.42

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Table of Statutes Pension Schemes Act 1993.........18.57 s 159(5)....................................1.121 Pension Schemes Act 2017.........18.126 Pensions Act 1995...... 2.49, 18.50, 18.56 s 22–25.....................................18.56  41...........................................18.58  51...........................................18.53  91...........................................1.121 Pensions Act 2004...... 2.49, 18.37, 18.58, 18.63 s 1–88.......................................18.37  90–181...................................18.38  135–143.................................18.54  182–189.................................18.39  190–220.................................18.40 Pt 3 (ss 221–233).....................18.53 s 221–238.................................18.41  239–325.................................18.42  241–243.................................18.55 Sch 5.........................................18.42 Sch 6.........................................18.42 Sch 7.......................18.38, 18.40, 18.42 para 25B–25F.......................18.40  26–28............................18.40 Sch 8.........................................18.42 Sch 9.........................................18.42 Sch 10.......................................18.42 Sch 11.......................................18.42 Sch 12.......................................18.42 Sch 13.......................................18.42 Pensions Act 2007.......18.1, 18.37, 18.43 s 14...........................................18.43  16...........................................18.44  122.........................................18.38 Sch 8.........................................18.38 Pensions Act 2008........18.119,45, 18.46, 18.53 Pensions Act 2014...... 18.1, 18.65, 18.71 Sch 1 para 79..................................18.95 Perpetuities and Accumulations Act 1964................... 2.6, 3.46, 10.1, 12.7, App 1 s 1...................................2.6, 3.47, 3.63  2........................................... 2.6, 3.57  3.............................................2.6 (4)(b)....................................3.48 (5)........................................3.48  4............................................2.6, 3.49 (4)(b)....................................3.48

Perpetuities and Accumulations Act 1964 – contd s 5............................................ 2.6, 3.49  5A, 5B...................................2.7  6–8........................................2.6, 3.49  9............................................ 2.6, 3.47  10, 11.................................... 2.6, 3.49  12...........................................2.6  13.........................2.6, 2.7, 2.36, 3.51, App 7 (1)(a)..................................3.51  14...........................................2.6 Perpetuities and Accumulations Act 2009............ 2.6, 2.7, 3.50, 3.51, 3.53, 10.1, App 1 s 1–4.........................................2.7  5............................................2.7, 3.63  6–9, 11–14.............................2.7 15...........................................2.6, 2.7 16–20.....................................2.7 21...........................................2.6, 2.7 22, 23.....................................2.7 Schedule...................................2.6 Police Act 1997............................4.2 Police and Criminal Evidence Act 1984 Pt 2 (ss 8–23)...........................1.95 Pt 4 (ss 34–52).........................1.95 Pt 5 (ss 53–65B).......................1.95 s 69...........................................5.88 Pt 8 (ss 73–83).........................1.95 s 304–310.................................1.95 316.........................................1.95 341.........................................1.95 378.........................................1.95 Policing and Crime Act 2009.....3.4 Powers of Attorney Act 1971..... App 1 s 1, 3–7.....................................2.41  10........................................2.19, 2.41 (2)......................................2.19 Sch 1.........................................2.41 Powers of Criminal Courts Act 1973 s 35...........................................4.4 Proceeds of Crime Act 2002......1.95, 2.51, 3.4, 4.1, App 1, App 6 Pt 2 (ss 6–91)........................1.95, 2.51 s 39A........................................4.6 Pt 4 (ss 156–239)..................1.95, 2.51

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Table of Statutes Proceeds of Crime Act 2002 – contd Pt 5 (ss 240–316)..................1.95, 2.51 s 243.........................................2.51  245A......................................2.51  246.........................................2.51  289......................................1.95, 2.51  294......................................1.95, 2.51  304–310.................................2.51 Pt 6 (ss 317–326).....................4.2 s 316......................................1.95, 2.51 327.........................................4.3 Pt 7 (ss 327–326).....................4.3 s 328, 329.................................4.3, 4.4  330–333.................................4.3  333A.................................... 4.3, 4.10  333B–333E............................4.3  335–339.................................4.4  340.........................................4.4 (2)....................................4.5 (3)....................................4.6 Pt 8 (ss 341–416)...........1.95, 2.51, 4.8 s 341......................................1.95, 2.51  342........................................4.3, 4.10  344.........................................4.3  375C...................................1.95, 2.51  378......................................1.95, 2.51  408C...................................1.95, 2.51 Pt 9 (ss 417–434).....................4.8 Pt 10 (ss 435–442)...................4.8 Pt 11 (ss 443–447)...................4.8 Pt 12 (ss 448–462)...................4.8 Sch 1.........................................1.95 Sch 9.........................................4.7 Public Trustee Act 1906 s 13...........................................2.3 R Recognition of Trusts Act 1987........................2.8, 10.4, 5.103, 10.4, 12.10, 14.23, App 1 s 1.............................................2.11 (2)........................................2.11 Schedule..................................2.9, 2.11 Recreational Charities Act 1958................................2.48, 11.14 s 1.............................................11.2 Regulation of Investigatory Powers Act 2000.................4.4

Revenue Scotland and Tax Powers Act 2014............1.85, 1.100 S Sale of Goods Act 1979 s 20A, 20B...............................1.35 Sale of Goods (Amendment) Act 1995...............................1.35 Sale of Land Act 1925..............1.5, 1.29, 2.3, 2.14, 2.18, 2.20, 2.36, 2.38, 2.39, 6.90, 17.1, 17.7 s 1..........................................2.15, 4.45  18(1)(c)..................................4.44  64..........................................2.4, 3.62  67...........................................4.45 (1)......................................2.18  68...........................................4.42  94(1)......................................4.44 Sanctions and Anti-Money Laundering Act 2018........ 1.99, 4.1 Sch 1.........................................4.1 Sch 2.........................................4.1 Sch 3.........................................4.1 Scotland Act 1998....................1.81, 1.85 Scotland Act 2012.......................6.10 Scotland Act 2016....................1.85, 1.92 Scottish Fiscal Commission Act 2016.....................................1.93 Serious Crime Act 2015.............3.4 Serious Crime Act 2007 s 74...........................................4.2 (2)......................................4.2  85...........................................4.2 Sch 8.........................................4.2 para 91(2)(a).........................4.2  92–99............................4.2 Sch 12.......................................4.2 Serious Organised Crime and Police Act 2005....................4.1 s 1.............................................4.5 103.........................................4.6 Settled Land Act 1882.............1.28, 1.29 Settled Land Act 1884.............1.28, 1.29 Settled Land Act 1887.............1.28, 1.29 Settled Land Act 1889.............1.28, 1.29 Settled Land Act 1890.............1.28, 1.29 Settled Land Act 1925........... 2.12, 2.13, 5.94, App 1

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Table of Statutes Small Charitable Donations Act 2012.....................................11.27 Social Security Contributions and Benefits Act 1992.........1.18 Sch 1.........................................16.60 Stamp Duty Land Tax Act 2015 s 1.............................................17.36 Statute of Uses Act 1535............1.2 Succession (Scotland) Act 1964.......................2.30, 2.35, 15.12 T Tax Collection and Manage­ ment (Wales) Act 2016.... 1.87, 1.93 Taxation of Chargeable Gains Act 1992...............................10.72 s 1(3)............................10.103, 10.110, 10.117, 10.119  1A..........................................10.73  1B...................................10.10, 10.79  1C................................. 6.115, 6.169, 10.78, 10.86 (1), (4), (5)........................10.79  1D.................................. 6.169, 10.80  1E...........................................6.169  1F...........................................6.169  1G..........................................6.169  1K....................... 6.94, 10.77, 10.103  1L...........................................6.95  1M.....................10.12, 10.70, 10.106  1N..........................................10.12  2.............................................6.129 (1)........................................10.59 (2)........................................10.110 (5)........................................10.107  2A..........................................6.157  2B........................ 6.92, 6.169, 10.75, 17.59  2C......................... 6.88, 6.169, 10.75  2D–2F....................................10.75  3..........................10.71, 10.73, 10.86, 12.21 (2).................................. 6.95, 10.84 (4)........................................10.84 (6)........................................10.84 (8)........................................10.85  3B..........................................10.85  3C..........................................10.85  3F...........................................10.85  3G..........................................10.85

Taxation of Chargeable Gains Act 1992 – contd s 3G(3).....................................10.84  4......................................12.12, 15.26 (1)(a)....................................18.27 (1AA)...................................15.26 (b)..............................15.26  5.......................................4.52, App 7  10....................................10.10, 10.74  10A........................................10.12  10AA.....................................10.12  10B........................................ App 5  12...........................................10.111 (1)......................................5.73  13.......................  1.61, 10.73,, 12.21, 16.18, 17.60, 19.37, App 6 (1A)...................................17.60 (10)....................................16.18  14...........................................1.61  14A........................................1.61  14B.................... 6.115, 6.169, 10.75, 10.86  14D........................1.98, 6.115, 6.169  16...........................................6.169 (2)......................................6.169 (2A)...................................6.169 (3)......................................10.103  17....................... 6.168, 6.177, 16.64, 16.90, 16.104 (1)(a)..................................4.88  18................................... 6.168, 16.64 (3)......................................6.168  19...........................................6.177  22B........................................1.129  24....................................1.126, 19.26  25...........................................1.159  26...........................................8.6  28...........................................6.180  37...........................................6.19 (1)......................................4.92  38................................... 6.108, 11.33 (1)(b)..................................6.110 (2)(b)..................................6.110  42...........................................17.30  46...........................................17.28  52(1)......................................6.109 (4)......................................6.177  58...........................................6.114  60(1).................................. 6.173, 8.1

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Table of Statutes Taxation of Chargeable Gains Act 1992 – contd s 61...........................................8.2  62.......................... 1.61, 6.177, 6.267, 8.13 (1)......................................6.170 (4)......................................15.25 (6)...................... 6.98, 6.170, 9.21, 10.11, 15.21 (b)..................................10.11 (7).............................. 6.170, 15.21 (8), (9)................................6.170  65(1)......................................15.25 (2)...............................6.107, 6.172 (3)......................................6.107 (4)................... 6.107, 6.181, 15.25  60, 68.....................................6.88  68A........................................6.94  69............................1.88, 1.139, 5.93, App 6 (1).........................5.94, 6.20, 6.89, 6.100 (2).................................. 5.94, 6.89 (2A)–(2C)...................... 5.94, 6.88 (2D)....................5.95, 6.88, App 5 (2E)....................................5.95 (3).................................5.94, 6.121 (4)......................................6.90  69A........................................6.103  70...........................................6.88  71........................... 6.99, 6.117, 7.19, 8.14, 8.15, 9.36 (1).................. 6.100, 6.168, 6.173, 6.177, 16.104 (2).............................. 6.168, 6.174 (2A)...................................6.174 (2B)................. 6.174, 6.175, 6.176 (2C)....................................6.175 (3).................................. 6.175, 8.4  72.......................... 6.108, 8.14, 11.33 (1)......................................8.13 (2), (4), (5).........................8.14  73(1)(a), (b)...........................8.15 (2), (3)................................8.15  74................................... 6.114, 6.117 (1)–(3)................................8.16  76......................... 6.181, 9.39, 10.93, 15.6 (1).................... 6.97, 6.178, 6.180, 10.93

Taxation of Chargeable Gains Act 1992 – contd s 76(1A), (1B), (2), (3)........6.97, 6.178  76A........................................6.179  76B........................................6.182  77......................... 4.95, 6.129, 6.179, 6.181, 6.182, 6.206, 6.251, 6.230, 6.299, 10.11, 10.107, 10.123, 12.12, 13.16, 15.19 (2)......................................10.125  78....................................13.16, 15.19  79....................................13.16, 15.19 (5)......................................6.129  79A(1)–(4).............................6.183  80.........................1.135, 10.89, 10.93 (1)......................................10.87 (2)................... 6.107, 10.87, 10.90 (3)–(8)................................10.87  80A........................................10.87  81(2)–(4)................................10.89  82(1), (2)................................10.90 (3)...............................10.90, 10.91 (4), (6)................................10.91  83.........................10.92, 10.93, 10.94  83A........................................10.88  84...........................................10.92  85(1)–(4)................................10.93 (5)–(11)..............................10.94  85A............................... 10.94, 10.125  86......................... 6.98, 6.182, 6.206, 10.7, 10.12, 10.15, 10.85, 10.95, 10.97, 10.98, 10.100, 10.101, 10.102, 10.107, 10.125, 12.12, 12.21, 16.19 (1)(a)..................................16.19 (b)..................................10.98 (c)............10.98, 10.106, 10.123 (e).......................10.101, 10.108 (f)..................................10.101 (2)......................................10.98 (3)......................................10.101 (4), (4A).............................10.102  86A........................................10,109 (1)(b)...............................10.106 (2)...................................10.109 (4)–(6).............................10.106 (7)........................10.106, 10.109 (8)...................................10.106

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Table of Statutes Taxation of Chargeable Gains Act 1992 – contd s 87..............................1.61, 6.71, 6.98, 6.182, 10.12, 10.20, 10.21, 10.49, 10.54, 10.70, 10.106, 10.109, 10.110, 10.112, 10.113, 10.115, 10.125, 12.12, 12.22, 16.18, 16.19, App 6 (2)......................................10.11 (4)......................................11.69 (7)...........................10.106, 10.111 (8)......................................10.115 (9)......................................10.93  87A............................10.110, 10.112, 10.119  87B........................................10.111 (4)....................................10.111  87C........................................10.111  87D...............................10.21, 10.112  87E................................10.21, 10.112  87F................................ 10.21, 10.112  87G..................10.21, 10.112, 10.114 (2)...................................10.114 (4)...................................10.114  87H..................10.21, 10.112, 10.114  87I.................... 10.21, 10.115, 10.119 (1), (2)..............................10.115  87J...................10.21, 10.115, 10.119  87K.................. 10.21, 10.115, 10.119  87L................... 10.21, 10.115, 10.119  87M................. 10.21, 10.115, 10.119  87N............................... 10.21, 10.113  87O........................................10.21  87P................................ 10.21, 10.113  88........................ 1.61, 10.112, App 6  89..................................... 1.61, App 6 (1)......................................10.116 (2).................10.49, 10.94, 10.116, 10.117 (3)......................................10.116  90........................ 1.61, 10.117, App 6 (5)......................................10.118 (6)......................................10.117  90A........................................10.117  91...........................1.61, 10.54, 10.70 (1A)...................................10.54  92...........................................1.61  93–95.....................................1.61

Taxation of Chargeable Gains Act 1992 – contd s 96..................................... 1.61; App 6 (1)–(10)..............................10.120  97(4)......................................1.98  97........................................... App 6 (7)...............................12.21, 16.19  97A.....................................1.98, 6.71  97B.....................................1.98, 6.71  97C.....................................1.98, 6.71  98........................................... App 6 (1), (2)................................10.121  98A........................................10.121  106A......................................10.124  117.........................................1.149 (1)....................................6.156 (b)................................1.149 (2AA)...............................6.43 (2)(b)................................1.149  122.........................................6.133 (1)....................................4.93 (3)....................................6.28  125.........................................16.65 (1)–(4)..............................16.65  126........................... 4.85, 4.86, 4.88, 4.89, 6.156  127........................... 4.85, 4.86, 4.88, 4.89, 6.156, 10.72  128............................4.85, 4.86, 4.88, 4.89  129, 130............................. 4.88, 4.89  135, 136................4.89, 6.156, 10.72, 10.72  137, 138.................................4.89  142............................ 4.84, 4.85, 4.86  144ZA....................................1.148  150A(2).................................1.157  151A......................................11.33  152......................6.122, 10.87, 17.19, 19.26  153................................. 6.122, 17.19  154.........................................6.122  155, 156, 156A......................6.123  158(1)(b)................................6.123  159................................. 6.123, 10.87  161.........................................19.26  162.........................................10.72  163.........................................6.124  164.........................................6.124 (3)–(5)..............................6.124

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Table of Statutes Taxation of Chargeable Gains Act 1992 – contd s 164B......................................6.167  165......................1.159, 6.106, 6.112, 6.114, 6.116, 6.117, 6.120, 6.121, 6.181, 6.183, 8.16, 9.37, 10.89, 17.19, 19.26 (1).............................1.104, 6.141 (2), (3)..............................6.111 (4)..................1.104, 6.111, 6.230 (5).............................1.104, 6.111 (8)–(11)............................6.112  165A.............................. 6.139, 6.158  166.........................................6.112  167.................................6.146, 10.65 (2)....................................1.159  167A...............................6.115, 6.118 (2), (3), (5)....................6.115  168.........................................6.116 (4)–(5)..............................6.113 (7)–(9)..............................6.113  169................................. 6.114, 6.116  169A.............................. 6.113, 6.139  169B......................................6.230  169C.............................. 6.120, 6.231  169D......................................6.231  169E–169G............................6.232  169I.....................6.133, 6.134, 16.15, 16.90 (7)...................................6.140 (8)...................................6.145  169J............................... 6.133, 6.146 (2)...................................6.148 (3)...................................6.147 (4)...................................6.148  169K...............................6.133, 6.153 (3).................................6.153  169L(4)..................................6.149  169M..............................6.147, 19.26 (2)(a)............................6.147  169N......................................6.149  169O......................................6.150 (2)–(4), (6)....................6.151  169P.......................................6.155  169S................................6.133, 6.163 (3)..................................6.137 (5)..................................6.138  169VB...................................6.158  169VC...................................6.158

Taxation of Chargeable Gains Act 1992 – contd s 169VC(3)...............................6.159  169VH...................................6.162  169VH(3)...............................6.162 (1)...............................6.159  169VL....................................6.164  169VM...................................6.164  169VV(1)–(3)........................6.158  169VW..................................6.160  169VW(3), (4).......................6.161  169VW(5), (6).......................6.160  169VX...................................6.161  169VX(2)...............................6.161  185.........................................5.85  188A......................................10.77 (5).................................10.77 188C......................................10.77  188D......................................1.98  192(2)....................................4.88  201.........................................6.28  222..................................6.127, 17.29 (3)....................................6.126 (5)....................................6.129 (a), (b).........................6.126  222B(11)................................6.130  223.......................6.127, 6.128, 17.29 (4)....................................6.131  224.........................................17.29 (3)....................................6.127  225.........................................6.125  225A....................6.125, 6.128, 17.29  225B–225E............................17.29  226A......................................6.128  236A......................................16.86  236H................. 16.89, 16.90, 16.102, 16.103, 16.104, 16.105  236I........................................16.90  236J..................  16.92, 16.93, 16.96, 16.117  236K..................16.92, 16.94, 16.117  236L...................16.92, 16.97, 16.117  236M............................16.91, 16.117  236O......................................16.102  236P.......................................16.103  236Q............. 16.104, 16.105, 16.106  236R......................................16.106  236S.......................................16.105  236U......................................16.100  238A......................................16.79

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Table of Statutes Taxation of Chargeable Gains Act 1992 – contd s 239..................................16.63, 16.64 (1), (2)..............................16.63 (3).............................16.63, 16.65 (4)–(7)..............................16.63 (8)....................................16.64  239ZA....................................16.63  241, 241A..............................17.19  242–244.................................19.26  248A......................................8.5  253.........................................19.26  256.........................................11.49 (1).............................11.68, 11.69 (2)....................................11.68  257.........................................12.48 (1)....................................11.33 (2).............................11.33, 11.65 (a)................................11.36 (3)....................................11.34  258(2)(a), (b).........................12.68 (3), (4)..............................12.68 (5)–(9)..............................12.69  259.........................................12.48  260..................... 6.111, 6.114, 6.117, 6.118, 6.119, 6.120, 6.128, 6.181, 6.183, 8.16, 9.14, 9.19, 9.37, 12.46, 15.16, 19.26 (1)(c)................................12.46 (2)................... 6.116, 7.19, 15.16 (a)................................6.116 (b)(i)............................12.47 (iii)..........................12.46 (iv)..........................12.70 (c)................................12.46 (d)............... 6.117, 9.36, 12.70 (e)................................12.70 (f)..........................12.46,12.70 (3)................. 6.116, 6.230, 10.69 (4), (5)..............................6.116  261................................. 6.116, 11.61  261ZA(1)–(3), (5)..................6.118  272.....................16.38, 16.85, 18.116 (3)....................................1.142 (5)....................................11.37  273..................................16.38, 16.85  274.........................................16.38  275.........................................6.239

Taxation of Chargeable Gains Act 1992 – contd s 275(1)....................................6.184  275A–275C...........................6.195  279..................................10.85, 19.26  281, 282.................................6.232  283.........................................19.49  286(2)–(8)..............................6.168  288.........................................16.64 Sch A1......................................6.157 para 2....................................10.128 Sch B1............................. 10.75, 10.127 para 4....................................10.75 Sch 1.........................................13.11 para 1....................................6.95 (1)...............................6.63 2(2)–(5)........................6.94 (7), (8)........................6.95 5....................................6.94 8....................................6.96 Sch 1A......................................16.18 para 3....................................10.80 (1)...............................10.83 4....................................10.80 5....................................10.81 9....................................10.80 Sch 1B para 4, 5................................10.128 Sch 1C......................................10.77 para 1....................................6.95 5(1)...............................6.94 6(3)...............................6.94 (1)–(3)........................6.95 8....................................6.96 Sch 3 para 6....................................6.155 Sch 4.........................................6.121 Sch 4A.............................. 6.179, 6.181 para 1–8................................6.179  9–14..............................6.180 Sch 4AA para 3.............................10.81, 10.82 4............................ 10.81, 10.82 5....................................10.81 6, 7................................10.81 8, 14..............................10.83 Sch 4B...............6.182, 10.118, 10.125, 13.19 Sch 4C..................10.49, 10.94, 10.125 para 8....................................10.49

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Table of Statutes Taxation of Chargeable Gains Act 1992 – contd Sch 4C – contd para 8(3)...............................10.94 8B, 8C..........................10.36 Sch 4ZA...................................6.103 para 1....................6.96, 6.103, 6.106 2.............................6.104, 6.105 3–8................................6.105 Sch 4ZZA............................6.92, 10.75 para 3....................................10.76 6....................................10.76 Sch 4ZZB............................6.92, 10.75 Sch 4ZZC.................................6.92 Sch 5.........................................10.105 para 1(3)...............................10.103 (4)...............................10.103 (7)–(9)........................10.103 2.........................10.100, 10.103 (1), (2)........................10.100 (3)....................10.100, 10.125 (4)–(10)......................10.100 2A(1)–(10)...................10.100 3, 5................................10.101 5.........................10.101, 10.103 5A.................................10.98 (3)(a)........................10.99 (5), (7).....................10.99 5B.................................10.99 (3)............................10.99 (6), (7)......................10.99 (8)(a), (b).................10.99 6............... 4.95, 10.103, 10.104 7....................................10.102 (9), (10), (10ZA)........10.96 8....................................10.102 8(8A)............................10.102 9....................................10.95 (1B)............................10.96 (3)...............................10.96 (a)...........................16.19 (4), (5)........................10.96 (6), (6A).....................10.97 (10A), (10B)...............10.95 10..................................10.105 10C...............................10.95 11..................................10.95 Sch 5A..........................10.105, 10.121 para 1....................................10.121 2, 3.........................10.7, 10.121

Taxation of Chargeable Gains Act 1992 – contd Sch 5A – contd para 4....................................10.121 5.............................10.7, 10.122 6....................................10.122 18..................................6.167 Sch 5B para 13–13C, 15...................6.167 17(1)–(6)......................6.166 (7), (8)......................6.167 Sch 6..................................6.111, 6.124 Sch 7 para 1....................................1.104 2............................ 6.111, 6.232 3–8................................6.111 Sch 7AC...................................10.83 para 30A...............................1.98 Sch 7C......................................16.86 para 1, 2................................16.86 3–8................................16.87 Sch 7D...............................16.79, 16.83 Sch 8.........................................17.28 para 1....................................17.28 Taxation of Pensions Act 2014....18.2 Taxation (International and Other Provisions) Act 2010 Pt 2 Ch 1 (ss 2–17)...................10.58 s 2–6......................................5.29, 6.30 7–17.......................................6.29 18...........................................5.29 Pt 2 Ch 2 (ss 18–104)...............10.58 s 19, 77, 80........................19.22, 19.30 Pt 2 Ch 3 (ss 105–134).............10.58 s 111....................... 6.32, 7.13, 7.14 112–115.................................19.12 134.........................................5.29 354.........................................10.66 355.........................................10.66 (1)....................................6.49 356.......................10.47, 10.49, 10.66 357–359.................................10.66 360, 361..........................10.66, 12.19 362, 363.................................10.66 Sch 4 para 5....................................19.30 Taxes Management Act 1970 s 7...............................1.98, 15.27, 19.1 (1), (2)..................................19.1 (8)........................................1.98

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Table of Statutes Taxes Management Act 1970 – contd s 7(9)........................................19.1  8......................................15.27, 19.20  8A................. 6.67, 19.7, 19.8, 19.20, 19.58, 19.60, 19.73 (1).....................................6.67 (1B)...................................19.7  8B..........................................19.7  9.............................................19.7  9A..........................................19.20 (2).....................................19.35  9ZA........................................19.8  9ZB........................................19.8  12AC......................................19.37  12B........................................19.73 (1)(a)...............................19.73 (2)....................................19.73 (2A), (3), (4), (4A), (5)–(5B), (6)................19.74  13....................................15.27, 19.37  13–16.....................................19.37  17, 18.....................................19.37  18B–18E................................10.60  19...........................................19.37  20...........................................19.42  20AD.....................................19.37  23–26.....................................19.37  27....................................10.86, 19.37  28....................................10.86, 19.37  28A........................................19.35  28B, 28C, 28ZA–28ZE.........19.36  29....................... 1.120, 1.151, 1.164, 19.39, 19.42 (1)...............................19.41, 19.42 (4)......................................1.120 (5)...............................1.120, 19.42 (6)...............................19.41, 19.42 (7)......................................19.41 30AA................................6.66, 19.47 30AA(2).................................6.66  31...........................................19.36  36A........................................19.40  46C........................................11.60  42...........................................19.24  50(6)......................................19.75 59A(2)–(6).............................19.46  59AA.....................................19.45 59C(7)–(6).............................19.46  60–70, 70A............................19.48

Taxes Management Act 1970 – contd s 72.............................. 6.20, 8.8, 13.10 (3)......................................8.8  73...........................................8.8  74......................................6.20, 15.24  76, 77................................6.20, 19.48  86...........................................19.46  88...........................................6.80  90...........................................6.86  93(9)......................................1.98  93A........................................19.61  95(2)......................................1.98  97A........................................19.61  98.......................10.60, 13.19, 19.61, App 6  98A........................................19.61 98C(2EA), (2EB)...................6.332  99, 99A..................................19.61  100–107..........................13.19, 19.61  103ZA....................................1.98  108.........................................1.98  107A......................................19.47 109B–109F............................5.85  114.........................................1.98  115.........................................1.98  118(1), (7)..............................19.47 Sch 1A......................................19.24 para 3....................................19.25  5–9................................19.41 Sch 1AB para 1(4)...............................6.24 2....................................19.33 5....................................19.34 Sch 1B......................................19.24 Telecommunications Act 1984 s 68...........................................1.96 Terrorism Act 2000.... 1.95, 2.51, 4.1, 4.3 Theft Act 1968........................4.63, 14.9 s 1, 15–17, 19–20.....................4.64  32...........................................5.86 Theft Act 1978............................14.9 s 1–3.........................................4.64 Tribunals, Courts and Enforce­ ment Act 2007.....................11.60 Trustee Act 1925.............1.5, 2.3, App 1, App 7 s 1–8.........................................4.99  9......................................... 4.57, 4.99 10, 11.....................................4.99

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Table of Statutes Trustee Act 1925 – contd s 12, 13.....................................2.3  14.................................2.3, 2.16, 4.45 (2)..................................4.44, 4.45 (a)..................................2.3  15..........................................2.3, 4.45  16..........................................2.3, 4.45  17...........................................2.3  18........................2.3, 4.23, 4.32, 4.45  19............................... 2.3, 2.20, 4.45, App 7  20...........................................2.3  22......................................... 2.3, 4.46 (4)......................................4.53  24..........................................2.3, 4.46  25.......................2.3, 2.19, 4.44, 4.46 (2)......................................2.3  26...........................................2.3  27..........................................2.3, 4.55  28...........................................2.3  30....................................... 4.39, 4.65  31...................... 1.14, 2.3, 2.30, 2.34, 4.47, 4.97, 6.117, 6.177, 6.216, 9.24, 9.29, 9.36, 15.10, App 7 (1).........................4.97, 9.29, 9.31, App 7 (2).................................. 9.29, 9.31 (3), (4)................................9.29  32.......................2.3, 2.30, 2.33, 2.34, 3.63, 4.47, 4.97, 6.24, 6.105, 6.190, 7.3, 9.20, 13.8, 13.18, 15.10, App 7 (1)......................................7.3 (a)............................4.97, App 7  33.....................1.17, 2.3, 6.105, 13.1, 13.4, 13.5, 13.6 (1)......................................9.23  34..........................................2.3, 4.28  35...........................................2.3  36............................... 1.50, 2.3, 4.24, 4.25, 4.31 (1), (2)................................4.24 37...........................................2.3 (1)(c)..................................2.3 (2)......................................3.67  38...........................................2.3  39........................1.50, 2.3, 4.21, 4.32

Trustee Act 1925 – contd s 40....................... 1.50, 2.3, 4.21, 4.28 (4)......................................4.21  41............................... 2.3, 4.23, 4.26, 4.31 (1)......................................4.24  42, 43....................................2.3, 4.27  44–52....................................2.3, 4.22  53.................................2.3, 3.62, 4.22  54–56....................................2.3, 4.22  57...................................2.3, 2.4, 3.60  58–0.......................................2.3  61..........................................2.3, 4.68  62..........................................2.3, 4.69  63, 64, 66–71.........................2.3 Trustee Act 2000..................1.5, 2.3, 2.5, 2.20, 2.30, 4.77, App 1, App 7 s 1................................2.18, 2.20, 2.21, 4.53, 4.57, 4.100 (1)........................ 2.3, 4.100, App 7  2...............................2.20, 2.21, 4.100  3............................... 2.20, 2.21, 4.99, 4.101  4............................. 2.20, 4.99, 4.101, App 7  5–7...........................2.20, 4.99, 4.101  8................................2.18, 2.20, 4.99, 4.101 (1)(b)....................................2.20  9, 10.......................................2.20  11........................................2.20, 4.46  12–15......................2.20, 4.46, App 7  16–26..................................2.20, 4.46  27...........................................2.20  28............................2.20, 4.36, App 7 (4)–(6)................................4.36  29............................2.20, 4.37, App 7  30....................................... 2.20, 4.37  31...............................2.20, 4.35, 4.39  32, 33................................. 2.20, 4.38  34.......................................... 2.3, 2.20  35–39.....................................2.20  40....................................... 2.20, 4.65  41–43.....................................2.20 Sch 1....................................2.20, 4.100 para 5....................................2.3 Sch 2.........................................2.20 Sch 3.........................................2.20 Sch 4.........................................2.20

liii

Table of Statutes Trustee Act (Northern Ireland) 2001.....................................1.5 Trustee Delegation Act 1999......2.19, 4.46, 4.50, App 1 s 1................................ 2.19, 4.25, 4.44 (1)........................................2.19  2–4.........................................2.19  5................................ 2.19, 4.44, 4.46  6.............................................2.19  7......................................... 2.19, 4.44  8–10.......................................2.19 Trustee Investments Act 1961....2.5, 2.20, App 1 Trusts (Capital and Income) Bill 2010............... 2.21, 4.76, 4.102 Trusts (Capital and Income) Act 2013..................2.21, 4.74, 4.79; App 1 s 4.............................................4.102 Trusts of Land and Appoint­ment of Trustees Act 1996.........1.26, 2.13, 2.14, 2.17, 2.18, 17.1, App 1, App 7 s 1..........................................1.52, 2.18  2................................ 2.18, 2.40, 3.29 (1)........................................2.12  3.............................................2.18  4........................1.30, 2.18, 3.29, 17.1  5.............................................2.18  6......................................... 2.18, 4.45  7–10.......................................2.18  11......................2.18, 4.45, 4.48, 4.49 (1)......................................2.20  12, 13.....................................2.18  14.............................. 2.15, 2.18, 4.51 (2)(a)..................................1.112  15.............................. 2.15, 2.18, 4.51  16–18.....................................2.18 Pt II (ss 19–21).........................2.18 s 19...................... 2.3, 2.18, 3.61, 4.21, 4.29 (3)......................................4.28  20, 21................................. 2.18, 4.29  22, 23.....................................2.18  24........................................1.29, 2.18  25....................................... 2.18, 4.25  27...........................................2.18 Sch 1.........................................2.18 Sch 2..................................... 2.18, 3.29 para 5....................................2.30

Trusts of Land and Appoint­ment of Trustees Act 1996 – contd Sch 3..................................... 2.18, 4.25 Sch 4.........................................2.18 Trusts (Scotland) Act 1961........9.22 s 5.............................................1.83 U Universities and College Estates Act 1925........................... 2.18, 2.20 V Value Added Tax Act 1994 s 48...........................................10.42 Sch 8.........................................11.73 Group 4................................11.73 Group 12..............................11.73 Group 15..............................11.73 Item 1, 1A........................11.73 2–10.........................11.73 Sch 9.........................................11.73 Group 12............11.56, 11.74, 11.75 Variation of Trusts Act 1958......2.4, 10.5, App 1 s 1.............................................3.63 W Wales Act 2017............................1.87 Wills Act 1837............2.23, 3.22, App1A s 9................................. 2.23, 2.24, 3.6, 15.1  11...........................................2.24  15........................................2.20, 2.24  18...........................................2.24 18A.....................................2.23, 2.24  20–22, 24–27, 33...................2.24 Wills Act 1963 s 1, 2.........................................2.32 Wills Act 1968.............................2.23 s 1.............................................2.24 Wills (Soldiers and Sailors) Act 1918.....................................2.24 Welfare Reform and Pensions Act 1999...............................1.121 INTERNATIONAL LEGISLATION Anguilla Trusts Ordinance 1994.................12.8 Bahamas Trustee Act 1988..........................1.144

liv

Table of Statutes Barbados International Trusts Act 1995.......12.8 Belize Trusts Act 1992............................12.8 Bermuda Trusts (Special Provisions) Act 1989.....................................12.8 Trusts (Special Provisions) Amend­ment Act 1998..........12.8 British Virgin Islands Trustee (Amendment) Act 2003....12.8 Cayman Islands Special Trusts (Alternative Regime) Law 1997........12.10, 12.14 Cook Islands International Trusts Act 1984.......12.8 Cyprus International Trusts Law 1992.....12.9 Dominican Republic International Exempt Trusts Act 1997.....................................12.8 Isle of Man Purpose Trusts Act 1996..............12.9 Jersey Financial Services (Jersey) Law 1998.....................................12.16 Foundations (Jersey) Law 2009....12.15 art 1..........................................12.15  2..........................................12.16  7..........................................12.15  13, 14..................................12.16

Foundations (Jersey) Law 200 – contd art 18, 20–22............................12.15  23................................ 12.15, 12.16  24........................................12.15  25, 26..................................12.16  30, 31..................................12.15  32, 33..................................12.17  40........................................12.15 Trusts (Amendment No  3) (Jersey) Law 1996................12.9 Trusts (Amendment No  6) (Jersey) Law 2013................3.93 Trusts (Jersey) Law 1984 art 41, 43..................................10.104 Labuan Offshore Trusts Act 1996.............12.9 Liechtenstein Civil Law art 897......................................12.9 Mauritius Offshore Trusts Act 2001.............12.9 Nevis Internationally Exempt Trust Ordinance 1994....................12.9 Seychelles International Trusts Act 1994.......12.9 United States Foreign Account Tax Compliance Act...................  10.61, 10.63, 10.64, 14.24

lv

Table of Statutory Instruments [References are to paragraph numbers and appendices.] A Anti-Money Laundering (Amend­ment) Regulations 2019.....................................3.4 C Charge to Income Tax by Reference to Enjoyment of Property Previously Owned Regulations 2005, SI 2005/724..................6.201, 6.206 reg 2.........................................6.205  3................................. 6.203, 6.207  4.........................................6.205  6.........................................6.205 Charitable Incorporated Organ­ isations (Conse­quen­tial Amend­ments) Order 2012, SI 2012/3014........................11.78 Charitable Incorporated Organ­ isations (General) Regula­ tions 2012, SI 2012/3012......11.78 Charitable Incorporated Organ­ isations (Insolvency and Dissolution) Regu­lations 2012, SI 2012/3013...............11.78 Civil Jurisdiction and Judg­ ments Order 2001, SI 2001/ 3929 Sch 1 para 12..................................14.23 Communications Act 2003 (Con­ se­quential Amend­ments) Order 2003, SI 2003/2155....11.23 Community Interest Regula­ tions 2005, SI 2005/1788....11.79 D Donations to Charity by Indivi­ duals (Appropriate Declara­ tions) (Amend­ment) Regu­ lations 2005 2005/2790.........11.23

Donations to Charity by Individuals (Appropriate Declarations) Regulations 2000, SI 2000/2074..............11.23 Double Taxation Relief (Estate Duty) (France) Order 1963, SI 1963/1319..............6.269 Double Taxation Relief (Estate Duty) (India) Order 1956, SI 1956/998..........................6.269 Double Taxation Relief (Estate Duty) (Italy) Order 1968, SI 1968/304..........................6.269 Double Taxation Relief (Estate Duty) (Pakistan) Order 1957, SI 1957/1522..............6.269 Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (Netherlands) Order 1980, SI 1980/706....6.269 Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (Republic of Ireland) Order 1978, SI 1978/1107....6.269 Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (Republic of South Africa) Order 1979, SI 1979/576..........................6.269 Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (Sweden) Order 1981, SI 1981/840.................6.269 Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (Switzerland) Order 1994, SI 1994/3214...............6.269

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Table of Statutory Instruments Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (United States of America) Order 1979, SI 1979/1454........................6.269 Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981, SI 1981/1121...............1.139 E Employer-Financed Retire­ ment Benefits (Excluded Benefits for Tax Purposes) Regulations 2007, SI 2007/ 3537.....................................18.35 Employment Income Provided Through Third Parties (Excluded Relevant Steps) Regulations 2011, SI 2011/ 2696.....................................18.119 Enactment of Extra-Statutory Concessions Order 2010, SI 2010/157..........................16.20 F Finance Act 1999, Schedule  10, Paragraph  18 (First and Second Appointed Days) Order 2000, SI 2000/1093....18.11 Finance Act 2009, Schedule  35 (Special Annual Allowance Charge) (Cessation of Effect) Order 2010, SI 2010/2939........................18.80 Finance Act 2010 Schedule  6 Part 1 (Further Conse­ quential and Incidental Provision etc) Order 2012, SI 2012/735..........................11.49 art 5, 6......................................11.49 Finance Act 2010, Schedule  6, Part 2 (Commencement) Order 2012, SI 2012/736....11.49 Foundations (Continuation) (Jersey) Regulations 2009...12.15 Foundations (Mergers) (Jersey) Regulations 2009................12.15 Foundations (Winding up) (Jersey) Regulations 2009...12.15

I Income Tax (Benefits Received by Former Owner of Pro­ perty) (Election for Inheritance Tax Treat­ ment) Regulations 2007, SI 2007/3000................ 6.201, 6.205 Income Tax (Building Societies) Regulations 1986, SI 1986/ 482.......................................6.323 Income Tax (Deposit-takers and Building Societies) (Interest Payments) Regu­la­tions 2008, SI 2008/2682...............6.41 Inheritance (Provision for Family and Dependants) (Northern Ireland) (Order) 1979, NI 1979/924...............15.12 Inheritance Tax Avoidance Schemes (Prescribed Des­­ criptions of Arrange­ments) Regulations 2011, SI 2011/ 170........................................6.327, 6.328 Inheritance Tax Avoidance Schemes (Prescribed Des­­ criptions of Arrange­ments) Regulations 2017, SI 2017/ 1172......................................6.327, 6.328 Inheritance Tax (Double Charges Relief) Regula­ tions 1987, SI 1987/1130....6.296 Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010, SI 2010/ 51.........................................18.125 Inheritance Tax (Settled Pro­ perty Income Yield) Order 2000, SI 2000/174 reg 3, 4.....................................8.19 International Tax Enforce­ment (Disclosable Arrange­ ments) Regulations 2019 Draft.................................... App 2 L Land Registration Rules 1925, SR & O 1925/1093 r 98.......................................... 3.8, 3.16

lviii

Table of Statutory Instruments Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guar­dian (Amendment) Regulations 2009, SI 2009/ 1884.....................................2.41 Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guardian (Amendment) Regula­tions 2013, SI 2013/ 506.......................................2.41 Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guardian Regulations 2007, SI 2007/1253......... 2.40, 2.41; App 1

Occupational Pension Schemes (Transitional Provisions) Regulations 1988, SI 1988/ 1436.....................................18.6 Offshore Funds (Tax) (Amend­ ment) Regulations 2009, SI 2009/3139...................6.49, 10.67 Offshore Funds (Tax) Regula­ tions 2009, SI 2009/3001....6.49, 10.66, 11.59, 12.19 reg 17.......................................10.66  20(1), (3)............................10.70  21(1)...................................10.70  36, 37.................................10.72 P Partnerships (Restrictions on Contributions to a Trade) Regulations 2005, SI 2005/ 2017.....................................1.117 Pension Schemes (Categories of Country and the Requirements for Over­ seas Pension Schemes and Recognised Overseas Pension Schemes) Regula­ tions 2006, SI 2006/206......18.121 Pension Schemes (Information Requirements – Qualify­ing Overseas Pension Schemes, Qualifying Recog­nised Overseas Pen­sion Schemes and Corres­pond­ing Relief) Regulations 2006, SI 2006/ 208............................18.121, 18.123 Pension Schemes (Information Requirements – Qualify­ing Overseas Pension Schemes, Qualifying Recog­­nised Overseas Pension Schemes and Corres­pond­ing Relief) Regu­la­tions 2006, SI 2006/ 208.......................................18.121 Personal Portfolio Bonds (Tax) Regulations 1999, SI 1999/ 1029.....................................6.48 Prior Rights of Surviving Spouse (Scotland) Order 2005, SI 2005/252................2.35

M Market Value of Shares, Securi­ ties and Strips Regulations 2015, SI 2015/616................ App 1 Money Laundering (Amend­ ment) Regulations 2015, SI 2015/11............................3.4, 4.1 Money Laundering Regulations 2003, SI 2003/3075.............. App 6 Money Laundering Regulations 2007, SI 2007/2157............. 3.4, 4.1, 4.18 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer), Regulations 2017, SI 2017/692.......................1.88, 19.1 O Occupational Pension Schemes (Disclosure of Inform­ ation) Regulations 1996, SI 1996/1655........................18.58 Occupational Pension Schemes ( M e m b e r- N o m i n a t e d Trus­ tees and Directors) Regulations 2006, SI 2006/ 714.......................................18.55 Occupational Pension Schemes (Scheme Funding) Regula­ tions 2005, SI 2005/3377....18.53

lix

Table of Statutory Instruments Proceeds of Crime Act 2002 (Business in the Regulated Sector and Supervisory Authorities) Order 2007, SI 2007/3287........................4.7 Public Trustee Rules 1912, SR & O 1912/348 r 30...........................................2.3

Tax Avoidance Schemes (Infor­m­ ation) (Amend­ment) Regu­ lations 2008, SI 2008/1947....6.329 Tax Avoidance Schemes (Inform­ ation) (Amend­ment) Regu­ lations 2009, SI 2009/ 611....6.329 Tax Avoidance Schemes (Infor­ m­ation) Regulations 2004, SI 2004/1864........................6.329 Tax Avoidance Schemes (Infor­ mation) Regulations 2012, SI 2012/1838........................6.330 Tax Avoidance Schemes (Pre­ scribed Descriptions of Arrangements) Regula­ tions 2004, SI 2004/1863....6.327 Tax Avoidance Schemes (Pre­ scribed Descriptions of Arrangements) Regula­ tions 2006, SI 2006/1543....6.327, 6.328 Tax Avoidance Schemes (Pro­ moters and Prescribed Circumstances) Regula­ tions 2004, SI 2004/1865....6.328 Tax Avoidance Schemes (Pro­ moters, Prescribed Circum­ stances and Informa­ tion) (Amend­ment) Regulations 2004, SI 2004/2613...............6.331 Taxes (Definition of Charity) (Relevant Territories) (Amendment) Regulations 2014, SI 2014/1807..............11.49 Taxes (Definition of Charity) (Relevant Territories) Regulations 2010, SI 2010/ 1904.....................................11.49 Taxes (Interest Rate) (Amend­ ment) Regulations 2017, SI 2017/305..........................1.98 Terrorism Act 2000 and Proceeds of Crime Act (Amendment) Regulations 2007, SI 2007/3398..............4.1, 4.3 Transfer of Functions and Revenue and Customs Appeals Order 2009, SI 2009/56............................6.305

R Recovery of Taxes etc Due in Other Member States (Amend­ ment of Section 134 of the Finance Act 2002) Regu­ lations 2005, SI 2005/1479........................4.95 Registered Pension Schemes and Relieved Non-UK Pension Schemes (Lifetime Allowance Transitional Protection) (Notification) Regulations 2013, SI 2013/ 1741.....................................18.84 Relief for Community Amateur Sports Clubs (Designation) Order 2002, SI 2002/1966....11.71 Retirement Benefit Schemes (Restrictions on Discretion to Approve) (Small Selfadministered Schemes) Regulations 1991, SI 1991/ 1614.....................................18.59 S Serious Organised Crime and Police Act 2005 (Com­ mencement No  1, Transi­ tional and Transitory Provisions) Order 2005, SI 2005/1521........................4.1 Small Charitable Donations Regulations 2013, SI 2013/ 938.......................................11.27 T Tax Avoidance Schemes (Infor­ m­ation) (Amend­ment) Regu­lations 2006 SI 2006/ 1544.....................................6.329

lx

Table of Statutory Instruments V Value Added Tax (Fund-Raising Events by Charities and Other Qualifying Bodies) Order 2000, SI 2000/802....11.74

Trustee Act 2000 (Commence­ ment) Order 2001, SI 2001/ 49.........................................2.20 Trustee Delegation Act 1999 (Commencement) Order 2000, SI 2000/216................2.19 Trusts of Land and Appoint­ ment of Trustees Act 1996 (Commencement) Order 1996, SI 1996/2974..............2.18

lxi

Table of Cases [References are to paragraph numbers and Appendices] A A v A, Intervening party St George Trustees Ltd [2007] EWHC 99 (Fam)....... 1.42 A v Rothschild Trust Cayman Ltd [2006] WTLR 1129, (2006-07) 9 ITELR 307.............................................................................................................. 3.82 A, B, C & D v United Kingdom (Application 8531/79) (1981) 23 DR 203...... 6.322 A-G for Scotland v Murray Group Holdings Ltd (2015) CSIH 77..................... 16.3 AMP (UK) Plc v Barker [2001] OPLR 197, [2001] Pens LR 77, [2001] WTLR 1237, (2000-01) 3 ITELR 414.................................................................... 3.75 Abacus (CI) Ltd (Trustee of the Esteem Settlement) Grupo Torras SA see Grupo Torras SA v Al-Sabah (No 8) Abacus Trust Co (Isle of Man) Ltd v Barr; sub nom Barr’s Settlement Trusts, Re [2003] EWHC 114 (Ch), [2003] Ch 409, [2003] 2 WLR 1362, [2003] 1 All ER 763, [2003] WTLR 149, (2002-03) 5 ITELR 602, (2003) 100(13) LSG 27................................................................................. 1.104, 3.27, 3.75, 3.85 Abacus Trust Co (Isle of Man) Ltd v NSPCC; sub nom Abacus Trust Co (Isle of Man) Ltd v National Society for the Prevention of Cruelty to Children [2001] STC 1344, [2002] BTC 178, [2001] WTLR 953, (2000-01) 3 ITELR 846, [2001] STI 1225, (2001) 98(35) LSG 37.................... 3.27; 3.75, 3.82 Abbott Fund Trusts, Re; sub nom Smith v Abbott; Trusts of the Abbott Fund, Re [1900] 2 Ch 326..................................................................................... 3.35 Aberdeen Asset Management Plc v R & C Comrs [2010] UKFTT 524 (TC).... 16.8 Abou-Rahmah v Abacha [2006] EWCA Civ 1492, [2007] Bus LR 220, [2007] 1 All ER (Comm) 827, [2007] 1 Lloyd’s Rep 115, [2007] WTLR 1, (200607) 9 ITELR 401......................................................................................... 1.21 Abrahams Will Trusts, Re; sub nom Caplan v Abrahams [1969] 1 Ch 463, [1967] 3 WLR 1198, [1967] 2 All ER 1175, (1967) 111 SJ 794................ 1.10 Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2008] VSCA 86, [2009] WTLR 1685 (Vic); reversing [2007] VSC 40, (2007-08) 10 ITELR 536, Sup Ct (Vic)............................................................................ 1.54 Acornwood LLP v HMRC [2016] UKUT 361 (TCC), [2016] STC 2317, [2016] 8 WLUK 67, [2016] BTC 517..............................................................1.119, 1.134 Adams (Henry William) (Deceased), Re; sub nom Bank of Ireland Trustee Co v Adams (Charlotte Margaret Lothian) [1967] IR 424............................... 5.42 Adams & Kensington Vestry, Re; sub nom Adams v Kensington Vestry (1884) LR 27 Ch D 394.......................................................................................... 1.33 Admiral Earl Beatty’s Executors v IRC (1940) 23 TC 574................................ 10.29 Admiralty Comrs v National Provincial & Union Bank Ltd (1922) 127 LT 452.............................................................................................................. 3.81 Agip (Africa) Ltd v Jackson [1991] Ch 547, [1991] 3 WLR 116, [1992] 4 All ER 451, (1991) 135 SJ 117.................................................................... 4.70, 14.19 Agnew v Belfast Banking Co [1896] 2 IR 204................................................... 3.21 Aiken v Macdonald Trustees (1894) 3 TC 306................................................ 6.74, 8.10

lxiii

Table of Cases Al-Bassam v Al-Bassam [2004] EWCA Civ 857, [2004] WTLR 757, (2004) 148 SJLB 826; reversing in part [2003] EWHC 2278 (Ch), [2004] WTLR 157.............................................................................................................. 5.30 Aldhous, Re; sub nom Noble v Treasury Solicitor [1955] 1 WLR 459, [1955] 2 All ER 80, (1955) 99 SJ 276....................................................................... 4.55 Alexander Bulloch & Co v IRC [1976] STC 514, 51TC 563, [1976] TR 201... 6.9 Alexander v IRC [1991] STC 112, (1991) 23 HLR 236, [1991] 2 EGLR 179, [1991] 20 EG 141, [1991] RVR 87, 64 TC 59............................................ 6.310 Alhamrani v Russa Management Ltd; sub nom Internine Trust & Intertraders Trust, Re [2006] WTLR 1551, (2004-05) 7 ITELR 308 (Jer)................. 3.73, 4.55 Ali v Khan [2002] EWCA Civ 974, [2009] WTLR 187, (2002-03) 5 ITELR 232, [2002] 30 EG 131 (CS), [2002] 2 P & CR DG19............................ 3.34, 3.36 Allen & Hateley (as executors of Johnson dec’d) v R & C Comrs [2005] SWTI 1264............................................................................................................ 5.30 Allen v Emery; sub nom Cooper (Deceased), Re [2005] EWHC 2389 (Ch), (2005-06) 8 ITELR 358.............................................................................. 2.23 Allen-Meyrick’s Will Trusts, Re; sub nom Mangnall v Allen-Meyrick [1966] 1 WLR 499, [1966] 1 All ER 740, (1965) 109 SJ 957................................... 4.54 Allhusen v Whittell (1867) LR 4 Eq 295................................................ 2.21; 4.74, 4.79 Allison v Murray [1975] 1 WLR 1578,[1975] 3 All ER 561, [1975] STC 524, [1975] TR 157, (1975) 119 SJ 712............................................................. 6.108 Allnutt v Wilding; sub nom Strain (Deceased), Re; Allnutt v Allnutt [2007] EWCA Civ 412, [2007] BTC 8003, [2007] WTLR 941, (2006-07) 9 ITELR 806, Civ Div; affirming [2006] EWHC 1905 (Ch), [2006] BTC 8040, [2006] WTLR 1317, (2006-07) 9 ITELR 381, (2006) 150 SJLB 1057............................................................................................................ 3.76, 3.79 Allsopp’s Marriage Settlement Trusts, Re; sub nom: Public Trustee v Cherry [1959] Ch 81, [1958] 3 WLR 78, [1958] 2 All ER 393, (1958) 102 SJ 489.............................................................................................................. 13.1 Al-Sabah v Grupo Torras SA [2005] UKPC 1, [2005] 2 AC 333, [2005] 2 WLR 904, [2005] 1 All ER 871, [2005] BPIR 544, (2004-05) 7 ITELR 531, (2005) 102(9) LSG 29, (2005) 149 SJLB 112, PC (CI).............................. 2.48 Alsop Wilkinson v Neary [1996] 1 WLR 1220, [1995] 1 All ER 431................ 14.22 American Thread Co v Joyce (1913) 6 TC 163.................................................. 5.82 Ames v HMRC [2018] UKUT 190 (TCC), [2018] STC 1704, [2018] 6 WLUK 495, [2018] BTC 518, [2018] STI 1420..................................................... 1.157 Amir Khan v Financial Services Authority (FS/2013/002), [2014] 4 WLUK 259.............................................................................................................. 19.40 Anders Utkilens Rederi A/S v O/Y Lovisa Stevedoring Co A/B & Keller Bryant Transport Co (The Golfstraum) [1985] 2 All ER 669, [1985] STC 301..... 8.3 Anderson v IRC [1998] STC (SCD) 43.............................................................. 5.50 Anderson v Patten [1948] 2 DLR 202................................................................ 3.6 Anderton v Lamb [1981] STC 43, 55 TC 1, [1980] TR 393, (1980) 124 SJ 884.............................................................................................................. 6.122 Ang v Parrish (Inspector of Taxes) [1980] 1 WLR 940, [1980] 2 All ER 790, [1980] STC 341, 53 TC 304, [1980] TR 105, (1980) 124 SJ 278.............. 6.194 Anglo Swedish Society v IRC, 16 TC 34........................................................... 11.15 Anglo-Persian Oil Co v Dale (1931) 16 TC 253................................................ 16.24 Anker-Petersen v Anker-Petersen (1991) 16 LS Gaz R32.................................. 3.60

lxiv

Table of Cases Annesley, Re; sub nom Davidson v Annesley [1926] Ch 692............................ 5.34 Aon Trust Corp Ltd v KPMG [2005] EWCA Civ 1004, [2006] 1 WLR 97, [2006] 1 All ER 238, [2006] ICR 18, [2005] OPLR 189, [2005] Pens LR 301; reversing in part [2004] EWHC 1844 (Ch), [2005] 1 WLR 995, [2005] 3 All ER 587, [2004] OPLR 373, [2004] Pens LR 337, (2004) 101(36) LSG 34, (2004) 154 NLJ 1326...................................................... 18.53 Application to Vary the Undertakings of A, Re [2005] STC (SCD) 103, [2005] WTLR 1, [2004] STI 2502, (2004) 148 SJLB 1432.............................12.52, 12.66 Aramyo Frincke Mines Ltd v Eccott (1925) 9 TC 445....................................... 5.82 Archer-Shee v Baker (1927) 11 TC 749................................. 1.44; 5.101, 5.104, 5.106, 7.18, 8.9; App 6 Archer-Shee v Baker (No 2) (1928) 15 TC 1...................................................... 5.104 Argyll and Bute Council v Gordon [2017] SAC (Civ) 6, 2017 SLT (Sh Ct) 53, [2017] 2 WLUK 253, 2017 GWD 6-87...................................................... 1.146 Arkwright (Williams Personal Representative) v IRC; sub nom IRC v Arkwright [2004] EWHC 1720 (Ch), [2005] 1 WLR 1411, [2004] STC 1323, [2005] RVR 266, 76 TC 788, [2004] BTC 8082, [2004] WTLR 855, [2004] STI 1724, (2004) 101(31) LSG 26..................................................................... 15.23 Armitage v Nurse [1998] Ch 241, [1997] 3 WLR 1046, [1997] 2 All ER 705, [1997] Pens LR 51, (1997) 74 P & CR D13................................... 2.20, 4.47, 4.66 Ashby, ex p Wreford, Re [1892] 1 QB 872......................................................... 13.1 Aspden (Inspector of Taxes) v Hildesley [1982] 1 WLR 264, [1982] 2 All ER 53, [1982] STC 206, 55 TC 609, [1981] TR 479........................................ 8.6 Astor’s Settlement Trusts, Re; sub nom Astor v Scholfield [1952] Ch 534, [1952] 1 All ER 1067, [1952] 1 TLR 1003, (1952) 96 SJ 246................ 1.20, 12.2 Atherton (Inspector of Taxes) v British Insulated & Helsby Cables Ltd [1926] AC 205, 10 TC 155...............................................................................16.25, 18.55 Atherton v HMRC [2019] UKUT 41 (TCC), [2019] STC 575, [2019] 2 WLUK 146.............................................................................................................. 1.161 Atkinson, Re; sub nom Barber’s Co v Grose-Smith [1904] 2 Ch 160................ 4.79 Attenborough & Son v Solomon; sub nom Solomon v George Attenborough & Son [1913] AC 76....................................................................................... 1.50 Attorney General of Hong Kong v Reid [1994] 1 AC 324, [1993] 3 WLR 1143, [1994] 1 All ER 1, (1993) 143 NLJ 1569, (1993) 137 SJLB 251, [1993] NPC 144, PC (NZ)...................................................................................... 1.46 Attorney General of the Cayman Islands v Wahr-Hansen [2001] 1 AC 75, [2000] 3 WLR 869, [2000] 3 All ER 642, [2001] WTLR 345, (2000-01) 3 ITELR 72, PC (CI)...................................................................................... 12.14 Attorney General v Alexander (1874) LR 10 Exch 20....................................... 5.82 Attorney General v Farrell [1931] 1 KB 81........................................................ 6.302 Attorney General v Heywood (1887) LR 19 QBD 326...................................... 6.302 Attorney General v Jacobs-Smith [1895] 2 QB 341........................................... 3.15 Attorney General v Power; sub nom Attorney General v Paver [1906] 2 IR 272.............................................................................................................. 7.21 Attorney General v Wilson (1840) Cr & Ph 1.................................................... 4.60 Attorney General v Worrall [1895] 1 QB 99...................................................... 6.301 Attorney General’s Reference (No  1 of 1985), Re [1986] QB 491, [1986] 2 WLR 733, [1986] 2 All ER 219, (1986) 83 Cr App R 70, (1986) 150 JP 242, [1986] Crim LR 476, (1986) 150 JPN 287, (1986) 83 LSG 1226, (1986) 130 SJ 299....................................................................................... 1.46

lxv

Table of Cases Australian Mutual Provident Society v IRC [1947] AC 605, [1947] 1 All ER 600, 41 R & IT 67, 28 TC 388, [1947] LJR 690, 177 LT 9........................ 5.29 Autoclenz Ltd v Belcher [2009] EWCA Civ 1046, [2009] 10 WLUK 315, [2010] IRLR 70........................................................................................... 1.97 Autoclenz Ltd v Belcher [2011] UKSC 41......................................................... 1.97 Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC), [2016] 4 WLUK 242, [2016] STI 1442.................................................................. 19.40 Avalon Trust, Re [2007] WTLR 1693, (2006-07) 9 ITELR 450 (Royal Ct (Jer))............................................................................................................ 4.53 Aykroyd v IRC [1942] 2 All ER 665, (1942) 24 TC 515.................................... 10.30 B B Trust, Re [2007] WTLR 1361, (2006-07) 9 ITELR 783 (Royal Ct (Jer))....... 14.18 B v B (Ancillary Relief) [2009] EWHC 3422 (Fam), [2009] 6 WLUK 549, [2010] 2 FLR 887, [2010] WTLR 1689; [2010] Fam Law 903..............1.34, 1.162 BS West v Lazard Brothers & Co (Jersey) Ltd (No 2) [1993] JLR 165............. 1.36 Baden v Societe Generale [1998] 2 BCLC 97.................................................... 14.19 Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, [1992] 4 All ER 161...... 3.40 Bagum v Hafiz [2015] EWCA Civ 801, [2016] Ch. 241, [2015] 3 WLR 1495, [2015] 7 WLUK 731, [2015] CP Rep 44, [2016] 2 FLR 337, [2015] WTLR 1303, [2015] Fam Law 1192, [2015] 2 P & CR DG21............ 1.112, 2.15, 2.18, 3.29 Bailhache Labesse Trustees Ltd v R & C Comrs [2008] STC (SCD) 869, [20008] WTLR 967, [2008] STI 1680........................................................ 11.4 Baker v Baker [2008] EWHC 977 (Ch), [2008] 2 FLR 1956, [2008] WTLR 1317, [2008] Fam Law 625......................................................................... 3.6 Baker, Re; sub nom Baker v Public Trustee [1924] 2 Ch 271............................ 4.78 Bambridge v IRC [1955] 1 WLR 1329, [1955] 3 All ER 812, 48 R & IT 814, 36 TC 313, (1955) 34 ATC 181, [1955] TR 295, (1955) 99 SJ 910........... 10.33, 10.39 Bank of Nova Scotia Trust Co (Bahamas) Ltd v Nelia Racart de Barletta (unreported, 1985)....................................................................................... 3.27 Banks v HMRC [2018] UKFTT 617 (TC), [2018] 10 WLUK 512, [2019] SFTD 304, [2019] STI 214......................................................................... 12.47 Bannister v Bannister [1948] 2 All ER 133, [1948] WN 261, (1948) 92 SJ 377......................................................................................................2.15, 3.13 Baptist Union of Ireland (Northern) Corpn Ltd v IRC (1945) 26 TC 335......... 11.8 Barber v Guardian Royal Exchange Assurance Group (C-262/88) [1991] 1 QB 344, [1991] 2 WLR 72, [1990] 2 All ER 660, [1990] ECR I-1889, [1990] 2 CMLR 513, [1990] ICR 616, [1990] IRLR 240, [1990] 1 PLR 103, (1990) 140 NLJ 925, ECJ....................................................................................... 6.323 Barclay v Smith [2016] EWHC 210 (Ch), [2016] 2 WLUK 274, [2016] WTLR 583, [2016] 2 P & CR DG6........................................................................ 3.65 Barclays Bank Ltd v Quistclose Investments Ltd; sub nom Quistclose Investments Ltd v Rolls Razor Ltd (In Voluntary Liquidation) [1970] AC 567, [1968] 3 WLR 1097, [1968] 3 All ER 651, (1968) 112 SJ 903........1.21, 3.35 Barclays Bank Plc v Eustice [1995] 1 WLR 1238, [1995] 4 All ER 511, [1995] BCC 978, [1995] 2 BCLC 630, (1995) 145 NLJ 1503, (1995) 70 P & CR D29.............................................................................................................. 14.16

lxvi

Table of Cases Barclays Bank Plc v R & C Comrs; sub nom R & C Comrs v Barclays Bank Plc [2007] EWCA Civ 442, [2008] STC 476, 79 TC 18, [2007] BTC 338, [2007] STI 1436, (2007) 151 SJLB 675..................................................... 18.36 Barclays Bank Trust Co Ltd v IRC [1998] STC (SCD) 125.............................. 6.250 Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2004] UKHL 51, [2005] 1 AC 684, [2004] 3 WLR 1383, [2005] 1 All ER 97, [2005] STC 1, [2004] 11 WLUK 686, 76 TC 446, [2004] BTC 414, 7 ITL Rep 383, [2004] STI 2435, (2004) 154 NLJ 1830, (2004) 148 SJLB 1403.................................................................................... 1.132, 1.137 Barclays Private Bank & Trust (Cayman) Ltd v Chamberlain [2007] WTLR 1697, (2006-07) 9 ITELR 302, Grand Ct (CI)............................................ 3.82 Barclays Wealth Trustees (Jersey) Ltd v HMRC [2017] EWCA Civ 1512, [2018] 1 WLR 2312, [2017] STC 2465, [2017] 10 WLUK 331, [2017] BTC 27, [2017] WTLR 917........................................................................ 7.41 Barlow Clowes International Ltd v Henwood see Henwood v Barlow Clowes International Ltd (in liquidation) Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476, [2006] 1 All ER 333, [2006] 1 All ER (Comm) 478, [2006] 1 Lloyd’s Rep 225; [2005] WTLR 1453, (2005-06) 8 ITELR 347, (2005) 102(44) LSG 32, [2006] 1 P & CR DG16, PC (IoM).................................................................................................. 1.21, 14.2 Barlow’s Will Trusts, Re; sub nom Royal Exchange Assurance v National Council of Social Service [1979] 1 WLR 278, [1979] 1 All ER 296, (1978) 122 SJ 646................................................................................................... 1.39 Barralet (South Place Ethical Society Trustees) v A-G see South Place Ethical Society, Re Barret v McCormack (2001-02) 4 ITELR 1 (Van)............................................. 3.41 Barrett v Hartley (1866) LR 2 Eq 789................................................................ 4.42 Barrett v R & C Comrs [2008] STC (SCD) 268, [2007] STI 2416................. 5.19, 5.24 Barrs Trustees v IRC (1943) 25 TC 72............................................................... 6.189 Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515, [1980] 2 WLR 430, [1980] 2 All ER 92, (1980) 124 SJ 221................................ 4.57, 4.58, 4.100 Basel Trust Corp (Channel Islands) Ltd v Anstalt; sub nom Bird Charitable Trust, Re [2008] WTLR 1505, (2008-09) 11 ITELR 157 (Royal Ct (Jer))........... 3.73 Basham (Deceased), Re [1986] 1 WLR 1498, [1987] 1 All ER 405, [1987] 2 FLR 264, [1987] Fam Law 310, (1987) 84 LSG 112, (1986) 130 SJ 986............ 3.43 Bassett v Nosworthy (1673) Cas temp Finch 102........................................... 3.39, 3.40 Batey v Wakefield [1982] 1 All ER 61, [1981] STC 521, 55 TC 550, [1981] TR 251, (1981) 125 SJ 498............................................................................... 6.126 Baudains v Heaume (1886) 211 Ex 379............................................................. 3.71 Baxendale v Murphy [1924] 2 KB 494, (1924) 9 TC 76.................................... 6.76 Bayard Brown v Burt (1911) 5 TC 667..............................................................  5.19 Beagles v HMRC [2018] UKUT 380 (TCC), [2019] STC 54, [2018] 11 WLUK 317.............................................................................................................. 1.154 Beaney (Deceased), Re; sub nom Beaney v Beaney [1978] 1 WLR 770, [1978] 2 All ER 595, (1977) 121 SJ 832................................................................ 3.2 Beatty (Deceased), Re; sub nom Hinves v Brooke [1990] 1 WLR 1503, [1990] 3 All ER 844.................................................................................7.4, 15.15, App 7 Beatty v IRC (1940) 23 TC 574.......................................................................... 10.29 Beaumont, Re; sub nom Beaumont v Ewbank [1902] 1 Ch 889........................ 3.21

lxvii

Table of Cases Beckman v IRC [2000] STC (SCD) 59, [2003] WTLR 773, [2000] STI 162.... 6.250 Beddoe, Re; sub nom Downes v Cottam [1893] 1 Ch 547..................... 2.3, 4.39, 14.22 Bedford Estates Sieff v Fox see Sieff v Fox Begg-McBrearty (Inspector of Taxes) v Stilwell [1996] 1 WLR 951, [1996] 4 All ER 205, [1996] STC 413, 68 TC 426, (1996) 93(15) LSG 31, (1996) 140 SJLB 110....................................................................................... 6.117, 6.177 Bell Talbot v Hope-Scott (1858) 4 K & J 139.................................................... 4.62 Bell v Kennedy (1866-69) LR 1 Sc 307.......................................................... 5.34, 5.38 Bell’s Indenture, Re; sub nom Bell v Hickley [1980] 1 WLR 1217, [1980] 3 All ER 425, (1979) 123 SJ 322......................................................................... 4.58 Beloved Wilke’s Charity, Re (1855) 3 Mac & G 444......................................... 3.27 Beneficiary) v IRC [1999] STC (SCD) 134, 1 ITL Rep 705.............................. 10.52 Benham’s Will Trusts, Re; sub nom Lockhart v Harker [1995] STC 210, [1995] STI 186........................................................................................................ 15.22 Benjamin, Re; sub nom Neville v Benjamin [1902] 1 Ch 723........................... 4.56 Bennet v Bennet (1878-79) LR 10 Ch D 474..................................................... 3.36 Bennett v Colley (1832) 5 Sims 182................................................................... 4.62 Bentleys Stokes & Lowless v Beeson (Inspector of Taxes) [1952] 2 All ER 82, [1952] 1 TLR 1529, [1952] 5 WLUK 71, 45 R & IT 461, 33 TC 491, (1952) 31 ATC 229, [1952] TR 239, [1952] WN 280, (1952) 96 SJ 345, CA....................................................................................................... 1.107 Berkeley (Deceased), Re; sub nom Inglis v Countess Berkeley [1968] Ch 744, [1968] 3 WLR 253, [1968] 3 All ER 364, (1968) 112 SJ 601.................... 7.2 Berry v Gaukroger [1903] 2 Ch 116................................................................... 6.279 Berry v Geen; sub nom Blake, Re [1938] AC 575.............................................. 4.51 Berry v Warnett (Inspector of Taxes) [1982] 1 WLR 698, [1982] 2 All ER 630, [1982] STC 396, 55 TC 92, [1982] BTC 239, (1981) 125 SJ 345.............. 6.88 Berry, Re; sub nom Lloyds Bank v Berry [1962] Ch 97, [1961] 2 WLR 329, [1961] 1 All ER 529, (1961) 105 SJ 256.................................................... 4.78 Bhander v Barclays Bank 1 OFLR 497.............................................................. 4.53 Bheekhun v Williams; Bheekhun v Stafford [1999] 2 FLR 229, [1999] Fam Law 379...................................................................................................... 5.42 Biddulph, Re (1869) 4 Ch App 280.................................................................... 4.60 Billingham (Inspector of Taxes) v Cooper; Edwards (Inspector of Taxes) v Fisher; Fisher v Edwards (Inspector of Taxes) [2001] EWCA Civ 1041, [2001] STC 1177, 74 TC 139, [2001] BTC 282, [2001] STI 1017, (2001) 98(31) LSG 37; affirming [2000] STC 122, [2000] BTC 28, [2000] STI 100, (2000) 97(6) LSG 36, (2000) 144 SJLB 85.................................  6.71, 10.40, 16.19 Birch v Treasury Solicitor [1951] Ch 298, [1950] 2 All ER 1198, [1951] 1 TLR 225, (1950) 94 SJ 838................................................................................. 3.21 Bird, Re; sub nom Evans, Re; Dodd v Evans [1901] 1 Ch 916.......................... 4.79 Bishopsgate Investment Management Ltd (in liquidation) v Homan [1995] Ch 211, [1994] 3 WLR 1270, [1995] 1 All ER 347, [1994] BCC 868, (1994) 91(36) LSG 37, (1994) 138 SJLB 176........................................................ 4.71 Bishopsgate Investment Management Ltd (in liquidation) v Maxwell (No 1) [1994] 1 All ER 261, [1993] BCC 120, [1993] BCLC 1282...................... 4.58 Blackwell v Blackwell; sub nom Blackwell, Re [1929] AC 318, 67 ALR 336.. 3.23 Blair v Vallely & Blair [2000] WTLR 615, HC (NZ)......................................... 3.27 Blake v London Corpn (1887) 2 TC 209............................................................ 11.6

lxviii

Table of Cases Blathwayt v Baron Cawley [1976] AC 397, [1975] 3 WLR 684, [1975] 3 All ER 625, (1975) 119 SJ 795......................................................................... 3.58 Blausten v IRC [1972] Ch 256, [1972] 2 WLR 376, [1972] 1 All ER 41, 47 TC 542, [1971] TR 363, (1971) 115 SJ 871..................................................... 6.191 Boardman v Phipps; sub nom Phipps v Boardman [1967] 2 AC 46, [1966] 3 WLR 1009, [1966] 3 All ER 721, (1966) 110 SJ 853..................... 3.39, 4.42, 4.71 Bonar Law Memorial Trust v IRC, 17 TC 508................................................... 11.15 Bond (Inspector of Taxes) v Pickford [1983] STC 517..................................6.99, 6.100 Bouche v Sproule (1887) 12 App Cas 385.............................................. 4.73, 4.81, 4.85 Bourne v Keane; sub nom Egan, Re; Keane v Hoare [1919] AC 815................. 12.5 Bowden, Re; sub nom: Hulbert v Bowden [1936] Ch 71................................... 3.14 Bowman v Fels [2005] EWCA Civ 226, [2005] 1 WLR 3083, [2005] 4 All ER 609, [2005] 2 Cr App R 19, [2005] 2 CMLR 23, [2005] 2 FLR 247, [2005] WTLR 481, [2005] Fam Law 546, (2005) 102(18) LSG 24, (2005) 155 NLJ 413, (2005) 149 SJLB 357, [2005] NPC 36....................................... 4.3, 4.10 Bradfield v Swanton [1931] IR 446.................................................................... 5.40 Bradford v Young (1885) LR 29 Ch D 617......................................................... 5.40 Brain Disorders Research Ltd Partnership v HMRC [2017] UKUT 176 (TCC), [2017] STC 1170, [2017] 5 WLUK 154, [2017] BTC 516......................... 1.136 Brain Disorders Research Ltd Partnership v HMRC [2018] EWCA Civ 2348, [2018] STC 2382, [2018] 10 WLUK 452................................................... 1.147 Brander v HMRC [2009] UKFTT 101 (TC), [2009] 5 WLUK 301, [2009] SFTD 374, [2009] WTLR 1117, [2009] STI 2028 .................................... 6.250 Brandon v Robinson (1811) 18 Ves 429............................................................. 13.2 Bray (Inspector of Taxes) v Best [1989] 1 WLR 167, [1989] 1 All ER 969, [1989] STC 159, 62 TC 705, (1989) 86(17) LSG 43, (1989) 139 NLJ 753, (1989) 133 SJ 323....................................................................................... 16.57 Bray v Ford [1896] AC 44.................................................................................. 4.34 Breadner v Granville-Grossman [2001] Ch 523, [2001] 2 WLR 593, [2000] 4 All ER 705, [2000] WTLR 829, (1999-2000) 2 ITELR 812...................... 3.75 Breakspear v Ackland [2008] EWHC 220 (Ch), [2009] Ch 32, [2008] 3 WLR 698, [2008] 2 All ER (Comm) 62, [2008] WTLR 777, (2007-08) 10 ITELR 852, (2008) 105(9) LSG 29............................................................ 3.27 Bricom Holdings Ltd v IRC 1997] STC 1179, 70 TC 272, [1997] BTC 471.... 10.12 Bridge Trust Co Ltd v Attorney General of the Cayman Islands (2001-02) 4 ITELR 369, Grand Court (CI).................................................................... 4.39 British Legion, Peterhead Branch v IRC, 46 R & IT 617, 35 TC 509, (1953) 32 ATC 302, [1953] TR 305............................................................................ 11.54 British Transport Commission v Gourley [1956] AC 185, [1956] 2 WLR 41, [1955] 3 All ER 796, [1955] 2 Lloyd’s Rep 475, 49 R & IT 11, (1955) 34 ATC 305, [1955] TR 303, (1956) 100 SJ 12............................................... 4.58 Brockbank, Re; sub nom Ward v Bates [1948] Ch 206, [1948] 1 All ER 287, [1948] LJR 952, (1948) 92 SJ 141.............................................................. 3.61 Brodie’s Trustees v IRC (1933) 17 TC 432..................................... 6.68, 7.2, 7.16, 7.34 Brokaw v Seatrain UK Ltd; sub nom United States v Brokaw [1971] 2 QB 476, [1971] 2 WLR 791, [1971] 2 All ER 98, [1971] 1 Lloyd’s Rep 337, [1971] TR 71, (1971) 115 SJ 172........................................................................... 4.95 Brown v Burdett (Declaration of Intestacy) (1882) LR 21 Ch D 667................ 12.6 Browne v Browne [1989 1 All ER 112............................................................... 4.43 Brown’s Executors v IRC [1996] STC (SCD) 277............................................. 6.250

lxix

Table of Cases Brumby (Inspector of Taxes) v Milner; sub nom Day v Quick [1976] 1 WLR 1096, [1976] 3 All ER 636, [1976] STC 534, 51 TC 583, [1976] TR 249, (1976) 120 SJ 754....................................................................................... 16.20 Brunel v Brunel (1871) LR 12 Eq 298................................................................ 5.42 Buck v R & C Comrs [2009] STC (SCD) 6, [2009] WTLR 215........................ 6.7 Buckinghamshire Constabulary Widows & Orphans Fund Friendly Society (No 2), Re; sub nom Thompson v Holdsworth [1979] 1 WLR 936, [1979] 1 All ER 623, (1978) 122 SJ 557................................................................ 1.69 Buffrey v Buffrey (2006-07) 9 ITELR 455, Sup Ct (NSW)............................... 1.21 Bull v Bull [1955] 1 QB 234, [1955] 2 WLR 78, [1955] 1 All ER 253, (1955) 99 SJ 60........................................................................................... 2.15, 3.31, 3.34 Bullock v Unit Construction Co [1960] AC 351, [1959] 3 WLR 1022, [1959] 3 All ER 831, 52 R & IT 828, 38 TC 712, (1959) 38 ATC 351, [1959] TR 345, (1959) 103 SJ 1027............................................................................. 5.80 Bulmer v IRC; Kennedy v IRC; Oates v IRC; Macaulay v IRC [1967] Ch 145, [1966] 3 WLR 672, [1966] 3 All ER 801. 44 TC 1, (1966) 45 ATC 293, [1966] TR 257, (1966) 110 SJ 644............................................................. 6.3 Bunn v Markham (1816) 7 Taunt 224................................................................. 3.21 Burdick v Garrick (1869-70) LR 5 Ch App 233................................................. 1.46 Burkinyoung v IRC [1995] STC (SCD) 29........................................................ 6.250 Burns v R & C Comrs [2009] STC (SCD) 165, [2009] STI 262........................ 10.52 Burns v Steel; sub nom Kirkpatrick (Deceased), Re (2005-06) 8 ITELR 597, HC (NZ)...................................................................................................... 3.61 Burrell v Burrell [2005] EWHC 245 (Ch), [2005] STC 569, [2005] Pens LR 289, [2005] BTC 8011, [2005] WTLR 313, (2004-05) 7 ITELR 622........ 3.75 Burroughs-Fowler, Re; sub nom Burrough-Fowlers Trustee v BurroughsFowler [1916] 2 Ch 251.............................................................................. 14.4 Burston v IRC (No 1) 28 TC 123........................................................................ 6.3 Burton, Re [1994] FCA 557 (Australia)............................................................. 4.23 Buschan v Rogers Communications Inc (2006) 9 ITELR 73............................. 3.61 Buswell v IRC [1974] 1 WLR 1631, [1974] 2 All ER 520, [1974] STC 266, 49 TC 334, [1974] TR 97, (1974) 118 SJ 864................................................. 5.50 Butler (Inspector of Taxes) v Wildin [1989] STC 22, 62 TC 666, [1988] BTC 475, (1988) 85(46) LSG 43......................................................................... 6.5 Butlin’s Settlement Trusts (Rectification), Re; sub nom Butlin v Butlin (Rectification) [1976] Ch 251, [1976] 2 WLR 547, [1976] 2 All ER 483, (1975) 119 SJ 794.....................................................................................3.79, 4.43 Butterworth, ex p Russell, Re (1881-82) LR 19 Ch D 588................. 2.44; 14.14, 14.19 Buzzoni v HMRC [2013] EWCA Civ 1684, [2014] 1 WLR 3040, [2013] 12 WLUK 730, [2014] 1 EGLR 181, [2014] BTC 1, [2014] WTLR 421....... 1.106 C C & E Comrs v Glassborow (t/a Bertram & Co) [1975] QB 465, [1974] 2 WLR 851, [1974] 1 All ER 1041, [1974] STC 142, [1974] TR 161, (1974) 118 SJ 170.......................................................................................................... 16.2 CI Law Trustees Ltd v Minwalla [2006] WTLR 807, (2006-07) 9 ITELR 601 (Royal Ct (Jer)).........................................................................................1.42, 3.66 CL Nye Ltd, Re [1971] Ch 442, [1970] 3 WLR 158, [1970] 3 All ER 1061, (1970) 114 SJ 413; reversing 1969] 2 WLR 1380, [1969] 2 All ER 587, (1969) 113 SJ 466....................................................................................... 3.64

lxx

Table of Cases Caffrey v Darby (1801) 6 Ves 488...................................................................... 4.58 Calcutta Jute Mills Co Ltd v Nicholson (1876) 1 TC 83.................................... 5.81 Camille & Henry Dreyfus Foundation Inc v IRC [1956] AC 39, 1955] 3 WLR 451, [1955] 3 All ER 97,1955 SLT 335,48 R & IT 551, 36 TC 126, (1955) 34 ATC 208, [1955] TR 229, (1955) 99 SJ 560......................................5.104, 11.4 Campbell Connelly & Co Ltd v Barnett (Inspector of Taxes) [1994] STC 50, 66 TC 380, [1994] BTC 12, [1993] STI 1426, [1993] EG 197 (CS)............... 6.122 Canadian Aero Services v O’Malley (1973) 40 DLR (3d) 371.......................... 3.40 Cannon v Hartley [1949] Ch 213, [1949] 1 All ER 50, 65 TLR 63, [1949] LJR 370, (1948) 92 SJ 719................................................................................. 3.20 Cannon v HMRC [2017] UKFTT 859 (TC), [2017] 12 WLUK 48, [2018] SFTD 667.................................................................................................... 19.40 Carafe Trust, Re; sub nom Guardian Trust Co Ltd v Louveaux [2006] WTLR 1329, (2005-06) 8 ITELR 29 (Royal Ct (Jer))............................................ 4.40 Cardinal Vaughan Memorial School Trustees v Ryall (1920) 7 TC 611............ 11.6 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256........................................... 1.48 Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (in liquidation) [1985] Ch 207, [1984] 3 WLR 1016, [1985] 1 All ER 155, (1984) 1 BCC 99210, [1985] PCC 222, (1984) 81 LSG 2375, (1984) 128 SJ 614............ 1.21 Cartier, Re [1952] SASR 280............................................................................. 5.34 Carver v Duncan (Inspector of Taxes); Bosanquet v Allen (Inspector of Taxes) [1985] AC 1082, [1985] 2 WLR 1010, [1985] 2 All ER 645, [1985] STC 356, 59 TC 125, (1985) 129 SJ 381......................................................... 6.76, 6.78 Carvill v IRC (Preliminary Rulings) [2002] EWHC 1488 (Ch), [2002] STC 1167, [2002] BTC 329, [2002] STI 1067................................................... 10.26 Carvill v IRC (Remit Principles) [1996] STC 126, 70 TC 126.......................... 10.52 Carvill v IRC (Transfer Purpose) [2000] STC (SCD) 143, [2000] STI 584....... 10.52 Caus, Re; sub nom Lindeboom v Camille [1934] Ch 162.................................. 12.5 Cave v MacKenzie (1877) 46 LJ Ch 564............................................................ 1.46 Centrepoint Community Growth Trust, Re (2000-01) 3 ITELR 269, HC (NZ).... 11.9 Centro di Musicologia Walter Stauffer v Finanzamt Munchen fur Korperschaften (C-386/04) [2008] STC 1439, [2006] ECR I-8203, [2009] 2 CMLR 31, [2009] BTC 651, [2006] STI 2203, ECJ..................................................... 11.4 Cesena Sulphur Co Ltd v Nicholson (1876) 1 TC 83......................................... 5.81 Chaine-Nickson v Bank of Ireland [1976] IR 393, HC (Irl).............................1.36, 4.53 Challoner Club Ltd (in liquidation), Re (The Times, 4 November 1997)........... 1.34 Charlton (Dr M) v R & C Comrs [2012] UKUT 770 (TCC), [2013] STI 259, [2013] BTC 1634, [2013] STC 866............................................................ 19.42 Chamberlain v IRC (1943) 25 TC 317............................................................ 6.5, 6.189 Chamberlain, Re (1976) 126 NLJ 104................................................................ 3.65 Chance’s Will Trusts, Re; sub nom Chance, Re; Westminster Bank Ltd v Chance [1962] Ch 593, [1962] 1 WLR 409, [1962] 1 All ER 942, 93 ALR2d 190, (1962) 106 SJ 285....................................................................................... 4.79 Chaplin v Boys [1971] AC 356, [1969] 3 WLR 322, [1969] 2 All ER 1085, [1969] 2 Lloyd’s Rep 487, (1969) 113 SJ 608............................................ 2.10 Chapman’s Settlement Trusts, Re; sub nom Blackwell v Blackwell; Marquess of Downshire v Royal Bank of Scotland; Chapman v Chapman (No 1); Blackwell’s Settlement Trusts, Re; Downshire Settled Estates, Re [1954] AC 429, [1954] 2 WLR 723, [1954] 1 All ER 798, 47 R & IT 310, (1954) 33 ATC 84, [1954] TR 93, (1954) 98 SJ 246.............................................. 3.60

lxxi

Table of Cases Charkham v IRC Lands Tribunal 14 November 1996, Tolley’s Tax Cases 2001 72.58........................................................................................................... 6.309 Charlton v RCC. See HMRC v Charlton Charman v Charman [2005] EWCA Civ 1606, [2006] 1 WLR 1053, [2006] 2 FLR 422, [2006] WTLR 1, (2006-07) 9 ITELR 43, [2006] Fam Law 516, (2006) 103(5) LSG 28................................................................................. 1.11 Charman v Charman [2007] EWCA Civ 503, [2007] 1 FLR 1246, [2007] 2 FCR 217, [2007] WTLR 1151, (2006-07) 9 ITELR 913, [2007] Fam Law 682, (2007) 157 NLJ 814, (2007) 151 SJLB 710....................................... 1.11 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105, [1980] 2 WLR 202, [1979] 3 All ER 1025, (1980) 124 SJ 99.................... 1.46 Chen Yeow Kelvin v Goh Chin Peng (2008-09) 11 ITELR 895......................... 15.4 Cheung v Worldcup Investments Inc (2008-09) 11 ITELR 449 (HK)................ 1.21 Chick v Stamp Duties Commissioner [1958] AC 435, [1958] 3 WLR 93, [1958] 2 All ER 623, (1958) 37 ATC 250, (1958) 102 SJ 488, PC (Aus).............. 6.301 Childers v Childers (1857) 1 De G & J 482........................................................ 3.9 Chillingworth v Chambers [1896] 1 Ch 685....................................................... 4.69 Chinn v Hanrieder, 2009 BCSC 635, (2008-09) 11 ITELR 1009, Sup Ct (BC).3.22 Chinn v Hochstrasser (Inspector of Taxes); sub nom Chinn v Collins (Inspector of Taxes) [1981] AC 533, [1981] 2 WLR 14, [1981] 1 All ER 189, [1981] STC 1, 54 TC 311, [1980] TR 467, (1981) 125 SJ 49............................3.11, 6.173 Chohan v Saggar [1994] BCC 134, [1994] 1 BCLC 706, [1993] EG 194 (CS), [1993] NPC 154.......................................................................................... 14.14 Cholmondeley v IRC [1986] STC 384, (1986) 83 LSG 2243............................ 13.5 Chubb’s Trustee (1941) 47 TC 353..................................................................... 6.108 Cicutti v Suffok CC [1981] 1 WLR 558, [1980] 3 All ER 689, [1980] ECC 424, 79 LGR 231, (1981) 125 SJ 134................................................................. 5.27 Circle Trust, HSBC International Trustee Ltd v Wong see HSBC International Trustee Ltd v Wong Kit Wan City of London Building Society v Flegg [1988] AC 54, [1987] 2 WLR 1266, [1987] 3 All ER 435, [1988] 1 FLR 98, (1987) 19 HLR 484, (1987) 54 P & CR 337, [1988] Fam Law 17, (1987) 84 LSG 1966, (1987) 137 NLJ 475, (1987) 131 SJ 806....................................................................................... 2.16 Civil Engineer v IRC [2002] STC (SCD) 72, [2002] WTLR 491, [2002] STI 45....................................................................................................11.4, 10.131 Clark v IRC (1947) 28 TC 55............................................................................. 6.189 Clarke (Inspector of Taxes) v Mayo [1994] STC 570, 66 TC 728, [1994] STI 680.............................................................................................................. 6.154 Clarkson v Barclays Private Bank & Trust (Isle of Man) Ltd [2007] WTLR 1703, CLD (IoM)........................................................................................ 3.80 Clayton v Ramsden; sub nom Samuel (Deceased), Re; Jacobs v Ramsden [1943] AC 320, [1943] 1 All ER 16............................................................ 3.58 Clayton’s Case; sub nom Devaynes v Noble [1814-23] All ER Rep 1, 35 ER 781, (1816) 1 Mer 572................................................................................ 4.70 Cleever, Re [1981] 1 WLR 939........................................................................... 3.42 Clegg v Edmondson (1857) 8 De GM & G 787................................................. 3.40 Clinch v IRC [1974] QB 76, [1973] 2 WLR 862, [1973] 1 All ER 977, [1973] STC 155, 49 TC 52, [1973] TR 157, (1973) 117 SJ 342............................ 10.55 Clitheroe’s Settlement Trusts, Re [1959] 1 WLR 1159, [1959] 3 All ER 789, (1959) 103 SJ 961....................................................................................... 3.65

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Table of Cases Clore (Deceased) (No 2), Re; sub nom Official Solicitor v Clore [1984] STC 609...................................................................................................... 5.50 Clore (Deceased) (No 3), Re see IRC v Stype Trustees (Jersey) Ltd Clore’s Settlement Trusts, Re; sub nom Sainer v Clore [1966] 1 WLR 955, [1966] 2 All ER 272, 21 ALR 3d 795, (1966) 110 SJ 252.......................... 9.24 Cochrane v IRC [1974] STC 335........................................................................ 8.3 Cole (A Bankrupt), Re [1964] Ch 175, [1963] 3 WLR 621, [1963] 3 All ER 433, [1963] 7 WLUK 136 (1963) 107 SJ 664, CA.................................1.113, 3.16 Collier v Rivaz (1841) 2 Curt 855...................................................................... 5.34 Collyer v Isaacs (1881-82) LR 19 Ch D 342...................................................... 3.15 Colman v Governors of the Rotunda Hospital, Dublin, 7 TC 517...................... 11.54 Combe, Re; sub nom Combe v Combe [1925] Ch 210....................................... 1.53 Comiskey v Bowring Hanbury; sub nom Hanbury, Re [1905] AC 84..............1.33, 3.26 Commissioner of Stamp Duties (NSW) v Permanent Trustee Co of New South Wales [1956] AC 512, [1956] 3 WLR 152, [1956] 2 All ER 512, 49 R & IT 416, [1956] TR 209, 91 CLR 1, (1956) 100 SJ 431, PC (Aus).............. 6.301 Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694, [1964] 3 WLR 963, [1964] 3 All ER 692, (1964) 43 ATC 325, [1964] TR 351, (1964) 108 SJ 820, PC (Aus).......................................................... 1.50, 3.11, 6.244 Compass Trustees Ltd v McBarnett [2003] WTLR 461, (2002-03) 5 ITELR 44 (Royal Ct (Jer))........................................................................................... 3.66 Congreve v Home Office [1976] QB 629, [1976] 2 WLR 291, [1976] 1 All ER 697, (1975) 119 SJ 847............................................................................... 6.323 Congreve v IRC [1948] 1 All ER 948, (1948) 41 R & IT 319, 30 TC 163, [1948] WN 197, [1948] LJR 1229, (1948) 92 SJ 407...........................10.31, 10.39 Copeman v Coleman (1939) 22 TC 594............................................................. 6.6 Corbally-Stourton v R & C Comrs [2008] STC (SCD) 907............................... 19.42 Corbett’s Executrices v IRC (1943) 25 TC 305............................................10.30, 10.39 Corrado v HMRC [2019] UKFTT 275 (TC), [2019] 4 WLUK 428, [2019] STI 1129 ..................................................................................................... 1.163 Cottingham’s Executors v IRC (1938) 22 TC 344.............................................. 10.29 Couch (Inspector of Taxes) v Administrators of the Estate of Caton; sub nom Administrators of the Estate of Caton v Couch (Inspector of Taxes); Caton’s Administrators v Couch (Inspector of Taxes) [1997] STC 970, 70 TC 10, [1997] BTC 360, (1997) 94(30) LSG 29........................................ 6.110 Countess Fitzwilliam v IRC [1993] 1 WLR 1189, [1993] 3 All ER 184, [1993] STC 502, 67 TC 614, [1993] STI 1038, (1993) 90(45) LSG 46, (1993) 137 SJLB 184..................................................................................................... 8.24 Courage Group’s Pension Schemes, Re; Ryan v Imperial Brewing & Leisure [1987] 1 WLR 495, [1987] 1 All ER 528, [1987] 1 FTLR 210, (1987) 84 LSG 1573, (1987) 131 SJ 507..................................................................... 18.56 Cowan v Scargill; sub nom Mineworkers Pension Scheme Trusts, Re [1985] Ch 270, [1984] 3 WLR 501, [1984] 2 All ER 750, [1984] ICR 646, [1984] IRLR 260, (1984) 81 LSG 2463, (1984) 128 SJ 550.................................. 4.53, 18.55 Cowcher v Cowcher [1972] 1 WLR 425, [1972] 1 All ER 943, (1972) 116 SJ 142.......................................................................................................... 3.34 Craddock v Crowhen [1995] 1 NZSC 40, 331................................................... 3.27 Cradock v Piper (1850) 1 Mac & G 664............................................................. 4.35

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Table of Cases Crossland (Inspector of Taxes) v Hawkins [1961] Ch 537, [1961] 3 WLR 202, [1961] 2 All ER 812, 39 TC 493, (1961) 40 ATC 126, [1961] TR 113, (1961) 105 SJ 424.......................................................................................  6.2, 6.4 Crowe v Appleby (Inspector of Taxes) [1975] 1 WLR 1539, [1975] 3 All ER 529, [1975] STC 502, [1975] TR 151, (1975) 119 SJ 776............. 6.173, 8.3, 8.15 Crowhurst Park, Re; sub nom Sims-Hilditch v Simmons [1974] 1 WLR 583, [1974] 1 All ER 991, (1974) 28 P & CR 14, (1973) 222 EG 1173, (1974) 118 SJ 331................................................................................................... 4.25 Crowswood Trust Ltd v Schmidt [2003] 3 All ER 76......................................... 4.53 Crystal Palace Trustees v Minister of Town & Country Planning [1951] Ch 132, [1950] 2 All ER 857, 66 TLR (Pt 2) 753, (1950) 114 JP 553, (194951) 1 P & CR 247, (1950) 94 SJ 670.......................................................... 11.9 Cunard’s Trustees v IRC; McPheeters v IRC (1945) 27 TC 122..................... 6.68, 7.16 Cundy v Lindsay; sub nom Lindsay v Cundy (1877-78) LR 3 App Cas 459, [1874-80] All ER Rep 1149, (1878) 42 JP 483, (1878) 14 Cox CC 93, (1878) 26 WR 406, (1878) 47 LJ QB 481, (1878) 38 LT 573, 15 Sask. R. 233.......................................................................................................... 1.47 Cunliffe v Fielden; sub nom Fielden v Cunliffe [2005] EWCA Civ 1508, [2006] Ch 361, [2006] 2 WLR 481, [2006] 2 All ER 115, [2006] 1 FLR 745, [2005] 3 FCR 593, [2006] WTLR 29, (2005-06) 8 ITELR 855, [2006] Fam Law 263, (2006) 103(3) LSG 26......................................................... 15.8 Cunnack v Edwards [1896] 2 Ch 679................................................................. 3.35 Curnock v IRC [2003] STC (SCD) 283, [2003] WTLR 955, [2003] STI 1052. 3.15 Cusack & Cotton v Scroop (Isle of Man) IOFLR 68/409................................... 3.39 Cutner v IRC [1974] STC 259, 49 TC 429......................................................... 6.220 Cyclops Electronics Ltd v HMRC [2016] UKFTT 487 (TC), [2016] 7 WLUK 255, [2016] SFTD 842 ............................................................................... 1.128 Cyganik v Agulian; sub nom Agulian v Cyganik [2006] EWCA Civ 129, [2006] 1 FCR 406, [2006] WTLR 565, (2005-06) 8 ITELR 762........................2.28, 5.34, 5.52, 15.8 D D (A Child) v O; sub nom CD (A Child) v O [2004] EWHC 1036 (Ch), [2004] 3 All ER 780, [2004] 3 FCR 195, [2004] WTLR 751, (2004-05) 7 ITELR 63, [2004] 2 P & CR DG13........................................................................ 3.63 DTE Financial Services Ltd v Wilson (Inspector of Taxes) [2001] EWCA Civ 455, [2001] STC 777, 74 TC 14, [2001] BTC 159, [2001] STI 670, (2001) 98(21) LSG 40............................................................................................ 16.4 Dale (Deceased), Re; sub nom Estate of Monica Dale (Deceased), Re; Proctor v Dale [1994] Ch 31, [1993] 3 WLR 652, [1993] 4 All ER 129, [1994] Fam Law 77, (1993) 137 SJLB 83.............................................................. 15.14 Dalgeaty v IRC (1941) 24 TC 280...................................................................... 6.3 Davidson v Seelig [2016] EWHC 549 (Ch), [2016] 3 WLUK 414, [2016] WTLR 627.................................................................................................. 3.73 Davies (Inspector of Taxes) v Hicks [2005] EWHC 847 (Ch), [2005] STC 850, 78 TC 95, [2005] BTC 331, [2005] STI 918.............................................. 10.124 Davies v HMRC [2008] EWCA Civ 933, [2008] STC 2813, [2008] 7 WLUK 292, [2009] CP Rep 2, [2008] BTC 733, [2008] STI 1715........................ 5.25 Davies v HMRC [2018] UKUT 130 (TCC), [2018] STC 1258, [2018] 4 WLUK 575, [2018] STI 1080 ................................................................................. 1.148

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Table of Cases Davis v Richards & Wallington Industries Ltd [1990] 1 WLR 1511, [1991] 2 All ER 563.................................................................................................. 18.56 Dawson (Deceased), Re; sub nom Union Fidelity Trustee Co v Perpetual Trustee Co [1966] 2 NSWR 211................................................................. 4.58 Dawson-Damer v Taylor Wessing LLP [2017] EWCA Civ 74, [2017] 1 WLR 3255, [2017] 2 WLUK 461, [2018] WTLR 57........................................ 1.9, 1.144 Dawson v IRC [1990] 1 AC 1, [1989] 2 WLR 858, [1989] 2 All ER 289, [1989] STC 473, 62 TC 301, (1989) 133 SJ 661.................................................... 6.66 De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) (1906) 5 TC 198....................................................................................................5.80, 12.23 De Lasteyrie du Saillant v Ministere de l’Economie, des Finances et de l’Industrie (C-9/02) [2005] STC 1722, [2004] ECR I-2409, [2004] 3 CMLR 39, [2006] BTC 105, 6 ITL Rep 666, [2004] STI 890, ECJ........... 10.87 De Rothschild v Lawrenson (Inspector of Taxes) [1995] STC 623, 67 TC 312.... 10.11 De Vigier v IRC [1964] 1 WLR 1073, [1964] 2 All ER 907, 42 TC 25, (1964) 43 ATC 223, [1964] TR 239, (1964) 108 SJ 617........................................ 6.225 Dean Leigh Temperance Canteen Trustees v IRC 52 R & IT 90, 38 TC 315, (1958) 37 ATC 421, [1958] TR 385............................................................ 11.9 Dean, Re; sub nom Cooper-Dean v Stevens (1889) LR 41 Ch D 552................ 12.3 Deane, Re; sub nom Bridger v Deane (1889) LR 42 Ch D 9.............................. 4.69 Defrenne v SA Belge de Navigation Aerienne (SABENA) (43/75); sub nom Defrenne v SABENA (43/75) [1981] 1 All ER 122, [1976] ECR 455, [1976] 2 CMLR 98, [1976] ICR 547, ECJ.................................................. 6.324 Delamere’s Settlement Trusts, Re [1984] 1 WLR 813, [1984] 1 All ER 584, (1984) 81 LSG 1597, (1984) 128 SJ 318.................................................... 7.21 Den Haag Trust, Re (1997–98) 1 OFLR 495...................................................... 4.53 Denley’s Trust Deed, Re; sub nom Holman v HH Martyn & Co [1969] 1 Ch 373, [1968] 3 WLR 457, [1968] 3 All ER 65, (1968) 112 SJ 673.............. 12.1 Densham (A Bankrupt), Re; sub nom Trustee, ex p v Densham [1975] 1 WLR 1519, [1975] 3 All ER 726, (1975) 119 SJ 774.......................................... 3.15 Despard, Re (1901) 17 TLR 478......................................................................... 4.81 Development Securities Plc v HMRC [2019] UKUT 169 (TCC), [2019] STC 1424, [2019] 6 WLUK 111, 21 ITL Rep 801, [2019] STI 1225................. 5.81 Dextra Accessories Ltd v MacDonald (Inspector of Taxes); sub nom MacDonald (Inspector of Taxes) v Dextra Accessories Ltd [2005] UKHL 47, [2005] 4 All ER 107, [2005] STC 1111, [2005] Pens LR 395, 77 TC 146, [2005] BTC 355, [2005] STI 1235, (2005) 102(29) LSG 33............................1.109, 16.7, 16.10, 16.13, 16.21, 16.24 Dhingra v Dhingra (1999-2000) 2 ITELR 262................................................... 1.33 Dicey, Re; sub nom Julian v Dicey [1957] Ch 145, [1956] 3 WLR 981, [1956] 3 All ER 696, (1956) 100 SJ 874................................................................ 3.74 Dickenson v Gross (1927) 11 TC 614................................................................ 6.9 Dickins v Harris (1866) 14 LT 98....................................................................... 4.62 Dingmar v Dingmar [2006] EWCA Civ 942, [2007] Ch 109, [2006] 3 WLR 1183, [2007] 2 All ER 382, [2007] 1 FLR 210, [2006] 2 FCR 595, [2006] WTLR 1171, 2006] Fam Law 1025, [2006] NPC 83................................. 15.10 Diplock, Re [1948] Ch 465, [1948] 2 All ER 318.................1.21, 3.40, 4.70, 4.71, 4.72 Donaldson’s Executors v IRC (1927) 13 TC 461............................................... 6.79 Double Happiness Trust, Re; sub nom Grant Thornton Stonehage Ltd v Ward [2003] WTLR 367, (2002-03) 5 ITELR 646 (Royal Ct (Jer)).................... 1.37

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Table of Cases Dougan v Macpherson; sub nom Macpherson v Dougan; Dougan’s Trustee v Dougan [1902] AC 197, (1902) 4 F (HL) 7, (1902) 9 SLT 439.................. 4.42 Doughty, Re; sub nom Burridge v Doughty [1947] Ch 263, [1947] 1 All ER 207, 63 TLR 257, 176 LT 173.................................................................... 4.75 Douglas v Douglas; Douglas v Webster (1871) LR 12 Eq 617.......................... 5.37 Dowse v Gorton; sub nom Gorton, Re [1891] AC 190....................................... 4.39 Drake v Whipp [1996] 1 FLR 826, [1996] 2 FCR 296, (1996) 28 HLR 531, [1995] NPC 188, (1996) 71 P & CR D32................................................... 3.43 Drewe’s Settlement, Re; sub nom Drewe v Westminster Bank Ltd [1966] 1 WLR 1518, [1966] 2 All ER 844 (Note), (1966) 110 SJ 689..................... 3.65 Drosier v Brereton (1851) 15 Beav 221.............................................................. 4.58 Drummond v Collins (Surveyor of Taxes) [1915] AC 1011, (1915) 6 TC 525..... 5.104, 7.14, 7.15 Dugdale, Re (1888) 3 Ch D 285......................................................................... 13.2 Duke of Buccleuch v IRC; Sub Nom: Duke of Devonshire’s Trustees v IRC [1967] 1 AC 506, [1967] 2 WLR 207, [1967] 1 All ER 129, [1967] RVR 25, [1967] RVR 42, (1966) 45 ATC 472, [1966] TR 393, (1967) 111 SJ 18............................................................................................................ 6.308 Duke of Cleveland’s Estate, Re; sub nom Hay v Wolmer [1895] 2 Ch 542....... 4.79 Duke of Marlborough v A-G (No.1) [1945] 1 All ER 165................................. 5.102 Duke of Norfolk’s case (1681–5) 22 ER 931...................................................... 3.45 Duleep Singh, Re (1890) 6 TLR 385.................................................................. 5.46 Dunbar v Dunbar [1909] 2 Ch 639..................................................................... 3.36 Duncan v IRC (1932) 17 TC 1............................................................................ 15.36 Dunk v General Commissioners for Havant [1976] STC 460, 51 TC 519, [1976] TR 213............................................................................................. 19.20 Dyer v Dyer, 30 ER 42, (1788) 2 Cox Eq Cas 92, KB....................................... 3.34 Dyer v HMRC [2016] UKUT 381 (TCC), [2017] STC 189, [2016] 9 WLUK 25, [2016] BTC 518, [2016] STI 2543 ...................................................... 1.126 E E Bott Ltd v Price (Inspector of Taxes); sub nom Bott v Price (Inspector of Taxes) [1987] STC 100, 59 TC 437............................................................ 16.26 Earl Grey v Attorney General; sub nom Attorney General v Earl Grey [1900] AC 124........................................................................................................ 6.301 Earl of Bute v Stuart (1762) 1 ER 700................................................................ 12.7 Earl of Chesterfield’s Trusts, Re (1883) LR 24 Ch D 643...................... 2.21; 4.74, 4.79 Earl of Ellesmere v IRC [1918] 2 KB 735, [1918] 7 WLUK 11........................ 6.308 Earl of Iveagh v Comrs [1930] IR 386............................................................... 5.50 East, Re (1873) 8 Ch App 735............................................................................ 4.24 Eastwood v IRC (1943) 25 TC 100.................................................................... 6.190 Ebrand v Dancer [1680] 2 Cas in Ch 26............................................................. 3.36 Eclipse Film Partners No 35 LLP v HMRC [2015] EWCA Civ 95, [2015] STC 1429, [2015] 2 WLUK 562, [2015] BTC 10, [2015] STI 522............. 1.132, 1.140 Edwards v Carter; sub nom Carter v Silber; Carter v Hasluck; Edwards v Earl of Lisburne [1893] AC 360......................................................................... 3.3 Egyptian Hotels Ltd v James Mitchell [1915] AC 1022, (1915) 6 TC 542........ 5.82 Eilbeck (Inspector of Taxes) v Rawling [1980] 2 All ER 12, [1980] STC 192, [1980] TR 13............................................................................................... 6.101 Ellenborough, Re; sub nom Towry Law v Burne [1903] 1 Ch 697.................... 3.20

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Table of Cases Elmhurst v IRC (1937) 21 TC 381...................................................................5.17, 5.27 Emery’s Investment Trusts, Re; sub nom: Emery v Emery [1959] Ch 410, [1959] 2 WLR 461, [1959] 1 All ER 577, (1959) 103 SJ 257.................... 3.36 Emmet’s Estate, Re; sub nom Emmet v Emmet (1881) LR 17 Ch D 142.......... 4.59 Endacott, Re; sub nom Corpe v Endacott [1960] Ch 232, [1959] 3 WLR 799, [1959] 3 All ER 562, 58 LGR 25, (1959) 103 SJ 918....................1.20, 12.2, 12.3, 12.7, 12.12 Energy Power Development Corp v Pardoe see Pardoe (Inspector of Taxes) v Energy Power Development Corp England’s Settlement Trusts, Re Dobb v England [1918] 1 Ch 24..................... 4.39 Ereaut v Girls Public Day School Trust Ltd (1930) 15 TC 529.......................... 11.6 Ernst & Young v Central Guaranty Trust Co (No 2) (2004-05) 7 ITELR 69 (Alta)...................................................................................................... 12.7 Esdaile v IRC (1936) 20 TC 700........................................................................ 6.68 Estate of Chong Sui Kum (dec’d), Re (2005) 8 ITELR 318............................... 3.34 Estate of Fuld (No 3) see Fuld (Deceased) (No 3) Estill v Cowling Swift & Kitchin; Bean v Cowling Swift & Kitchin [2000] Lloyd’s Rep PN 378, [2000] WTLR 417.................................................... 3.6 Evans, Re; sub nom Jones v Evans [1913] 1 Ch 23............................................ 4.73 Eves,Re, Midland Bank Executor & Trustee Co Ltd v Eves (1939) 18 ATC 401.............................................................................................................. 6.61 Ewart v Taylor (Inspector of Taxes) [1983] STC 721, 57 TC 401............... 6.101, 6.177 F F Trust, Re A Settlement, Re (2015) SC (Bda) 77 Civ (2015) 18 ITELR 459.... 3.94 F v IRC [2000 STC (SCD) 1, [2000] WTLR 505............................................... 5.59 Falconer v Falconer [1970] 1 WLR 1333, [1970] 3 All ER 449, [1971] JPL 111, (1970) 114 SJ 720....................................................................................... 1.21 Farmer & Anor (executors of Farmer deceased) v IRC (1999) SpC 216............ 6.140 Farmer v IRC [1999] STC (SCD) 321..............................................  2.29, 6.250, 6.259 Fasbender v Attorney General [1922] 1 Ch 232................................................. 5.38 Faulkner v IRC [2001] STC (SCD) 112, [2001] WTLR 1295, [2001] STI 943.... 1.11 Fawcett, Re; Public Trustee v Dugdale [1940] Ch 402....................................... 4.78 Faye v IRC (1961) 40 TC 103............................................................................ 5.51 Fetherstonaugh (formerly Finch) v IRC; sub nom Finch v IRC [1985] Ch 1, [1984] 3 WLR 212, [1984] STC 261, (1984) 81 LSG 1443, (1984) 128 SJ 302; reversing [1983] 1 WLR 405, [1983] STC 157, (1982) 126 SJ 838..... 6.250, 6.252 FII Group Litigation v RCC. See Test Claimants in the FII Group Litigation v IRC FM v ASL Trustee Co Ltd; sub nom A Trust, Re (2006-07) 9 ITELR 127 (Royal Ct (Jer))....................................................................................................... 3.66 Fielder v IRC (1965) 42 TC 501, [1965] T 221.................................................. 5.51 Figg v Clarke (Inspector of Taxes) [1997] 1 WLR 603, [1997] STC 247, 68 TC 645, [1997] BTC 157, (1996) 93(10) LSG 21, (1996) 140 SJLB 66....... 6.177, 8.3 Finch v IRC see Fetherstonaugh (formerly Finch) v IRC Finers v Miro [1991] 1 WLR 35, [1991] 1 All ER 182, (1990) 140 NLJ 1387, (1990) 134 SJ 1039..................................................................................... 3.40 Firth, Re; sub nom Sykes v Ball [1938] Ch 517................................................. 4.80 Fleetwood, Re; sub nom Sidgreaves v Brewer (1880) LR 15 Ch D 594............ 3.22

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Table of Cases Fletcher v Collis [1905] 2 Ch 24......................................................................... 4.69 Fletcher v Fletcher (1844) 4 Hare 67...................................................... 1.49, 3.14, 3.20 Foley v Burnell (1783) 1 Bro cc 274.................................................................. 4.62 Football Association Youth Trust (Incorporated Council of Law Reporting v A-G (1971) 47 TC 321................................................................................ 11.7 Forbes v Forbes (1854) Kay 341......................................................................... 5.36 Foreman v Kingston (2003) 6 ITELR 841.......................................................... 4.53 Foskett v McKeown [2001] 1 AC 102, [2000] 2 WLR 1299, [2000] 3 All ER 97, [2000] Lloyd’s Rep IR 627, [2000] WTLR 667, (1999–2000) 2 ITELR 711, (2000) 97(23) LSG 44; reversing [1998] Ch 265, [1998] 2 WLR 298, [1997] 3 All ER 392, [1997] NPC 83......................................................... 4.70 Foster v Hale (1798) 3 Ves 676........................................................................... 3.9 Fowkes v Pascoe (1874-75) LR 10 Ch App 343................................................. 3.34 Fowler v Barron [2008] EWCA Civ 377, [2008] 2 FLR 831, [2008] 2 FCR 1, [2008] WTLR 819, (2008-09) 11 ITELR 198, [2008] Fam Law 636, (2008) 152(17) SJLB 31, [2008] NPC 51................................................... 1.23 Fowler, Re (1914) 31 TLR 102........................................................................... 11.8 Frampton (Trustees of Worthing Rugby Football Club) v IRC see Worthing Rugby Football Club Trustees v IRC Frankland v IRC [1997] STC 1450, [1997] BTC 8045...................................... 15.16 Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450, [1953] 3 WLR 497, [1953] 2 All ER 739, [1953] 2 Lloyd’s Rep 238, (1953) 70 RPC 238, (1953) 97 SJ 556........................................................ 3.75 Frieburg Trust, Mourant & Co Trustees Ltd v Magnus (2004) 6 ITELR 1078..... 3.71, 3.73 Fry (Deceased), Re; Chase National Executors & Trustees Corp v Fry [1946] Ch 312......................................................................................................... 3.19 Fry (Surveyor of Taxes) v Shiels Trustees; sub nom IRC v Shiels’s Trustees (1915) 1915 SC 159, 1914 2 SLT 364, 6 TC 583....................................... 6.26 Fuld (Deceased) (No 3), In the Estate of; sub nom Hartley v Fuld (Conflict of Laws) [1968] P 675, [1966] 2 WLR 717, [1965] 3 All ER 776, (1966) 110 SJ 133, PDAD..........................................................................................5.34,5.40, 5.42 Furness v IRC [1999] STC (SCD) 232........................................................  2.29, 6.250 Furniss (Inspector of Taxes) v Dawson [1984] AC474, [1984] 2 WLR 226, [1984] 1 All ER 530, [1984] STC 153, 55 TC 324, (1984) 15 ATR 255, (1984) 81 LSG 739, (1985) 82 LSG 2782, (1984) 134 NLJ 341, (1984) 128 SJ 132................................................................................................... 6.284 Furse (Deceased), Re; sub nom Furse v IRC [1980] 3 All ER 838, [1980] STC 596, [1980] TR 275.................................................................................. 5.40, 5.50 Futter v Futter [2010] EWHC 449 (Ch), [2010] STC 982, [2010] 3 WLUK 320, [2010] Pens LR 145, [2010] BTC 455, [2010] WTLR 609, (2010) 12 ITELR 912, [2010] STI 1442...................................................................... 1.104 Fynn v IRC [1958] 1 WLR 585, [1958] 1 All ER 270, 51 R & IT 142, 37 TC 629, (1957) 36 ATC 313, [1957] TR 323, (1958) 102 SJ 381.................... 10.33 G G v C Trust Co (Jersey) Ltd (2001-02) 4 ITELR 779......................................... 1.76 GDF Suez Teesside Ltd v HMRC [2018] EWCA Civ 2075, [2019] 1 All ER 528, [2018] STC 2113, [2018] 10 WLUK 111, [2018] STI 1880.............. 1.152

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Table of Cases Gaines-Cooper v R & C Comrs [2007] EWHC 2617 (Ch), [2008] STC 1665, [2007] BTC 704, 10 ITL Rep 255, [2008] WTLR 209, [2007] STI 2651; affirming [2007] STC (SCD) 23, 9 ITL Rep 274, [2007] WTLR 101, [2006] STI 2532.............................................................. 5.1, 5.24, 5.30, 5.47, 5.50 Gajapatiraju v Revenue Divisional Officer Vizagaptam; sub nom Gajapatiraju v Vizagapatam (Revenue Divisional Officer) [1939] AC 302, [1939] 2 All ER 317, PC (Ind)......................................................................................... 6.309 Gardner v Parker, 56 ER 478, (1818) 3 Madd 184, KB...................................... 3.21 Garland v Archer-Shee (1930) 15 TC 693..........................................5.104, 5.106, 8.10, 7.14; App 6 Garnett, Re; sub nom Gandy v Macaulay (1885) LR 31 Ch D 1....................1.113, 4.69 Garrett, Re; sub nom Croft v Ruck [1934] Ch 477............................................. 7.3 Garth v Coton (1753) 21 ER 239........................................................................ 12.2 Gartside v IRC; Sub Nom Gartside’s Will Trusts, Re [1968] AC 553, [1968] 2 WLR 277, [1968] 1 All ER 121, (1967) 46 ATC 323, [1967] TR 309, (1967) 111 SJ 982...................................................................1.11, 6.296, 7.1, 7.21 Gascoigne v Gascoigne [1918] 1 KB 223........................................................... 3.36 Gasque v IRC [1940] 2 KB 80, (1940) 23 TC 210............................................. 5.91 General Medical Council v IRC (1928) 13 TC 819............................................ 11.11 General Nursing Council for Scotland v IRC [1929] 14 TC 645, 1929 SC 664, 1929 SLT 441.............................................................................................. 11.11 Genovese v R & C Comrs [2009] STC (SCD) 373, [2009] STI 1100................ 5.24 Geologists Association v IRC (1928) 14 TC 271............................................... 11.11 Gestetner Settlement, Re; sub nom: Barnett v Blumka [1953] Ch 672, [1953] 2 WLR 1033, [1953] 1 All ER 1150, 46 R & IT 467, (1953) 32 ATC 102, [1953] TR 113, (1953) 97 SJ 332............................................................... 1.37 Gibbon v Mitchell [1990] 1 WLR 1304, [1990] 3 All ER 338........................... 3.80 Gilchrist v HMRC [2014] UKUT 169 (TCC), [2015] Ch 183, [2015] 2 WLR 1, [2014] 4 All ER 943, [2014] STC 1713, [2014] 4 WLUK 507, [2014] BTC 513, [2014] WTLR 1209, [2014] STI.1875................................................ 1.114 Gillingham Bus Disaster Fund; sub nom Bowman v Official Solicitor [1959] Ch 62, [1958] 3 WLR 325, [1958] 2 All ER 749, (1958) 102 SJ 581; affirming [1958] Ch 300, [1957] 3 WLR 1069, [1958] 1 All ER 37, (1957) 101 SJ 974...............................................................................................3.35, 11.16 Gisborne v Gisborne (1876-77) LR 2 App Cas 300........................................... 4.51 Glyn v IRC [1948] 2 All ER 419, 41 R & IT 342, 30 TC 321, [1948] TR 225, [1948] WN 278, [1948] LJR 1813, (1948) 92 SJ 514................................. 6.189 Golay’s Will Trusts, Re; sub nom Morris v Bridgewater; Golay, Re [1965] 1 WLR 969, [1965] 2 All ER 660, (1965) 109 SJ 517................................... 1.35 Gold v Hill; Hill v Gold [1999] 1 FLR 54, [1998] Fam Law 664, (1998) 95(35) LSG 37, (1999) 1 ITELR 27, (1998) 142 SJLB 226.................................. 3.14 Goldcorp Exchange Ltd (In Receivership), Re; sub nom Kensington v Liggett; Goldcorp Finance Ltd, Re [1995] 1 AC 74, [1994] 3 WLR 199, [1994] 2 All ER 806, [1994] 2 BCLC 578, [1994] CLC 591, (1994) 13 Tr LR 434, (1994) 91(24) LSG 46, (1994) 144 NLJ 792, (1994) 138 SJLB 127, PC (NZ)....................................................................................................1.35, 4.70 Gomez v Gomez-Monche Vives [2008] EWCA Civ 1065, [2009] Ch 245, [2009] 2 WLR 950, [2009] 1 All ER (Comm) 127, [2008] 2 CLC 494, [2009] ILPr 32, [2008] WTLR 1623, (2008-09) 11 ITELR 422, (2008) 152(39) SJLB 32, [2008] NPC 105, [2009] 1 P & CR DG1...................... 5.102

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Table of Cases Goodchild v Goodchild; sub nom Goodchild (Deceased), Re [1997] 1 WLR 1216, [1997] 3 All ER 63, [1997] 2 FLR 644, [1997] 3 FCR 601, [1997] Fam Law 660, (1997) 147 NLJ 759............................................................ 15.14 Goodman v Gallant [1986] Fam 106, [1986] 2 WLR 236, [1986] 1 All ER 311, [1986] 1 FLR 513, (1986) 52 P & CR 180, [1986] Fam Law 59, (1985) 135 NLJ 1231, (1985) 129 SJ 891.............................................................. 3.32 Goodwin v Curtis (Inspector of Taxes) [1998] STC 475, 70 TC 478, [1998] BTC 176, (1998) 95(12) LSG 27, (1998) 142 SJLB 91; [1996] STC 1146, (1996) 140 SJLB 186.................................................................................. 6.126 Gordon’s Will Trusts, Re; sub nom National Westminster Bank Ltd v Gordon [1978] Ch 145, [1978] 2 WLR 754, [1978] 2 All ER 969, (1978) 122 SJ 148.......................................................................................................... 3.74 Goulding v James [1997] 2 All ER 239.............................................................. 3.63 Governors of the Rotunda Hospital v Colman see Colman v Governors of the Rotunda Hospital, Dublin Grace (1799) 1 Bos & P 376............................................................................... 4.39 Grace v HMRC [2008] EWHC 2708 (Ch), [2009] STC 213, [2008] 11 WLUK 220; [2008] BTC 843, [2008] STI 2503 Ch D............................................ 5.24 Grace v HMRC; sub nom R & C Comrs v Grace [2009] EWCA Civ 1082, [2009] STC 2707, [2009] BTC 704, [2009] STI 2834 reversing [2008] STC (SCD) 531, [2008] STI 279............................................................. 5.19, 5.24 Grainge v Wilberforce (1889) 5 TLR 436.......................................................... 3.11 Grand Council of the Royal Antediluvian Order of Buffalos v Owens (1927) 13 TC 176........................................................................................................ 11.9 Grant’s Will Trusts, Re; sub nom Harris v Anderson [1980] 1 WLR 360, [1979] 3 All ER 359, (1980) 124 SJ 84.................................................................. 1.68 Graphicshoppe Ltd, Re (2005-06) 8 ITELR 561 (Ont)...................................... 4.70 Gray v IRC; sub nom Executors of Lady Fox v IRC; Lady Fox’s Executors v IRC [1994] STC 360, [1994] 38 EG 156, [1994] RVR 129, [1994] STI 208, [1994] EG 32 (CS), [1994] NPC 15............................................. 6.177, 6.308 Gray v Perpetual Trustee Co Ltd [1928] AC 391, 60 ALR 613, PC (Aus)......... 15.14 Green GLG Trust, Re [2003] WTLR 377, (2002-03) 5 ITELR 590 (Royal Ct (Jer))....................................................................................................... 3.75 Green v Cobham [2002] STC 820, [2002] BTC 170, [2000] WTLR 1101, (2001-02) 4 ITELR 785, [2002] STI 879................................................. 3.75, 3.82 Green v IRC [1982] STC 485, 1982 SC 155, 1983 SLT 282............................. 6.126 Green, Re [1935] WN 151.................................................................................. 3.26 Green’s Will Trusts, Re [1985] 3 All ER 455, (1984) 81 LSG 3590.................. 4.56 Gresh v (i) RBC Trust Company Ltd & (ii) HM Revenue & Customs (R & C Comrs) No 42/2009 (16 September 2009)............................................... 3.78, 3.95 Gresh v RBC Trust Co (Guernsey) Ltd [2016] 2 WLUK 730, 18 ITELR 753, RC (Guernsey)............................................................................................ 3.95 Grey v IRC; sub nom Grey & Randolph (Hunter’s Nominees) v IRC [1960] AC 1, [1959] 3 WLR 759, [1959] 3 All ER 603, (1959) 38 ATC 313, [1959] TR 311, (1959) 103 SJ 896......................................................................... 3.10 Griffin (Inspector of Taxes) v Craig-Harvey [1994] STC 54, 66 TC 396, [1993] STI 1442, [1993] EG 200 (CS), (1994) 91(4) LSG 46............................... 6.126 Grimm v Newman [2002] EWCA Civ 1621, [2003] 1 All ER 67, [2002] STC 1388, [2002] 11 WLUK 156, [2002] BTC 502, [2002] STI 1507, (2002) 146 SJLB 261.............................................................................................. 5.74

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Table of Cases Grimond (otherwise Macintyre) v Grimond; sub nom Macintyre v Grimond’s Trustees [1905] AC 124, (1905) 7 F (HL) 90, (1905) 12 SLT 760............. 12.1 Grimwood-Taylor v IRC [2000] WTLR 321, [2000] STC (SCD) 39..........  2.29, 6.250 Grove v Young Men’s Christian Association (1903) 4 TC 613.......................... 11.54 Grupo Torras SA v Al-Sabah (No 8); sub nom Abacus (CI) Ltd, Re [2004] WTLR 1, (2003-04) 6 ITELR 368 (Royal Ct (Jer))........................ 1.42; 2.46; 3.27 Guardian Ocean Cargoes Ltd v Banco do Brasil SA (The Golden Med) (No 3) [1992] 2 Lloyd’s Rep 193........................................................................... 4.58 Gubay v Kington (Inspector of Taxes); sub nom Gubay v Kingston [1984] 1 WLR 163, [1984] 1 All ER 513, [1984] STC 99, 57 TC 601, (1984) 81 LSG 900, (1984) 134 NLJ 342, (1984) 128 SJ 100.................................... 5.13 Gulbenkian v Gulbenkian [1937] 4 All ER 618.................................................. 5.40 Gulbenkian’s Settlement Trusts (No 2), Re; sub nom Stephens v Maun; Whishaw v Stephens [1970] Ch 408, [1969] 3 WLR 450, [1969] 2 All ER 1173, (1969) 113 SJ 758............................................................................. 7.2 Gully v Cregoe (1857) 24 Beav 185................................................................... 1.33 H H Trust, Re [2007] JRC 187............................................................................... 14.18 HMRC v Investec Asset Finance Plc [2018] UKUT 69 (TCC), [2018] STC 874, [2018] 4 WLUK 11, [2018] BTC 510, [2018] STI 981.............................. 1.158 HMRC v Charlton [2012] UKFTT 770 (TCC), [2013] STC 866, [2012] 12 WLUK 726, [2013] BTC 1634, [2013] STI 259........................................ 1,151 HMRC v Cotter [2013] UKSC 69, [2013] 1 WLR 3514, [2014] 1 All ER 1, [2013] STC 2480, [2013] 11 WLUK 116, [2013] BTC 837, [2013] STI 3450 ..................................................................................................... 1.161 HMRC v Curzon Capital Ltd [2019] UKFTT 63 (TC), [2019] 1 WLUK 327, [2019] SFTD 506........................................................................................ 6.328 HMRC v Hok Ltd [2012] UKUT 363 (TCC), [2013] STC 225, [2012] 10 WLUK 655, 81 TC 540, [2012] BTC 1711, [2012] STI 3402................... 1.151 HMRC v JP Whitter (Waterwell Engineers) Ltd [2016] EWCA Civ 1160, [2017] STC 149, [2016] 11 WLUK 652, [2016] BTC 45, [2016] STI 3058.......... 1.125 HMRC v Personal Representatives of Staveley deceased. See Parry v HMRC HSBC International Trustee Ltd v Wong Kit Wan; sub nom Circle Trust, Re [2007] WTLR 631, (2006-07) 9 ITELR 676, Grand Ct (CI)...................... 3.73 HSBC Trustees Ltd v Camperio Legal & Fiduciary Services Plc...................... 3.93 HCS Trustees Ltd v Camperio Legal & Fiduciary Services Plc [2009-10] GLR 216...................................................................................................... 3.93 Hall & Hall (Hall’s Executors) v IRC [1997] STC (SCD) 126...................  2.29, 6.250 Hall v Conch [2009] STC (SCP) 353................................................................. 19.39 Hall v Palmer (1844) 3 Hare 532........................................................................ 3.20 Halletts Estate, Re (1880) 13 Ch D 696.................................................. 3.39, 4.61, 4.71 Halperin v IRC (1942) 24 TC 285...................................................................... 6.3 Hamilton, Re [1895] 2 Ch 370............................................................................ 1.33 Hampden Settlement Trusts, Re [1977] TR 177................................................. 10.104 Hanchett-Stamford v Attorney General [2008] EWHC 330 (Ch), [2009] Ch 173, [2009] 2 WLR 405, [2009] PTSR 1, [2008] 4 All ER 323, [2008] 2 P & CR 5, [2009] WTLR 101, (2008) 158 NLJ 371...................................... 11.12 Hancock v General Reversionary & Insurance Company Ltd (1918) 7 TC 358... 18.30 Hancock v IRC [1999] STC (SCD) 287............................................................. 19.39

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Table of Cases Hancock v Watson; sub nom Hancock, Re; Watson v Watson [1902] AC 14..... 1.33 Hankinson v R & C Comrs [2009] UKFTT 384 (TC), [2010] STI 1368, FTT (Tax)............................................................................................................ 5.24 Hannay’s Executors v IRC (1956) 37 TC 217.................................................... 6.190 Hardcastle v IRC [2000] STC (SCD) 532, [2001] WTLR 91, [2000] STI 1520..... 6.250 Harding & Another (executors of Loveday dec’d) v IRC [1997] STC (SCD) 321...................................................................................................... 15.15, 15.16 Harding v Harding (1886) LR 17 QBD 442....................................................... 3.18 Hardoon v Belilios [1901] AC 118, PC (HK)..................................................... 4.39 Hargreaves v HMRC [2016] EWCA Civ 174, [2016] 1 WLR 2981, [2017] 1 All ER 129, [2016] STC 1652, [2016] 3 WLUK 590, [2016] BTC 13, [2016] STI 1154.......................................................................................... 1.120 Harmel v Wright (Inspector of Taxes( [1974] 1 WLR 325, [1974] 1 All ER 945, [1974] STC 88, 49 TC 149, [1973] TR 275, (1973) 118 SJ 170................ 5.69 Harrison v Kirk; sub nom Beattie v Cordner [1904] AC 1................................. 4.72 Harrison v Randall (1851) 9 Hace 397............................................................... 4.58 Harrison’s Will Trusts, Re; sub nom Harrison v Milborne Swinnerton Pilkington [1949] Ch 678, 65 TLR 573, (1949) 93 SJ 601.......................................... 4.75 Harrold v IRC [1996] STC (SCD) 195, [1996] EG 70 (CS).............................. 6.259 Hart (Inspector of Taxes) v Briscoe [1979] Ch 1, [1978] 2 WLR 832, 52 TC 53, [1977] TR 285............................................................................................. 6.173 Harte v R & C Comrs [2012] UKFTT 258 (TC), [2012] STI 2219.................... 6.127 Hart’s Will Trust, Re [1943] 2 All ER 557.......................................................... 4.46 Harthan v Mason [1980] STC 94, 53 TC 272, [1979] TR 369........................... 8.3 Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405........................... 3.27 Harvey v Olliver (1887) 57 LT 239.................................................................... 4.65 Hastings-Bass (Deceased), Re; sub nom Hastings-Bass Trustees v IRC [1975] Ch 25, [1974] 2 WLR 904, [1974] 2 All ER 193, [1974] STC 211, [1974] TR 87, (1974) 118 SJ 422.....................................................  1.4, 3.27, 3.75, 3.76, 3.77, 3.82, 3.83, 3.88 Hatton v IRC [1992] STC 140, 67 TC 759, [1992] STI 171......................... 6.243, 8.24 Hatton, Re; sub nom Hockin v Hatton [1917] 1 Ch 357..................................... 4.75 Hawker v Compton (1922) 8 TC 306................................................................. 6.9 Hawkins v Hawkins (1920) SRNSW 550........................................................... 4.81 Hay’s Settlement Trusts, Re; sub nom Greig v McGregor [1982] 1 WLR 202, [1981] 3 All ER 786, (1981) 125 SJ 866.................................................... 7.4 Hayward v Dimsdale (1810) 17 Ves 111............................................................ 3.82 Head v Gould [1898] 2 Ch 250........................................................................... 4.65 Healey v Brown [2002] WTLR 849, (2001-02) 4 ITELR 894, [2002] 19 EG 147 (CS), [2002] NPC 59............................................................................ 15.14 Hearn v Morgan; Pritchard v Harding Lathom-Browne [1945] 2 All ER 480, 26 TC 478........................................................................................................ 6.76 Heather (Inspector of taxes) v PE Consulting Group Ltd [1973] Ch 189, [1972] 3 WLR 833, [1973] 1 All ER 8, 48 TC 293, [1972] TR 237, (1972) 116 SJ 824.........................................................................................16.15, 16.23, 16.25 Henderson (Inspector of Taxes) v Karmel’s Executors [1984] STC 572, 58 TC 201, (1984) 81 LSG 3179........................................................................... 6.177 Henderson v Henderson [1967] P 77, [1965] 2 WLR 218, [1965] All ER 179, (1964) 108 SJ 861 PDAD........................................................................... 5.46 Henderson, Re [1940] 1 All ER 623................................................................... 4.94

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Table of Cases Henwood v Barlow Clowes International Ltd (in liquidation) [2008] EWCA Civ 577, [2008] BPIR 778, [2008] NPC 61.....................................5.34, 5.35, 5.41 Hepworth (Inspector of Taxes) v William Smith Group [1981] STC 354, 54 TC 396........................................................................................................ 6.138 Herbert Smith (A Firm) v Honour (Inspector of Taxes) [1999] STC 173, 72 TC 130, [1999] BTC 44, [1999] EG 23 (CS), (1999) 96(11) LSG 70, (1999) 149 NLJ 250, (1999) 143 SJLB 72, [1999] NPC 24................................... 16.50 Herdman v IRC, 45 TC 394, (1967) 46 ATC 264, [1967] TR 243 (NI)............. 10.33 Hill v Permanent Trustee Co of New South Wales [1930] AC 720, PC (Aus)... 4.75 Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542, [2007] 1 WLR 2404, [2007] 1 All ER 1106, [2007] Bus LR 1213, [2006] 5 WLUK 324, [2006] BCC 646, [2007] 1 BCLC 450, [2006] BPIR 789, [2006] WTLR 1009 ..... 1.102 Hilton, Re; sub nom Gibbes v Hale-Hinton [1909] 2 Ch 548............................. 4.43 Hitch v Ruegg [1986] TL & P 62....................................................................... 4.80 Hitch v Stone (Inspector of Taxes); sub nom Stone (Inspector of Taxes) v Hitch [2001] EWCA Civ 63, [2001] STC 214, 73 TC 600, [2001] BTC 78, [2001] STI 104, [2001] NPC 19................................................................. 1.42 Hoare Trustees v Gardner (Inspector of Taxes) [1979] Ch 10, [1978] 2 WLR 839, [1978] 1 All ER 791, [1978] STC 89, [1977] TR 293, (1977) 121 SJ 852...................................................................................................... 6.173, 8.3 Hodgson v Marks [1971] Ch 892, [1971] 2 WLR 1263, [1971] 2 All ER 684, (1971) 22 P & CR 586, (1971) 115 SJ 224.............................................. 2.16, 3.34 Holland v IRC [2003] STC (SCD) 43, [2003] WTLR 207, [2003] STI 62, 2003) 147 SJLB 267................................................................... 8.25, 15.19, 15.37 Holmes v McMullan; sub nom Ratcliffe (Deceased), Re [1999] STC 262, [1999] BTC 8017, (1999) 96(11) LSG 70.................................................. 15.22 Holt’s Settlement, Re; sub nom Wilson v Holt [1969] 1 Ch 100, [1968] 2 WLR 653, [1968] 1 All ER 470, (1968) 112 SJ 195............................................ 3.63 Honour (Inspector of Taxes) v Norris [1992] STC 304, 64 TC 599, [1992] STI 263, [1992] EG 35 (CS), (1992) 89(13) LSG 32........................................ 6.126 Hood-Barrs v IRC (1946) 27 TC 385................................................................. 6.5 Hood-Barrs v IRC (No 3) (1960) 39 TC 209................................................... 6.5, 6.190 Hooper v Fynmores (A Firm) [2002] Lloyd’s Rep PN 18, [2001] WTLR 1019, (2001) 98(26) LSG 45, (2001) 145 SJLB 156............................................ 3.6 Hope v D’Hedouville [1893] 2 Ch 361............................................................... 4.78 Horton v Henry [2016] EWCA Civ 989, [2017] 1 WLR 391, [2017] 3 All ER 735, [2016] 10 WLUK 137, [2016] BPIR 1426, [2016] Pens LR 311 ...... 1.121 Hostick v New Zealand Railway & Locomotive Society Waikato Branch Inc [2007] WTLR 1563, (2006-07) 9 ITELR 140, HC (NZ)............................ 1.21 Howarth, Re (1872-73) LR 8 Ch App 415.......................................................... 7.3 Howarth’s Executors v IRC [1997] STC (SCD) 162.......................................... 6.279 Howe Family Number 1 Trust, Re; sub nom Leumi Overseas Trust Corp Ltd v Howe [2009] WTLR 419, (2008-09) 11 ITELR 14, Ct (Jer)...................... 3.75 Howe v Earl of Dartmouth; Howe v Countess of Aylesbury, 32 ER 56, (1802) 7 Ves Jr 137 Ct of Chancery.......................................... 2.21; 4.45, 4.77, 4.74, 4.78 Howell v Trippier (Inspector of Taxes); sub nom Red Discretionary Trustees v Inspector of Taxes [2004] EWCA Civ 885, [2004] STC 1245, 76 TC 415, [2004] BTC 305, [2004] WTLR 839, [2004] STI 1654, (2004) 148 SJLB 881.................................................................................................  4.74, 4.83 Hubbard v Dunlop’s Trustee (1933) SN 62, HL................................................. 1.113

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Table of Cases Huitson v HMRC [2015] UKFTT 448 (TC), [2015] 9 WLUK 60, [2016] SFTD 37, [2015] STI 3587.................................................................................... 1.118 Hulton (Deceased), Re (No 2); sub nom Midland Bank Executor & Trustee Co Ltd v Thompson [1936] Ch 536.................................................................. 6.76 Humblestone v Martin Tolhurst Partnership [2004] EWHC 151 (Ch), [2004] PNLR 26, [2004] WTLR 343, (2003-04) 6 ITELR 900, (2004) 101(9) LSG 32........................................................................................................ 15.1 Hume Nisbet’s Settlement (1911) 27 TLR 461.................................................. 4.81 Hunter v Moss [1994] 1 WLR 452, [1994] 3 All ER 215, (1994) 91(8) LSG 38, (1994) 138 SJLB 25.................................................................................... 1.35 I IMK Family Trust, Re; sub nom Mubarak v Mubarik [2009] WTLR 1543 (Jer).................................................................................................... 14.18 IRC v Arkwright see Arkwright (Williams Personal Representative) v IRC IRC v Baddeley (Trustees of the Newtown Trust); sub nom Baddeley (Trustees of the Newtown Trust) v IRC [1955] AC 572, [1955] 2 WLR 552, [1955] 1 All ER 525, 48 R & IT 157, 35 TC 661, (1955) 34 ATC 22, (1955) 99 SJ 166.......................................................................................................... 11.14 IRC v Bates; sub nom Bates v IRC[1968] AC 483, [1967] 2 WLR 60, [1967] 1 All ER 84, 44 TC 225, (1966) 45 ATC 445, [1966] TR 369, (1967) 111 SJ 56............................................................................................................ 6.227 IRC v Bernstein [1961] Ch 399, [1961] 2 WLR 143, [1961] 1 All ER 320, 39 TC 391, (1960) 39 ATC 415, [1960] TR 369, (1961) 105 SJ 128.............. 6.190 IRC v Berrill [1981] 1 WLR 1449, [1982] 1 All ER 867, [1981] STC 784, 58 TC 429, [1981] TR 347, (1981) 125 SJ 625............................................... 9.24 IRC v Blott; IRC v Greenwood [1921] 2 AC 171............................................... 4.73 IRC v Botnar [1999] STC 711, 72 TC 205, [1999] BTC 267......... 6.188, 10.30, 10.40, 10.42, 10.43, 10.30 IRC v Brackett; sub nom Brackett v Chater (Inspector of Taxes); Charter v Brackett [1986] STC 521, [1987] 1 FTLR 8, 60 TC 134......................10.32, 10.58 IRC v Brandenburg [1982] STC 555, (1982) 126 SJ 229.............................. 6.243, 8.22 IRC v Brown (1926) 11 TC 292......................................................................... 5.19 IRC v Bullock [1976] 1 WLR 1178, [1976] 3 All ER 353, [1976] STC 409, 51 TC 522, [1975] TR 179, (1976) 120 SJ 591............................................... 5.40 IRC v Carron & Co, 1968 SC (HL) 47, 1968 SLT 305, [1968] TR 173; affirming 1967 SC 204, 1967 SLT 186, 45 TC 18, (1967) 46 ATC 93, [1967] TR 101.............................................................................................................. 16.24 IRC v Challenge Corp [1987] AC 155, [1987] 2 WLR 24, [1986] STC 548, (1986) 83 LSG 3598, (1987) 131 SJ 46, PC (NZ)...................................... 10.52 IRC v City of Glasgow Police Athletic Association; sub nom IRC v Glasgow Police Athletic Association [1953] AC 380, [1953] 2 WLR 625, [1953] 1 All ER 747, 1953 SC (HL) 13, 1953 SLT 105, (1953) 117 JP 201, (1953) 46 R & IT 207, 34 TC 76, (1953) 32 ATC 62, [1953] TR 49, (1953) 97 SJ 208.............................................................................................................. 11.12 IRC v Clay; IRC v Buchanan [1914] 3 KB 466, [1914] 5 WLUK 90, CA........ 6.308 IRC v Cleary; sub nom IRC v Perren; Cleary v IRC [1968] AC 766, [1967] 2 WLR 1271, [1967] 2 All ER 48, 44 TC 399, (1967) 46 ATC 51, [1967] TR 57, (1967) 111 SJ 277................................................................................. 6.19 IRC v Cohen (1937) 21 TC 301.......................................................................... 5.50

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Table of Cases IRC v Combe (1932) 17 TC 405......................................................................... 5.23 IRC v Cookson [1977] 1 WLR 962, [1977] 2 All ER 331, [1977] STC 140, [1977] TR 17, (1977) 121 S.J. 544............................................................. 6.190 IRC v Countess of Kenmare [1958] AC 267, [1957] 3 WLR 461, [1957] 3 All ER 33, 50 R & IT 563, 37 TC 383, (1957) 36 ATC 189, [1957] TR 215, (1957) 101 SJ 646....................................................................................... 6.190 IRC v Crossman [1937] AC 26, [1936] 1 All ER 762, [1936] 3 WLUK 52, HL......................................................................................................... 6.310 IRC v Dewar (1935) 19 TC 561.......................................................................... 6.79 IRC v Duchess of Portland [1982] Ch 314, [1982] 2 WLR 367, [1982] 1 All ER 784, 54 TC 648, [1982] STC 149, [1981] TR 475................................... 5.38, 5.50 IRC v Educational Grants Association [1967] Ch 993, [1967] 3 WLR 41, [1967] 2 All ER 893, 44 TC 93, (1967) 46 ATC 71, [1967] TR 79, (1967) 111 SJ 194................................................................................................... 11.11 IRC v Eversden; sub nom IRC v Greenstock’s Executors; Essex (Somerset’s Executors) v IRC [2003] EWCA Civ 668, [2003] STC 822, 75 TC 340, [2003] BTC 8028, [2003] WTLR 893, [2003] STI 989, (2003) 100(27) LSG 38, (2003) 147 SJLB 594..................................................6.209, 6.210, 6.296 IRC v Falkirk Temperance Cafe Trust, 1927 SC 261, 1927 SLT 87, 11 TC 353... 11.9 IRC v Fisher’s Executors [1926] AC 395........................................................... 4.85 IRC v Glasgow Musical Festival Association (1926) 11 TC 154....................... 11.7 IRC v Gray see Gray v IRC; sub nom Executors of Lady Fox v IRC IRC v Gull (1937) 54 TLR 52, (1937) 21 TC 374........................................ 5.104, 11.4 IRC v Hashmi [2002] EWCA Civ 981, [2002] 5 WLUK 72, [2002] BCC 943, [2002] 2 BCLC 489, [2002] BPIR 974, [2002] WTLR 1027...............1.102, 14.14 IRC v Hawley (1927) 13 TC 327, [1928] 1 KB 578........................................... 15.36 IRC v Helen Slater Charitable Trust Ltd [1982] Ch 49, [1981] 3 WLR 377, [1981] 3 All ER 98, [1981] STC 471, 55 TC 230, [1982] TR 225, (1981) 125 SJ 414................................................................................................... 11.53 IRC v Holmden; sub nom Holmden’s Settlement Trusts, Re; Holmden’s Settlement, Re [1968] AC 685, [1968] 2 WLR 300, [1968] 1 All ER 148, (1967) 46 ATC 337, [1967] TR 323, (1967) 112 SJ 31.............................. 3.63 IRC v Jamieson; sub nom: Wills v IRC [1964] AC 1445, [1963] 3 WLR 156, [1963] 2 All ER 1030, 41 TC 43, (1963) 42 ATC 184, [1963] TR 209, (1963) 107 SJ 570....................................................................................... 6.190 IRC v John Emery see John Emery & Sons v IRC IRC v Laird Group Plc; sub nom Laird Group Plc v IRC [2003] UKHL 54, [2003] 1 WLR 2476, [2003] 4 All ER 669, [2003] STC 1349, 75 TC 399, [2003] BTC 385, [2003] STI 1821, (2003) 100(43) LSG 32...................... 6.19 IRC v Levy [1982] STC 442, 56 TC 68, [1982] BTC 235, (1982) 79 LSG 988, (1982) 126 SJ 413....................................................................................... 6.3 IRC v Lloyds Private Banking Ltd [1998] STC 559, [1999] 1 FLR 147, [1998] 2 FCR 41, [1998] BTC 8020, [1999] Fam Law 309, (1998) 95(19) LSG 23, (1998) 142 SJLB 164.............................................................. 1.11, 6.243, 7.21 IRC v Lord Hamilton of Dalzell (1926) 10 TC 406........................................... 6.78 IRC v Lysaght see Lysaght v IRC IRC v Macpherson [1989] AC 159, [1988] 2 WLR 1261, [1988] 2 All ER 753, [1988] STC 362, [1988] 2 FTLR 199, [1988] BTC 8065, (1988) 132 SJ 821......................................................................................................6.285, 7.34 IRC v Matthews Executors [1984] STC 386...................................................... 8.3

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Table of Cases IRC v McGuckian; McGuckian v IRC [1997] 1 WLR 991, [1997] 3 All ER 817, [1997] STC 908, [1997] NI 157, 69 TC 1, [1997] BTC 346, (1997) 94(27) LSG 23, (1997) 141 SJLB 153.................................................6.200, 10.32 IRC v McMullen [1981] AC 1, [1980] 2 WLR 416, [1980] 1 All ER 884, 54 TC 413, [1980] TR 85, (1980) 124 SJ 206....................................................... 11.7 IRC v Medical Charitable Society for the West Riding of Yorkshire (1926) 11 TC 1............................................................................................................ 11.5 IRC v Miller (1930) 15 TC 25............................................................................ 6.79 IRC v Mills (Hayley); sub nom Mills (Hayley) v IRC [1975] AC 38, [1974] 2 WLR 325, [1974] 1 All ER 722, [1974] STC 130, 49 TC 367, [1974] TR 39, (1974) 118 SJ 205................................................................................. 6.4 IRC v Morton (1941) 24 TC 259, 1941 SC 467, 1941 SLT 388........................ 6.3 IRC v National Anti Vivisection Society [1948] AC 31, [1947] 2 All ER 217, 63 TLR 424, 28 TC 311, [1947] LJR 1112, 177 LT 226................................. 11.15 IRC v Nicolson; sub nom IRC v Frank Butler Memorial Fund Trustees [1953] 1 WLR 809, [1953] 2 All ER 123, 46 R & IT 384, 34 TC 354, (1953) 32 ATC 203, [1953] TR 171, (1953) 97 SJ 438............................................... 6.191 IRC v Oldham Training & Enterprise Council [1996] STC 1218, 69 TC 231...... 11.12 IRC v Pay (1955) 48 R & IT 412, 36 TC 109, (1955) 34 ATC 223, [1955] TR 165, HC....................................................................................................... 6.4 IRC v Payne (1940) 23 TC 610, (1941) 110 LJ KB 323.................................... 6.189 IRC v Peeblesshire Nursing Association( 1927) 11 TC 335, 1927 SC 215, 1927 SLT 98......................................................................................................... 11.9 IRC v Plummer [1980] AC 896, [1979] 3 WLR 689, [1979] 3 All ER 775, [1979] STC 793, 54 TC 1, [1979] TR 339, (1979) 123 SJ 769............... 6.3, 16.19 IRC v Pratt [1982] STC 756, 57 TC 1, (1982) 79 LSG 1444............................. 10.33 IRC v Prince-Smith (1943) 25 TC 84................................................................. 6.3 IRC v Rainsford-Hannay (1941) 24 TC 273....................................................... 6.189 IRC v Regent Trust Co Ltd [1980] 1 WLR 688, [1980] STC 140, 53 TC 54, [1979] TR 401, (1980) 124 SJ 49............................................................7.17, 10.9 IRC v Richards Executorsm [1971] 1 WLR 571, [1971] 1 All ER 785, 1971 SC (HL) 60, 1971 SLT 107, 21 TC 626, [1971] TR 2, (1971) 115 SJ 225....... 6.108 IRC v Roberts Marine Mansions Trustees (1927) 11 TC 425, (1926) 43 TLR 270...................................................................................................... 11.9 IRC v Schroder [1983] STC 480, 57 TC 94, [1983] BTC 288.....................10.33, 10.44 IRC v Stannard [1984] 1 WLR 1039, [1984] 2 All ER 105, [1984] STC 245, (1984) 81 LSG 1523, (1984) 128 SJ 400.................................................... 6.279 IRC v Stype Investments (Jersey) Ltd; Clore (Deceased) (No 1), Re [1982] Ch 456, [1982] 3 WLR 228, [1982] 3 All ER 419, [1982] STC 625, [1982] BTC 8039................................................................................................. 3.6, 6.279 IRC v Stype Trustees (Jersey) Ltd; sub nom Clore (Deceased) (No 3), Re [1985] 1 WLR 1290, [1985] 2 All ER 819, [1985] STC 394, (1986) 83 LSG 205...................................................................................................... 6.279 IRC v Tayport Town Council (1936) 20 TC 191................................................ 11.9 IRC v Temperance Council of the Christian Churches of England & Wales (1926) 10 TC 748........................................................................................ 11.15 IRC v Tennant, 24 TC 215........................................................................... 6.188, 10.46 IRC v Trustees of Sir John Aird’s Settlement [1983] STC 700.......................... 7.21 IRC v Wachtel [1971] Ch 573, [1970] 3 WLR 857, [1971] 1 All ER 271, 46 TC 543, [1970] TR 195, (1970) 114 SJ 705.................................................. 6.3, 6.225

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Table of Cases IRC v Warden (1939) 22 TC 416........................................................................ 6.190 IRC v White (Re Clerkenwell Green Association of Craftsmen) (1980) 55 TC 651........................................................................................................ 11.7 IRC v Williamson (1928) 14 TC 335.................................................................. 6.9 IRC v Willoughby [1997] 1 WLR 1071, [1997] 4 All ER 65, [1997] STC 995, 70 TC 57, [1997] BTC 393, (1997) 94(29) LSG 28, (1997) 147 NLJ 1062, (1997) 141 SJLB 176.................................................................................. 10.26 IRC v Wright; sub nom IRC v Coke [1927] 1 KB 333....................................... 4.73 IRC v Yorkshire Agricultural Society (1927) 13 TC 58...................................... 11.9 IRC v Zorab (1926) 11 TC 289...........................................................................  5.19 Icebreaker 1 LLP v HMRC [2010] UKUT 477 (TCC), [2011] STC 1078, [2011] 1 WLUK 434, [2011] BTC 1579, [2011] STI 372.......................... 1.119 Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589, [1991] 2 All ER 597, [1991] ICR 524, [1991] IRLR 66, [1990] PLR 239, (1991) 88(9) LSG 39, (1991) 141 NLJ 55..............................................3.27, 18.56 Imperial Continental Gas Association v Nicholson (1877) 1 TC 138................ 5.81 In the marriage of Ashton (1986) FLC 91–777.................................................. 1.42 In the marriage of Harris (1991) 104 FLR 458................................................... 1.43 In the matter of Renard 108 Misc 2d 31............................................................. 1.74 Inchyra (Baron) v Jennings [1966] Ch 37, [1965] 3 WLR 166, [1965] 2 All ER 714, 42 TC 388, (1965) 44 ATC 129, [1965] TR 141, (1965) 109 SJ 356......................................................................................................... 5.104 India v Taylor; sub nom Delhi Electric Supply & Traction Co Ltd, Re [1955] AC 491, [1955] 2 WLR 303, [1955] 1 All ER 292, 48 R & IT 98, (1955) 34 ATC 10, [1955] TR 9, (1955) 99 SJ 94......................................4.95, 7.17, 10.9, 10.105 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, [1972] 2 All ER 162, (1972) 116 SJ 255, Assizes (Birmingham).......................... 4.42 Ingle v Farrand [1927] AC 417........................................................................... 6.320 Ingram v IRC [2000] 1 AC 293, [1999] 2 WLR 90, [1999] 1 All ER 297, [1999] STC 37, [1999] L & TR 85, [1998] BTC 8047, [1998] EG 181 (CS), (1999) 96(3) LSG 33, (1999) 143 SJLB 52, [1998] NPC 160............. 6.213, 6.292 Institution of Civil Engineers v IRC (1931) 16 TC 158..................................... 11.7 Interfish Ltd v HMRC [2014] EWCA Civ 876, [2015] STC 55, [2014] 6 WLUK 859. [2014] BTC 34, [2014] STI 2286....................................................... 1.107 Iveagh v IRC; sub nom Iveagh Trusts, Re [1954] Ch 364, [1954] 2 WLR 494, [1954] 1 All ER 609, (1954) 47 R & IT 157, (1954) 33 ATC 47, [1954] TR 47, (1954) 98 SJ 194................................................................................... 10.4 J J Leslie Engineers Co Ltd (in liquidation), Re [1976] 1 WLR 292, [1976] 2 All ER 85, (1976) 120 SJ 146........................................................................... 4.72 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), [2017] 10 WLUK 233, 20 ITELR 905 ............................................. 1.133 Jackson’s Trustees v IRC (1942) 25 TC 13........................................................ 6.68 Jaffa v Taylor Gallery; Jaffa v Harris (The Times, 21 March 1990)................... 3.16 Jaffray v Marshall [1993] 1 WLR 1285, [1994] 1 All ER 143........................... 4.59 James v Allen (1817) 36 ER 7............................................................................ 12.7 James, Re (1908) 98 LT 438............................................................................... 5.37 Jamieson v IRC see IRC v Jamieson

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Table of Cases Jasmine Trustees Ltd v Wells & Hind (A Firm) [2007] EWHC 38 (Ch), [2008] Ch 194, [2007] 3 WLR 810, [2007] 1 All ER 1142, [2007] STC 660, [2007] Pens LR 71, [2007] BTC 185, [2007] WTLR 489, (2006-07) 9 ITELR 574, [2007] STI 261....................................................................... 2.3, 4.25 Jeffreys v Jeffreys (1841) Cr & Ph 138............................................................... 3.20 Jeffs (Inspector of Taxes) v Ringtons Ltd [1986] 1 WLR 266, [1986] 1 All ER 144, [1985] STC 809, 58 TC 680, (1985) 129 SJ 894................................ 16.26 Jenkins (Inspector of Taxes) v Brown; sub nom Warrington (Inspector of Taxes) v Brown [1989] 1 WLR 1163, [1989] STC 577, 62 TC 230...................... 8.3 Jenners Princes Street Edinburgh Ltd v IRC [1998] STC (SCD) 196; Johnston v Britannia Airways Ltd [1994] STC 763................................................... 16.50 Jiggens v Low [2010] EWHC 1566 (Ch), [2010] STC 1899, [2010] 6 WLUK 712, [2010] BTC 631, [2010] WTLR 1803, 13 ITELR 169, [2010] STI 2122...................................................................................................... 1.103 Joel’s Will Trusts, Re; sub nom Rogerson v Brudenell-Bruce [1967] Ch 14, [1966] 3 WLR 209, [1966] 2 All ER 482, (1966) 110 SJ 570.................... 4.79 John Hood & Co Ltd v Magee (1918) 7 TC 327................................................ 5.82 John Lewis Properties Plc v IRC [2000] STC (SCD) 494, [2000] STI 1467..... 6.200 Johnston (Inspector of Taxes) v Britannia Airways [1994] STC 763, 67 TC 99.......................................................................................................... 16.50 Jones v Garnett (Inspector of Taxes) [2007] UKHL 35, [2007] 1 WLR 2030, [2008] Bus LR 425, [2007] 4 All ER 857, [2007] STC 1536, [2007] ICR 1259, [2007] 3 FCR 487, 78 TC 597, [2007] BTC 476, [2007] WTLR 1229, [2007] STI 1899, (2007) 157 NLJ 1118, (2007) 151 SJLB 1024..... 6.7, 6.8, 15.19 Jones v Lock (1865-66) LR 1 Ch App 25........................................................... 3.17 Jones v Wilcock (Inspector of Taxes) [1996] STC (SCD) 389........................... 6.127 Jones v Wright (1927) 13 TC 121....................................................................... 6.76 Jones, Re; sub nom Jones v Jones [1933] Ch 842............................................... 6.61 Jopp v Wood (1865) 4 De GJ & Sm 616............................................................ 5.40 Jordan, Re; sub nom Hayward v Hamilton [1904] 1 Ch 260.............................. 4.60 Jubb, Re (1941) 20 ATC 297............................................................................... 6.61 Judge (Walden’s Personal Representative) v Revenue & Customs Commissioners [2005] STC (SCD) 863, [2005] WTLR 1311, (2006-07) 9 ITELR 21, [2005] STI 1800........................................................................ 1.11 K Kayford Ltd (in liquidation), Re [1975] 1 WLR 279, [1975] 1 All ER 604, 1974) 118 SJ 752....................................................................................... 1.34, 3.4 Kay’s Settlement Trusts, Re; sub nom Broadbent v MacNab [1939] Ch 329..... 3.20 Keech v Sandford, 25 ER 223, (1726) Sel Cas Ch 61........................................ 4.41 Keen, Re; sub nom Evershed v Griffiths [1937] Ch 236.................................... 3.25 Kelly (Inspector of Taxes) v Rogers [1935] 2 KB 446, (1935) 19 TC 692.... 5.101, 6.22 Kemmis v Kemmis (Welland intervening); Lazard Brothers (Jersey) v Norah Holdings [1988] 1 WLR 1307, [1988] 2 FLR 223, (1988) 132 SJ 1697.... 14.18 Keren Kayemeth Le Jisroel Ltd v IRC (1932) 17 TC 27.................................... 11.15 Kerrison v HMRC [2019] UKUT 8 (TCC), [2019] 4 WLR 8, [2019] STC 614, [2019] 1 WLUK 254, [2019] STI 625........................................................ 1.161 Ker’s Settlement Trusts, Re [1963] Ch 553. [1963] 2 WLR 1210, [1963] 1 All ER 801, (1963) 107 SJ 415......................................................................... 2.10

lxxxviii

Table of Cases Kidson (Inspector of Taxes) v MacDonald; sub nom Kidson (Inspector of Taxes) v Mawle’s Executors [1974] Ch 339, [1974] 2 WLR 566, [1974] 1 All ER 849, [1974] STC 54, 49 TC 503, [1973] TR 259, (1974) 118 SJ 297.............................................................................................................. 8.3 King v Walden (Inspector of Taxes) [2001] STC 822, [2001] BPIR 1012, 74 TC 45, [2001] BTC 170, 3 ITL Rep 682, [2001] STI 837; affirming [2000] STC (SCD) 179, [2000] STI 641................................................................ 19.39 Kinloch v IRC (1929) 14 TC 736.................................................................... 5.18, 5.27 Kirkham v Williams (Inspector of Taxes) [1991] 1 WLR 863, [1991] STC 342, 64 TC 253, [1991] STI 532, (1991) 88(28) LSG 39................................... 17.26 Kirkness (Inspector of Taxes) v John Hudson & Co Ltd; sub nom John Hudson & Co Ltd v Kirkness (Inspector of Taxes) [1955] AC 696, [1955] 2 WLR 1135, [1955] 2 All ER 345, 48 R & IT 352, 36 TC 28, (1955) 34 ATC142, [1955] TR 145, (1955) 99 SJ 368............................................................... 6.320 Kleinwort Benson Ltd v Lincoln City Council; Kleinwort Benson Ltd v Birmingham City Council; Kleinwort Benson Ltd v Southwark LBC; Kleinwort Benson Ltd v Kensington & Chelsea RLBC [1999] 2 AC 349, [1998] 3 WLR 1095, [1998] 4 All ER 513, [1998] Lloyd’s Rep Bank 387, [1999] CLC 332, (1999) 1 LGLR 148, (1999) 11 Admin LR 130, [1998] RVR 315, (1998) 148 NLJ 1674, (1998) 142 SJLB 279, [1998] NPC 145..................................................................................................... 3.81 Kleinwort’s Settlement Trusts, Re; sub nom Westminster Bank Ltd v Bennett [1951] Ch 860, [1951] 2 All ER 328, [1951] 2 TLR 91, (1951) 95 SJ 415......................................................................................................4.75, 4.87 Klug v Klug [1918] 2 Ch 67............................................................................... 4.51 Kneen (Inspector of Taxes) v Martin [1935] 1 KB 499, 19 TC 33..................... 5.69 Knight v Browne (1861) 7 Jur NS 894............................................................... 13.3 Knight v Knight (1840) 3 Beav 148................................................................... 1.32 Kolb’s Will Trusts, Re; sub nom Lloyd’s Bank v Ullmann (1962) 106 SJ 669; reversing [1962] Ch 531, [1961] 3 WLR 1034, [1961] 3 All ER 811, (1961) 105 SJ 888....................................................................................... 1.35 Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035, [1988] STC 728, (1988) 85(33) LSG 44, (1988) 132 SJ 1118, PC (HK)..... 6.239 L Lacey ex p Lacey, (1802) 6 Ves 625................................................................... 3.40 Laerstate BV v R & C Comrs [2009] UKFTT 209 (TC), [2009] SFTD 551, [2009] STI 2669, FTT (Tax)................................................................... 5.81, 12.22 Lai Min Tet v Lai Min Kin [2004] SGHC 3, (2004-05) 7 ITELR 148, HC (Sing)........................................................................................................... 3.36 Lake v Bayliss [1974] 1 WLR 1073, [1974] 2 All ER 1114, (1974) 28 P & CR 209, (1974) 118 SJ 532............................................................................... 3.43 Lake v Lake [1989] STC 865.............................................................................. 6.266 Lambert (Administrators of CID Pension Fund) v Glover (Inspector of Taxes) [2001] STC (SCD) 250. [2001] STI 1524.................................................. 18.14 Land Securities Plc v HMRC [2013] UKUT 124 (TCC), [2013] STC 1043, [2013] 3 WLUK 386, 81 TC 843, [2013] BTC 1773, [2013] STI 1493..... 1.160 Langham (Inspector of Taxes) v Veltema [2004] EWCA Civ 193, [2004] STC 544, 76 TC 259, [2004] BTC 156, [2004] STI 501, (2004) 148 SJLB 269.... 6.7, 19.41, 19.42

lxxxix

Table of Cases Last Viceroy Restaurant v Jackson (Inspector of Taxes) [2000] STC 1093, 73 TC 322, [2000] STI 1651............................................................................ 19.39 Latilla v IRC [1943] AC 377, 25 TC 107.....................................................10.30, 10.39 Law Shipping Co Ltd v IRC (1923-24) 17 Ll L Rep 184, 1924 SC 74, 1923 SLT 742, 12 TC 621.................................................................................... 17.10 Lawrence v IRC (1940) 23 TC 333.................................................................... 11.5 Lawton, Re (1958) 37 ATC 216, [1958] TR 249................................................ 5.50 Leach, Re; sub nom Leach v Leach [1912] 2 Ch 422......................................... 13.2 Leahy v Attorney General of New South Wales [1959] AC 457, [1959] 2 WLR 722, [1959] 2 All ER 300, (1959) 103 SJ 391, PC (Aus)........................... 1.67 Learoyd v Whiteley; sub nom Whiteley v Learoyd; Whiteley, Re (1887) LR 12 App Cas 727................................................................................................ 4.57 Lee v HMRC [2017] UKFTT 279 (TC), [2017] 4 WLUK 180, [2017] SFTD 826, 19 ITL Rep 741................................................................................... 1.138 Lee v IRC (1941) 24 TC 207....................................................................... 10.29, 10.44 Lee v Jewitt (Inspector of Taxes) [2000] STC (SCD) 517, [2000] STI 1517..... 6.110 Leigh’s Will Trusts, Re; sub nom Handyside v Durbridge [1970] Ch 277, [1969] 3 WLR 649, [1969] 3 All ER 432, (1969) 113 SJ 758.................... 1.50 Lemos Trust Settlement, Re [1992/3] CILR 26................................................1.74, 4.53 Lemos v Coutts & Co [1992–3] CILR 5/460......................................... 1.36, 1.74, 4.53 Letterstedt v Broers; sub nom Vicomtesse Montmort v Broers (1883-84) LR 9 App Cas 371, [1881-85] All ER Rep 882, PC (Cape)................................ 4.33 Levene v IRC [1928] AC 217, [1928] All ER Rep 746, 13 TC 486..........5.7, 5.18, 5.38 Lewis (Inspector of Taxes) v Rook [1992] 1 WLR 662, [1992] STC 171, 64 TC 567, [1992] STI 206, [1992] EG 21 (CS), (1992) 89(14) LSG 32, (1992) 136 SJLB 83, [1992] NPC 23..................................................................... 6.126 Lewis v Nobbs (1878) LR 8 Ch D 591............................................................... 4.44 Lewis v Tamplin [2018] EWHC 777 (Ch), [2018] 4 WLUK 190, [2018] WTLR 215, 21 ITELR 277 ..................................................................................1.9, 1.155 Lily P Tang v HMRC [2019] UKFTT 81 (TC), [2019] 2 WLUK 116 .............. 1.164 Lindus & Hortin v IRC (1933) 17 TC 442......................................................6.68, 7.16 Lipinski’s Will Trusts, Re [1976] Ch 235, [1976] 3 WLR 522, [1977] 1 All ER 33, (1976) 120 SJ 473................................................................................. 1.69 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, [1991] 3 WLR 10, [1992] 4 All ER 512, (1991) 88(26) LSG 31, (1991) 141 NLJ 815, (1991) 135 SJLB 36....................................................................................................4.58, 4.71 Lister & Co v Stubbs (1890) 45 Ch D 1............................................................. 1.46 Lister, ex p Bradford Overseers & Bradford Corp, Re [1926] Ch 149............... 4.31 Lloyd Cheyham & Co v Littlejohn & Co [1987] BCLC 303, [1986] PCC 389.... 16.50 Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387, [1973] 3 All ER 754, (1973) 117 SJ 761................................................................................................... 14.14 Lloyds Bank Plc v Duker [1987] 1 WLR 1324, [1987] 3 All ER 193, (1987) 84 LSG 3254, (1987) 131 SJ 1358................................................................... 4.53 Lloyds Bank Plc v Rosset [1991] 1 AC 107, [1990] 2 WLR 867, [1990] 1 All ER 1111, [1990] 2 FLR 155, (1990) 22 HLR 349, (1990) 60 P & CR 311, (1990) 140 NLJ 478.......................................................................1.24, 3.43, 15.14 Lloyds Bank v Cola Cristal (Jersey) 1 OFLR 91................................................ 4.40 Lloyd’s Settlement, Re; sub nom Lloyd v Leeper [1967] 2 WLR 1078, [1967] 2 All ER 314 (Note), (1967) 111 SJ 258..................................................... 3.65 Loewenstein v De Salis (1926) 10 TC 424......................................................... 5.19

xc

Table of Cases Lofthouse (A Minor), Re (1885) LR 29 Ch D 921............................................. 4.51 Lombe v Stoughton (1841) 59 ER 11 48............................................................ 12.7 London Hospital Medical College v IRC [1976] 1 WLR 613, [1976] 2 All ER 113, 51 TC 365, [1976] TR 29, (1976) 120 SJ 250.................................... 11.6 London Syndicate v Lord (1878) LR 8 Ch D 84................................................ 4.62 London Wine Co (Shippers), Re [1986] PCC 121.............................................. 1.35 Londonderry’s Settlement, Re; sub nom Peat v Walsh [1965] Ch 918, [1965] 2 WLR 229, [1964] 3 All ER 855, (1964) 108 SJ 896.................................. 1.9, 4.53 Longson v Baker (Inspector of Taxes) [2001] STC 6, 73 TC 415, [2001] BTC 356, [2001] STI 44, (2001) 98(3) LSG 43.................................................. 6.126 Lonrho Plc v Al-Fayed (No 1); sub nom Lonrho Plc v Fayed [1992] 1 AC 448, [1991] 3 WLR 188, [1991] 3 All ER 303, [1991] BCC 641, [1991] BCLC 779, (1991) 141 NLJ 927, (1991) 135 SJLB 68......................................... 14.9 Lord Chetwode v IRC [1977] 1 WLR 248, [1977] 1 All ER 638, [1977] STC 64, 51 TC 647, [1977] TR 11, (1977) 121 SJ 172...................... 6.78, 6.193, 10.33 Lord Conway v Duke of Buckingham (1711) 1 ER 349.................................... 12.7 Lord Delamere (1939) 22 TC 525...................................................................... 6.190 Lord Gainsborough Watcombe Terra Cotta Co (1885) 54 LJ Ch 991................ 4.58 Lord Howard de Walden v Beck (1940) 23 TC 384........................................... 10.29 Lord Howard de Walden v IRC (1941) 25 TC 121.......................................10.29, 10.45 Lord Inchiquin v IRC (1948) 41 R & IT 570, 31 TC 125, [1948] TR 343......... 5.19 Lord Inglewood v IRC; sub nom Baron Inglewood v IRC [1983] 1 WLR 366, [1983] STC 133, (1983) 127 SJ 89.......................................................9.22, 10.104 Lord Tollemache v IRC (1926) 11 TC 277......................................................... 6.74 Lord Vestey’s Executors v IRC; Lord Vestey’s Executors v Colquhoun (Inspector of Taxes) [1949] 1 All ER 1108, (1949) 42 R & IT 314, (1949) 42 R & IT 325, 31 TC 1, [1949] TR 149, [1949] WN 233........6.189, 10.33, 10.44 Loring v Woodland Trust [2014] EWCA Civ 1314, [2015] 1 WLR 3238, [2015] 2 All ER 32, [2015] STC 598, [2014] 10 WLUK 467, [2015] WTLR 159, [2014] STI 3239 ......................................................................................... 1.110 Luo v Hui (Deceased) (2008-09) 11 ITELR 218................................................ 1.25 Lutea Trustees Ltd v Orbis Trustees Guernsey Ltd, 1997 SC 255, 1998 SLT 471, 1997 SCLR 735, 1997 GWD 19-927.................................................. 4.47 Lysaght (Deceased), Re; sub nom Hill v Royal College of Surgeons [1966] Ch 191, [1965] 3 WLR 391, [1965] 2 All ER 888, (1965) 109 SJ 577............ 3.71 Lysaght v Edwards (1875-76) LR 2 Ch D 499................................................... 3.12 Lysaght v IRC [1928] AC 234, [1928] All ER Rep 575, 13 TC 511...... 5.18, 5.27, 5.38 M MA v Finland (Application 27793/95)............................................................... 6.323 MJB/SJB Amethyst Trust (2002) 5 ITELR 372.................................................. 3.75 Mabbett, Re; sub nom Pitman v Holborrow [1891] 1 Ch 707............................ 13.2 McArdle, Re [1951] Ch 669, [1951] 1 All ER 905, (1951) 95 SJ 284............... 3.18 Macadam, Re; Dallow & Moscrop v Codd [1946] Ch 73, [1945] 2 All ER 664........................................................................................................ 4.42 McBlain v Cross (1871) 25 LT 804.................................................................... 3.9 McBurney v McBurney; sub nom Betsam Trust, Re [2009] WTLR 1489 (IoM)........................................................................................................... 3.80 McCormack v HMRC [2018] UKFTT 200 (TC), [2018] 4 WLUK 135, [2018] SFTD 1066, [2018] STI 1113 .................................................................... 1.151

xci

Table of Cases McCormick v Grogan (1869-70) LR 4 HL 82..................................................1.25, 3.22 McCrone v IRC, 1967 SC 192, 1967 SLT 198, 44 TC 142, (1967) 46 ATC 85, [1967] TR 95............................................................................................... 6.225 MacDonald v Dextra Accessories see Dextra Accessories Ltd v MacDonald (Inspector of Taxes) McDonald v Horn [1995] 1 All ER 961, [1995] I.CR 685, [1994] Pens LR 155, (1994) 144 NLJ 1515............................................................................. 4.40, 18.55 McDougall v IRC; sub nom: McDougall v Smith (Surveyor of Taxes) (1919) 1919 SC 86, 1918 2 SLT 281, 7 TC 134..................................................... 6.26 Macduff, Re; sub nom Macduff v Macduff [1896] 2 Ch 451............................. 12.1 MacFarlane v IRC (1929) 14 TC 532..............................................................6.78, 8.10 McGovern v Attorney General [1982] Ch 321, [1982] 2 WLR 222, [1981] 3 All ER 493, [1982] TR 157, (1981) 125 SJ 255........................................ 11.10, 11.14 McGrath v Wallis [1995] EWCA Civ 14, [1995] 2 FLR 114, [1995] 3 FCR 661, [1995] Fam Law 551, (1995) 92(15) LSG 41............................................. 3.36 McGreevy v HMRC [2017] UKFTT 690 (TC), [2017] 9 WLUK 149............... 1.143 McGregor (Inspector of Taxes) v Adcock [1977] 1 WLR 864, [1977] 3 All ER 65, [1977] STC 206, (1977) 242 EG 289, 51 TC 692, [1977] TR 23......... 6.134 Mackay v Douglas (1872) LR 14 Eq 106........................................................... 14.19 McKay v HMRC [2018] UKUT 378 (TCC), [2019] STC 83, [2018] 11 WLUK 391.................................................................................................. 1.153 McKelvey (Exor of McKelvey deceased) v R & C Comrs [2008] STC (SCD) 944, [2008] WTLR 1407, [2008] STI 1752................................................ 11.4 McKenzie, Re (1951) 51 SRNSW 293............................................................... 5.36 MacLaren’s Settlement Trusts, Re; sub nom Royal Exchange Assurance v MacLaren [1951] 2 All ER 414, [1951] 2 TLR 209, [1951] WN 394, (1951) 95 SJ 624......................................................................................... 4.85 MacLennan, Re; sub nom Few v Byrne [1939] Ch 750, [1939] 3 All ER 81..... 6.61 MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd; sub nom Westmoreland Investments Ltd v MacNiven (Inspector of Taxes) [2001] UKHL 6, [2003] 1 AC 311, [2001] 2 WLR 377, [2001] 1 All ER 865, [2001] STC 237, 73 TC 1, [2001] BTC 44, 3 ITL Rep 342, [2001] STI 168, (2001) 98(11) LSG 44, (2001) 151 NLJ 223, (2001) 145 SJLB 55, HL......................................................................................................... 10.52 McPhail v Doulton; Baden v Smith (No 1) [1971] AC 424, [1970] 2 WLR 1110, [1970] 2 All ER 228, (1970) 114 SJ 375.......................................... 1.37 McPherson v IRC. See IRC v Macpherson Macilster Todd Phillips Bodkins & Another v AMP General Insurance Ltd (2005) 8 ITELR 15...................................................................................... 4.57 Macpherson v IRC. See IRC v Macpherson Madsen Estate & Another (2007) 9 ITELR 903................................................. 3.34 Maitland’s Trustees v Lord Advocate, 1982 SLT 483, [1982] BTC 8054, OH.... 9.22 Makins v Elson [1977] 1 WLR 221, [1977] 1 All ER 572, [1977] STC 46, 51 TC 437, [1976] TR 281, (1976) 121 SJ 14................................................. 6.126 Malam, Re; sub nom Malam v Hitchens [1894] 3 Ch 578................................. 4.81 Mallender v IRC; sub nom IRC v Mallender [2001] STC 514, [2001] BTC 8013, [2001] WTLR 459, [2001] STI 548, [2001] NPC 62; reversing [2000] STC (SCD) 574, [2000] STI 1656.................................................. 6.250 Manan (Abdul), Re [1971] 1 WLR 859, [1971] 2 All ER 1016, (1971) 115 SJ 289.......................................................................................................... 5.39

xcii

Table of Cases Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea); sub nom Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The Star Sea) [2001] UKHL 1, [2003] 1 AC 469, [2001] 2 WLR 170, [2001] 1 All ER 743, [2001] 1 All ER (Comm) 193, [2001] 1 Lloyd’s Rep 389, [2001] CLC 608, [2001] Lloyd’s Rep IR 247........................................................ 14.20 Manisty’s Settlement, Re; sub nom Manisty v Manisty [1974] Ch 17, [1973] 3 WLR 341, [1973] 2 All ER 1203, (1973) 117 SJ 665......................1.10, 1.38, 4.51 Mankowitz v Special Commissioners of Income Tax, 46 TC 707, [1971] TR 53.......................................................................................................... 10.56 Mara v Browne [1896] 1 Ch 199........................................................................ 4.69 Marchioness Conyngham v R & C Comrs (1928) 1 ITC 259............................ 6.82 Markey (Inspector of Taxes) v Sanders [1987] 1 WLR 864, [1987] STC 256, 60 TC 245, (1987) 84 LSG 1148, (1987) 131 SJ 743...................................... 6.126 Marks & Spencer Plc v HMRC (C-62/00) [2003] QB 866, [2003] 2 WLR 665, [2002] STC 1036, [2002] ECR I-6325, [2002] 7 WLUK 342, [2002] 3 CMLR 9, [2002] CEC 572, [2002] BTC 5477, [2002] BVC 622, [2002] STI 1009 , ECJ............................................................................................ 6.324 Marquess of Hertford v IRC see Seymour (Ninth Marquess of Hertford) v IRC Marshall (Inspector of Taxes) v Kerr [1995] 1 AC 148, [1994] 3 WLR 299, [1994] 3 All ER 106, [1994] STC 638, 67 TC 81, (1994) 91(30) LSG 32, (1994) 138 SJLB 155........................................................6.98, 6.171, 6.267, 9.21, 10.11, 10.85 Marshall, Re; sub nom Marshall v Whateley [1920] 1 Ch 284........................... 3.2 Martin v HMRC [2014] UKUT 429 (TCC), [2015] STC 478, [2014] 9 WLUK 486, [2014] BTC 527, [2014] STI 3021..................................................... 1.111 Martin v IRC [1995] STC (SCD) 5..................................................................... 6.202 Mary Clark Home’s Trustees v Anderson [1904] 2 KB 645, (1904) 5 TC 48.... 11.5 Mascall v Mascall (1985) 50 P & CR 119, (1984) 81 LSG 2218....................... 3.19 Mason v IRC (1944) 26 TC 265......................................................................... 6.3 Massingbird’s Settlement, Re (1890) 63 LT 296................................................ 4.58 Matthews v Martin [1991] BTC 8048................................................................ 6.266 Mawsley Machinery Ltd v Robinson [1998] STC (SCD) 236)....................16.15, 16.27 Mayes v R & C Comrs [2011] EWCA Civ 407, [2011] STC 1269, 81 TC 247, [2011] BTC 261, [2011] STI 1444............................................................. 16.29 Melville v IRC [2001] EWCA Civ 1247, [2002] 1 WLR 407, [2001] STC 1271, 74 TC 372, [2001] BTC 8039, [2001] WTLR 887, (2001-02) 4 ITELR 231, [2001] STI 1106, (2001) 98(37) LSG 39, [2001] NPC 132...........1.40, 6.119, 6.120, 6.181, 6.188, 7.4 Memec Plc v IRC 1998] STC 754, 71 TC 77, [1998] BTC 251, 1 ITL Rep 3 affirming [1996] STC 1336......................................................................... 7.14 Mengel’s Will Trusts, Re; sub nom Westminster Bank Ltd v Mengel [1962] Ch 791, [1962] 3 WLR 311, [1962] 2 All ER 490, (1962) 106 SJ 510............ 3.74 Mercade & Shenk v Citibank (Bahamas) Ltd Eq No 1252................................ 4.26 Mercier v Mercier [1903] 2 Ch 98...................................................................... 3.36 Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, [1991] 2 All ER 513, [1990] Pens LR 9................................................................... 3.75, 3.82, 3.84, 18.56 Michelham’s Will Trusts, Re [1964] Ch 550, [1963] 2 WLR 1238, [1968] 2 All ER 188, (1963) 107 SJ 254......................................................................... 3.65

xciii

Table of Cases Midland Bank Plc v Wyatt [1997] 1 BCLC 242, [1995] 1 FLR 697, [1995] 3 FCR 11, [1996] BPIR 288, [1994] EG 113 (CS)........................................ 1.41 Midland Bank Trust Co Ltd v Green (No 1) [1981] AC 513, [1981] 2 WLR 28, [1981] 1 All ER 153, (1981) 42 P & CR 201, (1981) 125 SJ 33................ 3.38 Midland Counties Institution of Engineers (1928) 14 TC 285........................... 11.12 Miesgaes v IRC, 50 R & IT 643, 37 TC 493, (1957) 36 ATC 201, [1957] TR 231.....................................................................................................5.18, 5.27 Millar’s Trustees v Polson (1897) 5 SLT 94.................................................... 4.58, 4.65 Miller v IRC [1987] STC 108............................................................................. 7.21 Miller v Teale (1954) 92 Ch R 406..................................................................... 5.38 Milne (Exors of) v IRC (1956) 49 R & IT 528, 37 TC 10, (1956) 35 ATC 277, [1956] TR 283............................................................................................. 6.68 Milroy v Lord, 45 ER 1185, (1862) 4 De GF & J 264.................................... 3.16, 3.18 Minwalla v Minwalla [2004] EWHC 2823 (Fam), [2005] 1 FLR 771, [2006] WTLR 311, (2004-05) 7 ITELR 457, [2005] Fam Law 357...................... 1.42 Mitchell v IRC (1933) 18 TC 108....................................................................... 5.13 Moffat v R & C Comrs [2006] STC (SCD) 380, [2006] STI 1519.................... 18.36 Montague Trust Co (Jersey) v IRC [1989] STC 477.......................................... 6.242 Montagu’s Settlement Trusts, Re; sub nom: Duke of Manchester v National Westminster Bank Plc [1987] Ch 264, [1987] 2 WLR 1192, [1992] 4 All ER 308, (1987) 84 LSG 1057, (1987) 131 SJ 411...................................... 3.39 Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370........................................................................................................ 1.46 Moore (Martha Mary), Re; sub nom Prior v Moore [1901] 1 Ch 936................ 3.48 Moore v IRC [1985] Ch 32, [1984] 3 WLR 341, [1984] 1 All ER 1108, [1984] STC 236, (1984) 81 LSG 900, (1984) 128 SJ 333..................................... 7.1, 7.21 Moore v Thompson (Inspector of Taxes) [1986] STC 170, 60 TC 15, (1986) 83 LSG 1559.................................................................................................... 6.126 Morant (John) (Settlement (Trustees) v IRC [1948] 1 All ER 732, 41 R & IT 237, 30 TC 147, [1948] TR 71, (1948) 92 SJ 309...................................... 6.68 Morgan v Cilento; sub nom Morgan (Attorney of Shaffer) v Cilento [2004] EWHC 188 (Ch), [2004] WTLR 457.......................................................... 5.51 Morice v Bishop of Durham (1804) 9 Ves 399, 32 ER 947, (1805) 10 Ves Jr 522........................................................................................................... 12.7 Morley v Rennaldson (1843) 2 Hare 570........................................................... 13.2 Morris’ Will Trusts, Re; sub nom Public Trustee v Morris [1960] 1 WLR 1210, [1960] 3 All ER 548, (1960) 104 SJ 934.................................................... 4.75 Moss & Pearce v Integro 1 OFLR 427............................................................... 4.51 Moss v Hancock [1899] 2 QB 111..................................................................... 1.48 Moss, Re; sub nom Hobrough v Harvey [1949] 1 All ER 495, 65 TLR 299, [1949] WN 93, (1949) 93 SJ 164................................................................ 12.4 Movitex v Bulfield (1986) 2 BCC 99403, [1988] BCLC 104............................ 4.59 Mulligan, Re[1998] 1 NZLR 481....................................................................... 4.57 Munroe v Coms of Stamp Duties of New South Wales [1933] All ER Rep 185.6.301 Murphy v Murphy 2 OFLR 125.......................................................................... 4.53 Murphy v Murphy; sub nom Murphy’s Settlements, Re [1999] 1 WLR 282, [1998] 3 All ER 1, [1998] NPC 62............................................................. 4.53 Murray Group Holdings Ltd v HMR [2014] UKUT 292 (TCC); [2015] STC 1; [2014] 7 WLUK 292, [2014] BTC 521, [2014] STI 2409.......................... 1.109 Murray v IRC (1926) 11 TC 133..................................................................... 6.78, 8.10

xciv

Table of Cases N NBPF Pension Trustees Ltd v Warnock-Smith; Bus Employees Pension Trustees Ltd v Wheeler [2008] EWHC 455 (Ch), [2008] 2 All ER (Comm) 740, [2008] Pens LR 211, [2009] WTLR 447, (2008) 105(14) LSG 31.... 3.60 National & Provincial Building Society v United Kingdom (21319/93) [1997] STC 1466, [1997] 10 WLUK 454, (1998) 25 EHRR 127, 69 TC 540, [1997] BTC 624, [1998] HRCD 34 , ECtHR.............................................. 6.323 National Bank of Kuwait SAK v Menzies [1994] BCC 119, [1994] 2 BCLC 306................................................................................................... 14.10 National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373, PC (Aus)..................................................................... 4.57 Nearco Trust Co (Jersey) Ltd v AM; sub nom M & L Trusts, Re; Nearco Trustee Co (Jersey) Ltd v AM [2003] WTLR 491, (2002-03) 5 ITELR 656 (Royal Ct (Jer))....................................................................................................... 1.42 Neeld (No 1), Re; sub nom Carpenter v Inigo-Jones [1962] Ch 643, [1962] 2 WLR 1097, [1962] 2 All ER 335, (1962) 106 SJ 449................................. 3.58 Nelson Dance Family Settlement Trustees v MR & C Comrs; sub nom R & C Comrs v Nelson Dance Family Settlement Trustees [2009] EWHC 71 (Ch), [2009] STC 802, 79 TC 605, [2009] BTC 8003, [2009] WTLR 401, [2009] STI 260, [2009] NPC 11................................................................. 6.250 Nelson v Adamson [1941] 2 KB 12, (1941) 24 TC 36....................................... 5.104 Nelson v Larholt [1948] 1 KB 339, [1947] 2 All ER 751, 64 TLR 1, [1948] LJR 340....................................................................................................... 3.40 Nelson, Re; sub nom Norris v Nelson [1928] Ch 920........................................ 4.51 Nestlé v National Westminster Bank Plc [1993] 1 WLR 1260, [1994] 1 All ER 118, [1992] NPC 68............................................................. 4.57, 4.58, 4.99, 4.101 Netley v HMRC [2017] UKFTT 422 (TC), [2017] 5 WLUK 399..................... 1.142 Neubergh v IRC [1978] STC 181, 52 TC 79, [1977] TR 263, (1977) 121 SJ 852.......................................................................................................... 5.13 Neville Estates Ltd v Madden [1962] Ch 832, [1961] 3 WLR 999, [1961] 3 All ER 769, (1961) 105 SJ 806......................................................................... 1.68 New South Wales Stamp Duties Commissioner v Perpetual Trustee Co Ltd [1943] AC 425, PC (Aus)............................................................................ 6.302 New York Life Insurance Co v Public Trustee [1924] 2 Ch 101........................ 6.239 New Zealand Shipping Co Ltd v Stephens (1907) 5 TC 553............................. 5.81 New Zealand Shipping Co Ltd v Thew (1922) 8 TC 208................................... 5.81 New, Re; Leavers, Re; Morely, Re [1901] 2 Ch 534.......................................... 3.60 News Datacom Ltd v Atkinson (Inspector of Taxes) [2006] STC (SCD) 732, [2006] STI 2346.......................................................................................... 5.81 Nichols (Deceased), Re; sub nom Nichols v IRC [1975] 1 WLR 534, [1975] 2 All ER 120, [1975] STC 278, [1974] TR 411, (1974) 119 SJ 257............. 6.301 Northage, Re (1891) 60 LJ Ch 488.................................................................. 4.81, 4.85 Northcote’s Will Trusts, Re; sub nom Northcote v Northcote [1949] 1 All ER 442, [1949] WN 69..................................................................................... 4.35 Nova Scotia Trust v Barletta, Bahamas Supreme Court, EG No 550 of 1984.... 1.10 O OT Computers Ltd (In Administration) v First National Tricity Finance Ltd [2003] EWHC 1010 (Ch); [2007] WTLR 165, (2003-04) 6 ITELR 117... 1.39 O’Dwyer v Cafolla & Co (1948) 21 TC 374...................................................... 6.9

xcv

Table of Cases Oakes v Commissioner of Stamp Duties of New South Wales [1954] AC 57, [1953] 3 WLR 1127, [1953] 2 All ER 1563, 47 R & IT 141, (1953) 32 ATC 476, [1953] TR 453, (1953) 97 SJ 874, PC (Aus).............................. 6.302 Oakley v IRC [2005] STC (SCD) 343, [2005] WTLR 181, [2005] STI 224..... 1.11 Oatway, Re; sub nom Hertslet v Oatway [1903] 2 Ch 356................................. 4.70 Odeon Associated Theatres Ltd v Jones; sub nom Odeon Associated Cinemas v Jones [1973] Ch 288, [1972] 2 WLR 331, [1972] 1 All ER 681, 48 TC 257, [1971] TR 373, (1971) 115 SJ 850...............................................16.50, 17.10 Ogden v Trustees of the RHS Griffiths 2003 Settlement; sub nom Griffiths (Deceased), Re [2008] EWHC 118 (Ch), [2009] Ch 162, [2009] 2 WLR 394, [2008] 2 All ER 655, [2008] STC 776, [2009] BTC 8027, [2008] WTLR 685, [2008] STI 250........................................................................ 3.80 Ogilvie v Littleboy; sub nom Ogilvie v Allen (1899) 15 TLR 294; affirming (1897) 13 TLR 399..................................................................................... 3.80 Ogilvie, Re (1919) 35 TLR 218.......................................................................... 4.73 Ojjeh Trust, Re (1992–93) CILR 348................................................................. 4.53 O’Keefe (Deceased), Re; Poingdestre v Sherman [1940] Ch 124...................... 5.36 Oldham, Re [1927] WN 113............................................................................... 4.79 Olsson v Dyson (1969) 120 CLR 365, (1969) 43 ALJR 77, HC (Aus).............. 3.18 Ontario Treasurer v Aberdein [1947] AC 24, 62 TLR 637, [1947] LJR 410, PC (Can)...................................................................................................... 6.239 O’Rourke v Darbishire; sub nom Whitworth, Re [1920] AC 581....................... 4.53 Ostime (Inspector of Taxes) v Australian Mutual Provident Society [1960] AC 459, [1959] 3 WLR 410, [1959] 3 All ER 245, 52 R & IT 673, 38 TC 492, (1959) 38 ATC 219, [1959] TR 211, (1959) 103 SJ 811............................ 6.270 Ottaway v Norman [1972] Ch 698, [1972] 2 WLR 50, [1971] 3 All ER 1325, (1971) 116 SJ 38.......................................................................................1.25, 3.37 Oughtred v IRC [1960] AC 206, [1959] 3 WLR 898, [1959] 3 All ER 623, (1959) 38 ATC 317, [1959] TR 319, (1959) 103 SJ 896............................ 3.10 Outen’s Will Trusts, Re; sub nom Starling v Outen [1963] Ch 291, [1962] 3 WLR 1084, [1962] 3 All ER 478, (1962) 106 SJ 630................................. 4.85 Owen v Holmon (1853) 4 HL Cas 997............................................................... 3.97 Oxley v Hiscock; sub nom Hiscock v Oxley [2004] EWCA Civ 546, [2005] Fam 211, [2004] 3 WLR 715, [2004] 3 All ER 703, [2004] 2 FLR 669, [2004] 2 FCR 295, [2004] WTLR 709, (2003-04) 6 ITELR 1091, [2004] Fam Law 569, [2004] 20 EG 166 (CS), (2004) 101(21) LSG 35, (2004) 148 SJLB 571, [2004] NPC 70, [2004] 2 P & CR DG14........................... 3.44 P Padmore v IRC [1987] STC 36, (1987) 131 SJ 259........................................... 1.44 Padmore v IRC [2001] STC 280, 73 TC 470, [2001] BTC 36, 3 ITL Rep 315, [2001] STI 99, (2001) 98(6) LSG 46, (2001) 145 SJLB 27....................... 6.270 Page (Inspector of Taxes) v Lowther [1983] STC 799, 57 TC 199, (1983) 127 SJ 786; affirming [1983] STC 61, [1982] BTC 410, (1982) 126 SJ 857.... 6.60 Paget v IRC [1938] 2 KB 25, 21 TC 677............................................................ 6.200 Paget’s Settlement, Re; sub nom Baillie v De Brossard [1965] 1 WLR 1046, [1965] 1 All ER 58, (1965) 109 SJ 577...................................................... 2.10 Paine v Hall (1812) 18 Ves 475........................................................................... 3.24 Paintin & Nottingham Ltd v Miller Gale [1971] NZLR 164.............................. 1.43 Pallant v Morgan [1953] Ch 43, [1952] 2 All ER 951, [1952] 2 TLR 813......... 1.35

xcvi

Table of Cases Palmer v Maloney; sub nom Palmer v Moloney [1999] STC 890, 71 TC 502, [1999] BTC 357, (1999) 96(34) LSG 34, (1999) 149 NLJ 1515................ 6.124 Palmer v Simmonds (1854) 2 Drew 221............................................................. 1.35 Paradise Motor Co, Re [1968] 1 WLR 1125, [1968] 2 All ER 625, (1968) 112 SJ 271.......................................................................................................... 3.12 Paragon Finance Plc v DB Thakerar & Co; Paragon Finance Plc v Thimbleby & Co [1999] 1 All ER 400, (1998) 95(35) LSG 36, (1998) 142 SJLB 243...... 3.37 Paramount Airways Ltd (No  2), Re; sub nom Powdrill v Hambros Bank (Jersey) Ltd [1993] Ch 223, [1992] 3 WLR 690, [1992] 3 All ER 1, [1992] BCC 416, [1992] BCLC 710, (1992) 89(14) LSG 31, (1992) 136 SJLB 97, [1992] NPC 27............................................................................................ 14.15 Parkin, Re; sub nom Hill v Schwarz [1892] 3 Ch 510........................................ 3.20 Parry (Mrs RF Staveley’s Personal Representatives) v R & C Comrs [2014] UKFTT 419, [2014] WTLR 1265, [2014] STI 2415........................... 6.234, 6.285 Parry v HMRC [2017] UKUT 4 (TCC), [2017] STC 574, [2017] 1 WLUK 48, [2017] BTC 504, [2017] WTLR 1267..................................................1.141, 1.145 Parry, Re; sub nom Brown v Parry [1947] Ch 23, [1946] 2 All ER 413, 62 TLR 543, [1947] LJR 81, 175 LT 395, (1946) 90 SJ 478................................... 4.78 Passant v Jackson (Inspector of Taxes) [1986] STC 164, 59 TC 230, (1986) 83 LSG 876; affirming [1985] STC 133, (1985) 82 LSG 124, HC................. 8.6 Pattullo v HMRC [2016] UKUT 270 (TCC), [2016] STC 2043, [2016] 6 WLUK 315, [2016] BTC 510..................................................................... 1.154 Paul v Constance [1977] 1 WLR 527, [1977] 1 All ER 195, (1976) 7 Fam Law 18, (1977) 121 SJ 320................................................................................. 3.17 Pauling’s Settlement Trusts (No 1), Re; sub nom Younghusband v Coutts & Co (No 1) [1964] Ch 303, [1963] 3 WLR 742, [1963] 3 All ER 1, (1963) 107 SJ 492.......................................................................................................... 2.3 Pauling’s Settlement Trusts (No 2), Re; sub nom Younghusband v Coutts & Co (No 2); Pawling’s Settlement, Re [1963] Ch 576, [1963] 2 WLR 838, [1963] 1 All ER 857, (1963) 42 ATC 97, [1963] TR 157, (1963) 107 SJ 395........... 4.69 Peach & Dolphin Trust (1988), Re (2004-05) 7 ITELR 570 (Royal Ct (Jer)).... 3.75 Peal v Peal (1930) 46 TLR 645........................................................................... 5.36 Pearson v IRC; sub nom Pilkington Trustees v IRC [1981] AC 753, [1980] 2 WLR 872, [1980] 2 All ER 479, [1980] STC 318, [1980] TR 177, (1980) 124 SJ 377...............................................................1.11, 4.52, 7.21, 8.9, 8.17, 9.32 Pearson, ex p Stephens, Re (1876) LR 3 Ch D 807............................................ 13.3 Pecore v Pecore, 2007 SCC 17, [2007] WTLR 1591, (2006-07) 9 ITELR 873, Sup Ct (Can)............................................................................................... 3.34 Peel v IRC (1927) 13 TC 443......................................................................... 5.27, 5.28 Peel’s Settled Estates, Re [1910] 1 Ch 389......................................................... 4.94 Penrose, Re; sub nom Penrose v Penrose [1933] Ch 793................................... 7.4 Perpetual Executors & Trustees Association of Australia Ltd v Roberts [1970] VR 732........................................................................................................ 10.4 Perrin v HMRC [2018] UKUT 156 (TCC), [2018] STC 1302, [2018] 5 WLUK 234, [2018] BTC 513 ................................................................................. 1.150 Performing Right Society Ltd v London Theatre of Varieties Ltd [1924] AC 1.... 1.35 Persche (Heine) v Finanzamt Ludenscheid (C-318/07) [2009] PTSR 915, [2009] All ER (EC) 673, [2009] STC 586, [2009] ECR I-359, [2009] 2 CMLR 32, [2009] CEC 804, [2009] WTLR 483, [2009] STI 258, ECJ..... 5.104, 11.4, 11.62

xcvii

Table of Cases Peters v Pinder [2009] SGHC 90, (2009-10) 12 ITELR 137, HC (Sing)........... 5.39 Pettingall v Pettingall (1842) 11 LJ Ch 176........................................................ 12.4 Pettit, Re; sub nom Le Fevre v Pettit [1922] 2 Ch 765............................1.21, 3.36, 6.61 Pettitt v Pettitt; sub nom P v P [1970] AC 777, [1969] 2 WLR 966, [1969] 2 All ER 385, (1969) 20 P & CR 991, (1969) 113 SJ 344................................ 1.21, 3.36 Petty v Petty (1853) 22 LJ Ch 1065.................................................................... 3.4 Pexton v Bell; sub nom Pexton v Colbourne’s Will Trusts; Crowe v Appleby [1976] 1 WLR 885, [1976] 2 All ER 914, [1976] STC 301, 51 TC 457, [1976] TR 105, (1976) 120 SJ 368........................................................ 6.173, 8.15 Pfrimmers Estate, Re [1936] 2 DLR 460............................................................ 3.6 Philippi v IRC [1971] 1 WLR 1272, [1971] 3 All ER 61, 47 TC 75, (1971) 50 ATC 16, [1971] TR 167, (1971) 115 SJ 427............................................... 10.31 Phillips v R & C Comrs [2006] STC (SCD) 639, [2006] WTLR 1281, [2006] STI 2094...................................................................................................... 6.250 Phillips v Lamdin [1949] 2 KB 33, [1949] 1 All ER 770, [1949] LJR 1293, (1949) 93 SJ 320......................................................................................... 1.48 Pilkington v IRC; sub nom Pilkington’s Will Trusts, Re; Pilkington v Pilkington [1964] AC 612, [1962] 3 WLR 1051, [1962] 3 All ER 622, 40 TC 416, (1962) 41 ATC 285, [1962] TR 265, (1962) 106 SJ 834.......................... 2.3, 3.60, 6.173 Piratin v IRC [1981] STC 441, 54 TC 730, [1981] TR 93................................. 6.227 Pitt v Holt; Futter v Futter [2013] UKSC 26, [2013] 2 AC 108, [2013] 2 WLR 1200, [2013] 3 All ER 429, [2013] STC 1148, [2013] Pens LR 195, 81 TC 912, [2013] BTC 126, [2013] WTLR 977, 15 ITELR 976, [2013] STI 1805, [2013] P & CR DG14......................................... 3.83, 3.86, 3.87, 3.90, 3.92 Plummer v IRC [1987] STC 698........................................................................ 5.50 Plumptres Marriage Settlement, Re; sub nom Underhill v Plumptre [1910] 1 Ch 609.............................................................................................................. 1.48 Postlethwaite’s Executors v HMRC [2006] 11 WLUK 509, [2007] STC (SCD) 83, [2007] WTLR 353, [2007] STI 346, Sp Comm.................................... 1.103 Potts Executors v IRC [1951] AC 443, [1951] 1 All ER 76, [1951] 1 TLR 152, 44 R & IT 136, 32 TC 211, [1950] TR 379................................................ 6.227 Powell & Halfhide (Pearce’s Personal representatives) v IRC [1997] STC (SCD) 181................................................................................................... 6.250 Powell-Cotton v IRC [1992] STC 625................................................................ 8.32 Prest v Bettinson [1980] STC 607, [1980] TR 271............................................ 8.3 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415, [2013] 3 WLR 1, [2013] 4 All ER 673, [2013] 6 WLUK 283, [2013] BCC 571, [2014] 1 BCLC 30, [2013] 2 FLR 732, [2013] 3 FCR 210, [2013] WTLR 1249, [2013] Fam Law 953, (2013) 163(7565) NLJ 27, (2013) 157(24) SJLB 37....................................................................................................... 1.105 Price v Craig; sub nom Craig (Deceased), Re [2006] EWHC 2561 (Ch), [2006] WTLR 1873, (2006-07) 9 ITELR 393........................................................ 3.76 Price v HMRC [2015] UKUT 164 (TCC), [2015] STC 1975, [2015] 4 WLUK 246, [2015] BTC 516 ................................................................................. 1.116 Protheroe v Protheroe [1968] 1 WLR 519, [1968] 1 All ER 1111, (1968) 19 P & CR 396, (1968) 112 SJ 151..................................................................... 4.41 Pryce, Re; sub nom Nevill v Pryce [1917] 1 Ch 234.......................................... 3.20 Public Trustee v Smith (2007-08) 10 ITELR 1018, Sup Ct (NSW)................... 1.43 Pullan v Koe [1913] 1 Ch 9................................................................................ 3.15

xcviii

Table of Cases Purves (Inspector of Taxes) v Harrison [2001] STC 267, 73 TC 390, [2001] BTC 69, [2000] STI 1607, (2000) 97(46) LSG 40..................................... 6.134 R R v Allen (Brian Roger) [2001] UKHL 45, [2002] 1 AC 509, [2001] 3 WLR 843, [2001] 4 All ER 768, [2001] STC 1537, [2002] 1 Cr App R 18, [2002] HRLR 4, 74 TC 263, [2001] BTC 421, 4 ITL Rep 140, [2001] STI 1348.... 5.87, 5.88, 10.34, 10.47, 10.35, 14.3, 17.22 R v Barnet LBC, ex p Shah (Nilish); R v Shropshire CC, ex p Abdullah; Ablack v Inner London Education Authority; Shah (Jitendra) v Barnet LBC; Shabpar v Barnet LBC; Abdullah v Shropshire CC; Akbarali v Brent LBC [1983] 2 AC 309, [1983] 2 WLR 16, [1983] 1 All ER 226, 81 LGR 305, (1983) 133 NLJ 61, (1983) 127 SJ 36.......................................................5.17, 5.27 R v Charlton (Christopher) [1996] STC 1418, 67 TC 500 (Crim Div)...........5.86, 5.87, 10.34, 14.8 R v Cunnngham see R v Charlton (Christopher) R v Dimsey (Dermot Jeremy); R v Allen (Brian Roger) [2001] UKHL 46, [2002] 1 AC 509, [2001] 3 WLR 843, [2001] 4 All ER 786, [2001] STC 1520, [2002] 1 Cr App R 17, [2002] HRLR 5, 74 TC 263, [2001] BTC 408, 4 ITL Rep 168, [2001] STI 1349............................ 5.87, 10.11, 10.34, 10.47, 10.48, 14.8 R v District Auditor, ex p West Yorkshire Metropolitan CC [1986] RVR 24, [2001] WTLR 785....................................................................................... 1.37 R v Ghosh (Deb Baran) [1982] QB 1053, [1982] 3 WLR 110, [1982] 2 All ER 689, (1982) 75 Cr App R 154, [1982] Crim LR 608, (1982) 126 SJ 429...... 4.63 R v Gill (Sewa Singh); R v Gill (Paramjit Singh) [2003] EWCA Crim 2256, [2004] 1 WLR 469, [2003] 4 All ER 681, [2003] STC 1229, [2004] 1 Cr App R 20, [2003] BTC 404, [2003] Crim LR 883, [2003] STI 1421, (2003) 100(37) LSG 31, (2003) 147 SJLB 993.......................................... 5.88 R v Governor of Pentonville Prison, ex p Azam; R v Secretary of State for Home Department, ex p Azam; R v Secretary of State for Home Department, ex p Khera; R v Governor of Winson Green Prison, ex p Khera; R v Secretary of State for Home Department, ex p Sidhu; Khera v Secretary of State for the Home Department; Sidhu v Secretary of State for the Home Department [1974] AC 18, [1973] 2 WLR 1058, [1973] 2 All ER 765, [1973] Crim LR 512, (1973) 117 SJ 546.................................................... 5.39 R v Hunt (Michael John) [1995] STC 819, (1995) 16 Cr App R (S) 87, 68 TC 132, [1994] Crim LR 747 (Crim Div).....................................................5.90, 10.34 R v Income Tax Special Comrs (ex p University College of North Wales) (1909) 5 TC 408.......................................................................................... 11.6 R v IRC, ex p Bishopp; sub nom IRC v Pricewaterhouse Coopers; IRC v Ernst & Young; R v IRC, ex p Allan [1999] STC 531, (1999) 11 Admin LR 575, 72 TC 322, [1999] BTC 158, [1999] COD 354, (1999) 149 NLJ 682, [1999] NPC 50............................................................................................ 6.141 R v IRC, ex p Roux Waterside Inn Ltd [1997] STC 781, [1999] OPLR 239, [1997] Pens LR 123, 70 TC 545, [1997] BTC 270, (1997) 94(16) LSG 29................................................................................................................ 18.14 R v Radio Authority, ex p Bull [1998] QB 294, [1997] 3 WLR 1094, [1997] 2 All ER 561, [1997] EMLR 201, [1997] COD 382, (1997) 147 NLJ 489........... 11.10

xcix

Table of Cases R v Redford (David) [1988] STC 845, (1989) 89 Cr App R 1, [1989] Crim LR 152 (Crim Div)............................................................................................ 5.86 R v Special Comrs, ex p Headmasters Conference (1925) 10 TC 73................. 11.11 R v Werner (Laurence Ian) [1998] STC 550, [1998] BTC 202, (1998) 95(16) LSG 24, (1998) 142 SJLB 125................................................................... 10.34 R v Williams [1942] AC 541, PC (Can).............................................................. 6.239 RAS1 Trust, Re (2006) 9 ITELR 798................................................................. 3.76 RFC 2012 Plc (In Liquidation) (formerly Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45, [2017] 1 WLR 2767, [2017] 4 All ER 654, [2017] STC 1556, 2018 SC (UKSC) 15, 2017 SLT 799, 2017 SCLR 517, [2017] 7 WLUK 77, [2017] BTC 22, [2017] WTLR 1093, [2017] STI 1610, 2017 GWD 21-357....................1.109, 1.137, 6.326, 16.3, 16.8, 16.44 RS Briggs v Integritas Trust Management (Cayman) Ltd v Others 1988–89 CCR 456..................................................................................................... 3.75 R (on the application of City Shoes Wholesale Ltd) v RHMRC [2016] EWHC 107 (Admin), [2016] STC 2392, [2016] 1 WLUK 458, [2016] BTC 5, [2016] STI 249, QBD................................................................................. 1.124 R (on the application of Davies) v R & C Comrs; R (on the application of GainesCooper) v R & C Comrs [2010] EWCA Civ 83, [2010] STC 860, [2010] BTC 198, [2010] WTLR 681, [2010] STI 485, (2010) 107(9) LSG 17......  5.1, 5.25 R (on the application of Huitson) v R & C Comrs [2011] EWCA Civ 893, [2012] QB 489, [2012] 2 WLR 490, [2011] STC 1860, [2011] BTC 456, 14 ITL Rep 90, [2011] STI 2307, [2011] NPC 91..................................1.44, 6.319 R (on the application of Ingenious Media Holdings Plc) v HMRC [2015] EWCA Civ 173, [2015] 1 WLR 3183, [2015] STC 1357, [2015] 3 WLUK 108, [2015] BTC 12, [2015] STI 612.................................................. 1.115, 1.130 R (on the application of Ingenious Media Holdings Plc) v HMRC [2016] UKSC 54, [2016] 1 WLR 4164, [2017] 1 All ER 95, [2016] STC 2306, [2016] 10 WLUK 413, [2017] EMLR 6, [2016] BTC 41, [2016] STI 2746........ 1.115, 1.130 R (on the application of IRC) v Kingston Crown Court [2001] EWHC Admin 581, [2001] 4 All ER 721, [2001] STC 1615, [2001] BTC 322, [2001] STI 1240...................................................................................................... 5.89 R (on the application of Locke) v HMRC [2018] EWHC 1967 (Admin), [2018] STC 1938, [2018] 7 WLUK 664, [2018] BTC 33, QBD............................ 1.140 R (on the application of Mander) v IRC [2001] EWHC Admin 358, [2002] STC 631, 73 TC 506, [2002] STI 677................................................................. 18.14 R (on the application of Shiner) v R & C Comrs [2011] EWCA Civ 892, [2011] STC 1878, [2012] 1 CMLR 9, [2011] BTC 444, 14 ITL Rep 113, [2011] STI 2305...................................................................................................... 1.44 R (on the application of Sword Services Ltd) v HMRC [2016] EWHC 1473 (Admin) [2016] 4 WLR 113, [2017] STC 596, [2016] 6 WLUK 589, [2016] BTC 24, [2016] STI 1799 QBD...................................................... 1.123 R (on the Application of Walapu) v RCC (2016) EWHC 658. See Walapu v HMRC Rabaiotti 1989 Settlement, Re; sub nom Latour Trust Co Ltd & Latour Trustees (Jersey) Ltd’s Representation, Re [2000] WTLR 953, (1999-2000) 2 ITELR 763, [2001] Fam Law 808 (Royal Ct (Jer)).................................... 4.53 Rae (Inspector of Taxes) v Lazard Investment Co Ltd [1963] 1 WLR 555, 41 TC 1, (1963) 42 ATC 84, [1963] TR 149, (1963) 107 SJ 474................. 4.75, 4.90

c

Table of Cases Rahman v Chase Bank [1991] JLR 103.................................................1.41, 1.74, 12.17 Ralli’s Will Trusts Re; sub nom Ralli’s Marriage Settlement, Re; Calvocoressi v Rodocanachi [1964] Ch 288, [1964] 2 WLR 144, [1963] 3 All ER 940, (1964) 108 SJ 74......................................................................................... 3.18 Ramsay v Liverpool Royal Infirmary; sub nom Liverpool Royal Infirmary v Ramsay [1930] AC 588, 1930 SC (HL) 83...............................................5.34, 5.43 Ramsden v IRC, 50 R & IT 662, 37 TC 619, (1957) 36 ATC 325, [1957] TR 247........................................................................................................ 10.29 Rawcliffe v Steele [1993] Manx LR 426, SGD (IoM)....................................... 3.73 Rawson Trust v Perlman (Bahamas) Eq No 194 of 1984................................... 3.72 Raybould, Re; sub nom Raybould v Turner [1900] 1 Ch 199............................ 4.39 Recher’s Will Trusts, Re; sub nom National Westminster Bank Ltd v National Anti Vivisection Society [1972] Ch 526, [1971] 3 WLR 321, [1971] 3 All ER 401, (1971) 115 SJ 448......................................................................... 1.67 Reed (Inspector of Taxes) v Clark [1986] Ch 1, [1985] 3 WLR 142, [1985] STC 323, 58 TC 528, (1985) 82 LSG 2016, (1985) 129 SJ 469.......................5.14, 5.23 Reeves v HMRC [2018] UKUT 293 (TCC), [2019] 4 WLR 15, [2018] STC 2056, [2018] 9 WLUK 317......................................................................... 1.159 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, [1942] 1 All ER 378........... 3.40 Reid v IRC, 1926 SC 589, 1926 SLT 365, 10 TC 673..................................... 5.18, 5.27 Reid’s Trustees v IRC (1929) 14 TC 512............................................................ 19.1 Religious Tract & Book Society of Scotland v Forbes (1896) 3 TC 415........... 11.54 Remnant’s Settlement Trusts, Re; sub nom Hooper v Wenhaston [1970] Ch 560, [1970] 2 WLR 1103, [1970] 2 All ER 554, (1970) 114 SJ 398.......... 3.64 Reynaud v IRC [1999] STC (SCD) 185............................................................. 6.285 Reynolds, Re; sub nom Official Assignee v Wilson [2008] WTLR 1235, (200708) 10 ITELR 1064 (NZ)............................................................................ 1.43 Ridgwell v Ridgwell [2007] EWHC 2666 (Ch), [2008] STC 1883, [2008] WTLR 527, (2007-08) 10 ITELR 754, [2007] STI 2655........................... 3.65 Roberts (Deceased), Re; Public Trustee v Roberts [1946] Ch 1......................... 3.36 Robertson v IRC (No 1) [2002] STC (SCD) 182, [2002] WTLR 885, [2002] STI 766........................................................................................................ 19.64 Robertson v IRC (No 2) [2002] STC (SCD) 242, [2002] WTLR 907, [2002] STI 899........................................................................................................ 19.64 Robertson v Pett; sub nom Robinson v Pett, 24 ER 1049, (1734) 3 P Wms 249..................................................................................................... 4.35 Robinson v Pett, 24 ER 1049, (1734) 3 P Wms 249........................................... 3.40 Roche, Re [1842] 2 Dr & War 287..................................................................... 4.24 Rochefoucauld v Boustead (No 1); sub nom Rochefoucauld v Boustead [1897] 1 Ch 196...................................................................................................... 3.38 Rogers v IRC [1879] 1 TC 225........................................................................... 5.13 Roome v Edwards (Inspector of Taxes) [1982] AC 279, [1981] 2 WLR 268, [1981] 1 All ER 736, [1981] STC 96, 54 TC 359..........................3.63, 6.99, 6.100 Rose (Deceased), Re; sub nom Rose v IRC [1952] Ch 499, [1952] 1 All ER 1217, [1952] 1 TLR 1577, (1952) 31 ATC 138, [1952] TR 175................. 3.19 Roth, Re (1896) 74 LT 50................................................................................... 4.43 Routier v HMRC [2016] EWCA Civ 938, [2017] PTSR 73, [2016] STC 2218, [2016] 9 WLUK 317, [2016] BTC 38, [2016] STI 2653............................ 1.127 Rowe v Prance [1999] 2 FLR 787, [2000] WTLR 249, [1999] Fam Law 623, [1999] EG 75 (CS), (1999) 96(21) LSG 41................................................ 3.4

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Table of Cases Rowinska (Deceased) see Wyniczenko v Plucinska-Surowka; sub nom Rowinska (Deceased), Re Royal Bank of Canada v IRC [1972] Ch 665, [1972] 2 WLR 106, [1972] 1 All ER 225, 47 TC 565, (1971) 115 SJ 968...................................................... 10.55 Royal Brunei Airlines Sdn Bhd v Tan; sub nom: Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378, [1995] 3 WLR 64, [1995] 3 All ER 97, [1995] BCC 899, (1995) 92(27) LSG 33, (1995) 145 NLJ 888, [1995] 139 SJLB 146, (1995) 70 P & CR D12, PC (Bru)............ 4.70, 14.2, 14.19 Royal Choral Society v IRC [1943] 2 All ER 101, (1943) 25 TC 263............... 11.7 Royal Trust Co v Attorney General of Alberta [1930] AC 144, PC (Can).......... 6.239 Royal Trust Corp of Canada v AS(W)S (2003-04) 6 ITELR 1082 (Alta).......... 2.10 Royscot Spa Leasing Ltd v Lovett [1995] BCC 502, [1994] NPC 146.............. 14.10 Roywest Trust v Nova Scotia Trust (Bahamas) Eq No 431 of 1985).............. 4.42, 4.47 Rubin v Eurofinance SA [2012] UKSC 46, [2013] 1 AC 236, [2012] 3 WLR 1019, [2013] 1 All ER 521, [2013] 1 All ER (Comm) 513, [2013] Bus LR 1, [2012] 2 Lloyd’s Rep 615, [2013] BCC 1, [2012] 2 BCLC 682, [2012] BPIR 1204................................................................................................... 14.17 Rudd’s Will Trusts, Re; sub nom Wort v Rudd [1952] 1 All ER 254, [1952] 1 TLR 44, [1952] WN 49............................................................................... 4.85 Rutter (Inspector of Taxes) v Charles Sharpe & Co Ltd [1979] 1 WLR 1429, [1979] STC 711, 53 TC 163, [1979] TR 225, (1979) 123 SJ 522.............. 16.27 Rysaffe Trustee Co (CI) Ltd v IRC; sub nom Rysaffe Trustee Co (CI) Ltd v C & E Comrs; C & E Comrs v Rysaffe Trustee Co (CI) Ltd [2003] EWCA Civ 356, [2003] STC 536, [2003] BTC 8021, [2003] WTLR 481, (2002-03) 5 ITELR 706, [2003] STI 452, (2003) 100(22) LSG 31, (2003) 147 SJLB 388, [2003] NPC 39.................................................................................... 7.27 S SR v CR [2008] EWHC 2329 (Fam), [2009] 2 FLR 1083, [2009] 2 FCR 69, (2008-09) 11 ITELR 395, [2009] Fam Law 792........................................ 1.11 STG Valmet Trustees Ltd v Brennan [2002] WTLR 273, (2001-02) 4 ITELR 337 (Gib)..................................................................................................... 4.39 Sainsbury’s Settlement, Re; sub nom Sainsbury v First CB Trustee (Practice Note) [1967] 1 WLR 476, [1967] 1 All ER 878, (1967) 111 SJ 177.......... 3.65 St Andrew’s Allotment Association, Re; sub nom St Andrew’s Allotment Association Trusts, Re; Sargeant v Probert [1969] 1 WLR 229, [1969] 1 All ER 147, (1969) 20 P & CR 404, (1968) 112 SJ 927............................ 1.69 St Barbe Green v IRC; sub nom Green v IRC [2005] EWHC 14 (Ch), [2005] 1 WLR 1772, [2005] STC 288, [2005] BPIR 1218, [2005] BTC 8003, [2005] WTLR 75, [2005] STI 106, (2005) 102(7) LSG 26, [2005] NPC 6......................................................................................................... 8.17 Samarkand Film Partnership No 3 v HMRC [2015] UKUT 211 (TCC), [2015] STC 2135, [2015] 4 WLUK 621, [2015] BTC 517.................................... 1.117 Samarkand Film Partnership No 3 v HMRC [2017] EWCA Civ 77, [2017] STC 926, [2017] 2 WLUK 645, [2017] BTC 4 ...........................................1.132, 1.134 Sanderson v R & C Comrs [2013] UKUT 623 (TCC)........................................ 19.42 Sanderson’s Trust, Re, 69 ER 1206, (1857) 3 Kay & J 497............................... 13.2 Sansom v Peay (Inspector of Taxes) [1976] 1 WLR 1073, [1976] 3 All ER 375, [1976] STC 494, 52 TC 1, [1976] TR 205, (1976) 120 SJ 571.............6.70, 6.125, 15.6, 17.29

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Table of Cases Sargeant v National Westminster Bank Plc (1991) 61 P & CR 518, [1990] EG 62 (CS)........................................................................................................ 4.34 Sassoon v IRC (1943) 25 TC 154....................................................................... 10.52 Saunders v HMRC [2017] UKFTT 765 (TC), [2017] 10 WLUK 411, [2018] SFTD 487, [2018] STI 95........................................................................... 1.143 Saunders v Vautier, 41 ER 482, (1841) Cr & Ph 240.......................................... 3.61 Saunders v Vautier, 49 ER 282, (1841) 4 Beav 115..........................2.6, 4.51, 8.1, 18.60 Savage v Dunningham [1974] Ch 181, [1973] 3 WLR 471, [1973] 3 All ER 429, (1973) 26 P & CR 177, (1973) 117 SJ 697......................................... 3.31 Scheme Manager Depositors Compensation Scheme v Ahuja (1997) (1996– 98) MLR 278............................................................................................... 1.7 Schindler v Garner & Bermuda Trust, EQ No 318 of 1991/4 of 1992............... 1.74 Schnieder v Mills [1993] 3 All ER 377, [1993] STC 430.................................. 6.266 Scholefield v Redfern, 62 ER 587, (1863) 2 Drew & Sm 173............................ 4.94 Scott v Commissioner of Police of the Metropolis; sub nom R v Scott (Anthony Peter) [1975] AC 819, [1974] 3 WLR 741, [1974] 3 All ER 1032, (1974) 60 Cr App R 124, [1975] Crim LR 94, (1974) 118 SJ 863......................... 4.64 Scott v HMRC [2015] UKFTT 266 (TC), [2015] 6 WLUK 19, [2015] WTLR 1461, [2015] STI 2635................................................................................ 1.113 Scott v Scott (Trusts) 1930 SC 903, 1930 SLT 652............................................ 8.3 Scottish Flying Club Ltd v IRC 1935 SC 817, 1935 SLT 534, (1935) 20 TC 1.11.12 Scottish Provident Institution v Allan (4 TC 409/591)....................................... 5.74 Scottish Woollen Technical College Galashiels v IRC (1926) 11 TC 139......... 11.6 Scotts Atlantic Management Ltd (in liquidaton) v R & C Comrs [2015] UKUT 66, [2015] STC 1321, [2015] BTC 504...................................................... 16.28 Seale’s Marriage Settlement, Re [1961] Ch 574, [1961] 3 WLR 262, [1961] 3 All ER 136, (1961) 105 SJ 257.................................................................3.65, 10.5 Seatons Trustees Ltd, Re (unreported, 19th March 2009).................................. 3.78 Sechiari (Deceased), Re; sub nom Argenti v Sechiari [1950] 1 All ER 417, 66 TLR (Pt 1) 531, [1950] WN 133, (1950) 94 SJ 194................................ 4.75, 4.87 Secretary of State for Trade & Industry v Deverell [2001] Ch 340, [2000] 2 WLR 907, [2000] 2 All ER 365, [2000] BCC 1057, [2000] 2 BCLC 133, (2000) 97(3) LSG 35, (2000) 144 SJLB 49................................................ 17.22 Seddon v HMRC [2015] UKFTT 140 (TC), [2015] 4 WLUK 95, [2015] SFTD 539, [2015] WTLR 1103............................................................................. 1.114 Sellack v Harris (1708) 5 Vin Arb 512 PL 31..................................................... 3.22 Sempra Metals Ltd v HMRC [2008] 7 WLUK 193, [2008] STC (SCD) 1062, [2008] STI.1923, Sp Comm................................................................. 1.109, 16.10 Sen v Headley [1991] Ch 425, [1991] 2 WLR 1308, [1991] 2 All ER 636, [1996] 1 FCR 692, (1991) 62 P & CR 277, [1991] Fam Law 373, [1991] EG 23 (CS), (1991) 88(16) LSG 32, (1991) 141 NLJ 384, (1991) 135 SJ 384.......................................................................................................... 3.21 Servoz-Gavin (Deceased), Re; sub nom Ayling v Summers [2009] EWHC 3168 (Ch), [2010] 1 All ER 410, [2009] WTLR 1657......................................... 15.1 Seven Individuals v HMRC [2017] UKUT 132 (TCC), [2017] STC 874, [2017] 3 WLUK 787, [2017] BTC 513.................................................................. 1.134 Seymour (Ninth Marquess of Hertford) v IRC [2005] STC (SCD) 177, [2005] WTLR 85, [2004] STI 2546........................................................................ 12.25 Seymour v Seymour [1989] BTC 8043.............................................................. 6.266 Shaffer, Morgan v Cilento, Re see Morgan v Cilento......................................... 5.68

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Table of Cases Shah v Barnet LBC see R v Barnet LBC, ex p Shah (Nilish) Shalson v Russo; sub nom Mimran v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281, [2005] 2 WLR 1213, [2003] WTLR 1165, (2005-06) 8 ITELR 435, (2003) 100(35) LSG 37.....................................................................1.42, 3.41 Shanks v IRC [1929] 1 KB 342, (1929) 14 TC 249........................................ 6.79, 6.82 Sharrment Pty Ltd, Re (Bankruptcy no G348 of 1987)...................................... 1.42 Shaw, Re; sub nom Public Trustee v Day [1958] 1 All ER 245 (Note); affirming [1957] 1 WLR 729, [1957] 1 All ER 745, (1957) 101 SJ 408.................... 1.20 Shephard v Cartwright; sub nom Shephard, Re [1955] AC 431, [1954] 3 WLR 967, [1954] 3 All ER 649, (1954) 98 SJ 868.............................................. 3.36 Shepherd v R & C Comrs [2005] STC (SCD) 644............................................. 5.24 Shepherd v R & C Comrs; sub nom Shepherd IRC [2006] EWHC 1512 (Ch), [2006] STC 1821, 78 TC 389, [2007] BTC 426, [2006] STI 1518........ 5.19, 5.24, 5.30 Sherman (Deceased), Re; sub nom Walters (Deceased), Re; Trevenen v Pearce [1954] Ch 653, [1954] 2 WLR 903, [1954] 1 All ER 893, (1954) 98 SJ 302.......................................................................................................... 4.42 Shoh v Barnett London BC (1983) IAU ER 226................................................ 1.153 Shroder Cayman Bank & Trust Co Ltd v Schroder Trust AG (FSD 122/2014).... 3.92 Sieff v Fox; sub nom Bedford Estates, Re [2005] EWHC 1312 (Ch), [2005] 1 WLR 3811, [2005] 3 All ER 693, [2005] BTC 452, [2005] WTLR 891, (2005-06) 8 ITELR 93, [2005] NPC 80...................... 1.104, 3.77, 3.80, 3.82, 3.85 Simpson v Simpson [1992] 1 FLR 601, [1989] Fam Law 20............................. 3.2 Sinclair v Lee; sub nom [1993] Ch 497, [1993] 3 WLR 498, [1993] 3 All ER 926, [1994] 1 BCLC 286............................................................................ 4.89 Sir Robert Peel’s Settled Estates see Peels Settled Estates, Re Six Continents Ltd v IRC [2016] EWHC 2426 (Ch), [2017] STC 1228, [2016] 10 WLUK 69, [2016] BTC 43, [2016] STI 2749 ....................................... 1.131 Skeats Settlement, Re (1889) LR 42 Ch D 522.................................................. 3.72 Sleeman v Wilson (1871-72) LR 13 Eq 36......................................................... 4.69 Smallwood v R & C Comrs; sub nom Trustees of Trevor Smallwood Trust v R & C Comrs [ 2010] EWCA Civ 778, [2010] STC 2045, [2010] STI 2174, [2009] EWHC 777 (Ch), [2009] STC 1222, [2009] BTC 135, 11 ITL Rep 943, [2009] WTLR 669, [2009] STI 1092, (2009) 106(17) LSG 15.... 1.139, 10.123 Smith v Incorporated Council of Law Reporting for England & Wales (1914) 6 TC 477........................................................................................................ 18.30 Snook v London & West Riding Investments Ltd [1967] 2 QB 786, [1967] 2 WLR 1020, [1967] 1 All ER 518, (1967) 111 SJ 71.................................1.41, 1.43 Snowden (Deceased), Re [1979] Ch 528, [1979] 2 WLR 654, [1979] 2 All ER 172, (1979) 123 SJ 323............................................................................... 3.25 Societe Comateb v Directeur General des Douanes et Droits Indirects (C192/95) [1997] STC 1006, [1997] ECR I-165, [1997] 2 CMLR 649, ECJ.............. 6.324 Somerset, Re; sub nom Somerset v Earl Poulett [1894] 1 Ch 231..................... 4.69 Sorrell v Finch [1977] AC 728, [1976] 2 WLR 833, [1976] 2 All ER 371, 19 Man. Law 4, (1976) 120 SJ 353.................................................................. 1.46 South Place Ethical Society, Re; sub nom Barralet v Attorney General [1980] 1 WLR 1565, [1980] 3 All ER 918, 54 TC 446, [1980] TR 217, (1980) 124 SJ 774.......................................................................................................... 11.7 Southwood v Attorney General [2000] WTLR 1199, (2000-01) 3 ITELR 94, (2000) 97(29) LSG 45, (2000) 150 NLJ 1017, (2000) 80 P & CR D34..... 11.10

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Table of Cases Special Commissioners of Income Tax v Pemsel; sub nom R v Income Tax Commissioners [1891] AC 531, (1891) 3 TC 53.............................1.19, 11.4, 11.8 Speight v Gaunt; sub nom Speight, Re (1883-84) LR 9 App Cas 1.................... 4.57 Springfield Acres v Abacus [1994] NZLR 503................................................... 4.70 Stack v Dowden; sub nom Dowden v Stack [2007] UKHL 17, [2007] 2 AC 432, [2007] 2 WLR 831, [2007] 2 All ER 929, [2007] 1 FLR 1858, [2007] 2 FCR 280, [2007] BPIR 913, [2008] 2 P & CR 4, [2007] WTLR 1053, (2006-07) 9 ITELR 815, [2007] Fam. Law 593, [2007] 18 EG 153 (CS), (2007) 157 NLJ 634, (2007) 151 SJLB 575, [2007] NPC 47, [2007] 2 P & CR DG11................................................................. 1.23, 3.37, 3.44 Stainer’s Executors v Purchase (Inspector of Taxes); sub nom Purchase (Inspector of Taxes) v Gospel (Stainer’s Executors); Gospel v Purchase (Inspector of Taxes) [1952] AC 280, [1951] 2 All ER 1071, [1951] 2 TLR 1112, 45 R & IT 14, 32 TC 367, (1951) 30 ATC 291, [1951] TR 353, (1951) 95 SJ 801......................................................................................... 7.14 Stamp Duties Commissioner v Livingston see Commissioner of Stamp Duties (Queensland) v Livingston Standard Chartered Bank Ltd v IRC [1978] 1 WLR 1160, [1978] 3 All ER 644, [1978] STC 272, [1978] 2 WLUK 129, [1978] TR 45, (1978) 122 SJ 698, Ch D............................................................................................................ 6.239 Staniland v Willott (1852) 3 Mac & G 664......................................................... 3.21 Stanley v IRC [1944] KB 255, [1944] 1 All ER 230, [1944] 1 WLUK 50, CA.... 6.20 Stannard v Fisons Pension Trust Ltd [1991] PLR 224, [1992] IRLR 27..........3.75, 4.51 Starke v IRC [1995] 1 WLR 1439, [1996] 1 All ER 622, [1995] STC 689, [1996] 1 EGLR 157, [1996] 16 EG 115, [1995] EG 91 (CS), (1995) 92(23) LSG 32, (1995) 139 SJLB 128, [1995] NPC 94............................. 6.259 State of Norway’s Applications, Re [1989] 1 All ER 743..................................4.95 Steele v Paz (1993–5) MLR 102...................................................................... 3.70, 4.26 Steele v Paz Ltd [1995] MLR 426...................................................................... 1.42 Steibelt (Inspector of Taxes) v Paling [1999] STC 594, 71 TC 376, [1999] BTC 184, (1999) 96(20) LSG 40, (1999) 143 SJLB 140.................................... 6.122 Steiner v IRC [1973] STC 547, 49 TC 13, [1973] TR 177................................. 5.50 Stenning, Re; sub nom Wood v Stenning [1895] 2 Ch 433................................ 4.70 Stephenson (Inspector of Taxes) v Barclays Bank Trust Co Ltd [1975] 1 WLR 882, [1975] 1 All ER 625, [1975] STC 151, 50 TC 374, [1974] TR 343, (1974) 119 SJ 169.................................................................................... 6.173, 8.3 Sterling Trust v IRC(1925) 12 TC 868............................................................... 6.79 Stevens v Stevens (2007) 212 FLR 362.............................................................. 1.43 Stevenson (Inspector of Taxes) v Wishart [1987] 1 WLR 1204, [1987] 2 All ER 428, [1987] STC 266, [1987] 1 FTLR 69, 59 TC 740, (1987) 84 LSG 1575, (1987) 131 SJ 744............................................................................. 6.69 Stewart, Re; sub nom Stewart v McLaughlin [1908] 2 Ch 251.......................... 3.19 Stichting Goed Wonen v Staatssecretaris van Financien (C-376/02) [2006] STC 833, [2005] ECR I-3445, [2005] 2 CMLR 41, [2007] BTC 5989, [2008] BVC 25, [2005] STI 890, ECJ (Grand Chamber)........................... 6.324 Stone v Hoskins [1905] P 194, PDAD................................................................ 3.42 Stone v Stone [1958] 1 WLR 1287, [1959] 1 All ER 194, (1958) 102 SJ 938, PDAD.......................................................................................................... 5.38 Stott v Milne (1884) LR 25 Ch D 710................................................................ 4.39 Strahan, Re (1856) 8 De GM & G 291............................................................... 4.65

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Table of Cases Strong v Bird (1874) LR 18 Eq 315.................................................................... 3.19 Sugarwhite v Budd (Inspector of Taxes) [1988] STC 533, 60 TC 679............... 6.60 Sugden v Crossland (1856) CH 3 Sm & G......................................................... 4.42 Sutherland Estate v Nicoll Estate (1944) SCR 253............................................ 3.22 Sutton v IRC (1929) 14 TC 662.......................................................................... 6.79 Swales v IRC [1984] 3 All ER 16, [1984] STC 413, (1984) 81 LSG 2300........ 7.21 Swedish Central Rly Co Ltd v Thompson (1925) 9 TC 342.............................. 5.82 Swires (Inspector of Taxes) v Renton [1991] STC 490, 64 TC 315, (1991) 88(39) LSG 36..................................................................................... 6.101, 6.177 T T Choithram International SA v Pagarani; sub nom Pagarani, Re [2001] 1 WLR 1, [2001] 2 All ER 492, [2001] WTLR 277, (2000-01) 3 ITELR 254, (2001) 145 SJLB 8, PC (BVI)............................................................. 3.15 T Settlement, Re [2002] WTLR 1529, (2001-02) 4 ITELR 820 (Royal Ct (Jer))............................................................................................................ 10.104 T’s Settlement, Re [1964] 1 Ch 158................................................................... 2.4; 3.63 Tager v HMRC [2018] EWCA Civ 1727, [2019] 1 WLR 720, [2018] STC 1755, [2018] 7 WLUK 466, [2018] BTC 30 .............................................. 1.156 Tailby v Official Receiver; sub nom Official Receiver as Trustee of the Estate of Izon (A Bankrupt) v Tailby (1888) LR 13 App Cas 523........................ 3.20 Tankel v Tankel [1999] 1 FLR 676, [1999] Fam Law 93................................... 7.1 Tappenden (t/a English & American Autos) v Artus [1964] 2 QB 185, [1963] 3 WLR 685, [1963] 3 All ER 213, (1963) 107 SJ 572................................... 1.47 Target Holdings Ltd v Redferns [1996] AC 421, [1995] 3 WLR 352, [1995] 3 All ER 785, [1995] CLC 1052, (1995) 139 SJLB 195; [1995] NPC 136........... 4.58 Tatham, National Provincial Bank Ltd v MacKenzie, Re[1945] 1 All ER 29.... 6.61 Taylor v IRC (1946) 27 TC 93............................................................................ 6.191 Tee v Inspector of Taxes see West (Inspector of Taxes) v Trennery Temperley v Visibell [1974] STC 64, (1973) 231 EG 111, 49 TC 129, [1973] TR 251, (1973) 118 SJ 169......................................................................... 6.122 Tennant Plays Ltd v IRC [1948] 1 All ER 506, 41 R & IT 297, 30 TC 107, [1948] TR 49, (1948) 92 SJ 308................................................................. 11.12 Test Claimants in the FII Group Litigation v R & C Comrs [2010] All ER (D) 261........................................................................................................ 19.33 Test Claimants in the FII Group Litigation v IRC (C-35/11) [2013] Ch 431, [2013] 2 WLR 1416, [2013] STC 612, [2012] 11 WLUK 352, [2013] 1 CMLR 50, [2013] BTC 424, [2012] STI 3271 ECJ................................... 1.131 Thomas & Agnes Carvel Foundation v Carvel [2007] EWHC 1314 (Ch), [2008] Ch 395, [2008] 2 WLR 1234, [2007] 4 All ER 81, [2007] WTLR 1297, (2007-08) 10 ITELR 455.................................................................. 15.14 Thomas v Times Book Co Ltd [1966] 1 WLR 911, [1966] 2 All ER 241, [1966] 3 WLUK 70, (1966) 110 SJ 252 Ch D........................................................ 1.113 Thompson, Re; sub nom Public Trustee v Lloyd [1934] Ch 342........................ 12.4 Thompson’s Settlement, [1986] Ch 99, [1985] 3 WLR 486, [1985] 3 All ER 720, (1985) 129 SJ 575............................................................................... 4.42 Thomson (Inspector of Taxes) v Moyse [1961] AC 967, [1960] 3 WLR 929, [1960] 3 All ER 64, 39 TC 291, (1960) 39 ATC 322, [1960] TR 309, (1960) 104 SJ 1032..................................................................................... 5.69 Thornley v Thornley [1893] 2 Ch 229................................................................ 3.36

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Table of Cases Thorpe v Revenue & Customs Commissioners [2010] EWCA Civ 339, [2010] BTC 425, [2010] STI 1439; affirming [2009] EWHC 611 (Ch), [2009] STC 2107, [2009] Pens LR 139, [2009] BTC 177, [2009] WTLR 1269, (2009-10) 12 ITELR 279, [2009] STI 824............................................... 3.37, 3.61 Threlfall v Jones (Inspector of Taxes); Gallagher v Jones (Inspector of Taxes) [1994] Ch 107, [1994] 2 WLR 160, [1993] STC 537, 66 TC 77, (1993) 90(32) LSG 40, (1993) 137 SJLB 174........................................................ 16.50 Tilley’s Will Trusts, Re; sub nom Burgin v Croad [1967] Ch 1179, [1967] 2 WLR 1533, [1967] 2 All ER 303, (1967) 111 SJ 237.............................. 4.61, 4.70 Tindal, Re (1892) 9 TLR 24................................................................................ 4.81 Tinker’s Settlement, Re [1960] 1 WLR 1011, [1960] 3 All ER 85 (Note), (1960) 104 SJ 805................................................................................................... 3.64 Tito v Waddell; Tito v Attorney General [1977] Ch 106, [1977] 2 WLR 496, [1977] 3 All ER 129, (1976) 121 SJ 10...................................................... 4.2 Tod v Barton [2002] EWHC 264 (Ch), [2002] WTLR 469, (2001-02) 4 ITELR 715.................................................................................................. 1.76 Todd (Inspector of Taxes) v Egyptian Delta Land & Investment Co Ltd [1929] AC 1, (1928) 14 TC 119............................................................................. 5.82 Todd (Inspector of Taxes) v Mudd [1987] STC 141, 60 TC 237........................ 6.122 Todd (Inspector of Taxes) v South Essex Motors (Basildon) Ltd [1988] STC 392, 60 TC 598........................................................................................... 19.75 Toland Trust, Re; sub nom Pennywise Trust, Re; Sequential Trust, Re (200607) 9 ITELR 321 (Royal Ct (Jer))............................................................... 3.75, Tomlinson (Inspector of Taxes) v Glyn’s Executor & Trustee Co; sub nom Glyn’s Executor & Trustee Co v Tomlinson [1970] Ch 112, [1969] 3 WLR 310, [1970] 1 All ER 381, 45 TC 600, [1969] TR 211, (1969) 113 SJ 367........ 8.3 Tooth v RCC [2018] UKUT 38 (TCC), [2018] STC 824, [2018] 2 WLUK 162, [2018] BTC 505, [2018] STI 1052............................................................. 1.160 Tottenham Hotspur Ltd v HMRC [2016] UKFTT 389 (TC), [2016] 6 WLUK 78, [2016] SFTD 803, [2016] STI 2499..................................................... 1.129 Tower MCashback LLP 1 v HMRC [2011] UKSC 19, [2011] 2 AC 457, [2011] 2 WLR 1131, [2011] 3 All ER 171, [2011] STC 1143, [2011] 5 WLUK 255, 80 TC 641, [2011] BTC 294, [2011] STI 1620, (2011) 108(21) LSG 19 ....................................................................................................... 1.158 Tower Radio & Total Property Support Services v R & C Comrs [2015] UKUT 60 (TCC), [2015] STC 1257, [2015] BTC 505.....................................12.27, 16.29 Townley v Sherborne (1634) Bridg J 35............................................................. 4.65 Travers Will Trust, Re see Trustees of the Travers Will Trust v R & C Comrs Trigg v HMRC [2018] EWCA Civ 17, [2018] 1 WLR 5180, [2018] 2 All ER 455, [2018] STC 281, [2018] 1 WLUK 208, [2018] BTC 7, [2018] STI 257........................................................................................................ 1.149 Trustees Executors & Agency Co Ltd v IRC (The Natalie) [1973] Ch 254, [1973] 2 WLR 248, [1973] 1 All ER 563, [1973] 1 Lloyd’s Rep 216, [1973] STC 96, [1972] TR 339, (1973) 117 SJ 147................................... 6.239 Trustees of Pierse-Duncombe Trust v IRC (1940) 23 TC 199........................... 6.68 Trustees of the British Museum v Attorney General [1984] 1 WLR 418, [1984] 1 All ER 337, (1984) 81 LSG 585, (1984) 128 SJ 190............................... 3.60 Trustees of the Christian Brothers in Western Australia Inc v Attorney General of Western Australia [2007] WTLR 1375, (2006-07) 9 ITELR 212, Sup Ct (WA)....................................................................................................... 11.17

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Table of Cases Trustees of the P Panayi Accumulation and Maintenance Settlements v HMRC (C-646/15) [2017] 4 WLR 210, [2017] STC 2495, [2017] 9 WLUK 214, [2017] BTC 25, [2017] WTLR 1497, 20 ITELR 624, ECJ........................ 1.135 Trustees of the Zetland Settlement v R & C Comrs [2013] UKFTT 284 (TC), [2013] WTLR 1065, [2013] STI 2424........................................................ 6.250 Trustees of the Travers Will Trust v R & C Comrs [2013] UKFTT 436 (TC), [2014] SFTD 265, [2013] WTLR 1831, [2013] STI 3402.......................... 4.74 Tryon, Re (1844) 7 Beav 496.............................................................................. 4.31 Tuck’s Settlement Trusts, Re; sub nom Public Trustee v Tuck; Tuck (Estate of Sir Adolph) (Deceased), Re [1978] Ch 49, [1978] 2 WLR 411, [1978] 1 All ER 1047, (1977) 121 SJ 796................................................................. 3.58 Turner v Maule (1850) 15 Jur 761...................................................................... 4.24 Turner v Turner [1984] Ch 100, [1983] 3 WLR 896, [1983] 2 All ER 745, (1984) 81 LSG 282, (1983) 127 SJ 842...................................................... 7.1 Turner, Re; sub nom Barker v Ivimey [1897] 1 Ch 536................................... 4.68, 4.69 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, [2002] 2 WLR 802, 2002] 2 All ER 377, [2002] PNLR 30, [2002] WTLR 423, [2002] 38 EG 204 (CS), (2002) 99(19) LSG 32, (2002) 152 NLJ 469, (2002) 146 SJLB 84, [2002] NPC. 47..............................................................1.21, 14.2, 14.20 Tyler, Re; sub nom Graves v King; Tyler’s Fund Trusts, Re [1967] 1 WLR 1269, [1967] 3 All ER 389, (1967) 111 SJ 794.......................................... 3.8 Tyser v Attorney General [1938] Ch 426............................................................ 12.57 U UBS AG v HMRC [2016] UKSC 13, [2016] 1 WLR 1005, [2016] 3 All ER 1, [2016] STC 934, [2016] 3 WLUK 249, [2016] BTC 11, [2016] STI 513.... 1.128, 1.137 Udny v Udny (1866-69) LR 1 Sc 441, (1869) 7 M (HL) 89.......... 5.34, 5.36, 5.39, 5.40 Union Corp v IRC; Johannesberg Consolidated Investment Co v IRC; Trinidad Leaseholds v IRC [1953] AC 482, [1953] 2 WLR 615, [1953] 1 All ER 729, 46 R & IT 190, 34 TC 207, (1953) 32 ATC 73, [1953] TR 61, (1953) 97 SJ 206..................................................................................................... 5.82 United Grand Lodge of Ancient Free & Accepted Masons of England v Holborn BC [1957] 1 WLR 1080, [1957] 3 All ER 281, (1957) 121 JP 595; 56 LGR 68, 2 RRC 190, 50 R & IT 709, (1957) 101 SJ 851................................... 11.8 United States of America v Grant & Another (2005) 8 ITELR 339................... 14.2 Unmarried Settlor v IRC [2003] STC (SCD) 274, [2003] WTLR 915, [2003] STI 992........................................................................................................ 10.46 Untelrab Ltd v McGregor (Inspector of Taxes) [1996] STC (SCD) 1................ 5.81 Urquhart v Butterfield (1888) LR 37 Ch D 357.................................................. 5.36 V Vaccine Research LP v HMRC [2014] UKUT 389 (TCC), [2015] STC 179, [2014] 9 WLUK 37, [2014] BTC 525.................................................. 1.108, 1.136 Van der Merwe v Goldman [2016] EWHC 790 (Ch), [2016] 4 WLR 71, [2016] 4 WLUK 160, [2016] WTLR 913............................................................... 3.96 Van-Arkadie (Inspector of Taxes) v Plunket [1983] STC 54, (1983) 133 NLJ 154....................................................................................................... 10.85 Vandervell v IRC [1967] 2 AC 291, [1967] 2 WLR 87, [1967] 1 All ER 1, 43 TC 519, (1966) 45 ATC 394, [1966] TR 315, (1966) 110 SJ 910..............3.13, 6.4

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Table of Cases Vandervell’s Trusts (No 1), Re; sub nom White v Vandervell Trustees [1971] AC 912, [1970] 3 WLR 452, [1970] 3 All ER 16, 46 TC 341, [1970] TR 129, (1970) 114 SJ 652............................................................................... 3.13 Vandervell’s Trusts (No 2), Re; sub nom White v Vandervell Trustees [1974] Ch 269, [1974] 3 WLR 256, [1974] 3 All ER 205, (1974) 118 SJ 566.............1.21, 3.33 Verge v Somerville [1924] AC 496, PC (Aus).................................................... 11.10 Vestey v IRC (No 1); Baddeley v IRC; Payne v IRC (No 1) [1980] AC 1148, [1979] 3 WLR 915, [1979] 3 All ER 976, [1980] STC 10, 54 TC 503, [1979] TR 381, (1979) 123 SJ 826, HL; affirming [1979] Ch 177, [1978] 2 WLR 136, [1977] 3 All ER 1073, [1977] STC 414, [1977] TR 221, (1977) 121 SJ 730......................................................................10.17, 10.27, 10.33, 10.39, 10.43, 10.44, 10.45, 10.49 Vinogradoff, Re [1935] WN 68.......................................................................... 3.34 Vogelius v Vogelius (2005-06) 8 ITELR 619...................................................... 10.5 Von Ernst & Cie SA v IRC [1980] 1 WLR 468, [1980] 1 All ER 677, [1980] STC 111, [1979] TR 461, (1980) 124 SJ 17............................................... 6.242 Von Knieriem v Bermuda Trust Co Ltd & Grosvenor Trust Co Ltd EG Nos 154 and 162 of 1994.......................................................................................... 3.72 W WT Ramsay Ltd v IRC; Eilbeck (Inspector of Taxes) v Rawling [1982] AC 300, [1981] 2 WLR 449, [1981] 1 All ER 865, [1981] STC 174, 54 TC 101, [1982] TR 123, (1981) 11 ATR 752, (1981) 125 SJ 220.............1.116, 1.137, 6.200, 6.285, 10.32 Wahl v Attorney General (1932) 147 LT 382..................................................... 5.42 Wai Yu-Tsang v R [1992] 1 AC 269................................................................... 14.7 Wain v Earl of Egmont (1843) 3 My & K 445................................................... 4.51 Wakeling v Pearce [1995] STC (SCD) 96.......................................................... 6.126 Walapu v HMRC [2016] EWHC 658 (Admin), [2016] 4 All ER 955, [2016] STC 1682, [2016] 3 WLUK 693, [2016] BTC 14, [2016] STI 1336 ......... 1.122 Walding v IRC [1996] STC 13........................................................................... 6.252 Waley Cohen v IRC (1945) 26 TC 471............................................................... 6.82 Walia v Michael Naughton Ltd [1985] 1 WLR 1115, [1985] 3 All ER 673, (1986) 51 P & CR 11, (1985) 82 LSG 3174, (1985) 129 SJ 701................ 2.19 Walker v Stones [2001] QB 902, [2001] 2 WLR 623, [2000] 4 All ER 412, [2001] BCC 757, [2000] Lloyd’s Rep PN 864, [2000] WTLR 975, (19992000) 2 ITELR 848, (2000) 97(35) LSG 36............................................... 4.67 Walker v Symonds, 36 ER 751, (1818) 3 Swans 1, CCP................................ 4.44, 4.65 Walker v Walker [2007] All ER (D) 418............................................................. 4.33 Walker v Wetherell (1801) 6 Ves 473.................................................................. 7.3 Walker, Re; sub nom Summers v Barrow [1901] 1 Ch 259................................ 4.24 Wallace & Heis v Shoa Leasing (Singapore) Pty Ltd [1999] 2 WTLR 301....... 3.40 Wallach (Deceased), Re; sub nom Weinschenk v Treasury Solicitor [1950] 1 All ER 199, 66 TLR (Pt 1) 132, [1950] WN 40, (1950) 94 SJ 132, PDAD................................................................................................. 5.51 Wallersteiner v Moir (No 2); sub nom Moir v Wallersteiner (No 2) [1975] QB 373, [1975] 2 WLR 389, [1975] 1 All ER 849, (1975) 119 SJ 97........... 4.57, 4.59 Wallgrave v Tebbs (1855) 2 K & J 313............................................................... 3.24 Walls v Livesey (Inspector of Taxes) [1995] STC (SCD) 12.............................. 17.17 Walsh v Randall [1940] 23 TC 55 (KB)............................................................. 5.69

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Table of Cases Walters v Woodbridge (1877-78) LR 7 Ch D 504.............................................. 4.39 Wannell v Rothwell (Inspector of Taxes) [1996] STC 450, [1996] 3 WLUK 472, 68 TC 719, Ch D................................................................................. 1.134 Ward (Cook’s Executors) v IRC [1999] STC (SCD) 1....................................... 6.310 Warman International Ltd v Dwyer (1995) 69 Al Jr 362.................................... 4.59 Watson, Re (1904) 49 Sol Jo 54 Watton (Inspector of Taxes) v Tippett; sub nom Tippett v Watton (Inspector of Taxes) [1997] STC 893, 69 TC 491, [1997] BTC 338; affirming [1996] STC 101, (1996) 93(2) LSG 29.................................................................. 6.122 Webster v Webster [2008] EWHC 31 (Ch), [2009] 1 FLR 1240, [2009] WTLR 339, [2009] Fam Law 286, [2009] 3 EG 102 (CS)..................................... 3.44 Wendt v Orr (2005-06) 8 ITELR 523, Sup Ct (WA) (Full Ct)............................ 4.74 West (Inspector of Taxes) v Trennery [2005] UKHL 5, [2005] 1 All ER 827, [2005] STC 214, [2005] 1 WLUK 444, 76 TC 713, [2005] BTC 69, [2005] WTLR 205, [2005] STI 157, (2005) 149 SJLB 147, [2005] NPC 10, HL.... 10.125 West Sussex Constabulary’s Widows, Children & Benevolent (1930) Fund Trusts, Re; Barnett v Ketteringham [1971] Ch 1, [1970] 2 WLR 848, [1970] 1 All ER 544, (1970) 114 SJ 92...................................................... 3.33 West v Lazard Brothers & Co (Jersey) Ltd (No 1) (1987–88) 1 OFLR 414...... 4.53 West v Lazard Brothers Co (Jersey) Ltd (No 2) [1993] JLR 165....................... 4.47 Westbury Settlement, Re (2000-01) 3 ITELR 699 (Royal Ct (Jer))................... 3.75 Westdeutsche Landesbank Girozentrale v Islington LBC; sub nom Islington LBC v Westdeutsche Landesbank Girozentrale; Kleinwort Benson Ltd v Sandwell BC [1996] AC 669, [1996] 2 WLR 802, [1996] 2 All ER 961, [1996] 5 Bank LR 341, [1996] CLC 990, 95 LGR 1, (1996) 160 JP Rep 1130, (1996) 146 NLJ 877, (1996) 140 SJLB 136....................1.3, 1.6, 1.21, 3.33, 3.41, 4.70 Weston v IRC [2000] STC 1064, [2000] BTC 8041, [2001] WTLR 1217, [2000] STI 1635, (2001) 98(2) LSG 41, [2000] NPC 126.......................... 6.250 Weston’s Settlements, Re; sub nom Weston v Weston [1969] 1 Ch 223, [1968] 3 WLR 786, [1968] 3 All ER 338, [1968] TR 295, (1968) 112 SJ 641....3.65, 10.5 Wheatley’s Executors v IRC [1998] STC (SCD) 60........................................... 6.259 Whishaw v Stephens; Hacobian v Maun [1970] AC 508, [1968] 3 WLR 1127, [1968] 3 All ER 785, (1968) 112 SJ 882..................................................1.37, 4.51 White v Jones [1995] 2 AC 207, [1995] 2 WLR 187, [1995] 1 All ER 691, [1995] 3 FCR 51, (1995) 145 NLJ 251, (1995) 139 SJLB 83,; [1995] NPC 31.... 3.6 White v Shortall (2006-07) 9 ITELR 470, Sup Ct (NSW)................................. 1.35 Wight v IRC (1982) 264 EG 935, [1984] RVR 163, Lands Tr........................... 6.309 Wight v Olswang (No 2) [2001] CP Rep 54, [2001] Lloyd’s Rep PN 269, [2001] WTLR 291, (2000-01) 3 ITELR 352.............................................. 4.58 Wiles v Gresham (1854) 2 Drew 258................................................................. 4.60 Wilkie v IRC [1952] Ch 153, [1952] 1 All ER 92, [1952] 1 TLR 22, 45 R & IT 29, 32 TC 495, (1952) 31 ATC 442, [1951] TR 371, (1951) 95 SJ 817, Ch D............................................................................................................ 5.26 Wilkinson v Chief Adjudication Officer [2000] EWCA Civ 88, [2000] 3 WLUK 744, [2000] 2 FCR 82, CA..........................................................2.15, 2.18 William Denby & Sons Ltd, Sick & Benevolent Fund , Re [1971] 1 WLR 973.... 1.69 Williams & Glyn’s Bank Ltd v Boland; Williams & Glyn’s Bank Ltd v Brown [1981] AC 487, [1980] 3 WLR 138, [1980] 2 All ER 408, (1980) 40 P & CR 451, (1980) 124 SJ 443.......................................................................2.15, 3.31

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Table of Cases Williams (Inspector of Taxes) v Merrylees [1987] 1 WLR 1511, [1987] STC 445, 60 TC 297, (1987) 84 LSG 2198, (1987) 131 SJ 1328....................... 6.126 Williams Trustees v IRC [1947] AC 447, [1947] 1 All ER 513, 63 TLR 352, 27 TC 409, [1948] LJR 644, 176 LT 462......................................................... 11.12 Williams’ Trusts, Re (1887) LR 36 Ch D 231.................................................... 4.26 Williams v Barton [1927] 2 Ch 9........................................................................ 3.40 Williams v Evans (Inspector of Taxes); Jones v Evans; Roberts v Evans [1982] 1 WLR 972, [1982] STC 498, 59 TC 509, (1982) 126 SJ 346................... 6.122 Williams v IRC [1965] NZLR 395..................................................................... 1.35 Williams v Singer (1921) 7 TC 387........................................................ 5.101, 6.22, 8.9 Williams, Re; sub nom Williams v Parochial Church Council of the Parish of All Souls, Hastings [1933] Ch 244............................................................. 3.26 Williams-Ashman v Price; Williams-Ashman v Williams [1942] Ch 219......... 3.40 Williamson v Ough (Inspector of Taxes) [1936] AC 384, (1936) 20 TC 194..... 6.68 Wilover Nominees v IRC [1974] 1 WLR 1342, [1974] 3 All ER 496, 1974] STC 467...................................................................................................... 6.220 Wilson v Wilson (1872) LR 2 P & D 435........................................................... 5.43 Wily v Fuller [2000] FCA 1512, (2000-01) 3 ITELR 321, Fed Ct (Aus).......... 1.42 Winans v Attorney General (No 1) [1904] AC 287................................ 5.32, 5.34, 5.42 Winans v Attorney General (No 2); sub nom Winans v King, The [1910] AC 27.......................................................................................................... 6.239 Windeatt’s Will Trusts, Re; sub nom Webster v Webster [1969] 1 WLR 692, [1969] 2 All ER 324, (1969) 113 SJ 450..................................................3.65, 10.5 Winder’s Will Trusts, Re; sub nom Westminster Bank Ltd v Fausset [1951] Ch 916, [1951] 2 All ER 362, [1951] 2 TLR 93............................................... 4.76 Withers v Wynyard (1938) 21 TC 724................................................................ 5.19 Wolfson v IRC [1949] 1 All ER 865, 65 TLR 260, 42 R & IT 196, 31 TC 141, [1949] TR 121, [1949] WN 190, (1949) 93 SJ 355.................................... 6.189 Wood v Holden (Inspector of Taxes); sub nom R v Holden (Inspector of Taxes) [2006] EWCA Civ 26, [2006] 1 WLR 1393, [2006] STC 443, [2006] 2 BCLC 210, 78 TC 1, [2006] BTC 208, 8 ITL Rep 468, [2006] STI 236, (2006) 150 SJLB 127..............................................................................5.81, 12.23 Woodard v Woodard [1995] 3 All ER 980, [1992] RTR 35, [1996] 1 FLR 399, [1997] 1 FCR 533, [1991] Fam Law 470.................................................... 3.21 Woodhall v IRC [2000] STC (SCD) 558, [2001] WTLR 475, [2000] STI 1653........................................................................... 1.11, 6.209, 6.244, 7.21 Woolwich Equitable Building Society v IRC [1993] AC 70, [1992] 3 WLR 366, [1992] 3 All ER 737, [1992] STC 657, (1993) 5 Admin LR 265, 65 TC 265, (1992) 142 NLJ 1196, (1992) 136 SJLB 230..................................... 6.323 Worshipful Co of Master Mariners v IRC (1932) 17 TC 298, (1932) 43 Ll L Rep 344....................................................................................................... 11.11 Worthing Rugby Football Club Trustees v IRC; sub nom IRC v Frampton (Trustees of Worthing Rugby Football Club) [1987] 1 WLR 1057, [1987] STC 273, [1987] 1 FTLR 30, [1987] RVR 253, 60 TC 482, (1987) 84 LSG 1415, (1987) 131 SJ 976; affirming [1985] 1 WLR 409, [1985] STC 186, [1985] PCC 330, [1985] RVR 56, (1985) 82 LSG 1643............................ 8.3 Wright v Gater [2011] EWHC 2881 (Ch), [2012] 1 WLR 802, [2012] STC 255, [2012] WTLR 549, 14 ITELR 603, [2011] STI 3431................................. 2.4 Wright v Morgan [1926] AC 788, PC (NZ)........................................................ 4.42 Wright’s Settlement, Re; sub nom Wright v Wright [1945] Ch 211................... 4.73

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Table of Cases Wyndham v Egremont [2009] EWHC 2076 (Ch), [2009] WTLR 1473, (200910) 12 ITELR 461....................................................................................... 3.63 Wyniczenko v Plucinska-Surowka; sub nom Rowinska (Deceased), Re [2005] EWHC 2794 (Ch); [2006] WTLR 487, (2005-06) 8 ITELR 385............... 2.23 Wynne v Tempest (1897) 13 TLR 360................................................................ 4.65 X X v Blompied & Abacus, Jersey, 28 January 1994............................................. 4.95 Y Yaxley v Gotts; sub nom Yaxley v Gott [2000] Ch 162, [1999] 3 WLR 1217, [2000] 1 All ER 711, [1999] 2 FLR 941, (2000) 32 HLR 547, (2000) 79 P & CR 91, [1999] 2 EGLR 181, [1999] Fam Law 700, [1999] EG 92 (CS), (1999) 96(28) LSG 25, (1999) 143 SJLB 198, [1999] NPC 76, (1999) 78 P & CR D33................................................................................................ 15.14 Young (Inspector of Taxes) v Pearce; Young (Inspector of Taxes) v Scrutton [1996] STC 743, 70 TC 331....................................................................... 6.3 Young & Young v Phillips (Inspector of Taxes) [1984] STC 520, 58 TC 232, (1984) 81 LSG 2776................................................................................... 6.239 Yuill v Fletcher (Inspector of Taxes) [1984] STC 401, 58 TC 145, [1984] BTC 164, (1984) 81 LSG 1604........................................................................... 6.60 Yuill v Wilson (Inspector of Taxes) [1980] 1 WLR 910, [1980] 3 All ER 7, [1980] STC 460, 52 TC 674, [1980] TR 285, (1980) 124 SJ 528.............. 6.60 Z Z Trust, Re [1997] CILR 248.............................................................................. 3.73 Zanelli v Zanelli (1948) 64 TLR 556, [1948] WN 381, (1948) 92 SJ 646......... 5.40 Zeital v Kaye [2010] EWCA Civ 159, [2010] 3 WLUK 178, [2010] 2 BCLC 1, [2010] WTLR 913, [2016] WTLR 535................................................... 3.1

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Abbreviations and References AA 1870 ACT AEA 1925 AJA 1982 AJA 1985 ARA ATCSA ATED BA 1914 CA 1985, 1989, 2006 CA 1993, 2006, 2011 CAA 1990, 2001 CDF CG CGT CIO CLCSA CTA 2009, 2010 CTO CTVA 1954 CUA 1601 DMPA 1973 DOTAS EBT EIS EPAA 1985 ESC ESOP ESOT FA

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

Apportionment Act 1870 Advance Corporation Tax Administration of Estates Act 1925 Administration of Justice Act 1982 Administration of Justice Act 1985 Assets Recovery Agency Anti-terrorism, Crime and Security Act 2001 annual tax on enveloped dwellings Bankruptcy Act 1914 Companies Act 1985, 1989, 2006 Charities Act 1993, 2006, 2011 Capital Allowances Act 1990, 2001 Contractual Disclosure Facility Capital Gains Manual (HMRC) Capital Gains Tax Charitable Incorporated Organisations Criminal Law (Consolidation) (Scotland) Act 1995 Corporation Tax Act 2009, 2010 Capital Taxes Office Charitable Trusts (Validation) Act 1954 Charitable Uses Act 1601 Domicile and Matrimonial Proceedings Act 1973 disclosure of tax avoidance schemes Employee Benefit Trust Enterprise Investment Scheme Enduring Powers of Attorney Act 1985 Extra Statutory Concession Employee Share Ownership Plan Employee Share Ownership Trust Finance Act cxiii

Abbreviations and References FLRA 1969 F(No 2)A 2015 FRS FSA 1986 FSMA 2000 FURBS GAAR GAD IA 1986 ICTA 1988 IEA 1952 IHT IHTA 1984 IHTM INTM IPDA IPFDA 1975

= = = = = = = = = = = = = = = = =

ITA 2007 ITEPA 2003 ITPA 2015 ITTOIA 2005 HMRC LA 1980 LAEF LCA 1925 LDT 2017 LPA 1925 LPAR 2007 LP(MP)A 1989

= = = = = = = = = = = =

MARD MCA 1973 MCA 2005

= = =

Family Law Reform Act 1969 Finance (No 2) Act 2015 Finance Reporting Standard Finance Services Act 1986 Financial Services and Markets Act 2000 funded unapproved retirement benefit scheme General Anti-Abuse Rule Government Actuary Department Insolvency Act 1986 Income and Corporation Taxes Act 1988 Intestate Estates Act 1952 Inheritance Tax Inheritance Tax Act 1984 Inheritance Tax Manual (HMRC) International Manual (HMRC) Immediate Post Death Interest Inheritance (Provision for Family and Dependants) Act 1975 Income Tax Act 2007 Income Tax (Earnings and Pensions) Act 2003 Inheritance and Trustees’ Powers Act 2015 Income Tax (Trading and Other Income) Act 2005 Her Majesty’s Revenue and Customs Limitation Act 1980 Lifetime Allowance Enhancement Factors Land Charges Act 1925 Landfill Disposals Tax (Wales) Act 2017 Law of Property Act 1925 Lasting Power of Attorney Regulations 2007 Law of Property (Miscellaneous Provisions) Act 1989 Mutual Assistance Recovery Directive Matrimonial Causes Act 1973 Mental Capacity Act 2005

cxiv

Abbreviations and References MLR 2003 MLRO MHA 1983 MPPA 1970 MWPA 1882 NCIS NEST OEIC PA 1890 PA 2004, 2008 PAA 1964, 2009 PAA 1971 PADA POCA 2002 PSA 2017 PTA 1906 QNUPS QROPS RCA 1958 RI RPSM RTA 1987

= = = = = = = = = = = = = = = = = = = = = =

Money Laundering Regulations 2003 money laundering reporting officer Mental Health Act 1983 Matrimonial Proceedings and Property Act 1970 Married Women’s Property Act 1882 National Criminal Intelligence Service National Employment Savings Trust open-ended investment company Partnership Act 1890 Pensions Act 2004, 2008 Perpetuities and Accumulations Act 1964, 2009 Powers of Attorney Act 1971 Personal Accounts Delivery Authority Proceeds of Crime Act 2002 Pension Schemes Act 2017 Public Trustee Act 1906 Qualifying Non-UK Pension Schemes Qualified Recognised Overseas Pension Scheme Recreational Charities Act 1958 Revenue Interpretation Registered Pension Schemes Manual (HMRC) Recognition of Trusts Act 1987

RSTPA SAM SAMLA 2018 SCA 2007 SIPP SLA 1882–90, 1925 SOCA SOCPA 2005 SP SSAS SSCBA 1992

= = = = = = = = = = =

Revenue Scotland and Tax Powers Act 2014 Self Assessment Manual (HMRC) Sanctions and Anti-Money Laundering Act 2018 Serious Crimes Act 2007 Self Invested Personal Pension Settled Land Act 1882–90, 1925 Serious Organised Crime Agency Serious Organised Crime and Police Act 2005 Statement of Practice small self-administered pension scheme Social Security Contributions and Benefits Act 1992 cxv

Abbreviations and References TA 1925, 2000 TACT 2000 TCGA 1992 TDA 1999 TIA 1961 TIEA TIOPA 2010

= = = = = = =

TLATA 1996

=

TSEM UITF UURBS VAT VATA 1994 VTA 1958 WA 1837, 1963, 1968 WRPA 1999

= = = = = = = =

Trustee Act 1925, 2000 Terrorism Act 2000 Taxation of Chargeable Gains Act 1992 Trustee Delegation Act 1999 Trustee Investment Act 1961 Tax Information Exchange Agreements Taxation (International and Other Provisions) Act 2010 Trusts of Land and Appointment of Trustees Act 1996 Trusts, Settlements and Estates Manual (HMRC) Urgent Issues Task Force unfunded unapproved retirement benefit scheme value added tax Value Added Tax Act 1994 Variation of Trusts Act 1958 Wills Act 1837, 1963, 1968 Welfare Reform and Pensions Act 1999

cxvi

Chapter 1

A Useful Relationship

INTRODUCTION 1.1 A common view of the origin of trusts rests with the landed knight in shining armour rushing off to the crusades to fight for Christendom. Before leaving, however, he would transfer the family estates to his loyal brother for the use of his wife and family. It not infrequently happened that the loyal brother turned into a wicked uncle and took the estate for himself and if the remains of our trusty knight were rusting away on some foreign field his wife and family were destitute. The only hope was an appeal to the king, or, in due course, to the Lord Chancellor as keeper of the king’s conscience to give them back the use of the family estate, even though the legal title to the land remained with the brother. 1.2 The reality, of course, was rather less romantic and, in fact, the holding of land by one person for the use of another was not unknown prior to the Norman Conquest, but the common law did not recognise the use and it was not actually until about 1400 that the Lord Chancellor was acting to enforce uses, appointing the legal owner the feoffee to uses and the intended occupier or beneficiary the cestui que use. One of the consequences of holding land for the use of another, by the relatively simple device of vesting the land in a number of feoffees to uses as joint tenants, was that the legal estate passed by survivorship to the remaining joint tenants on the death of one of the feoffees and the feudal dues payable on assets passing on death did not apply. The rights of the cestui que use continued to be enforced under the law of equity in what in due course became the Chancery Division of the courts and could be passed to successive cestui que use without incurring a tax charge. The exploitation of the English system of equity for tax avoidance therefore has a long pedigree. One of the earliest anti-avoidance provisions was the Statute of Uses, introduced in 1535, which was designed to extinguish most of the uses and transfer the legal estate to the cestui que use, which helped to raise increased feudal dues arising on death for Henry VIII and his successors. However, the tax avoidance industry of the day came up with the solution whereby the land was transferred to the feoffees (A) for the use of the cestui que use (B) to hold in trust for the intended beneficiary (C). Thus the use upon a use turned into a trust, as the statute of uses merely transferred the legal estate from A to B but 1

A Useful Relationship equity would still enforce the rights of the beneficiary C. In due course it was only necessary to transfer the property to the trustee who held the legal estate for the benefit of the beneficiary who held the equitable estate. The Court of Chancery was there to remind the trustee that although he may hold the legal estate his conscience ought not to allow him to treat it as if it were his own property, rather, it was entrusted to him for the beneficiary. Equity would not permit him to do the unconscionable and ignore the beneficiary’s interests.

A MATTER OF CONSCIENCE 1.3 The concept of acting in accordance with the conscience of the alleged trustee is still fundamental to trusts, as is shown by the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996]  AC  669 at 705 where Browne-Wilkinson LJ summarised the basic requirements of a valid trust as follows: ‘(i) equity operates on the conscience of the owner of the legal interest. In the case of a trust the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust); (ii) since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience ie until he is aware that he is intended to hold the property for the benefit of others, in the case of an express or implied trust, or in the case of a constructive trust, of the factors which are alleged to affect his conscience; (iii) in order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust, who may come under fiduciary duties even if he does not receive identifiable trust property; (iv) once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice.’ 1.4 Although the Judicature Acts of 1873–75 abolished the requirement to take separate actions under common law or equity by allowing courts to apply legal or equitable remedies where appropriate, the dual thread of law and equity, with the consequent legal interests of the trustee and equitable interests of the 2

A Useful Relationship beneficiary in a trust situation, with its inevitable consequence of two enforceable interests in the same property at the same time, continues to the present day. It also continues to confuse those familiar with civil law jurisdictions where an equitable interest distinct from a legal interest is unknown.

THE NATURE OF A TRUST 1.5 A trust is not in any sense a separate legal entity in the same way as a company or building society is a separate legal person created by statute. It is a relationship enforceable at law which arises when the owner of property, the settlor, transfers the legal estate in that property to trustees who become the legal owners, with the obligation on them to hold the property for the benefit of the beneficiaries. These beneficiaries, or others on their behalf, may enforce their rights under the trust, which are usually encompassed in a trust deed or deed of settlement or implied by a statute or jurisprudence. A trust of land is often referred to as a settlement and a trust, usually of a landed estate, created under SLA 1925 as a strict settlement. However, for tax purposes the term settlement or settled property includes any trust whether or not the assets include land, and as this book is aimed at tax advisers rather than trust lawyers the terms trust and settlement will be treated as synonymous except where a contrary intention is indicated. The main trust law is in the Trustee Acts of 1925 and 2000 and the Inheritance and Trustee Powers Act 2014. This book is based on the trust law in England and Wales. Reference should be made to the Trustee Act (Northern Ireland) 2001 and the Charities and Trustee Investment (Scotland) Act where appropriate. 1.6 A  trust requires a settlor, but the settlor can be a trustee, even the sole trustee, and can be a beneficiary, even the sole beneficiary. There must, however, be other interests or potential beneficiaries as otherwise there is full retention of the legal title which includes all proprietorial rights over the assets. An equitable interest does not arise until another party is involved. In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Browne-Wilkinson LJ stated that a person solely entitled to the full beneficial ownership of money or property both at law and in equity does not enjoy an equitable interest in that property. The legal title carries with it all rights. Unless and until there is a separation of the legal and equitable estates there is no separate equitable title.

TYPES OF TRUST Bare trusts 1.7 The simplest type of trust is the bare or absolute trust, under which assets are transferred by the settlor to the legal ownership of the trustee, 3

A Useful Relationship or nominee, for the benefit of the settlor absolutely and are potentially exempt transfers for inheritance tax purposes if not within the £3,000 annual exemption. The bare trust is often used in share dealings where the investment manager is appointed the shareholder, as nominee, to enable shares to be bought and sold expeditiously. It is sometimes used to make the beneficial owner less conspicuous, although nowadays CA 1985 s 208 requires certain nominee holdings to be disclosed to the company. It is not unusual for a group of shareholders and members of the same family to transfer their shares to the same trustees to hold as nominees for them, enabling the combined shareholding to be voted as a single block of shares, which, in turn, enables the influence of the individual shareholdings to be maximised. However, a group of investors settling assets on trust for themselves and others created a discretionary not a bare trust in The Scheme Manager Depositors Compensation Scheme v Ahuja and Others (1997) (1996–98)  MLR  278, an Isle of Man case concerning deposits in the Bank of Credit and Commerce International (BCCI). 1.8 In the case of land, the number of joint owners is limited to four and it is common practice where real estate is owned in a partnership, to hold the legal estate in the names of four of the more senior partners as nominees for all the equity partners interested in the property, for the time being. In some cases the land is held through a company acting as nominee for the partners for the same purpose.

Discretionary trusts 1.9 A discretionary trust is one where at least some of the beneficiaries are identified but the precise interests of each beneficiary, including that of any future beneficiary appointed by the trustees is left to the discretion of the trustees. In some cases the trustees are required to refer to the settlor for guidance before exercising their discretion; in other cases at the time of creating the trust the settlor indicates to the trustees how he would like the discretion to be exercised and this is recorded in a trustees’ minute. In other cases the settlor may write to the trustees setting out his wishes in a letter which, although not binding on the trustees, is likely to be followed by them in most circumstances. HMRC regards a settlor’s letter of wishes as part of the trust documentation. Whether HMRC is right is a moot point in the light of Re Londonderry’s Settlement [1965] Ch 918, however considerations should be given to recent litigation in Dawson-Damer v Taylor Wessing LLP (2017) EWCA 74 and Lewis v Tamplin (2018) EWHC 777 (Ch) in view of the subject access request (SAR) procedure under Data Protection Act 1998 s 7. 1.10 The wide powers to add potential beneficiaries to a discretionary trust have been explored in Re Manisty’s Settlement [1974] Ch 17 and in Abrahams Wills Trust [1969] 1 Ch 463. Nova Scotia Trust v Barletta, Bahamas Supreme 4

A Useful Relationship Court, EG  No  550 of 1984, confirms that a letter of wishes is in no way binding on the trustees and any circumscription of the trustees’ powers has to be included in the trust deed itself. A discretionary trust is a relevant property trust under IHTA  1984 s  58. A  discretionary trust may have a protector, see 3.70–3.73.

Interest in possession trusts 1.11 An interest in possession exists where a beneficiary has a present entitlement to the present income of the trust, after deduction of proper trust expenses (Pearson v IRC [1980] STC 318). The beneficiary with an interest in possession for life is usually known as the life tenant; until 21 March 2006 a life tenant was treated as owner of the settled property for IHT purposes (IHTA 1984 s 49). A beneficiary may be entitled to an interest in possession in the whole or any part of the trust fund. In Oakley v IRC [2005] STC (SCD) 343, the Special Commissioners held that, where the freehold of a property was left to the widow for life but was occupied rent free by a company and that right of occupation was confirmed by the will, the company and not the wife had the present right to present enjoyment of the property which constituted an interest in possession, and therefore the wife did not have an interest in possession on her death. An interest in possession trust is a relevant property trust with effect from 22 March 2006, unless the life tenant has a transitional serial interest, an immediate post-death interest or a disabled person’s interest; see Chapter 6. In Judge and Another (Personal Representatives of Walden Dec’d) v RCC [2005] STC (SCD) 863, it was held that, where property had been left ‘upon trust with the consent in writing of my wife during her lifetime to sell the same with full power to postpone sale for so long as they shall in their absolute discretion think fit’ together with a declaration to the trustees during the lifetime of the wife to permit her the use and enjoyment of the property, it did not amount to an interest in possession. In Gartside v IRC [1968] AC 553, Lord Reid stated (at 607) that ‘in possession’ must mean that your interest enables you to claim now whatever may be the subject of the interest. A  right of occupation can, however, amount to an interest in possession, as in IRC  v Lloyds Private Banking Ltd [1998]  STC  559, Woodhall (Personal Representative of Woodhall Dec’d) v IRC [2000] STC (SCD) 558 and Faulkner (Trustee of Adams dec’d) v IRC [2001] STC (SCD) 112. In the UK, unlike Australia, the ‘alter ego’ trust, in the absence of it being a sham, is not treated as giving rise to a separate right against the controlling settlor beneficiary; but a beneficiary’s entitlement, even though only a discretionary entitlement under a trust, may be treated as a resource of the beneficiary for the purposes of ancillary relief in divorce proceedings under Matrimonial Causes Act 1973 s 25(2)(a) (Charman v Charman [2005] EWCA Civ 1606). 5

A Useful Relationship In this case, the trustees were resident in Bermuda, and Lloyd LJ in the Court of Appeal (at para 67) suggested that trustees might properly consider that it would be in the interests of beneficiaries that the trustees should give evidence of the assets in the trust and the rights of the beneficiaries so that the English court could make an informed judgment, rather than having to draw inferences as to the likelihood of one of the parties having access to the trust fund which might not be accurate, with the resulting judgment not being in the interests of the beneficiaries. This case related to the decision to grant an order requiring the director of the trustee company in Bermuda and the husband’s accountant in London to produce documents and answer specific questions relating to the trusts. The case finally proceeded to the High Court, and to the Court of Appeal in Charman v Charman [2007] EWCA Civ 503 where the High Court judgment was upheld. The Court of Appeal confirmed that the £68 million held within an offshore discretionary trust, known as the Dragon Holdings Trust, which the husband had set up and had expressed a wish to the trustees that, during his lifetime, he should be its primary beneficiary. This was held to be part of the financial resources of the husband for the purposes of Matrimonial Causes Act 1973 s 25(2)(a). In this case, Sir Mark Potter stated (at para 53) that ‘it is in law a perfectly adequate foundation for the aggregation of trust assets with a party’s personal assets for the purposes of s 25(2)(a) of the Act that they should be likely to be advanced to him or her in the event only of “need”’. This does not mean that the trust is a sham or is ignored or set aside or is an asset of the settlor beneficiary but is a resource to be taken into account in the ancillary relief proceedings. A similar decision was reached in SR v CR (ancillary relief: family trusts) [2008] EWHC 2329 (Fam).

Immediate post-death interest trust (IPDI) 1.12 An IPDI is an interest in possession trust, effected by will or on intestacy, under which the life tenant became beneficially entitled to an interest in possession which is not a bereaved minor’s trust or a disabled person’s interest (IHTA  1984 s  49A). An IPDI is treated as the property of the life tenant for IHT purposes, although appointments may be made to other adult beneficiaries who could benefit if the trust allowed this.

Transitional serial interest trust (TSI) 1.13 A  TSI exists where a beneficiary became entitled to an interest in possession, on or after 22  March 2006 and before 6  October 2008, on the death (or termination of the interest) of a life tenant of a pre-22 March 2006 trust before 6 October 2008 (IHTA 1984 ss 49B–49C). Where, on the death of a life tenant on or after 6 October 2008, his spouse or civil partner acquires a life interest, this is treated as a TSI. A TSI is treated as the property of the life tenant for IHT purposes. 6

A Useful Relationship

Accumulation and maintenance trusts 1.14 An accumulation and maintenance trust is a discretionary trust for minors, where the trustees are empowered to use the trust income for the maintenance, education or benefit of the beneficiaries, with any balance being accumulated and added to the trust capital. The term is usually confined to those trusts within the definition in IHTA  1984 s  71, which ceases to apply to new trusts created on or after 22 March 2006, and which in turn is based on the statutory trusts for infants in Trustee Act 1925 s  31. As well as the requirement that there is no interest in possession in the settlement while it is an accumulation and maintenance settlement, there is also the requirement that one or more of the beneficiaries will become entitled to an interest in possession on or before reaching the age of 25. A  requirement to have an interest in possession at age 25 or earlier is not a requirement to have any entitlement to the trust capital at that stage, although the beneficiary’s share of the trust fund has become vested. It is quite common to provide that a beneficiary’s share of the trust capital should be paid to his estate on death, or advanced to him at an earlier age as specified in the trust deed, or left to the trustees’ discretion.

Bereaved minor’s trusts 1.15 A  bereaved minor’s trust is a relevant property trust established under IHTA 1984 ss 71A–71C by will or intestacy on the death of a parent in favour of a minor child. Whilst the bereaved minor is under the age of 18, he must be entitled to the income from the settled property, or the income must not be capable of being applied for the benefit of any other person. Income which is not paid to the bereaved minor may be accumulated for his benefit. A significant difference between a bereaved minor’s trust and an accumulation and maintenance settlement is the requirement for the bereaved minor to become absolutely entitled to the settled property, income arising therefrom and accumulated income on reaching the age of 18.

Age 18 to 25 trusts 1.16 An age 18 to 25 trust is a discretionary trust, similar in concept to a bereaved minor’s trust, and is created by will or intestacy on the death of a parent where the child is aged between 18 and 25. The trust capital, including accumulated income, and income, if appropriate, must vest in the beneficiary upon his reaching age 25. Prior to becoming entitled to the trust capital, the beneficiary must either be entitled to the income of the trust, or the trustees must not have the power to apply the income for the benefit of any other person and accumulate the income. An accumulation and maintenance trust 7

A Useful Relationship established prior to 22  March 2006 could have been converted into an age 18 to 25 trust before 6 April 2008, provided that the relevant conditions as to entitlement to income and capital etc are met. This is the case even where the trust was established by a person other than the parent, or the parent is still alive (IHTA 1984 s 71D).

Protective trusts 1.17 A protective trust, or spendthrift trust, is one in which the beneficiary’s interest in the trust, which is usually a life interest, is determinable upon his bankruptcy or attempted alienation of his rights under the trust. On determination of the life interest, the trust usually reverts to being a discretionary trust in favour of the former life tenant and his spouse and children, if any. TA 1925 s 33 provides a model form of protective trust.

Disabled person’s trusts 1.18 A  disabled person’s trust is a discretionary trust, although for IHT purposes under IHTA 1984 s 89 it is treated as an interest in possession trust in which the disabled person has the life tenancy. In order to qualify, the trust must be for someone incapable of looking after their own affairs within the meaning of MHA 1983 or in receipt of an attendance allowance or disability living allowance under SSCBA 1992. Normally a true interest in possession trust or a straightforward discretionary trust is used in preference to a disabled person’s trust in these situations.

Charitable trusts 1.19 A  charitable trust is a purpose trust which is given a number of taxation privileges and is exempt from the normal perpetuity period applied to a trust, and can therefore last indefinitely. Charitable purposes were summarised by Macnaghten LJ in Income Tax Special Purposes Comrs v Pemsel [1891] AC 531 as falling into four principal divisions: (a)

trusts for the relief of poverty;

(b) trusts for the advancement of education; (c)

trusts for the advancement of religion; and

(d) trusts for other purposes beneficial to the community and not falling under any of the other preceding heads. This has now been extended by the Charities Act 2011; see Chapter 11. 8

A Useful Relationship

Purpose trusts 1.20 It is generally considered under English law that purpose trusts for non-charitable purposes will only be enforced in very limited cases, such as trusts for the erection or maintenance of monuments or graves, trusts for the saying of masses, trusts for the maintenance of particular animals, trusts for the benefit of unincorporated associations and miscellaneous cases. This classification in The Rule Against Perpetuities by Morris & Leach (1956) was endorsed by Lord Evershed MR in Re Endacott [1960] Ch 232, and followed Re Astor [1952] Ch 534 and Re Shaw [1957] 1 WLR 729. Some commentators argue that the perceived prohibition of most purpose trusts that are not charitable under English law is misconceived, and many foreign jurisdictions specifically allow purpose trusts for either public or private purposes. Where purpose trusts are created, they are usually discretionary in nature.

Resulting trusts 1.21 The trusts so far described have been created by the settlor as a result of consciously transferring assets to trustees to hold on trust for the beneficiaries. Trusts, however, can also arise as a result of law without there being any express trust. A  resulting trust arises where the settlor and beneficiary are the same person. For example, if property is transferred into the name of the third party, in the absence of consideration or any evidence of donative intent by the transferor, the transferee is presumed to hold the legal estate in trust for the transferor who retains the absolute beneficial interest. There is, therefore, a presumed resulting bare trust, with the transferee being treated as mere nominee for the transferor (Re Vandervells Trust (No 2) [1974] Ch 269; Buffrey v Buffrey and Another (2006) 9 ITELR 455; Hostick and Another v The New Zealand Railway and Locomotive Society Waikato Branch Incorporated (2006) 9 ITELR 140. A transfer into the name of a spouse or child may give rise to a presumption of advancement, ie a gift; see Cheung and Others v World Cup Investments Inc and Others (2008) 11 ITELR 449, a Hong Kong case. In the UK, the presumption is less likely to apply (Pettitt v Pettitt [1970]  AC  777; Falconer v Falconer [1970] 3 All ER 449). A second type of resulting trust arises where there is a transfer to a trustee of the legal estate, but some or all of the beneficial interests are undisposed of and are automatically held on resulting trusts for the settlor. Barclays Bank Ltd v Quistclose Investments Ltd [1970]  AC  567, Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (in liquidation) [1985] 1 All ER 155, Re Diplock [1948] 2 All ER 318 and Westdeutsche v Islington London Borough Council [1996] AC 669 would seem to confirm that these are the only two types of resulting trust acceptable to the law in the UK. In Abou-Rahmah and Another v Abacha and Others (2006) 9 ITELR 401, the victim of a Nigerian banking scam brought an action against the bank involved for knowing/dishonest assistance, restitution of money had and received, 9

A Useful Relationship negligence and breach of a resulting or Quistclose trust. The appeal concerned only the knowledge/dishonest assistance claim, which was rejected following Barlow-Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2006] 1 All ER 333 and Twinsectra Ltd v Yardley [2002] 2 All ER 377.

Implied trusts 1.22 Implied trusts arise where the court infers the settlor’s intentions from his actions. For example, if an author were to send copies of a number of aircraft books to the librarian of an aviation trust, the implication would be that these were an addition to the trust archives, not to the librarian in his personal capacity, although, as with all presumptions, this is capable of being rebutted by appropriate evidence to the contrary.

Constructive trusts 1.23 A constructive trust is imposed by the court contrary to the wishes of the person identified as the trustee in circumstances where his acquisition of the legal title was subject to the equitable interests of some third-party beneficiary. This may apply, for example, in the case of co-habitees who acquire a house in the name of one of the parties, which is occupied by both. In order to show a constructive trust of part of the property in favour of the non-legal owner, it is necessary to show that there was some prior agreement, however informal, for them to share the beneficial interest, and that the beneficiary has altered his or her position to his or her detriment in reliance on the presumed equitable interest (Fowler v Barron [2008] EWCA Civ 377; Stack v Dowden [2007] UKHL 17). 1.24 Alternatively, the trust may be construed as a result of both parties’ contribution to the original purpose or the repayment of the mortgage on the property acquired (Lloyds Bank Plc v Rosset [1991] 1 AC 107). 1.25 Constructive trusts can also be imposed as a result of fraud by the transferee, as in McCormick v Grogan (1869) LR 4 HL 82, or to give effect to a secret trust, eg Ottaway v Norman [1972] Ch 698, where a property was left in A’s will to B on terms that she would leave it in her own will to A’s son, C. In the Hong Kong case of Luo v The Estate of Hui (deceased) and Others (2008) 11 ITELR 218, it was held that the property was not held on constructive trusts but that justice could be served under the doctrine of promissory estoppel.

Statutory trusts 1.26 Under the Law of Property Act (LPA) 1925 s 19, the conveyance of a legal estate to an infant is held on statutory trust until he reaches the age of 18. 10

A Useful Relationship Under LPA 1925 s 36, where a legal estate is held as joint tenants, it is treated as held on a trust of land under the Trust of Land and Appointment of Trustees Act (TLATA) 1996. 1.27 Under LPA  1925 s  34, land held in undivided shares, eg  for the members of a partnership, will vest in the first four named joint owners as a trust of land for all the partners. Under AEA  1925 s  33, the property of an intestate vests in his personal representatives on trusts for sale and, to the extent that this includes real property, as a trust of land. AEA 1925 s 47 sets out the statutory trusts which apply on intestacy.

STRICT AND SETTLED LAND ACT SETTLEMENTS 1.28 Prior to the Settled Land Acts of 1882 to 1890, it was not uncommon for land to be settled for generations which prevented it being freely transferable. This stultified its development, leading to general decay for both the landed families and the workers on the land. The reform of settled land and the rule against perpetuities allowed a person to appoint real estate on a strict settlement for himself for life with remainder to his son for life, followed by an entailed interest for his son’s eldest son, as, in practice, land was settled in entail male, with daughters being excluded. When the grandson became the life tenant entail in possession, he could bar the entail and create for himself a freehold interest of the fee simple absolute in possession, which would allow him to sell the land. 1.29 In order to keep the property within the settlement, it became common practice to grant an income from the land to the entailed beneficiary before he came into possession, on condition that, on barring the entail to create a freehold, which could only be done with his father’s consent because he was not yet in possession, he resettled the land on his father and himself for life and would then entail it for his own eldest son. When the son came into possession on the death of his father, he would be life tenant not tenant entail in possession, because of the existence of the new entail to his own son. The land was then kept in the family for generations. The Settled Land Acts of 1882, 1884, 1887, 1889, 1890 and 1925 effectively gave the life tenant in possession power to sell the freehold interest, although the proceeds of sale had to be paid to the trustees of the settlement. SLA 1925 separated the trust instrument on which the land, or any proceeds of sale, would be held from the deed vesting the legal estate in the land in the life tenant as the statutory owner. Unfortunately, the 1925 Act applied wherever there was a succession of equitable interests, sometimes with unforeseen consequences. TLATA 1996 s 24 has prevented the formation of any further strict settlements, and prospectively abolishes such settlements under SLA 1925 by providing that, if there ceases to be any relevant property which is or is deemed to be subject to the settlement, the settlement permanently ceases at that time to be a settlement for the purposes of SLA 1925. 11

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TRUSTS FOR SALE 1.30 Various statutory trusts, as referred to above, and express trusts provide that assets are to be held on trusts for sale with or without powers of postponement. Where such trusts relate to real property, TLATA 1996 s 4 implies, despite any provisions in the trust deed to the contrary, a power for the trustees to postpone sale of the land for an indefinite period. The trustees of a trust of land, therefore, have no duty to sell the land. Section 6 gives trustees power to convey the land to beneficiaries who are sui juris and to acquire land for the purposes of the trust. TLATA 1996 came into effect on 1 January 1997.

THREE CERTAINTIES OF A VALID TRUST 1.31 In order to create a valid trust, there must, except in the case of a constructive trust, be an intention on the part of the settlor to create in the trust ‘the certainty of intention’. Secondly, there is the requirement actually to transfer the assets to the trustees or identify the assets held by the settlor as trustee, which is the ‘certainty of subject matter’. Thirdly, there is the necessity to be able to identify the beneficiaries, ie the ‘certainty of objects’. It is not necessary to identify all possible beneficiaries, because a discretionary trust may be drafted widely enough to include beneficiaries unborn at the time of creation or otherwise unidentified. It is necessary to have at least one beneficiary and to identify whether or not someone falls within the class of beneficiaries. In the case of a purpose trust, rather than identifying specific beneficiaries, the requirement is to be able to identify the charitable objects or other valid purpose of the trust. 1.32 These three certainties may be traced back to the judgment given by Langdale LJ in Knight v Knight (1840) 3 Beav 148. If there is a valid transfer of property but there is no certainty as to the intention to create a trust, the transferee would hold the legal estate absolutely, ie  for his own benefit. If, however, for any reason the subject matter of the trust or the object could not be identified, the transferee would hold on a resulting trust for the settlor.

Certainty of intention 1.33 Although it is not necessary for a trust to be in writing, it is necessary that the settlor intended to create a trust (Gully v Cregoe (1857) 24 Beav 185; Dhingra v Dhingra (1999–2000) 2 ITELR 262). It was held in Re Adams and Kensington Vestry (1884) 27 Ch D 394 that a bequest to a widow ‘in full confidence that she would do what was right as to the disposal thereof between my children either in her lifetime or by will after her decease’ was insufficient to create a trust in favour of the children and the widow was ‘entitled to the assets absolutely’. It is necessary, however, to look at the entire document: in Re Hamilton [1895] 2 12

A Useful Relationship Ch 370 and in Comiskey v Bowring-Hanbury [1905] AC 84, it was held that the bequest made ‘absolutely in full confidence that she (the widow) will make such use of (the property) as I would have made myself and that on her death she will devise it to such one or more of my nieces as she may think fit’ created a trust for the nieces. Where there is no doubt as to the intention to make the transfer but the trust itself fails for uncertainty, the transferee takes the assets absolutely and not subject to the failed trust (Hancock v Watson [1902] AC 14). 1.34 Further cases on certainty of intention include Re Challoner Club Ltd (in liquidation) (1997) The Times, 4 November, in which a mere transfer of additional funds received into a separate bank account did not create a trust in favour of the contributors, as this did not sufficiently identify the terms of the trust; unlike Re Kayford Ltd [1975] 1 WLR 279, where a company in financial difficulties set up a specific customers’ trust bank deposit account, into which deposits paid by customers pending delivery were placed, and in this case the terms of the trust were sufficiently clear to enable it to be upheld by the court. In BVB (2010) WTLR 1689 a potential beneficiary of his father’s trust had a legitimate expectation to benefit which was taken into account in calculating the award to his wife on divorce.

Certainty of subject matter 1.35 In Palmer v Simmonds (1854) 2 Drew 221, a trust of the ‘bulk’ of the residue was insufficient to identify that portion of the residue subject to trust and therefore the residuary legatee took absolutely. Similar uncertainty was found in the reference to ‘blue chip securities’ in Re Kolb’s Will Trust [1962] Ch 531, as the term was not sufficiently precise to determine the actual securities to which it was intended to refer. Surprisingly, in Re Golay’s Will Trust [1965] 1 WLR 969 a reference to ‘reasonable income from my other properties’ was accepted as something which could be determined by the court. Certainty of intangible subject matter does not necessarily require the asset to be segregated and, in Hunter v Moss [1994] 3 All ER 215, a declaration that a settlor held 50 of his 950 shares on trust for an individual was sufficient identification. This was followed in the Australian case of White v Shortall (2006) 9 ITELR 470. However, in Re London Wine Shippers Ltd (1986) PCC 121 and Re Goldcorp Exchange Ltd [1995] 1 AC 74, part of an unsegregated stock of goods could not be identified and no trust existed (but see now the Sale of Goods (Amendment) Act 1995, inserting ss  20A and 20B into the Sale of Goods Act 1979). The court will overcome technical difficulties to prevent fraudulent reliance on uncertainty (Pallant v Morgan [1953] Ch 43). It is not possible to settle into trust a right over future property which is no more than a mere expectancy or spes (Performing Rights Society v London Theatre of Varieties [1924] AC 1). However, an assignment of copyright in a work not yet written is specifically allowed under Copyright, Designs and Patents Act 1988 s 91. In Williams v Commissioners of Inland Revenue [1965] NZLR 395, a settlor who purported 13

A Useful Relationship to settle a fixed sum out of income that he received from a settlement was unable to do so as there may have been no such income, although an assignment of part of his right to any such income would have been perfectly permissible.

Certainty of objects 1.36 Under the concept of a trust, a settlor, having passed the legal title in the trust assets to the trustees, will normally cease to have anything to do with the trust unless the trust deed specifically provided otherwise, or unless he was also a beneficiary. It is the beneficiaries who are empowered to enforce the trust and it is therefore essential for the trustees to know who the beneficiaries are, so that they can ensure that their interests are properly taken into account and so the court can determine, if necessary, who it is who can take action against the trustees. Not only must there actually be beneficiaries, but they must know that they are beneficiaries, or else they are, in practice, unable to enforce the trust; see, for example, BS West v Lazard Brothers and Co (Jersey) Ltd (No 2) [1993] JLR 165; Lemos v Coutts & Co (Cayman) Ltd [1992] CILR 5–460; and Chaine-Nickson v Bank of Ireland [1976] IR 393. 1.37 Where trustees are given wide discretionary powers, it may not be practicable to identify everybody who could be entitled at any one time; and, in Re Gestetner Settlement, Barnett v Blumka [1953] Ch 672, it was confirmed that the inability to classify the entire class would not cause the trust to fail for lack of certainty of objects. All that is necessary is to be able to determine with certainty whether an individual is or is not a member of the class (Whishaw v Stephens [1970] AC 508). It is, however, necessary for trustees contemplating a distribution to take into account, so far as possible, the interests of all the beneficiaries and, if necessary, the court would itself exercise discretion if the trustees refused to do so (McPhail v Doulton [1971] AC 424). A trust for the benefit of any or all or some of the inhabitants of the county of West Yorkshire failed for lack of certainty of objects in R  v District Auditor (No  3) Audit District of West Yorkshire Metropolitan County Council, ex p West Yorkshire Metropolitan County Council [1986] RVR 24. A similar decision was reached in the Jersey case of Re The Double Happiness Trust, Grant Thornton Stonehage Ltd v Ward and Others (2002) 5 ITELR 646. 1.38 A  discretion given to trustees has to be exercised, even if that discretion is exercised by deciding to accumulate income within the permissible accumulation period and not to distribute. A  power of appointment, be it a general or specific power, given to trustees is different from a discretion, in that there is no requirement to exercise a power and, in the absence of exercising it, the trust will normally provide for a trust to other beneficiaries or, in some cases, a resulting trust in favour of a settlor. Therefore, a power to benefit anyone in the world, apart from excluded persons, was upheld in Re Manisty’s Settlement [1974] Ch 17 and Re Hay’s Settlement Trusts [1982] 1 WLR 202. 14

A Useful Relationship 1.39 A provision in a will enabling ‘any members of my family and any friends of mine who wish to do so to purchase paintings at their catalogue price or probate value whichever was the lower’ was upheld as not void for lack of certainty, as family could be defined as a blood relation, and a friend merely had to prove that he had been a friend of the testatrix, and it was not necessary to know who all the friends were (Re Barlow’s Will Trusts [1979] 1 WLR 278). In OT Computers Ltd (in administration) v First National Tricity Finance Ltd (2003) ITELR 117, a trust for customers making deposits was upheld, but a trust for urgent supplies was void for uncertainty of objects, as urgent supplies could not be identified with certainty. 1.40 Although powers are contained within trusts, it is perfectly possible for a donee to be given assets with the power of appointment to a specific class of beneficiaries. If he fails to exercise that power, the deed of gift will probably provide for a gift in favour of a trust or, in the absence of such a clause, the assets would revert to the settlor on a resulting trust. However, the donee of a general power of appointment may, by definition, appoint anybody, including himself, as beneficiary, as he has no fiduciary duty to exercise the power in any particular way, or indeed at all. His position is therefore analogous to that of an absolute owner (Melville v IRC [2001] STC 1271).

SHAM TRUSTS ETC 1.41 A  sham is, under English law, a document which purports to represent the true legal position but fails to do so. In Rahman v Chase Bank [1991] JLR 103, the settlor purported to transfer various assets to the trustees but continued to deal with them as if they were still his own property. The trust was set aside on the grounds that it was actually a sham, in that the settlor never intended to give up control of the assets and for the trustees to deal with them in accordance with the purported trust documents. Similarly, a purported declaration of trust in favour of a wife and children was set aside in Midland Bank Plc v Wyatt [1995] 1 FLR 696. In Snook v London and West Riding Investments Ltd [1967] 1 All ER 518, Diplock LJ defined sham in the following terms: ‘I apprehend that if it has any meaning in law it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create … all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.’ 1.42 It should be noted that, to be classified as a sham, both parties, and not just one of them, must intend the documents not to have legal effect. In 15

A Useful Relationship the Jersey case of Re Abacus (CI) Ltd (Trustee of the Esteem Settlement), Grupo Torras SA v Al Sabah (2003) 6 ITELR 368, it was held that the trust was not a sham and, unlike a company, did not have a veil to pierce merely because the trustees usually went along with the wishes of the settlor. In Minwalla v Minwalla (2004) 7  ITELR  457, it was held that trustees who accepted two inconsistent letters of wishes on the same day contributed to the trust being declared a sham, although it was a Jersey trust and the Jersey court declined to make any findings of culpability on the part of the trustees pending further argument (In Re Fountain Trust, CI  Law Trustees Ltd v Minwalla and Others (2005) 9  ITELR  601). The Jersey court did, however, enforce the substance of the English order in the name of comity. In Shalson v Russo [2003] WTLR 1165, a settlement was held not to be a sham where the trustees had executed the document that created the settlement in the honest belief and intention that it was a valid settlement and were at no time a party to any understanding that the settlement was merely warehousing the settlor’s assets. See also the Australian cases of Re Sharrment Pty Ltd (Bankruptcy no G348 of 1987) and In the marriage of Ashton (1986) FLC 91–777. Steele v Paz Ltd [1995]  MLR  426 concerned a limbo trust in the Isle of Man with a named charitable beneficiary, where the intention was to appoint personal beneficiaries with the consent of the protector, who had not been appointed. In the circumstances of this case, it was held that the trust was not a sham and the court would not allow the trust to fail for want of a protector, and one was duly appointed. As the named beneficiary, the Red Cross, was never intended to benefit and the named settlor had settled a purely nominal amount into trust, it is by no means unlikely that other jurisdictions would have dismissed the whole arrangement as a sham. However, a limbo trust was upheld in the Australian case of Wily v Fuller (2000) 3 ITELR 321. Allegations that a Jersey trust was a sham were considered in Re M and L Trusts, Nearco Trustee Company (Jersey) Ltd v AM and Others (2003) 5  ITELR  656. There are useful reviews of the case law on sham trusts in Shalson and Others v Russo and Others (Mimran and Others Part 20 Claimants) (2003) 8 ITELR 435; Hitch and Others v Stone (2001)  STC  214; and A  v A, Intervening party St George Trustees Ltd and Others [2007] EWHC 99 (Fam). 1.43 In Public Trustee v Smith (2008) 10  ITELR  1018, a person who controlled the company, which was a trustee of a trust under which that person was entitled to remove the trustees and appoint new trustees, did not necessarily have a beneficial interest in the trust property. Such ‘alter ego’ trusts can enable the trust property to be treated as belonging to the person who controlled the trustee and ordered to pay money or exercise powers, but that is not the same as finding that the person was the owner of the property or that the trust was a sham. This case referred to other Australian cases, such as In the marriage of Harris (1991) 104  FLR  458 and Stevens v Stevens (2007) 212  FLR  362, where it was held that, for matrimonial purposes, the property in an alter ego trust could be treated as the property of the settlor beneficiary who had power to appoint trustees. For there to be a sham, however, the settlor and the trustees 16

A Useful Relationship must have a common intention not to deal with the assets in accordance with the stated intentions in the trust deed. This was considered further in the New Zealand case of Re Reynolds Official Assignee v Wilson and Others (2008) 10 ITELR 1064, relying on Snook v London and West Riding Investments Ltd [1967] 2 QB 786 and the New Zealand case of Paintin and Nottingham Ltd v Miller Gale [1971] NZLR 164. 1.44 In R (on the application of Huitson) v RCC (2011) STC 1860, a UK resident self-employed IT consultant provided his services to UK-based endusers. Had he been employed through a UK company he would have been caught by the IR35 legislation. He was employed through an intermediary company, Montpelier Tax Planning (Isle of Man) Limited, which provided a scheme involving the Allenby partnership and a trust in the IOM. It consisted of five companies in the IOM, each corporate partner was trustee of an interest in possession IOM trust of which Huitson was the settlor and life tenant. The trustee was Crackington Limited which was a member of the partnership. Mr Huitson entered into a consultancy agreement with the Allenby partnership for a fixed annual fee of up to £15,000 which was subject to UK tax. The Allenby partnership, exploiting his services received his commercial income of, say, another £15,000 pa, which was paid to the trustee who paid Mr Huitson in his capacity as beneficiary of the IIP trust. He claimed that the income from ‘the offshore trust, in my capacity as the sole income beneficiary represents the share of the profit of an Isle of Man Partnership whose profits are excluded from UK tax by virtue of art 3 of the UK-Isle of Man Double Taxation Agreement. My claim for Double Tax Relief, as the life tenant, is based on Baker v ArcherShee principles’ (see Baker v Archer-Shee (1927) 11 TC 749, [1927] AC 844; this case is authority for the proposition that a beneficiary under an interest in possession trust has an absolute right to the income and that the income does not belong to the trustee). ‘[19] On 21  July 2008 s  58 of the 2008 Finance Act came into force. It amended, with retrospective effect, the existing legislation in s 858 of the Income Tax (Trading and Other Income) Act 2005. That section provided that where a UK resident is a member of a foreign partnership (ie one which resides outside the UK or carries on a trade, the control and management of which is outside the UK) and by virtue of DTAs any of the income of the firm is relieved from tax in the UK, the partner is liable to income tax on the partner’s share of the income of the firm despite the DTA.’ This resulted in a UK resident reducing the effective rate of tax on his UK income to an average of 3.5%. Although HMRC were challenging the scheme, FA  2008 s  58 (now ITT0IA 2005 s  858) was introduced to override double tax agreements and catch such income and was deemed always to have bad effect so defeating the scheme for past as well as future years. Therefore, although not a sham as such, the trust failed to have the effect intended by the taxpayer. Similar retrospective legislation had been introduced to counter 17

A Useful Relationship an earlier scheme, in Padmore v IRC  (1987)  STC  62. The judge concluded that, although retrospective, the legislation was proportionate and compatible with the First Protocol of the European Convention on Human Rights, as set out in the Human Rights Act 1998 Sch 1, Part II, Article 1. The Court of Appeal upheld the judgment of Kenett Parker, J in (2010) STC 715. A similar decision on FA 2008, s 58 was arrived at in R (on the application of Shiner) v RCC (2011) STC 1878 where the claimants unsuccessfully complained that it breached the free movement of capital provisions of Article  56  EC (now Article 63 TFEU).

IR35, Off-payroll working rules from April 2020 1.45 HMRC published a policy paper and consultation document on 5  March 2019 with a view to change off-payroll working rules from 6  April 2020 to increase compliance with the existing off-payroll working rules to bring the private sector in line with the public sector. The smallest organisations will not have to determine the employment status of the offpayroll workers they engage, but medium and large-size businesses will have to comply with new rules, which have applied to public sector workers from April 2017 under ITEPA 2003 ss 554A–554Z21 as amended by FA 2017 s 15 and Sch 6. The definition of a small company is to follow the Companies Act 2006 s 382, satisfying two out of three of annual turnover of not more than £10.2 million balance sheet total of not more than £5.1 million and not more than 50 employees.

AGENCY RELATIONSHIPS AND ENTITIES WITH TRUST-LIKE CHARACTERISTICS 1.46 A principal and agent relationship is a fiduciary relationship, in that the agent must not make secret profits and has a duty of good faith to his principal and, to that limited extent, such relationship may be compared with that of the trustee to a beneficiary (Sorrell v Finch [1977] AC 728). A  beneficiary has a proprietary equitable interest in property owned legally by the trustee and, on the trustee’s insolvency, could recover the trust property held by the trustees, which would not be available for the trustee’s own creditors. If the trustee had misapplied the money in breach of trust, equity would allow the beneficiary to trace the money and recover it (Chase Manhattan Bank v Israel-British Bank [1981] Ch 105). An agency relationship is a personal one between the principal and agent, and the agent’s duties cannot therefore be delegated further; delegatus non potest delegare. To the extent that an agent has his principal’s property vested in him, he will normally only be in possession of it and not have legal title to it (Cave 18

A Useful Relationship v MacKenzie (1877) 46 LJ Ch 564; Montgomerie v United Kingdom Mutual Steamship Association Ltd [1891] 1  QB  370). It is possible for an agency agreement to require an agent to keep funds belonging to his principal separately from those of his own, in which case he would be trustee of those funds (Burdick v Garrick (1870) 5 Ch App 233). The principal will therefore merely be a creditor of the agent and able to claim accordingly (Lister & Co v Stubbs (1890) 45 Ch D  1, following Re A-G’s Reference (No  1) of 1985 [1986] 2 All ER 219). However, where the agent has acted in breach of his fiduciary duty, the Privy Council imputed a constructive trust in favour of the principal which would allow equitable tracing (A-G  for Hong Kong v Reid [1994] 1 AC 324).

Bailments 1.47 Under a bailment, the property involved has to be a chattel, and it cannot be land or an intangible asset. Legal title remains with the bailor, but the bailee acquires possession and the right to use the asset for his own benefit (Tappenden v Artus [1964] 2 QB 185). If the bailee were fraudulently to sell the chattel, the purchaser, even the purchaser for value without notice, would not obtain good title, because the transferor had no title and could not pass on what he did not have, nemo dat quod non habet (Cundy v Lindsay (1878) 3 App Cas 459), except in rare cases such as estoppel or under the Factors Act 1889 by a mercantile agent. This compares with a situation where a trustee who has legal title but not beneficial ownership sells an asset to a bona fide purchaser for value; in those circumstances, the purchaser would obtain good title.

Contracts 1.48 A contract requires offer and acceptance, and consideration passing from the offeree to the offeror (Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; Moss v Hancock [1899] 2 QB 111). It is enforceable at law or, in some cases, in equity, eg specific performance as in Phillips v Lamdin [1949] 2 KB 33. Only in the case of a contract under seal is it possible to do without the consideration, although the adequacy or otherwise of consideration is not a factor. In the absence of consideration, the offeree is a mere volunteer and has no rights in common law. Neither does he normally have rights in equity, as equity will not assist a volunteer (Re Plumptre’s Marriage Settlement [1910] 1 Ch 609). 1.49 The beneficiary under a trust, however, who is also normally a volunteer, has an enforceable proprietary right under the trust (Fletcher v Fletcher (1844) 4 Hare 67). It is possible to have a valid contract with 19

A Useful Relationship consideration or under seal under which the offeror binds himself to settle assets upon trust.

Interests under a will or intestacy 1.50 Where a person dies and the assets pass to his personal representatives, who are either the executors under the will or administrators returning letters of administration, they are acting in a fiduciary capacity even though they are not trustees as such. TA  1925, however, governs the fiduciary relationship of the personal representatives to beneficiaries, as it does that of trustees and beneficiaries, with a number of differences. A trustee is entitled to retire under TA  1925 s  36 or s  39, whereas an executor holds office for life and can only relinquish office with leave of the court. The power to appoint new trustees under TA 1925 s 40 does not apply to executors. A trustee is only a trustee of the trust of which he is appointed, whereas, if an executor dies, his executor may have to deal not only with the deceased executor’s estate but also with the estates for which he was acting as executor, under the chain of representation applied by AEA 1925 s 7. The limitation period for actions of a breach of trust under the Limitation Act 1980 is six years, whereas that for claims against executors may be 12 years. A single executor can pass title to a chattel, but trustees must act jointly (Attenborough v Solomon [1913] AC 76). A beneficiary under a will cannot directly enforce a legacy or bequest, as the personal representatives take the full legal title, albeit in a fiduciary capacity, and there is no external equitable interest (Stamp Duties Comr (Queensland) v Livingston [1965] AC 694). The beneficiaries’ right under a will or intestacy is for the estate to be properly administered, which is a chose in action which is assignable (Re Leigh’s Will Trusts [1970] Ch 277). 1.51 The precise relationship of the personal representatives and the beneficiaries may change, in that the will itself may create a trust and may appoint the personal representatives as trustees. At the termination of the administration, the personal representatives cease to hold the assets as personal representatives and hold them as trustees, at which point the beneficiaries have the normal rights to have their interests as beneficiaries enforced under the trust. It is not always clear when the administration of the estate ceases and the will trust becomes established, but it will normally be when the specific and pecuniary bequests have been paid, the assets collected and the liabilities paid. 1.52 Statutory will trusts may arise on intestacy in favour of minor beneficiaries under AEA 1925 s 47. Where, however, a person dies intestate, or where the will is wholly or partly invalid or does not cover the entire estate, the personal representatives hold the assets on trust for sale under AEA 1925 s 33, except in the case of land which becomes a trust of land under TLATA 1996 s 1. A beneficiary on intestacy, therefore, has the normal rights to enforce the trust as a proprietorial right in equity. 20

A Useful Relationship

Powers 1.53 The use of powers within a trust has already been referred to above. Powers of appointment exist under LPA1925 s 1(7). There is no obligation or duty on the donee of a power to exercise it (Re Combe [1925] Ch 210). 1.54 The most common area where powers arise outside a trust are powers of attorney, under which the attorney is specifically appointed to act on behalf of the appointee, either generally or for a specific purpose. The power of attorney may be a legal power, eg to convey land. In Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 10 ITELR 536, it was held that there was neither a fraud on a power nor a breach of trust where a power in a trust deed was absolute and unfettered.

Usufruct 1.55 Usufruct is the assignment, for consideration or by way of gift, of income arising from an asset without disposing of the asset itself. It is commonly met with in civil law jurisdictions but is unusual under English law, where the same effect would normally be achieved by transferring the asset to trustees for the benefit of the beneficiary for life or for a period of years with a reversion in favour of the transferor. This is not very tax efficient under UK law, as the income remains that of the settlor (ITTOIA  2005 ss  622–627 or s 151 (ICTA 1988 s 660A or s 730)). A more common arrangement is for the settlor to create a life interest trust or discretionary trust from which the settlor and his spouse are entirely excluded from benefit. In some jurisdictions, the income arising on the asset is only taxable on the usufructee who receives the income, and not on the usufructor who retains ownership of the asset.

Fidei-commissum 1.56 A fidei-commissum in civil law is a disposal by will of an inheritance to a person in confidence that he would convey it or dispose of the profits at the behest of another, ie  in practice the property would pass to the fideicommissary on the death of the fiduciary. The valuation basis is similar to that of a usufructory interest. In the fiduciary’s estate, the value of the fideicommissum would be based on the life expectancy of the fidei-commissary heir. If the fidei-commissum is bequeathed for a limited period of time after the death of the fiduciary, the value of the fidei-commissum is substantially reduced. The fidei-commissum is not directly known to English law, but a similar effect is achieved by a life interest trust to a beneficiary which, on his death, passes to another person, either absolutely or in trust. A feature of the fidei-commissum in certain jurisdictions is that the fiduciary can not only use up the income of the assets transferred, as under a usufruct, but also consume 21

A Useful Relationship the capital in whole or in part, so that only that which is left passes to the fideicommissary. An English trust allows the consumption of capital by way of an appointment or advancement to a beneficiary. Many Anglo-Saxon-style trusts have a number of beneficiaries, and the trustees have discretion to distribute or accumulate the income and all or part of the capital of the trust in accordance with the terms of the trust deed and law. 1.57 Under the English common law doctrine of privity of contract, contracts could not be enforced by or against third parties. The Contracts (Rights of Third Parties) Act 1999 changed this, and it is now possible for two parties to enter into contract for the benefit of a third. (It is still not possible for liabilities to be imposed on third parties.) Because the English law concept of a trust has been so successful historically as a vehicle for the provision of ‘third party’ benefits (ie by settlor/trustees for beneficiaries), there has been no particular reason for private client lawyers to explore ways in which English contract law could be used for the same purpose. Nevertheless, the 1999 Act would appear to provide the mechanism for English law to replicate civil law-type structures and with considerable flexibility as to the types of third-party benefits allowed. Thus, fidei-commissum de residuo and other forms of fidei-commissum are now probably all allowable under English law. An interesting question then arises as to how such structures would be treated from a UK taxation perspective and, particularly, whether they would be taxed in the same way as a trust or settlement? There may be a lacuna in the UK inheritance tax legislation, which enables certain non-UK structures with the same characteristics as trusts to be taxed as trusts, but the same does not apply to UK structures with those characteristics. It is also not necessarily the case that something which ‘looks like’ a trust is a trust, because a trust is created only by the parties intending to create one.

Deeds of covenant 1.58 A covenant is essentially a contract under seal enforceable at common law. It may be used to provide an income to an intended donee not normally possible under equity, which would not allow specific performance, except in the limited case of a contract made in contemplation of, and in consideration of, marriage to a specific individual. 1.59 Historically, covenants paid out of income were deductible for tax purposes by the payer as a charge on income and taxable on the payee. They were therefore used as a tax-effective means of transferring income from wealthier to less wealthy members of a family. In this sense, they are no longer effective and the income remains that of the donor. They can, however, still 22

A Useful Relationship have a place, eg in persuading an elderly person to part with assets in return for an assured income provided by the donee or a third party under covenant. Until recently, covenants were also used for charitable donations but, for UK tax purposes, charitable covenants have been subsumed into the Gift Aid scheme. Covenants are still met with in partnerships, where unfunded pensions may be paid to former partners by way of covenant which, because of the consideration given, are treated as payments made for bona fide commercial reasons in connection with the trade, profession or vocation.

Foundations 1.60 A foundation is often used in civil law jurisdictions where a trust would be used in a common law jurisdiction. A  foundation differs fundamentally from a trust, in that it is a separate legal entity to which assets are transferred by a donor and which is then managed, as a company would be, by a board of officers. It is common for the donor to retain wide powers of control over the appointment and dismissal of the directors, and a foundation may be either revocable or irrevocable. In UK fiscal terms, a revocable foundation might be regarded as a nomineeship of the donor, and still regarded as his property. An irrevocable foundation may be regarded as a company. In many civil law jurisdictions, a foundation may be required to be a non-profit organisation for the furtherance of charitable and similar objects. However, the foundation laws of, for example, Liechtenstein, Panama, Austria, Germany and Switzerland allow private foundations to be used for almost any legitimate purpose, as do certain other countries such as Jersey, Guernsey, Isle of Man, St Kitts, Nevis and the Bahamas and other offshore jurisdictions. A foundation as a creature of statute does not have the same requirements as a trust, such as certainty of intention, certainty of subject matter and certainty of objects. The foundation may, therefore, be used instead of a purpose trust where these are allowed, for example, to hold the shares in a private trust company. A  foundation is established by a founder, has a deed of incorporation and articles, its charter (all of which are, in some jurisdictions, public documents) and the by-laws, which are a private document. The foundation is normally governed by a foundation council. With the foundation, the rights and duties of those involved are based on contract and not a fiduciary relationship, which may limit the rights of beneficiaries compared to those of a trust. 1.61 Under UK tax law, property within a foundation is not property held in trust within TCGA 1992 s 62, but could be a settlement within ITTOIA 2005 s  620 for the purposes of TCGA  1992 ss  86A–96, and as a company under TCGA  1992 ss  13–14A depending on the rights of the founder, which, depending on the foundation charter, may be quite extensive. Like trusts, foundations often have underlying companies to hold investments. The rights of a beneficiary under a foundation can be difficult to enforce unless specifically enshrined in the charter or by-laws. See 12.15 et seq below. 23

A Useful Relationship

Anstalts 1.62 An anstalt, or establishment, is an entity peculiar to Liechtenstein. It is a separate legal entity, without shareholders, usually used for the purposes of managing family interests, and can be compared with a private family purpose trust set up in those common law jurisdictions which allow valid purpose trusts more readily than England.

Trust enterprises 1.63 A trust enterprise is known to a number of civil law jurisdictions, such as Louisiana in the USA and Liechtenstein, as being very close to an English trading trust, except that it has the distinction of being a separate legal entity and not merely an enforceable relationship like an English trust. Apart from this aspect, a trust enterprise has so many of the characteristics of an English trust that it is likely to be classified in a similar way for UK tax purposes.

Hybrid companies 1.64 A hybrid company is one limited by shares and guarantee, and may be so structured that the guarantee members are entitled to the majority of the profits and assets, but only when distributed to them by the directors who are appointed by the shareholder members. The effect is to create a vehicle with many of the characteristics of a trust but which may not be classified as such for tax purposes. Hybrid companies are still popular in the Isle of Man and certain other former British jurisdictions, but no longer exist under UK company law. The articles of a hybrid company may provide that, on the death or resignation of a guarantee member, the assets are retained within the company for the remaining guarantee members, and there may be power to add new members. 1.65 It is probable that HMRC would regard a hybrid company as being an arrangement equivalent to a settlement for UK tax purposes under ITTOIA 2005 ss 620, 648 (ICTA 1988 s 660G(1)).

Other arrangements 1.66 In addition to trusts and trust-like arrangements, a number of taxpayers are avoiding the tax costs of establishing and running relevant property trusts through family partnerships, limited partnerships, limited liability partnerships and companies, either alone or in combination. These arrangements can hold investments managed as a business for the benefit of a family. The parties could be adult family members, and bare trustees for children under 18 years 24

A Useful Relationship of age, or a family investment company in which income could simply be accumulated. The arrangement could be established onshore or offshore, subject to the transfer of assets abroad and attributions of chargeable gains of non-resident companies. If a limited partnership is chosen, a company could be the general partner. An arrangement of this nature may have many of the characteristics of a trust without some of the tax penalties, but does not have the flexibility of a trust.

Unincorporated associations 1.67 An unincorporated association such as a club or society has, by definition, no legal personality and therefore cannot itself own property. On the basis that a purpose trust is usually invalid, property cannot, under English law, be held for the purposes of the club or society (Re Rechers Will Trust [1972] Ch 526; Leahy v A-G for New South Wales [1959] AC 457); see Chapter 12. 1.68 Neville Estates v Madden [1962] Ch  832 suggested the contractual solution of a gift to the existing members, not as joint tenants but subject to their respective contractual rights and liabilities towards one another as members of the association. In such a case, a member cannot sever his share. It will accrue to the other members on his death or resignation, even though such members include persons who became members after the gift took effect. If this is the effect of the gift, it will not be open to objection on the score of perpetuity or uncertainty unless there is something in its terms or circumstances, or in the rules of the association, which precludes the members at any given time from dividing the subject of the gift between them on the footing that they are solely entitled to it in equity. In order for this to work, the club rules must be sufficient to give the club suitable autonomy, which was a problem in Re Grant’s Will Trusts [1980] 1 WLR 360 in respect of a donation to the Chertsey and Walton Constituency Labour Party, which did not have control over its own property, being bound by the rules of the Labour Party nationally. As a result, the gift failed. 1.69 An unincorporated association may be wound up under its rules or, if all the interested parties agree, if a court so orders or if its substratum has gone (Re William Denby & Sons Ltd, Sick and Benevolent Fund [1971] 1 WLR 973; Re St Andrew’s Allotment Association [1969] 1 WLR 229). On this contractual analysis, each member’s subscription or any donation to the club is to the members for the time being absolutely, which means that on dissolution only the existing members share in the surplus on winding-up, and they do so equally (Re Bucks Constabulary Widows’ and Orphans’ Fund Friendly Society (No  2) [1979] 1  WLR  936). Because, on the contractual basis, the members for the time being are those entitled to the assets, a gift cannot be conditional on being used for a particular purpose (Re Lipinski’s Will Trust [1976] Ch 235). 25

A Useful Relationship 1.70 It is because of these problems that many non-charitable associations for particular purposes, such as professional societies, are incorporated as companies limited by guarantee, which gives them a legal persona and enables the society to serve its non-charitable purpose. In some cases a charity may properly be formed as, say, an educational charity, as a charitable trust or have a separate legal entity under Royal Charter.

THE CIVIL LAW APPROACH TO TRUSTS 1.71 A  number of civil law and non-common law jurisdictions have actually introduced trust law, including Scotland, Quebec, Sri Lanka, South Africa, Liechtenstein, Panama and Mexico. Even France toyed with the idea of introducing ‘La Fiducie’, although this proposal seems to be permanently stalled. 1.72 In the USA, Louisiana has a largely civil law-based State code, but has enacted legislation for trusts and trust enterprises. Mauritius and Vanuatu, with their legal systems based originally on French and English law respectively, nonetheless have fully developed trust legislation. Most other territories which recognise trusts have a legal system originally based on English common law and equity. 1.73 In the absence of specific trust legislation, the problem for a civil law jurisdiction is that the civil code does not recognise more than one interest in property, and cannot therefore readily conceive of legal title being held by the trustees, with the beneficiaries having a proprietorial right over the same assets enforceable in equity. This potentially gives rise to a host of problems. If the settlor transfers assets to trustees in an Anglo-Saxon-style trust for the benefit of his children, what are the consequences? The settlor has no intention of benefiting the trustees to whom he has given the property; therefore, should he be treated as if he had made no such disposition and the property was still his? However, the trustees own the property and have full legal title to it. Does this mean that they are to be treated as the owners and that the assets are part of their own estate, in insolvency or on death, with the consequence that the trust assets would be available for creditors and subject to estate and gifts taxes on the death of a trustee? Is the settlor to be regarded as making a disposition to the trustees, or indirectly to his children, and how is this dealt with where there are different rates of tax payable, as there are in many civil law jurisdictions, for gifts to close family at lower rates than those applicable to gifts to third parties, such as the trustees? Where there is an acquisitions tax, do the trustees become liable to pay tax at third party rates, or is the trustee ignored and the asset treated as passing directly to the beneficiaries, and taxable accordingly? Is the income arising in the trust, and any trust capital gains, to be that of the settlor, the trustees, or the beneficiary? Where the trust is a discretionary trust, does the income, and the tax liability arising thereon, go into limbo until a 26

A Useful Relationship distribution is made, and is the distribution taxed as income or as a capital gain or as a gift of capital, or a mixture of these, on the distributee beneficiary? 1.74 There is also a problem in many civil law jurisdictions, in that the surviving spouse and children are entitled to a minimum pre-ordained share of the overall estate; and, if much of the property has already been passed into an Anglo-Saxon-style trust, the estate may be substantially reduced. There have been a number of actions by disappointed heirs who feel that their forced heirship rights under the civil code were undermined by the inter vivos trust, eg the Cayman Islands cases of Lemos v Coutts & Co [1992–3] CILR 5/460 and Re Lemos Trust Settlement [1992/3] CILR 26, the Bermudan case of Schindler v Garner and Bermuda Trust, EQ No 318 of 1991/4 of 1992, and the New York case of In the matter of Renard 108 Misc 2d 31. In the Jersey case of Rahman v Chase Bank [1991] JLR 103, the Jersey trust was successfully attacked by the heirs on the grounds that it was a sham, as a result of the way the trustees allowed the settlor to continue to manage the trust assets that had ostensibly been transferred to them, in precisely the same way as if he had retained legal ownership of them. A similar decision was recorded under Swiss interpretation of Guernsey trust law in WKR Trust (1999) Zurich Law Report ZR98. 1.75 In relatively few cases have trusts been considered by the courts in civil law jurisdictions and, even where they have, the treatment has not been clear and consistent even within a single jurisdiction. In any event, prior jurisprudence is not binding as precedent in a civil law jurisdiction in the same way as it is under the English legal system. The difficulties, in many civil law jurisdictions, of dealing with trusts can be both a trap for the unwary and an opportunity for tax arbitrage, to take advantage of the different rules in different jurisdictions.

The Hague Convention 1.76 In order to try and deal with some of the problems created by trusts within civil law jurisdictions, on 1 July 1985 the Hague Convention on the Law Applicable to Trusts and on Their Recognition (see Appendix 9) was entered into. The Convention was signed by most of the main civil law and common law jurisdictions, but has actually been ratified by relatively few. However, it is a starting point for the interpretation of trusts in a civil law jurisdiction, although the Convention is by no means all-embracing. It only applies to trusts created voluntarily and evidenced in writing, and does not address the validity of the trust in the first instance, eg whether the settlor or testator had power to create the trust (Art 3). The applicable law is, usually, that chosen by the settlor, which obviously has to be related to a system of law, which in the UK is England and Wales (with certain Welsh tax issues devolved to Wales), Northern Ireland or Scotland, and in the USA is the law of each State (Todd v Barton (2002) 4 ITELR 715; G v C Trust Co (Jersey) Ltd (1999) 4 ITELR 779). Where, for some reason, the proper law is not referred to in the trust instrument 27

A Useful Relationship or is inapplicable, eg because it is in a jurisdiction which does not recognise the trust, the proper law has to be determined under Art 6 by reference to: (a)

the place of administration of the trust designated by the settlor;

(b) the situs of the assets of the trust; (c)

the place of residence or business of the trustee; and

(d) the objects of the trust and the places where they are to be fulfilled. Only if these tests lead to a trust jurisdiction does the Convention apply at all. Article 9 allows different legal systems to apply to different aspects of the trust. 1.77 Article 11 is extremely important, because this recognises a trust as a separate fund, and therefore not part of the trustees’ own assets, for insolvency purposes, and allows the trustee to sue and be sued in his capacity as such. However, Art 13 specifically provides that no State is bound to recognise the trust where significant elements of it are closely connected with a jurisdiction which does not know the trust concept. Therefore, a German resident and national could not settle German assets in favour of his German beneficiaries on a Jersey trust and expect it to be recognised in Germany. It is also provided in Art 19 that nothing in the Convention shall prejudice the powers of States in fiscal matters, which effectively means that the Convention is of no direct assistance in sorting out the fiscal consequences of a trust in a civil law jurisdiction. However, the mere fact that there is an international Convention on the recognition of trusts does help with their classification for fiscal purposes, and a number of civil law jurisdictions have recognised trusts, particularly as far as they relate to foreign nationals and assets outside the jurisdiction. 1.78 In some cases, civil law trusts in those States where there is specific legislation enabling them to be formed can have advantages. Liechtenstein and Panama, for example, have statutory trust legislation, which follows typical English trust law in many ways, but does not have any rule against accumulations or perpetuities, and which recognises purpose trusts in nearly all circumstances. 1.79 It is sometimes possible to avoid some of the problems of a trust owning assets in a civil law jurisdiction by owning the asset through a company owned by the trustees. However, this is not always a practical solution, as some countries, such as France and Spain, levy a capital tax on the value of real estate held by a company in a jurisdiction with which there is no appropriate double taxation treaty, so ownership by a foreign trust through a company in a low tax jurisdiction, such as Jersey or the British Virgin Islands, would be ineffective in avoiding the annual capital tax. 1.80 It is outside the scope of this book to provide a detailed coverage of the treatment of trusts in other jurisdictions, but the practitioner needs to be 28

A Useful Relationship aware that it is unsafe to assume that the treatment by foreign fiscal authorities will in any way follow that adopted under UK law.

SCOTLAND 1.81 This book is based on the law in England and Wales, although the taxation provisions apply to the whole of the UK, occasionally with modification to take account of the Scottish, Welsh or Northern Ireland legal systems. The Scottish legal system is based on Roman law, canon law in relation to marriage, wills, succession and contract, and feudal law in relation to land. There is no concept of different legal and equitable interests in Scottish law. Scottish trusts are now largely governed by the Scotland Act. The rights of beneficiaries and duties of trustees under Scottish law may differ from those under English law. The settlor is called the trustor. 1.82 Property, under Scottish law, is corporeal (tangible) heritable property, consisting of land and buildings, but including crops and growing timber, or incorporeal (intangible) heritable property, including bonds or securities over land. All other property is either corporeal or incorporeal moveable property. 1.83 A child in Scotland comes of age at 18, but Trusts (Scotland) Act 1961 s 5 refers to a minor as a person under the age of 21, and governs the maximum accumulation period of 21 years. There is no rule against perpetuities under Scottish law. Under the Age of Legal Capacity (Scotland) Act 1991, a child has full legal capacity from age 16. 1.84 The executor of a valid will is the executor nominate, the personal representative of an intestate is an executor dative, and the estate is an executory. Confirmation (probate) of a will is obtained from the Sheriff’s Clerk’s Office. The surviving spouse and children under Scottish law have specific legal rights, legitim or forced heirship entitlements. If there are no surviving children or remoter issue, the surviving spouse can claim one half of the moveable estate, otherwise one third. Conversely, children can claim, between them, one third of the net moveable estate if there is a surviving spouse, otherwise one half. A life rent (life interest) in an estate can be created for a life in being, and a trust can arise under the doctrine of equitable compensation. 1.85 HMRC has a trust office (IR  Trusts) in Edinburgh dealing with Scottish trust and estate matters. Readers are referred to specialist books on Scottish trusts such as Wilson and Duncan, Trusts, Trustees and Executors and Norrie and Scabbie, Trusts. Taxation in Scotland is governed by the Scotland Act 1998, the Revenue Scotland and Tax Powers Act 2014, Landfill Tax (Scotland) Act 2014, Land and Buildings Transaction Tax (Scotland) Act 2015, the Scotland Act 2016 and Air Departure Tax (Scotland) Act 2016. 29

A Useful Relationship

NORTHERN IRELAND 1.86 Northern Ireland has its own legal system and legislation, but it follows closely the law of England and Wales. The Corporation Tax (Northern Ireland) Act 2015 gives the Stormont Assembly power to set the rate of corporation tax in Northern Ireland. However, at the time of writing Stormont is not sitting.

WALES 1.87 The National Assembly for Wales is a devolved assembly, created by the Government of Wales Act 1998 and amended by the Government of Wales Act 2006 which allowed limited tax-raising powers to Wales. These include stamp duty land tax, landfill tax and Welsh rates of income tax under the Wales Act 2017. Stamp Duty Land Tax and landfill tax have been devolved as Land Transactions Tax (LTT) and Anti-avoidance of Devolved Taxes (Wales) Act 2017 and Landfill Disposals Tax (Wales) Act 2017 (LDT) and the Tax Collection and Management (Wales) Act 2016 has power to make limited changes to income tax.

RECENT DEVELOPMENTS On 7 November 2018 HMRC published ‘The Taxation of Trusts – A Review’, summarised below. 1.88 1.1–1.3  The treatment of trusts should be simpler, fairer and more transparent. 1.4 The potential for avoidance and evasion in respect of non-UK resident trusts – the case for reform is specified. 1.5–1.8  Consideration should be given to fairness, the interaction with inheritance tax, simplicity and vulnerable beneficiaries.

Introduction 2.

Introduction to the consultation to make the taxation of trusts simpler, fairer and more transparent.

3.4 A trust is a legal obligation where the settlor appoints trustees to hold and manage assets, the trust property, for the benefit of the beneficiaries. 3.5–3.6  HMRC must be able to assess the overall tax liabilities of all parties and government bodies should have information on all parties to any given trust. 30

A Useful Relationship 3.7 Preventing tax avoidance – eg  settlor interested trust is deemed the settlor’s; and the income of the settlor’s minor children is taxed as the settlor’s income. Pilot trusts are subject to anti-avoidance rules to prevent multiple nil rate bands. 3.8 Non-resident trusts are considered at paragraphs 4.13–4.15. 3.9 The government is addressing tax avoidance by the use of non-resident trusts. 3.10 Tax transparency, fairness, neutrality and simplicity is a reasonable approach for an effective trust taxation system. Question 1 Are these principles of transparency, fairness, neutrality and simplicity a reasonable approach to ensure an effective trust taxation system? 4.

Transparency A

Policy principle 4.1 Offshore anti-evasion requires a ‘no safe havens’ strategy Privacy not tax avoidance/evasion is desirable 4.2–4.3  Transparency of trust ownership of assets is essential and benefits should not be hidden

B

Action underway 4.4 The OECD  Common Reporting Standard (CRS) is the global standard on automatic exchange of financial information between tax authorities, and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer), Regulations 2017 (MLRs) have been introduced. 4.5 The OECD  Common Reporting Standard – automatic exchange of financial information between tax authorities, has led to the exchange of financial account information among around 100 participating countries. 4.6 MLRs established the Trusts Registration Service (TRS) online register of all tax paying trusts in July 2017 to comply with the EU  Fourth Anti-Money Laundering Directive (4MLD) which imposes a legislative obligation on trustees of UK-resident express trusts and non-UK resident express trusts that generate a UK tax liability, to hold written, accurate and up-to-date records of beneficial owners, which are available to UK law enforcement authorities on request. 31

A Useful Relationship 4.7 The TRS will be expanded under the EU Fifth Anti-Money Laundering Directive (5MLD) with effect from 10 July 2018 with the transposition deadline of January 2020 and the implementation deadline of 10 March 2020. 4.8 These rules will apply to all UK express trusts, whether or not liable to UK tax, and non-EU trusts that acquire UK real estate. Separate 5MLD consultation is due to be published in the winter of 2018/19. Question 2 The UK government seeks views on other measures to enhance transparency still further. C

Trust tax residence 4.9 Further consideration is required in relation to the use of non-UK resident trusts for tax purposes. 4.10 A trust is UK resident for income tax and capital gains tax if the trustees are UK resident, or if there are UK and non-UK resident trustees, if the settlor was UK resident or domiciled when the trust was made or assets added, or was so immediately prior to the settlor’s death (ITA  2007 s  475 and TCGA  1992 s  69). The CGT liability is extended to non-UK resident trusts or non-UK residential UK property and interests in UK property rich entities. 4.11 Trusts with UK-resident trustees are taxable in the UK on their worldwide income and gains, even if the settlor is resident and domiciled oversees. 4.12 Any significant changes to trust taxation would need to result in a significant improvement.

Question 3 Is the UK’s current approach to defining the territorial scope of trusts satisfactory? 4.13 The UK’s National Risk Assessment of Money Laundering and Terrorist Financing is assessed as low for UK trusts but significantly higher for overseas trusts. 4.14 The UK policy is to ensure that there is no tax advantage in using an overseas as opposed to a UK trust, but enforcement is a problem. 4.15 and Questions 4 and 5  The government seeks to understand why a UK settlor might choose to use a non-resident rather than a resident trust, other than for tax avoidance or evasion, and how this could be addressed. 32

A Useful Relationship 5.

Fairness and neutrality 5.1 The government wishes to take a fair approach to trust taxation so that it neither incentivises nor disincentivises their use. 5.2 This policy of neutrality should neither encourage nor discourage their use. 5.3 Assessing tax neutrality for trusts is difficult. Should it be treated as property still belonging to the settlor or belonging to the beneficiaries or to the trustees? 5.4 The current system of adapting the tax rules caters for the type of trust and the beneficiaries as well as the tax differences for income tax, capital gains tax and inheritance tax.

B

Potential issues 5.5 The government believes that the current complex rules result in a complex but broadly neutral result, except for inheritance tax. 5.5.1 IHT is payable once the lifetime chargeable transfers in the preceding seven years has exceeded the relevant nil rate band, of £325,000, which also applies to potentially exempt transfers to an individual although there is no limit to the number of individuals who can benefit from such transfers so long as the donor survives for seven years. 5.5.2 Trusts, however, are subject to a 20% entry charge over the available nil rate band and a ten yearly periodic charge of 6%, ie 38% in the first 30-year period, broadly equivalent to inheritance tax at 40% on the settlor’s death. However if the settlor lives a long time and starts the maximum gifts early enough the tax charge on gifts in the next 30 years would be 18% (6% × 3), a considerable improvement on inheritance tax but is unlikely in practice unless the donor has substantial assets at an early age. 5.5.3 Will trusts set up on death have suffered a 40% inheritance tax charge as well as the 6% 10 yearly periodic charges.

Question 6 Should there be changes to these rules and if so what would better meet the fairness and neutrality principle? 5.6.1 There may be exceptions to the fairness and neutrality concept, such as private residence relief for capital gains tax for the only or main residence, as opposed to rental properties or second homes which do not qualify for this relief. Trust properties may also give rise to problems. 33

A Useful Relationship 5.6.2 Tax relief for trust management expenses is available to trustees but there is no such relief for individuals. 5.6.3 Trustees capital receipts are subject to income tax at the basic rate or to capital gains tax, which are significantly lower than the special trust rates and higher rates for individuals. 5.6.4 Trusts and transactions may be declared void by the courts. Unexpected tax consequences can sometimes be put right on an application to the court to have the relevant transaction or trust declared void, and be set aside, but it may produce an unfair tax outcome. Question 7 The government seeks evidence on exceptions to fairness and neutrality in 5.6 and elsewhere. 6. Simplicity A

Policy principle 6.1 The government claims to be committed to increasing the simplicity of the tax system and making it more responsive to users’ needs. 6.2, 6.3  Trusts can cause unexpected complexity in the tax system and HMRC’s desire is to ensure fairness to trust users and non-users and to avoid needless complexity.

B

Possible issues 6.4 Trusts such as vulnerable beneficiary trusts where the beneficiaries have a disability or are bereaved minors may lead to tax complexity and unintended consequences. 6.5/6.6  Simplification of such vulnerable beneficiary Trusts (VBT) including ‘age 18 to 25’ trusts is the goal as is the elimination of undue complexity in ensuring that the correct amount of tax is paid. 6.7 The government recognises that many small trusts have to cope with unduly onerous complexity and the cost of professional advice may outweigh the cost of the tax.

Questions 8 and 9 seek options for simplification of VBTs or other ways to simplify or align trust taxation. 7.

Summary of Consultation Questions, see 9 below:

8.

The Consultation Process. The Tax Consultation Framework for tax policy development sets out the five stages to tax policy development: 34

A Useful Relationship Stage 1 Setting out objectives and identifying options. Stage 2 Determining the best option and developing a framework for implementation including detailed policy design. Stage 3 Drafting legislation to effect the proposed change. Stage 4 Implementing and monitoring the change. Stage 5 Reviewing and evaluating the change. Annex: Current Trust Tax Framework. This briefly summarises inheritance tax including qualifying interest in possession (QIIP) trusts and relevant property trusts and lists other trust categories. It also summarises the income tax treatment of UK resident trusts, where the beneficiary is entitled to income, discretionary and accumulation trusts and trusts where income is treated as that of the settlor. Capital gains tax as applied to UK and offshore trusts is explained. Responses to this review were required by 30 January 2019. The CIOT commented on these proposals on 7  March 2019: ‘The Taxation of Trusts: A Review’. 9.

The taxation of trusts: Summary of consultation questions (1) The government seeks views on whether the principles of transparency, fairness and neutrality, and simplicity constitute a reasonable approach to ensure an effective trust taxation system; including views on how to balance fairness with simplicity where the two principles could lead to different outcomes. (2)

There is already a significant activity under way in relation to trust transparency. However, government seeks views and evidence on whether there are other measures it could take to enhance transparency still further.

(3) The government seeks views and evidence on the benefits and disadvantages of the UK’s current approach to defining the territorial scope of trusts and other potential options. (4) The government seeks views and evidence on the reasons a UK resident and/or domiciled person might have for choosing to use a non-resident trust rather than a UK resident trust. (5) The government seeks views and evidence on any current uses of non-resident trusts for avoidance and evasion, and on the options for measures to address this in future. 35

A Useful Relationship (6) The government seeks views and evidence on the case for and against targeted reform to the inheritance tax regime as it applies to trusts; and broad suggestions as to what any reform should look like and how it would meet the fairness and neutrality principle. (7) The government seeks views and evidence on: (a) The case for and against targeted reform in relation to any of the possible exceptions to the principle of fairness and neutrality detailed at paragraph 5.6; (b) Any other areas of taxation not mentioned there that would benefit from reform in line with the fairness and neutrality principle. (8) The government seeks views and evidence on options for the simplification of vulnerable beneficiary trusts, including their interaction with ‘18 to 25’ trusts. (9) The government seeks views and evidence on any other ways in which HMRC’s approach to trust taxation would benefit from simplification and/or alignment, where that would not have disproportionate additional consequences.

FINANCE ACTS HIGHLIGHTS, 2015 TO 2019, IN RELATION TO TRUSTS ETC. THE MAIN CHANGES SINCE THE 5TH EDITION OF THE TAX ADVISERS’ GUIDE TO TRUSTS FA 2015 Penalties for offshore matters and offshore transfers 1.89 FA 2007 Sch 24 is amended by FA 2015 Sch 20. Penalties for errors amount to 30% for careless action, 70% for deliberate but not concealed action and 100% for deliberate action if in category zero and 37.5%, 87.5% and 125% if in category 1. Category 2 penalties to non-automatic exchange of information territories are 45%, 105% and 150% and category 3 penalties of 60%, 140% and 200% remain unchanged under FA 2007 Sch 24 para 4. Paragraph 4A is amended to determine the category for the inaccuracy in Categories 1 to 3. Paragraph  4AA, minimum penalties, is amended as one of the penalties for failure to notify or make a return.

Other penalties FA 2015 Sch 21, penalties in connection with offshore asset moves, applies where conditions A, B and C are met. Condition A is that a person is liable 36

A Useful Relationship for an ‘original penalty’ in paragraph  2 which is a deliberate failure under paragraph  3. Condition B  is where there is a relevant offshore asset move, defined in paragraph  4 which occurs after the relevant time in paragraph  5. Condition C is that a main purpose of the relevant asset move was to prevent or delay the discovery of a potential loss of tax by HMRC. The penalty amounts to 50% of the ‘original penalty’, paragraph 6. HMRC must make an assessment, which must be paid within 30 days, or appealed, para 7, subject to appeal under para 8.

F(No 2)A 2015 Part 2 Inheritance tax – settlements 1.90 F(No 2)A 2015 s 12 amends IHTA 1984 s 79(3) to enable trustees to claim exemption from the ten yearly charge on heritage property on making a claim within two years after the charge or such later date as HMRC allows. A  conditionally exempt transfer of such property becomes chargeable if the exemption conditions cease to apply. F(No 2)A 2015 s 13 amends IHTA 1984 s 80 to refer to a ‘qualifying’ interest in possession where one party to a couple succeeds to a life interest during the lifetime of their spouse or civil partner. It becomes subject to the ten year charge, with effect from 18 November 2015. F(No  2)A  2015 s  14, distributions etc from property settled by will, amend IHTA 1984 s 144 for deaths on or after 10 December 2014 where an appointment is made within three months of the date of deaths. Under F(No 2)A 2015 s 15, interest on inheritance tax payable, may be updated by regulations under FA 2009 s 53, to enable IHT returns to be made online with interest and penalties consistent with other taxes.

Part 6 Administration and enforcement F(No 2) A 2015 s 51 and Sch 8 HMRC is given power to recover debts, including tax and tax credits, directly from a taxpayer’s bank and building society accounts, including Individual Savings Accounts (ISAs) or Direct Recovery of Debts (DRD), subject to a de minimis limit of £1,000. HMRC must leave the tax payer with £5,000 across his or her accounts.

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SCHEDULE 8 ENFORCEMENT BY DEDUCTION FROM ACCOUNTS This schedule introduces a scheme for enforcement by deduction of tax payable from accounts. It enables HMRC to collect tax and tax credits from the taxpayer’s bank accounts and other deposit takers and Individual Savings Accounts (ISAs) under a scheme known as the Direct Recovery of Debts (DRD). The ‘relevant sum’ is the amount due and payable to HMRC of at least £1,000, and an established debt under the accelerated payment provisions in FA 2014 s 223, or Sch 32 para 6 or an accelerated payment of disputed tax under FA 2014 s 221(2)(b). It must be known to be due by the taxpayer and no part of it could cease to be due to HMRC on appeal. An information notice may be supplied to the deposit taker requiring prescriptive information. The scheme includes a hold notice given to a deposit taker specifying the safeguarded amount, minimum £5,000 and HMRC must consider whether the taxpayer may be at a particular disadvantage in dealing with his tax affairs. The hold notice specifies the requirements which need to be satisfied by the deposit taken. The debtor or joint account holder or interested third party may object to the hold notice, which HMRC may vary, and consider any objections. A person affected by the hold notice may appeal. HMRC may give a deduction notice to the deposit taker when no further appeal is possible. A deposit taker that fails to apply may be subject to a penalty. Various terms are defined. The enforcement of deductions from accounts does not apply to Scotland. There are miscellaneous amendments to other Acts of Parliament, in particular the Insolvency Act 1986.

FINANCE ACT 2016 Section 93 and Schedule 15, inheritance tax: nil rate band 1.91 IHTA 1984 ss 8FA–8FE are inserted to amend IHTA 1984 ss 8D–8M which were introduced by F(No 2)A 2015 to correct errors and omissions in IHTA 1984 ss 8D–8X, with effect from 8 July 2015. The headings are: IHTA 1984 s 8FA, downsizing addition entitlement: low-value death interest in home, s 8FB, downsizing addition entitlement: no residential interest at death, ss 8FC and 8FD, downsizing addition: effect: sections 8E and 8F cases, s 8FE, Calculation of lost relievable amount, s 8HA, ‘Qualifying former residential interest’: interests in possession. 38

A Useful Relationship FA 2016, Sch18, serial tax avoidance, Sch 20, penalties for enablers of offshore tax evasion or non-compliance, Sch  22, asset-based penalty for offshore inaccuracies and failures, are enacted. Other enactments which may have to be considered are:

SCOTLAND ACT 2016 Part 2 1.92

Tax borrowing and financial information

Income tax 13

Power of Scottish Parliament to set rates of income tax

14

Amendment of Income Tax Act 2007

15

Consequential amendments, income tax

Devolved taxes 19

Devolved taxes: further provisions

Information 21

Provision of information to the Office for Budget Responsibility

Part 7  General 70

Transitional provision

71

Power to make consequential, transitional and saving provision

72 Commencement

SCOTTISH FISCAL COMMISSION ACT 2016 1.93

Sections 1–32 set out constitutional arrangements

TAX COLLECTION AND MANAGEMENT (WALES) ACT 2016 1.94 Sections 1–195 establish the Welsh Revenue Authority to make provision about its organisation and main function in connection with devolved tax

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CRIMINAL FINANCES ACT 2017 Overview of the Act The Act is in four parts. 1.95 Part 1 deals with the proceeds of crime, money laundering, civil recovery, enforcement powers and related offences and creates a range of new powers for law enforcement agencies to request information and seize monies stored in bank accounts and mobile stores of value. Part 2 ensures that relevant investigatory, money laundering and civil recovery powers are extended to the Terrorism Act 2000 (TACT) and the Anti-terrorism, Crime and Security Act 2001 (ATCSA), as well as the Proceeds of Crime Act 2002 (POCA). Part 3 creates two new corporate offences of failure to prevent facilitation of tax evasion. Part 4 includes minor and consequential amendments to POCA and other enactments.

Corporate failure to prevent tax evasion There are a range of statutory offences of ‘fraudulently evading’ taxes. Beyond these statutory offences of fraudulent evasion, there is a common law offence of cheating the public revenue, committed by a person who engages in any fraudulent conduct that tends to divert funds from the public revenue. It is also a crime deliberately to facilitate another person’s tax evasion. The above offences are committed where a person is knowingly concerned in, or takes steps with a view to, the fraudulent evasion of a tax owed by another. Moreover, like any offence, it is a crime to aid and abet another person to commit a tax evasion offence. As such, where a banker, accountant, or any other person, deliberately facilitates a client to commit a tax evasion offence, the banker or accountant commits a crime. Previously, where a banker or accountant criminally facilitated a customer to commit a tax evasion offence, the taxpayer and the banker or accountant committed a criminal offence but the company employing the banker or accountant did not. Even in cases where the company tacitly encouraged its staff to maximise the company’s profits by assisting customers to evade tax, the company remained safely beyond the reach of the criminal law.

40

A Useful Relationship The offences in Part 3 hold these organisations and corporations to account for the actions of their employees. This power gives effect to the former Prime Minister’s commitment to legislate following the International Consortium of Investigative Journalists’ (ICIJ) publication of what are known as the ‘Panama Papers’. Rather than focusing on attributing the criminal act to the company, the offences focus on – and criminalise – the company’s failure to prevent those who act for or on its behalf from criminally facilitating tax evasion when acting in that capacity. Therefore, where a person acting for and on behalf of a relevant body, acting in that capacity, criminally facilitates a tax evasion offence by another person, the relevant body would be guilty of the corporate failure to prevent the facilitation of tax evasion offence, unless the relevant body can show that it had in place reasonable prevention procedures (or that it was not reasonable to expect such procedures). The new corporate offences cannot be committed by individuals; they can only be committed by ‘relevant bodies’, that is legal persons (companies and partnerships). Moreover, they are only committed in circumstances where a person acting for or on behalf of that body, acting in that capacity, criminally facilitates a tax evasion offence committed by another person. Thus where the taxpayer commits a tax evasion offence contrary to the existing criminal law, and a person acting for and behalf of the relevant body also commits a tax evasion facilitation offence contrary to the existing law by criminally facilitating the taxpayer’s crime, the relevant body commits a tax fraud in relation to another’s tax without facilitating another, the offence is not committed. It is an offence to unreasonably fail to prevent the criminal facilitation of tax evasion, not tax evasion itself. The new offences do not make companies responsible for the crimes of their customers (unless those who act for or on behalf of the company criminally facilitate such crimes). Nor are the new offences committed: (a) Where the taxpayer engages in aggressive avoidance falling short of fraudulent evasion or is otherwise non-compliant. (b)

Where the person acting for and behalf of the relevant body inadvertently or negligently facilitates the taxpayer’s fraudulent evasion of tax.

(c) Where the taxpayer’s fraudulent evasion is facilitated by a person who is not acting for or on behalf of the relevant body at the time of doing the facilitating act (eg  if an employee, in their private life, criminally facilitates his or her partner’s fraudulent evasion of their tax; or where a sub-contractor criminally facilitates tax fraud when working for an entirely different contractor during work unconnected to the relevant body). The 41

A Useful Relationship new offences are only about ensuring that relevant bodies have reasonable procedures to prevent those acting for or on their behalf from criminally facilitating the fraudulent evasion of tax, when acting in that capacity. (d) Every time somebody acting for or on behalf of the relevant body criminally facilitates another’s tax crime (only reasonable procedures, not fool-proof procedures, are required) a risk-based, rather than zero tolerance, approach is adopted. (e) Where tax evasion offences are currently being committed by those acting for or on behalf of a company, the new offences require nothing more than for that company to have reasonable procedures in place to prevent such offences being committed by those acting for or on its behalf.

CHAPTER 4: ENFORCEMENT POWERS AND RELATED OFFENCES Extension of powers Section 17: Serious Fraud Office 169. Section 17 introduces Schedule  1, which makes a series of technical amendments to a number of provisions in POCA, in order to allow SFO officers to directly access the asset preservation powers under Parts 2, and 4 of POCA, the civil recovery powers under Part 5 and the investigation powers in Part 8. 170. Schedule 1 contains the consequential amendments to POCA 171. The inclusion of SFO staff in the ‘appropriate officer’, ‘senior officer’ and ‘senior appropriate officer’ definitions under various provisions grant them direct access to asset preservation powers in confiscation proceedings, recovery of cash and investigatory powers.

Section 18: Her Majesty’s Revenue and Customs: removal of restrictions 172. Officers of HMRC currently have various powers to enable them to investigate crimes, such as the power of arrest of the power to apply for a search warrant. However, these powers are unavailable in relation to offences committed against certain functions of HMRC (typically former Inland Revenue functions). Section 18 seeks to remove such restrictions, enabling officers of HMRC to use their existing criminal investigation powers in relation to crimes relating to any of HMRC’s functions. 173. Sub-section (2) removes the current restriction within section 23A of the Criminal Law (Consolidation) (Scotland) Act 1995 (CLCSA) that 42

A Useful Relationship prevents HMRC from using its criminal powers for offences relating to prohibitions and restrictions or the movement of goods. This gives officers of HMRC in Scotland criminal powers in relation to crimes involving prohibitions and restrictions or the movement of goods similar to those currently enjoyed by officers of HMRC in England and Wales and Northern Ireland. 174. Sub-sections (3), (4) and (5) remove restrictions on the use of HMRC’s criminal investigation powers in relation to offences relating to functions of HMRC that are functions previously held by the Inland Revenue. 175. Sub-section (3) amends the definition of ‘officer of law’ in Criminal Procedure (Scotland) Act 307 ss 3–7. 176. Sub-section (4) amends the Proceeds of Crime Act 2002 to remove the restrictions on the exercise of the powers contained in ss 289, 294, 375C and 408C, so that these powers can be used when investigating crimes related to former Inland Revenue functions for which they are currently unavailable. 177. Sub-section (5) amends the Finance Act 2007 to remove the specified restriction at s  84, enabling HMRC officers to use their criminal investigatory powers from the Police and Criminal Evidence Act 1984 in relation to certain former Revenue functions in relation to which they are not currently available.

Section 19: Her Majesty’s Revenue and Customs: new powers 178. Section 19 makes amendments to POCA s 316 in relation to England, Wales and Northern Ireland to include HMRC in the definition of ‘enforcement authority’. This allows a member of staff of HMRC to bring forward civil recovery proceedings under Chapter 2 of Part 5 of POCA against property or any person who they think holds recoverable property. ‘Recoverable property’ is defined in POCA ss  304–310 and essentially means the proceeds of crime. 179. The inclusion of HMRC staff in the definition of ‘appropriate officer’ and ‘senior appropriate officer’ in POCA s 378 allows them to apply for the orders and warrants to build a case for civil recovery proceedings. They are officers for the purposes of a ‘civil recovery investigation’, see s 341 of POCA.

DIGITAL ECONOMY ACT 2017 1.96 An Act to make provision about electronic communications infrastructure and services; to provide for restricting access to online 43

A Useful Relationship pornography; to make provision about protection of intellectual property in connection with electronic communications; to make provision about datasharing; to make provision in connection with Telecommunications Act 1984 s 68; to make provisions about functions of OFCOM in relation to the BBC; to provide for determination by the BBC of age-related TV licence fee concessions; to make provision about the regulation of direct marketing; to make other provision about OFCOM and its functions; to make provision about internet filters; to make provision about preventing or restricting the use of communication devices in connection with drug dealing offences; to confer power to create an offence of breaching limits on ticket sales; to make provision about the payment of charges to the Information Commissioner; to make provision about payment systems and securities settlement systems; to make provision about qualifications in information technology; and for connected purposes. This Act is outside the scope of this book.

FINANCE ACT 2017 Part 1 Direct and indirect taxes Income tax charges and rates 1.97 1–4. Main rates of income tax for 2017–18. The basic rate remains at 20% as does the higher rate of 40% from £33,500 (£31,500 in Scotland) and the additional rate of 45% from £150,000. The starting rate for savings income is £5,000.

Corporation tax charge 5. Corporation tax for the financial years 2018 and 2019 ending 31 March 2018 and 2019 is 19% under F(No 2)A 2015 s 7, and for the year ending 31 March 20 it is 17% under FA 2016 s 46.

Income tax: general 6. Workers services provided to public sector through intermediaries, and Sch 1. 7. Optional remuneration arrangements. Schedule 2 These are Type A if an employee gives up a right to earnings in return for a benefit and Type B if an employee agrees to be provided with a benefit in lieu 44

A Useful Relationship of a right to earnings. These benefits are ITEPA 2003 s 81, cash vouchers, s 87 non-cash vouchers, s 94 credit tokens, s 102 living accommodation, s 120 car benefits, s 149 car fuel benefits, s 154 van benefits, s 160, van fuel benefits, s 175 taxable cheap loans, s 203 cash-equivalent benefits. 8. Taxable benefits: assets made available without transfer These are covered by ITEPA 2003 s 205 with a deduction under s 205A if the asset is unavailable for private use and s 205B if the asset is shared. Schedule 2 Optional remuneration arrangements introduced ITEPA 2003 as amended to treat these as earnings to include benefits in kind, non-cash vouchers, credittokens, cars, accommodation etc. Classic cars with a market value of £15,000 or more give rise to a benefit in kind based on the market value. Car fuel, van fuel, use of vans, cheap loans etc are treated as taxable benefits. 9–11. FA 2004 s 242C–242E introduce Schedules 3, 4 and 5 to tax non-UKregistered pension schemes as if UK-registered schemes, Part 1 Schedule  3 100% (not 90%) of overseas pensions are charged to tax under Part 2.

Employee shareholder shares 12. Employee shareholder shares; amount treated as earnings ITEPA  2003 s  226A is amended to treat the market value of employee shareholder shares as earnings from the employment. 13. Employee shareholder shares: abolition of CGT exemption ITEPA  2003 ss  226B–226D, which provided income tax relief on £2,000 worth of shares acquired by an employee as consideration for the arrangement of an employee shareholder agreement and both the income tax relief and the National Insurance contributions relief have been abolished, with consequential amendments, normally with effect from 1, exceptionally 2, December 2016. 14 Employee shareholder shares: purchase by company The income tax exemption in such cases is similarly abolished from 1, exceptionally 2, December 2016. 45

A Useful Relationship 15 Disguised remuneration Schedule 3 Overseas pensions Foreign service relief for employee funded retirement benefit schemes is abolished from 2017–18, Schedule 3 Part 3. Schedule 6 Employment income provided through third parties 1 Introductory. Part 7A of ITEPA 2003 is amended to tax employment income provided through third parties. 2 Meaning of ‘relevant step’. ITEPA  2003 is amended to include steps involving a breach of trust. 3–4 Loans: transferring, releasing or writing off ITEPA  2003 ss  554A–554C are amended to create a tax charge in such circumstances. 5 IEPA 2003 s 554OA is inserted. 554OA Exclusions: transfer of employment-related loans There is no tax charge on an employee-related loan of up to £10,000 if it is transferred to a new employer, unless part of a tax avoidance arrangement. HMRC’s Employment Status Manual, updated to 20 April 2017 stated: ‘Entire agreements; an employer or their representatives may claim the contractual provisions represent the entire agreement and that HMRC should not be looking outside those contractual provisions. Where it becomes necessary to test a contract you should establish if there are any terms and conditions outside of their contractual provisions – for example, other written documentation, any oral or varied terms. You should also establish and obtain evidence as to how the written provisions operate in practice. If an employer and/or their adviser suggest HMRC should not be looking beyond the contractual provisions ie  what happens in practice, you should refer to the comments of Smith LJ in the Court of Appeal case Autoclenz Ltd and Belcher & Ors [2009] EWCA Civ 1046. See the commentary at ESM7310 (https://www.gov.uk/hmrc-internal-manuals/ employment-status-manual/esm/7310). The Court of Appeal judgment was upheld by the Supreme Court – Autoclenz Ltd v Belcher & Ors [2011] UKSC41.’ 46

A Useful Relationship 6–9  ITEPA  2003 ss  554Z, 554RA and 554XA are inserted for exclusions: relevant repayments, and exclusions: payment in respect of a tax liability.

DOUBLE TAXATION 10 Section 554Z5 Overlap with money or asset subject to earlier tax liability. 10.

Sections 554Z11B–554Z11G are inserted

11.

Amendments to Schedule 2 to FA 2011.

13–16. Commencement.

FINANCE (NO 2) ACT 2017 Part 1  Direct taxes Income taxes: employment and pensions 1.98 Provisions in ss  1–14 apply to taxable benefits which can be made good by 6  July following the end of the fiscal year on 5  April. These are low-emission vehicles, pensions advice, certain legal expenses, termination payments and awards, PAYE settlement agreements, pension contributions.

Income tax: investments These are the dividend nil rate band, life assurance policies, personal portfolio bonds, enterprise and small enterprise investment schemes, venture capital trusts, paper for paper share transfers and social investment tax relief. 1 Taxable benefits: Time limit for making good Benefits in kind not accounted for in real time through PAYE may be paid for through making good by 6 July following the end of the fiscal year, from 2017–18. 2 Taxable benefits: ultra-low emission vehicles The carbon dioxide emissions are recalculated. 3 Pensions advice Advice for employees etc up to £500 may be provided from 2017–18. 47

A Useful Relationship 4 Legal expenses etc ITEPA  2003 ss  346BA and 346BB are inserted from 2017–18 to allow employers to arrange for tax-free legal advice for employees who have allegations made against them or who may be required to give evidence at a public hearing in connection with termination of employment or death. 5 Termination payments etc: amounts chargeable on employment income This is an anti-avoidance section to prevent the manipulation of termination payments to avoid National Insurance contributions and ITEPA 2003 ss 402A, B, C, D and E and 404B are inserted. 6 PAYE settlement agreements These are redefined. 7 Money purchase annual allowance FA  2004 ss  227ZA, 227ZB and 227ZD are amended to reduce the money purchase annual allowance from £10,000 to £4,000 from 6 April 2017. 8 Income tax: investments The dividend nil rate for 2018–19 is reduced from £5,000 to £2,000 for 2018– 19 et seq. 9–14 Outside the scope of this book, life insurance policies etc. 15 Business investment relief Business investment relief is amended with effect from 6  April 2017 under ITA 2007 s 809VC–VN to allow a qualifying investment to be acquired and to extend the start-up period from two to five years. A hybrid stakeholder and trading company qualifies for relief. A partner in a partnership is not carrying on the trade of the partnership or trade eligible for Business Investment Relief unless the target company is carrying on a trade in its own right. Further consequential amendments are made. Income tax 16 Calculation of profits of trades and property businesses Schedule  2 contains provisions about the calculation of profits on the cash basis. 48

A Useful Relationship 17 Trading and property allowance Schedule 3 introduces a trading and a property allowance giving relief from income tax.

Corporation tax 18–25. Trusts with underlying companies which are subject to corporation tax are subject to the normal rules for the taxation of companies. F(No  2) Act 2017 makes changes to carried forward losses (s  18 and Sch  4); the counteraction of avoidance arrangements involving losses (s 19), the corporate interest restriction (s 20 and Sch 5), museum and gallery exhibitions (s 21). Relief for expenditure on grass-roots sport is contained in s  22 introducing CTA  2010 Part 6A. Section 23 deals with cost-sharing arrangements with patents, enacting CTA 2010 ss 357GC–357GCZF, s 24, with hybrid and other mismatches and s  25 introduces Schedule  7, Trading profits taxable at the Northern Ireland rate.

Chargeable gains 26–28. F(No 2)A 2017 s 26 covers elections in relation to assets appropriated to trading stock, ss 27 and 28 deal with the substantial shareholding exemption, and introduces TCGA 1992 Schedule 7AC para 30A, the meaning of ‘qualifying institutional investor’.

Domicile, overseas property etc 29 Deemed domicile: income tax and capital gains tax ITA 2007 is amended to insert s 835BA, deemed domicile for the purposes of income tax and capital gains tax if condition A or B is met. Condition A is that the individual was born in the UK with a UK domicile of origin and was UK resident in the relevant tax year. Condition B is that the individual has been UK resident for at least 15 of the 20 tax years immediately preceding the relevant tax year, unless the individual is not UK resident for the relevant tax year and there is no tax year beginning after 5 April 2017 and preceding the relevant tax year in which the individual was UK resident. 30 Deemed domicile: inheritance tax IHTA 1984 s 30 is amended to include as deemed domiciled in the UK for the relevant tax year if a person was resident in the UK for at least 15 out of 20 tax 49

A Useful Relationship years immediately preceding the relevant tax year, and at least one of the four years ending with the relevant year. Various terms are defined. 31 Settlements and transfer of assets abroad; value of benefits IHTA 1984 Schedule 9 is introduced. 32 Exemption from attribution of carried interest gains This section is inserted to prevent a double tax charge. 33 Inheritance tax on overseas property representing UK residential property Schedule 10 is introduced to apply inheritance tax to UK residential property owned by foreign domiciliaries or trusts through foreign companies or partnerships. Disguised remuneration 34 Employment income provided through third parties This applies PAYE to most loans to individuals from an EBT back to 1999 under the disguised remuneration rules if the loans were outstanding on 5 April 2019. 35 Trading income provided through third parties ITTOIA  2005 ss  23A–23H are inserted to tax benefits arising on or after 6 April 2017 if the relevant conditions apply and various terms are defined. 36 Disguised remuneration schemes: restriction of income tax relief 37 Disguised remuneration schemes: restriction of corporation tax relief The disguised remuneration rules restrict income tax or corporation tax reliefs. 38 First-year allowance for expenditure on electric vehicle charging points 39 Disposals concerned with land in the UK 40–42 Co-ownership authorised contractual schemes Part 2 Indirect taxes Part 3 Fulfilment businesses 50

A Useful Relationship Part 4 Administration, avoidance and enforcement Part 5 Final supplementary provisions and schedules.

Capital gains tax: settlements: value of benefit conferred by certain capital payments by way of loan 1. TCGA 1992 s 97(4) introduced ss 86A–96 and Schedule 4C to determine the value of a benefit made by way of a loan or by making movable property or land available.

TCGA 1992 s 97A. Value of benefit conferred by capital payment made by way of loan This is the amount of interest at the official rate, currently 2.5% under FA 1989 s  178(2) (the Taxes (Interest Rate) (Amendment) Regulations SI  2017/305) less any interest actually paid in the relevant fiscal year.

TCGA 1992 s 97B Value of benefit conferred by capital payment made by way of making movable property available The value of the benefit in this case is the capital cost of the movable property when first made available to the user times the number of days in the year it was made available to the taxpayer (P) at the average of the official rates of interest for the relevant period (r) less the amount, if any, paid by P, divided by the number of days in the year.

TCGA 1992 s 97C. Value of benefit conferred by capital payment made by making land available The value of the benefit in this case is the rental value of the land for the period in the year during which the land is made available, less any rent paid by P, plus any costs of repair, insurance or maintenance of the land. This does not apply if the whole of the donor’s interest in the land is transferred to P. The rental value is the rent which would have been paid in the market had the land been let to P at the annual rent with the tenant paying the running costs and the landlord paying the costs of repairs, maintenance and insurance plus the cost of any relevant services provided by the landlord, other than the repair, insurance or maintenance of the property.

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2. INCOME TAX: TRANSFER OF ASSETS ABROAD, VALUE OF CERTAIN BENEFITS Value of certain benefits ITA 2007 s 742B Value of certain benefits Sections 742B–742E apply to the calculation of the income tax on a benefit received in 2017–18 and subsequent years, provided by a person by way of: (a)

(s 742C) a payment by way of loan;

(b) (s 742D) making movable property available; (c)

(s 742E) making land available.

without transferring the whole interest in it.

ITA 2007 s 742C Value of benefit provided by a payment by way of loan The benefit is the excess of the official rate of interest, under FA 1989 s 178 of ITEPA 2003 Part 3 Chapter 7, currently 2.5%, over any interest actually paid by P in that year.

ITA 2007 s 742D Value of benefit provided by making movable property available This is the capital cost times the number of days on which the property is made available to P in the relevant period, at the official rate of interest, less the total of the amounts paid by P in the year,

ITA 2007 s 742E Value of benefit provided by making the land available: 1.

This is the excess of the rental value of the land for the period it is made available to P less any amounts paid by P to the person providing the benefit of the availability of the land, less the costs of repair, insurance or maintenance relating to the land, unless it is a transfer of the transferor’s entire interest in the land.

2.

The rental value is the rent for the period as if it had been let at an annual rent equal to the annual value, ie the market rent as if the tenant paid all the taxes, rates and usual charges and the landlord paid the costs of the repairs, insurance and other expenses necessary to command that rent. 52

A Useful Relationship

3. COMMENCEMENT This schedule applies for 2017–18 and subsequent years. FA 2007 s 743 prevents a duplication of charges. Section 744 explains the meaning of taking income into account in charging income tax under s  743. Section 744 sets out the roles of tax applicable to income charged under ss 720 and 727 etc. Section 745 specifies rates of tax of tax applicable to income charged under ss 720 and 727 etc. Section 746 sets out the deductions and reliefs where individual charged under ss 720 or 727. Section 747 specifies the amounts corresponding to accrued profits and related interest and s 748 sets out power to obtain information and s 749, restrictions on particulars to be provided by relevant lawyers Section 750 restrictions on particulars to be provided by banks and s 751, the Tribunal’s jurisdiction on appeals. The official rate of interest is specified by FA  1989 s  178 and regulations thereunder, and is currently 2.5% under Statutory Instrument 2017 No 305 of 8 March 2017. F(No 2)A 2017 Schedule 18 Requirement to correct certain offshore tax noncompliance, s 67.

Failure to correct relevant offshore tax non-compliance 1.

A penalty is payable by a person who has any relevant offshore tax noncompliance to correct at the end of 2016–17 which was not corrected in the period 6 April 2017 to 30 September 2018, the requirement to correct (RTC) period.

Main definitions, general 2.

Paragraphs 3–13 are inserted.

Relevant offshore tax non-compliance 3.

A  person has relevant offshore tax non-compliance at 5  April 2017 if conditions A and B are satisfied on or before 5 April 2017 and condition C in para 6 is satisfied. 53

A Useful Relationship 4.

Condition A  is that the original non-compliance was not corrected by 5 April 2017.

5.

Condition B  is that the non-compliance involved a potential loss of revenue when committed which was not fully corrected by 5 April 2017.

6.

Condition C  is that it is lawful, disregarding the extension period to 5 April 2021 in para 26, for HMRC to assess the taxpayer, as HMRC were aware of the failure to correct or were aware of the missing information and the non-compliance was not corrected by 6 April 2017 or, in the case of inheritance tax by Royal Assent on 17 November 2017.

Offshore tax non-compliance etc 7.

Offshore tax non-compliance is that which involves an offshore matter or offshore transfer as defined by paras 9–11.

Tax non-compliance 8.

This includes failure to comply with a filing obligation under TMA 1970 s 7 or other obligation to deliver to HMRC a return of other document, as listed, or delivering an inaccurate return or document leading to an understatement of a liability to tax or a false or inflated loss or claim. Various terms and documents are defined.

‘Involves an offshore matter’ and ‘Involves an offshore transfer’ 9.

This paragraph covers tax non-compliance under TMA  1970 s  7 for failure to notify chargeability to income tax or capital gains tax.

Tax non-compliance ‘involves an offshore matter’ if the potential loss of revenue arises from a source, or assets situated or held, or activities carried on, outside the UK, or anything similar. It involves an offshore transfer if it does not involve an offshore matter but applies to income received or transferred on or before 5  April 2017 to a territory outside the UK, or similarly for capital gains tax, directly or indirectly. 10. Tax non-compliance is where there is a failure to comply with a requirement to deliver a return etc containing information to enable HMRC to assess a person’s tax liability where there is a non-UK element, including an offshore transfer. Inheritance tax is included, as are income tax and capital gains tax. 11. Tax non-compliance arises where there is an inaccurate return or information which involves an offshore matter, or offshore transfer, 54

A Useful Relationship including where the tax at stake is inheritance tax or income tax which was received in a territory outside the UK or transferred to such a territory on or before 5 April 2017. Similar rules apply for capital gains tax.

Tax 12. References to tax may include income tax, capital gains tax or inheritance tax but excludes non-resident CGT, gains of companies and charges under TCGA 1992 ss 14D or 188D.

Correcting offshore non-compliance 13. Offshore tax non-compliance may be corrected by giving the requisite unprompted notice to HMRC containing the relevant information, by making and delivering a tax return or using HMRC’s digital disclosure service, communicating it to an officer of HMRC, or other method agreed with HMRC containing the information which should have enabled HMRC to calculate the offshore tax due. Offshore non-compliance may be corrected by giving the relevant information, as defined, to HMRC using a method approved by an agreement with HMRC.

Part 2 Amount of penalty 14. The penalty referred to in paragraph 1 is 200% of the offshore potential loss of revenue (PLR) attributable to the uncorrected offshore non-compliance which remains uncorrected within the requirement to correct (RTC) period.

Offshore PLR 15. This is the ‘potential loss of revenue’ relating to the offshore noncompliance such as failure to notify chargeability, under FA 2008 s 41, pre1 April 2010, TMA 1970 s 7(8). Failure to deliver a return or other document is charged under FA  2009 Sch  5 para  24, or, pre-1  April 2011, under TMA  1970 s  93(9). Delivering an inaccurate return results in the potential lost revenue being charged under FA 2007, Sch 24 paras 5–8, or, if pre-1 April 2008, under TMA 1970 s 95(2). FA 2007 Sch 24 para 6 is amended accordingly. Offshore tax non-compliance is defined by F(No 2)A 2017 Sch 18, as amended. Apportionment between UK and offshore non-compliance is treated as two separate matters and apportioned on a just and reasonable basis. 55

A Useful Relationship

Reduction of penalty for disclosure etc by person liable to penalty 16. The 200% penalty in paragraph 1 may be reduced for disclosure of relevant non-compliance in relation to chargeability to income tax or capital gains tax, a missing tax return, or inaccuracy in a document, false or withheld information and failure to disclose an under assessment. The appropriate method of disclosure and co-operation, including identifying an enabler of the offshore tax avoidance, is specified but the penalty may not be reduced below 100% of the offshore potentially lost revenue. 17. HMRC may reduce a penalty because of special circumstances, which could include staying a penalty or agreeing a compromise.

Procedure for assessing penalty etc 18. Where a person is found liable to a penalty under paragraph 1, HMRC must assess the penalty in the manner specified. 19. An assessment of a penalty under paragraph 1 must be made before the end of the period of 12 months beginning with the end of the relevant appeal period, as defined.

Appeals 20–21. A person may appeal against a penalty under para 1 in the same way as an appeal against an assessment. 22. On appeal the First-tier or Upper Tribunal may affirm or amend or cancel HMRC’s decision.

Reasonable excuse 23. A  failure to correct any relevant offshore non-compliance within the Requirement to Correct (RTC) period may be allowed if the taxpayer has a reasonable excuse and convinces HMRC, or the relevant tribunal of that fact. An insufficiency of funds, or relying on any other person, is not normally a reasonable excuse.

Double jeopardy 24. Where a person has been convicted of an offence, or is liable to a penalty other than under para 1, the aggregate of the penalties must not exceed 200% of the liability to tax. 56

A Useful Relationship

Application of provisions of TMA 1970 25. TMA 1970 s 108, responsibility of officers, s 114, want of form, and s 115, delivery and service of documents, apply.

Part 3 Further provisions relating to the requirement to correct Extension of period for assessment etc of offshore tax 26. If, at April 2017, a person has relevant offshore tax non-compliance to correct, the last day on which HMRC may assess the person to tax would usually be between 6  April 2017 and 4  April 2021 and is extended to 5 April 2021.

Further penalty in connection with offshore asset moves 27. FA  2015 Sch  21, penalties in connection with offshore asset moves, is amended.

Asset-based penalty in addition to penalty under paragraph 1 28. FA 2016 Sch 22, asset-based penalty for offshore inaccuracies and failures, is amended, 29. TMA 1970 s 103ZA is extended to FA 2017 Sch 18.

Publishing details of persons assessed to penalty or penalties under paragraph 1 30. HMRC may name and shame persons who have incurred relevant penalties under paragraph 1, if the potential lost revenue exceeds £25,000 31. The Treasury may amend the relevant amount for naming and shaming by Statutory Instrument. Part 4 Supplementary Interpretation: minor 32. Various terms are defined. 33. Bank levy (omitted). 34. Debt traded on a multilateral trading facility (omitted). 57

A Useful Relationship 35. Settlements: anti-avoidance etc. 36. Fixed rate deduction for expenditure on vehicles etc. 37. Carried income.

FINANCE ACT 2018 1.99 Finance Act 2018 specifies the income tax and corporation tax charge, income tax rates and allowances, employment amendments, disguised remuneration and pensions, in ss  1–13. Section 14 introduced a risk-tocapital condition to the Enterprise Investment Scheme, the Small Enterprise Investment Scheme and the Venture Capital Trust Scheme under ITA  2007 ss 157A, 257AA, 286ZA with further amendments in ss 15–17. Section 18 introduces Schedule 6 amending the rules relating to bare trusts, the notional trade and business of an indirect partner, the information to be included in returns, of overseas partners in investment partnerships etc. Returns are conclusive as to shares of profits and losses. Schedule 7 deals with hybrid and other mismatches, Schedule 8, with corporate interest restriction and investment managers and Schedule 10 settlements: antiavoidance etc relating to capital gains, and income tax.

Section 35 settlements: anti-avoidance etc Schedule 10 Part 1 Capital gains tax TCGA 1992 s 87D, ss 87 and 87A: disregard of capital payments to non-residents Such payments are disregarded unless s  87E applies to a temporary nonresident, or the recipient beneficiary is a close member of the settlor’s family under s 87H.

Section 87E, ss 87 and 87A: disregarded payments to temporary non-resident These payments are treated as those of the beneficiary on his return to the UK and taxed accordingly. 58

A Useful Relationship

Section 87F, ss 87 and 87A: disregarded payments in year settlement ends If one or more of the recipients of capital payment is UK resident all of them are taxed on their share. A non-resident beneficiary is one who at all times in the year is non-resident in the UK.

Section 87G, settler liable if capital payment received by close family member If a trust beneficiary receives a capital payment and the settlor is a UK resident at any time in that year the receipt is deemed to be that of the settlor and not the beneficiary, and the settlor may recover the tax paid from the beneficiary.

Section 87H, meaning of ‘close member of the settlor’s family’ This term is defined to include the settlor’s spouse or civil partner or their child aged under 18.

Section 87I, non-UK resident settlements: recipients of onward gifts Sections 87J and K apply in such cases.

Section 87J, relevant parts of payment from which onward gift derived The slicing and matching rules are explained. Section 87K Attribution of gains as payments to recipient of onward gift The calculation of the chargeable payment is specified.

Section 87L, cases where settlor liable following onward gift Where a settlor is treated as receiving a capital payment in such circumstances they are taxed as if they had received the payment. 59

A Useful Relationship

Section 87M, cases where recipient of onward gifts is user of remittance basis Where a payment is treated or received by the settlor the unremitted portion of the capital payment is taxable under s 87I.

Section 87N, ss 87 and 87A: disregard of payments to migrating beneficiary If the capital payment is made to a migrating emigrant while still in the UK it may be treated as the beneficiary’s unless the relevant person under s 81G(2) is the settlor who becomes liable for the tax.

Section 87P, ss 87 and 87A: temporary migration after payment disregarded If the payment was not taxed on the recipient on leaving the UK it may be taxed on his return to the UK. Various terms are defined.

Sch 10 part 2 Where the period of temporary non-UK residence began before 8  July 2015 TCGA 1992 s 10A applies to treat the capital payment as received by the individual in the period of return, he may make a claim for ITA 2007 s 809B (1A) not to apply. The European Union (Withdrawal) Act 2018 may repeal the European Communities Act 1972, but existing EU law will continue to apply on and after exit day, subject to conditions, for two years.

EUROPEAN UNION (WITHDRAWAL) ACT 2018 This Act repeals the European Communities Act 1972 (ECA) and makes provision in connection with the withdrawal of the UK from the European Union. It repeals the ECA except for EU-derived UK legislation or direct EU legislation, subject to exceptions and provides guidance on the status and interpretation of retained EU law, etc. It lists the numerous regulations required to exit from the EU and lists the substantial number of regulations which will need to be replaced, abolished or otherwise modified. 60

A Useful Relationship

SANCTIONS AND ANTI-MONEY-LAUNDERING ACT 2018 ‘An Act to make provision enabling sanctions to be imposed where appropriate for the purposes of compliance with United Nations obligations or other international obligations of for the purposes of furthering the prevention of terrorism or for the purposes of national security or international peace and security or for the purposes of furthering foreign policy objectives; to make provision for the purposes of the detection, investigation and prevention of money laundering and terrorist financing and for the purposes of implementing Standards published by the Financial Action Task Force relating to combating threats to the integrity of the international financial system; and for commercial purposes.’

FINANCE ACT 2019 1.100 For 2019–20 ss 3–6 specified that the basic default and savings rate is 20% and the basic rate limit is £37,500, the higher rate is 40% and the additional rate is 45%. The personal allowance is £12,500. The starting rate limit for savings is £5,000 for 2019–20. The Scottish rates are tax rates where the Revenue Scotland and Tax Powers Act 2014 (RSTPA 2014) applies and for 2019/20 are: Under the personal allowance, usually £12,500 (starter rate) next £2,049 19%, £2,049–£12,444 (basic rate) 20%, £12,444–£30,930 (intermediate rate), £30,930–£150,000 41%, over £150,000 46%. The personal allowance reduces by £1 for every £2 of income over £100,000. The 19% for the first £2,000 of tax to be income, 20% from £2001 to £12,150 21% from £12,151 to £31,580, £41% from £31,581 to £150,000 and 46% from £150,001. Section 13 and Schedule 1 brings disposals of land in the UK, held by non-UK residents, into the capital gains tax net and repeals the specific charge to tax on ATED-related chargeable gains. Section 14 and Schedule 2 requires capital gains tax returns and payments on account on any direct or indirect disposals of UK land. Section 15 and Schedule 3 inserts ITTOIA 2005 Chapter 2A, Offshore receipts in respect of intangible property brought into charge to tax under ITTOIA 2015 ss 608A–608Z. FA  2019 s  16 and Schedule  4 applies to counter avoidance involving profit fragmentation arrangements as defined. Section 17 amends CTA 2009 s 5 and Schedule 5 extends the scope of charge to corporation tax to non-UK resident companies carrying on UK property business etc, amending a number of UK taxing acts in the process. 61

A Useful Relationship Section 18 and Schedule  6 amends the diverted profits tax in FA  2015 Part 3. Section 19 amends the hybrid and other mismatches in TIOPA 2010 Part 6A, rewriting s 259HC, Counteraction of the multinational payee deduction/ non-inclusion mismatch. Section 20 amends the controlled foreign companies: finance company exemption and control in TIOPA 2010 Part 9A and inserts TIOPA  2010 s  371RG which applies to companies in which a UK-resident company has more than a 50% investment. Section 21 amends CTA  2010 s  1143 to counter a fragmented business operation. Section 22 and Schedule 7 counters CGT exit charge payment plans and s 23 and Schedule 8 makes further amendments to exit charges. Finance Act 2019 ss 80 and 81 inserting TMA 1970 s 36A and IHTA 1984 s 240B extended the time limits for HMRC to raise an assessment from four years, for a taxpayer taking reasonable care and six years where the loss of tax is due to careless behaviour to 12 years where offshore matters are involved with effect from 6 April 2019. Where the loss of tax is deliberate the time limit remains at 20 years. FA  2019 ss  90–93 refer to the EU withdrawal and give the Treasury power to make, by regulations, such provision as they consider appropriate to maintain the effect of any relevant legislation on the withdrawal from the European Union and ceasing to be a European Economic Area state; by way of regulations. Power is given to remedy deficiencies in the EU Withdrawal Act 2018, in connection with any reference to Euros or EU legislation and to amend mutual international tax enforcement provisions under FA  2006 s  173 and in the process may amend any enactment, certain incidental or savings provisions, and make different provision for different purposes, with effect from exit day. Regulations are to be by statutory instrument subject to annulment by the House of Commons. Section 91 relates to preparatory expenditure. Section 92 requires the Chancellor of the Exchequer to review the impact of various sections in this Act. Section 93 requires the Chancellor of the Exchequer to review the effectiveness of preventing tax avoidance. FA  2019 s  23 and Schedule  8 covers corporation tax exit charges. Part 1 introduces CT exit charge payment plans to amend TMA  1970 Sch  3ZB. Minor amendments are made to paras 1–10. Paragraphs 11–17 are rewritten. Paragraph 11 introduces the payment method. 62

A Useful Relationship Paragraph  12 confirms that the balance of the Exit Charge Payment Plan (ECPP) tax becomes due on the company becoming insolvent; the appointment of a liquidator, or a corresponding overseas event, the company ceasing to be resident in a relevant EEA state or failure to pay as per the ECPP tax for 12 months after it becomes due. Paragraph 13 defines all the outstanding balance attributable to a particular exit charge asset or liability due. Paragraph 14 Part 1 applies if part of the outstanding balance attributable to a particular exit charge asset or liability becomes due. Part 2 deals with the repeal of certain postponement provisions including TCGA 1992 s 187, postponement of charge on deemed disposals under s 185, and consequential matters. Part 3 deals with the treatment of assets subject to EU exit charges, inserting TCGA 1992 s 184J, asset subject to EU exit charge on becoming a chargeable asset, and CTA 2009 s 863A, asset becoming chargeable intangible asset: EU exit charge. FA 2019 s 25 and Schedule 9 applies to intangible fixed assets: restrictions on goodwill and certain other assets in CTA 2009 Part 8 and inserts Chapter 15A, Debits in respect of goodwill, and certain other assets, and s 879A, Introduction, s 879B, the Requirement to write down at a fixed rate, s 879C, Restrictions on debits: pre-FA 2019 relevant assets, s 879D, Pre-FA 2019 relevant asset: the first case, s 879E, Pre-FA 2019 relevant asset: the second case, s 879F, Pre-FA 2019 relevant asset, the third case, s 879G. The preserved status condition etc, s 879H, Pre-FA 2019 relevant asset: the fourth case, s 879I, Restrictions on debits: no business or no qualifying IP assets acquired, s 879J, Meaning of qualifying IP asset, s 879K, Restrictions on debits: acquisition from individual or firm, s 879L, Meaning of relevant business and third-party acquisition, s 879M, When the partial restrictions apply: qualifying intellectual property (IP) assets, s 879N, When the partial restrictions apply: acquisition from individual or firm; s 879O. The partial restriction on debits, and s 879P, Date of acquisition of relevant asset. Section 27 Schedule  10, corporation tax relief for carried forward losses, restrictions on deductions from profits. Various amendments are made and CTA 2010 s 269ZFA, Relevant profits, is inserted, as is s 269ZFB, Modifications for certain insurance companies and s 45G, Section 45F: accounting period partly within three-year period. This is followed by amendments to group relief for carried forward losses, Transferred trades, Deduction buying and commencement. FA  2019 s  28 and Sch  11, Corporate interest restriction, is inserted, as is TIOPA  2010 ss  391A  Amounts capitalised in carrying value of intangible fixed assets. TIOPA  2010 s  395A, Carry forward interest allowance: new 63

A Useful Relationship holding company, TIOPA  2010 s  400A, Carry forward of excess debt cap: new holding company, is inserted and adjusted for net group-interest expense: capitalised interest in TIOPA 2010 ss 410, 413, and 423 and Adjusted net group interest expense: impairment debits and credits and connected companies. An alternative calculation of the interest allowance election for unpaid employees’ remuneration is inserted in TIOPA 2010 s 424A. Adjustments may be made for interest allowance (alternative calculation) changes in accounting policy, interest allowance (non-consolidated investment) elections and amendment for Public infrastructure, Real Estate Investment Trusts, interest restriction returns, Consequential amendments and Commencement. Schedule 12, Eliminating tax mismatch for certain debt, Schedule 13, Annual Investment Allowance: periods straddling 1 January 2019 or 2021. Schedule 14, Leases: changes to accounting standards etc, inserts CAA 2001 ss 70E, 70YA, 70YI, ITTOIA 2005 ss 148GA and 377A Lessee under long funding finance leases: right of use leases, with effect from accounting periods beginning on or after 1 January 2019. Part 2, Long funding leases adds various definitions and Part 3, Changes to Accounting Standards and Tax Adjustments, repeals FA 2011 s 53 and introduces consequential transitional provisions in various cases. Schedule 15, Oil activities is outside the scope of this book. Schedule 16 s 39, Entrepreneurs’ relief. A number of amendments are made including the periods throughout which the conditions for relief must be met, additional requirements relating to the beneficial ownership of companies, relief where a company ceases to be an individual as a personal company, inserting TCGA1992 Chapter 3A, ss 169SB–169SH. Schedule  17 amends the VAT treatment of vouchers, inserting VATA  1994 ss 51C, 51D and Sch 10B. Schedule 18 amends VAT groups eligibility under VATA 1994 s 43A etc. Schedule 19, Gaming Duty, is outside the scope of this book. Schedule 20, s 89, deals with the taxation of hybrid capital instruments, amending CTA  2009 and inserting ss  420A, 475C, 320B and making consequential amendments and exemptions from stamp duty and stamp duty reserve tax.

DRAFT FINANCE BILL 2019–20 Direct taxes – charge to tax 1.101

Section 1. Income tax is charged for the tax year 2019–20.

Section 2. Corporation tax is charged for the financial year 2020. 64

A Useful Relationship Sections 3–6 specify that the basic, default and savings rate of income tax is 20% and the basic rate limit is £37,500, the higher rate is 40% and the additional rate is 45%. The personal allowance is £12,500. The starting rate limit for savings is £5,000 for 2019–20. Sections 7–12 deal with optional remuneration arrangements for cars etc.

Chargeable gains etc Section 13 and Schedule 1 bring disposals of land in the UK, held by non-UK residents, into the capital gains tax net and repeal the specific charge to tax on ATED-related chargeable gains. Section 14 and Schedule 2 require capital gains tax returns and payments on account on any direct or indirect disposals of UK land.

International matters Section 15 and Schedule 3 insert ITTOIA 2005, Chapter 2A, offshore receipts in respect of intangible property which are brought into charge to tax under ITTOIA 2015 ss 608A–Z. Section 16 and Sch 4 applies to counter avoidance involving profit fragmentation arrangements as defined. Section 17 amends CTA 2009 s 5 and Schedule 5 extends the scope of charge to corporation tax to non-UK resident companies carrying on UK property business etc, amending a number of UK taxing acts in the process. Section 18 and Schedule 6 amend the diverted profits tax in FA 2015 Part 3. Section 19 amends the hybrid and other mismatches in TIOPA 2010 Part 6A, rewriting s 259HC, Counteraction of the multinational payee deduction/noninclusion mismatch. Section 20 amends the controlled foreign companies: finance company exemption and control in TIOPA 290 Part 9A and inserts TIOPA 2010 s 371RG which applies to a company in which a UK-resident company has more than a 50% investment. Section 21 amends CTA  2010 s  1143 to counter a fragmented business operation. Section 22 and Schedule 7 counters CGT exit charge payment plans. 65

A Useful Relationship Section 23 and Schedule 8 makes further amendments to corporation tax exit charges. Section 24 amends the definition of ‘UK-related’ company for group relief etc.

Corporation tax: miscellaneous Section 25 and Schedule  9 introduce restrictions on intangible fixed assets such as goodwill, amending CTA 2009 and inserts Chapter 16 into CTA 2009 to write down goodwill at 6.5% per annum with restrictions on pre-FA 2019 relevant assets in CTA 2009 ss 879A–879P. Section 26 inserts CTA 2009 s 782A where a company leaves a group because of a relevant share disposal. Section 27 and Schedule  10 restrict corporation tax relief on certain group relief carried forward losses, with special rules for certain insurance companies and terminal losses etc. Section 28 and Schedule 11 amend the corporate interest restriction in TI0PA 2010 s 2010. Section 29 and Schedule 12 eliminate the tax mismatch for loan relationships with a qualifying link, inserting CTA 2009 s 352B. Sections 30 and 31 amend capital allowances on construction expenditure on buildings and structures and on plant and machinery. Section 32 and Schedule 13 applies to an annual investment allowance period straddling 1  January 2019 or 1  January 2021 by treating them as separate periods under CAA 2001 s 51A. Sections 33 and 34 amend first-year allowances and tax credits on plant and machinery, and electric vehicle charge points. Section 35 amends the rules for qualifying expenditure on buildings, structures and land banks. Section 36 and Schedule  14 deal with amendments to finance leases as a result of changes to accounting standards. ITTOIA 2005 s 148GA is inserted for right-of-use leases under CAA  2001 s  70YI(1) and CTA  2010 s  288 (sale and lease back) is amended, as is s  331 (meaning of financing costs etc), and s  337A, Lessee under long funding finance leases, is inserted and ss 381 and 437 are amended and various terms are defined, with effect from 1 January 2019. 66

A Useful Relationship Schedule 14 Part 2 deals with long funding leases, amending CAA 2001 Part 2. Schedule 14 Part 3 repeals FA 2011 s 53 and makes changes to accounting standards and tax adjustments. Section 37 and Schedule 15 relate to oil activities outside the scope of this book. Section 39 and Schedule  16 amend entrepreneurs’ relief, tightening the requirements and amending TCGA  1992 Chapter 3A of Part 5 where a company ceases to be an individual’s personal company, under TCGA1992 ss 169SB–169SH. FA2019 ss  42–50 relate to stamp duty land tax, stamp duty and stamp duty reserve tax. Sections 51, 52 and Schedule  17 deal with the VAT treatment of vouchers, introducing VATA 1994 ss 57C and 51D and inserting Schedule 10B. Section 53 and Schedule  18 amend VATA  1994 s  43A, eligible groups, and insert s 43AZA, the control test for s 43A. Part 2 makes various consequential amendments. Sections 54–65 and 67–79 deal with various duties and levies outside the scope of this book. Section 66 amends the International Tax nil rate band. Part 4, Administration and Enforcement, Section 80 increases the time limits for income tax and capital gains tax to 12 years where there is an offshore matter or offshore transfer and s 81 likewise applies for inheritance tax. Section 82 inserts FA 2004 s 70A and FA 1998 Sch 18 para 88A to give security for payments to HMRC. Section 83 inserts TIOPA  2010 s  128A, Power by regulations to give effect to international obligations etc, s 128B, Giving effect to requirements under s 128A regulations, s 128C, Disclosure under international obligations etc, s  84, deals with international tax enforcement: disclosable arrangements, ss 85 and 86 with interest in respect of unlawful ACT (Advance Corporation Tax), Supplementary, s  87 Voluntary returns under TMA  1970 ss 12D, 20A and 88, interest under s 178 of FA 1989 and s 101 of FA 2009. Part 5, Miscellaneous and Final, s  89 and Schedule  20 apply to regulatory capital securities and hybrid capital instruments, s 90, Minor amendments in consequence of EU withdrawal, s  91, Emissions reduction trading scheme: preparatory expenditure, s 92, Impact analyses of the anti-avoidance provisions of this Act. Section 93, Review of effectiveness of provisions on tax avoidance, s 94, Review of public health effects of gaming provisions, s 95, Review of changes made by ss 80 and 81, s 96, Interpretation, s 97, Short title. 67

A Useful Relationship

RECENT TAX CASES Hill v Spread Trustee Co Ltd (2006) EWCA Civ 542 1.102 Mr Nurkowski owned two plots of land, 0S149 and 0S160 at a cost of £21,000. 0S160 was gifted to a UK trust for his daughter valued at £35,000 which was exported to Guernsey. He had an offer at that time for £100,000 for both plots which were sold two months later for £2,000,000. The trustee lent £700,000 to Mr N. HMRC challenged the value of 0S160 but settled on £160,000. The Capital Gains Tax on 0S149 was £436,790 which Mr Hill could not pay and HMRC commenced bankruptcy proceedings against him, under the Insolvency Act 1986 ss 423–425. This case referred to IRC v Hashmi (2002) EWCA Civ 981 which related to an attempt to put assets in trust for a relative to mitigate the effect of insolvency as a result of tax fraud.

Postlethwaite v HMRC (2006) UK SPC 00571 1.103 In this case a non-UK resident close company, Pintacorze Limited (PL) paid £700,000 to the trustees of a Funded Unapproved Retirement Benefit Scheme (FURBS) to provide benefits for Dr Postlethwaite (DP) and his family, as the sole beneficial shareholder and sole employee of PL. PL had contracted with an Italian company to provide DP’s services for £600,000 pa and entered into an employment contract with PL at £75,000 plus a bonus and pension arrangements to be agreed. DP died at the age of 55 and PL was wound up in February 2001. HMRC argued that the FURBS was a gratuitous benefit and taxable but Patrick Way, for the taxpayer, submitted that IHTA 1994 s 10, Dispositions not intended to confer a gratuitous benefit, applied. The appeal was allowed as the payment of £700,000 was not intended to confer a gratuitous benefit on DP or anyone else.

Jiggens and Another v Low and Others (2010) EWHC 1566 (Ch) 1.104 This is a case where a deed of appointment was set aside as void as an irrevocable and unlimited appointment of the income to the beneficiaries was tantamount to an absolute appointment of capital which for capital gains tax purposes was a deemed disposal of the whole trust fund. The settlement was a common form of accumulation and maintenance settlement for 80 years from the settlement date. The trust assets were two farms totalling 362 acres of which the local District Council had identified 27.35 acres as part of its 68

A Useful Relationship district housing provision, which would increase the value of that land from its agricultural value of £2,806 per acre to £60,000 per acre, ie  £1,641,000 in total. The trustees entered into a deed of appointment shortly before the older beneficiary’s 25th birthday in order to create an interest in possession and appointed all of the trust income to the two main beneficiaries, Matthew and Katie, not appreciating that this was tantamount to an absolute appointment of capital for CGT purposes of the whole of the trust fund. The transfer of capital from the trust fund to Katie would not qualify for holdover relief under TCGA 1992 s 165(1)(4) and (5) and Schedule 7 Paragraph 1 and IHTA 1984 ss 116–117 as she would not qualify for relief as not occupied by her for the purposes of agriculture unlike Matthew. The principle in Hastings-Bass Trustees v IRC (1975) Ch 25 as applied in Sieff v Fox (2005) EHHC 1312 (see 3.77) and re Futter (2010) EWHC 449 (Ch) (see 3.83) were referred to, as was Abacus Trust Co (Isle of Man) v Barr (2003) Ch 409 (see 3.75 and 3.85).

Prest v Petrodel Resources Limited and Others (2013) UKSC 34 1.105 This was a post-divorce case involving Michael and Yasmin Prest and the wife’s application for ancillary relief following the divorce. Michael was born in Nigeria and Yasmin in England and they married in 1993 and both had dual Nigerian and British nationality. The claim was for ancillary relief following a divorce. In paragraphs 20–35 Lord Sumption, in the Supreme Court, considered the general case law on piercing the corporate veil, and considered that it could not be justified in this case. However Matrimonial Causes Act 1973 s 24(1)(a) was considered, and the purpose and intention of this Act was that the companies’ assets should be treated as part of the marital wealth. Moylon J is quoted as saying that the purpose and intention of the Matrimonial Causes Act 1973 was that the companies’ assets should be treated as part of the marital wealth, and he said ‘effectively the husband, in respect of the companies and their assets is in the same position that he would be in if he was the beneficiary of a bare trust or the companies were his nominees’ which was going too far. However s 37 provides for a setting aside of disposals of assets in certain circumstances. The London properties were reviewed and had been transferred at various times to Petrodel Resources Limited (PRL). Lord Sumption’s conclusion was that the seven disputed properties were vested in PRL and Vermont Petroleum Limited (Vermont) and held on trust for the husband and would be transferred to the wife and the costs of the appeals to the Court of Appeal and the Supreme Court would be payable by PRL and Vermont. 69

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Buzzoni v HMRC (2013) EWCA Civ 1684 1.106 Mrs Kamki granted an underlease to Overlap Nominees Limited as nominee for Legis Trust Limited, a trust for the benefit of her two sons. HMRC argued that the underlease had not been granted to the entire exclusion or virtually the entire exclusion of the donor under FA 1986 s 102 (1)(b) and therefore Mrs Kamki had retained a benefit. It was held that even if Mrs Kamki obtained a benefit she had not previously enjoyed, as a result of the covenant in the new lease granted for 999 years from 1 April 2003, it was not obtained at the expense of the donee’s enjoyment of the underlease. It neither added to, nor subtracted from, their enjoyment in the light of the obligations into which they had already entered with the head landlord, ie the covenants in the underlease.

Interfish Ltd v RCC (2014) EWCA 876 1.107 The taxpayer’s primary business was in the fishing industry. His company paid £1.2 million to Plymouth Albion Rugby Club in three accounting periods between 2003 and 2006. These payments were claimed as advertising and marketing but the First-tier Tribunal held that these disbursements were not deductible as not wholly and exclusively for the purpose of the trade within ICTA 1988 s 74(1). The Upper Tribunal agreed as did the Court of Appeal. The dual purpose of the expenditure required it to be disallowed, following Bentleys, Stokes and Lowless v Beeson (HOMT) (1952) 33 TC 491.

Vaccine Research Limited Partnership v RCC (2014) UKUT 389 (TCC) 1.108 The appellants were a limited partnership and Mrs L P Vaughan was one of the Class B partners in that partnership. The question was whether the partnership incurred qualifying expenditure under CAA 201 s 437 in respect of Peptcell Limited (trading as SEEK) which needed funds to undertake relevant research and development of vaccines and for patent application costs. Matrix Structured Finance LLP was one of the entities responsible for helping to develop the scheme and market it to individual investors. MRD Limited, a Jersey company, was the general partner and Numology Limited, a Jersey company was the Class A Limited Partner. Class B Limited partners became partners who arranged finance for 80% of the sum to be invested with the Bank of Scotland Plc (BOS) and research and development agreements were entered into with Numology Limited to undertake research and development of vaccines. An investor for a £1 million tranche would borrow £800,000 from the Bank of Scotland and the balance of £270,000 from other resources pending the anticipated tax relief of 419,600. 70

A Useful Relationship The total sum paid into the partnership was £193,102,126 consisting of £107,278,959 from the Class B  Limited Partners and £85,823,167 from the Class A Limited Partner Numology Limited (a special purpose vehicle with a share capital of £2 held by a charitable trust. In addition there were fees from the Class B  Limited Partners of £7, 082,552. The Class B  Limited Partners borrowed £85,823,167 equal to the sum contributed by the Class A Limited Partner. The development work which Numology was to perform was subcontracted to Peptcell Limited for only £14 million which involved computer modelling instead of the traditional methodical approach to vaccine development and qualifying expenditure under CAA 2001 ss 437–451. Therefore the costs of the methodical approach were irrelevant. The reality was that the Class B Limited Partners contributed £114 million of capital, £86 million from the partners by way of loans arranged with the Bank of Scotland and £28 million from other sources. This was used to pay the full capital and interest on the partners loans which were held not to be a trading activity as not spent on research and development which was limited to the £14 million paid to Peptcell Limited, which was a trading transaction.

Murray Group Holdings Limited and Others v RCC (2014) UKUT 292 (TCC), (2015) CSIH 77 1.109 The appellants were members of a group of companies which established employee remuneration trusts for the benefit of the group’s employees. An employer company in the group would make a contribution to a principal trust which would set up sub-trusts for specific employees and would transfer funds to the sub-trusts by way of extended and discounted loans. The employees would normally become protectors of the sub-trusts. This case eventually ended up in the Supreme Court as RFC  2012 Plc (in liquidation) (formerly the Rangers Football Club Plc v Advocate General for Scotland (2017)  UKSC  45. The court decided that Sempra Metals Limited v RCC  (2008)  STC (SCD) 1062 was wrongly decided and that Dextra Accessories Limited v Macdonald (2003) 77 TC 146 applied and the House of Lords correctly held that the loans were taxable as income and applied in this case.

Loring and Another v Woodland Trust and Others (2014) EWCA 1314 1.110 In this case S  had made a will which left her unused nil rate band for inheritance tax to family beneficiaries and the balance to a named charity. 71

A Useful Relationship FA 1984 s 8A was inserted by FA 2008. This allowed the deceased person’s nil rate band to pass to a surviving spouse or civil partner. On the death of S her unused nil rate band was £325,000 and her late husband’s unused band was also £325,000 under s 8A, a total of £650,000. The charity argued that the High Court was wrong in allowing the nil rate band to be increased to £650,000 under s 8A for the purpose of distribution of the estate but the Court of Appeal held that the post-death election by her executors increased the nil rate band to £650,000 and dismissed the charity’s appeal.

Martin v Revenue and Customs Commissioners (2014) UKUT 429 (TCC) 1.111 This case held that an employee who received a bonus for commitment to work for a specified period but left the employment early and repaid a proportion of the bonus, had incurred negative earnings which were tax deductible as made for the purposes of the employment.

Bagum v Hafiz and Another (2015) EWCA Civ 801 1.112 In this case it was held that a four-bedroomed house in Islington, was owned by a mother, Mrs Bagum, and her two sons, Mr Hafiz and Mr Hai in equal shares. An order for the purchase by Mr Hafiz of Mr Hai’s one-third share was outwith the jurisdiction of the judge but she could make an order for directing the trustees to sell the property on terms that Mr Hafiz would have the first opportunity to buy the property at a price determined by the valuation evidence by the court and, if Mr Hafiz failed to exercise the option to buy within six weeks the property should be sold on the open market. Mr Hai appealed this decision but the judge’s order was within her jurisdiction under the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA). The judge did not have power to direct one beneficiary to transfer his interest to another. In Bagum v Hafiz and Another (2016) Ch 421 it was held that s 14(2) (a) of TOLATA allowed the court to order a sale of the property on the open market to ensure that a beneficiary obtains proper value for his beneficial interest.

Malcolm Scott v HMRC (2015) UKFTT266 (TC) 1.113 This case illustrates the difficulties which can arise where tangible assets of value, in this case pictures, are transferred within a family. The decision summarises the facts: ‘This appeal relates to the Inheritance Tax Notice of Determination dated 22 May 2013 (D98-105) in respect of the estate of the late Dr Olive Scott 72

A Useful Relationship (“Olive”) who died on 4  March 2007. The appellant, Malcolm Scott (“Malcolm”), is her surviving son and co-executor. The other executor is the deceased’s late son Alistair Scott (“Alistair”), who died on 7 November 2009. They each submitted different IHT 400 accounts in respect of Olive’s estate. Principally there are two differences in the accounts viz whether there was an effective gift of three paintings (the Atkinson Grimshaw paintings) in 1985 by Olive and her late husband, Professor James Scott (“James”) who died in September 2006, to Malcolm and Alistair, and whether there was an effective gift of six other paintings by Dr Janet Steel (“Janet”), the appellant’s great aunt, who died on 15  December 1992, in favour of Malcolm and Alistair in early 1986 or 1991.’ Cases referred to were: In Re Cole (1963) 3 All ER 433; Thomas v The Times Book Co (1996) I All ER  241; In Re Garnett (1885) 31 ChD 1; Hubbard v Dunlop’s Trustee (1933) SN 62 (HL). The main decisions were set out in paragraph 42: The circumstances of a possible gift in 1986 are unclear to us. We note carefully paragraphs 11–13 of Malcolm’s second witness statement. We accept his account of a declared intention by his great-aunt to gift her paintings to himself and Alistair, but they did remain in her house until she moved into a care-home in 1991. While Malcolm believed that there had been ‘parallel’ thoughts and actings with his parents’ gift in 1985, there is no evidence of acts which might amount to delivery until 1991 when the contents of Dr Steel’s flat were removed. Delivery and a change of possession and control about that time bears to be confirmed by Malcolm’s account and objectively by his father’s instructions recorded in the Valuation by the Calton Gallery (E24–27). Therefore we find in fact and in law that in 1991 when Dr Steel had to enter care and leave her own flat, her paintings were delivered by her to James on behalf of Malcolm and Alistair as a joint gift to them both.

Seddon and Others (Trustees of M Seddon Second Discretionary Settlement) v Revenue and Customs Commissioners (2015) UKFTT 0140 (TC) 1.114 In this case the trustees of a settlement received a group dividend of preference shares in January 2000 which was distributed in March 2009, before the tenth anniversary of the trust, for £1.26 million. It was held, contrary to the trustees’ opinion, that the group dividend was capital and liable to an inheritance tax exit charge of £55,000 at a tax rate of 4.817% under IHTA 1984 s 68(5)(c). 73

A Useful Relationship There were conflicting opinions from the High Court in Pierce v Wood (2009) EWHC 3225 and the Upper Tribunal, J P Gilchrist (or trustee of the J P Gilchrist 1993 Settlement v RCC (2014) STC 1713, which was not bound by the earlier High Court decision. The First-tier Tribunal was bound by the later Upper Tribunal decision.

R (on the application of Ingenious Media Holdings Plc and Another) v Revenue and Customs Commissioners (2015) EWCA 173 1.115 In 2012 two journalists from The Times newspaper contacted HMRC and asked for a briefing on tax avoidance schemes. An off-the-record meeting took place but the subsequent article in the newspaper referred to Ingenious and its founder and chief executive. They claimed that the briefing was unlawful and claimed damages. Their appeal to the Court of Appeal was dismissed as a factually correct disclosure not involving the private affairs of a taxpayer which had the effect of raising the total tax revenue or reducing the effect of tax avoidance which HMRC genuinely considered ineffective was a disclosure which HMRC was free to make.

Price and Others v Revenue and Customs Commissioners (2015) UKUT 164 (TCC) 1.116 A  tax avoidance scheme which claimed to give rise to substantial capital losses was challenged by HMRC when a taxpayer participant in the scheme claimed to have acquired shares for £6,001,200 which were sold a few days later for £552. Not surprisingly HMRC challenged the claimed loss of more than £6 million. The £6 million was not paid for the shares but for the extinction of a debt which formed part of the scheme in which large amounts of money, in excess of £40 million, went around in circles. W T Ramsay Limited v IRC and Eilbeck v Rawling (1981) STC 174 were considered.

Samarkand Film Partnership No 3 and Others v Revenue and Customs Commissioners (2015) UKUT 211 1.117 The acquisition by taxpayers of interests in films and their sale and leaseback for fixed and guaranteed neutral payment over 15 years were not trades carried on on a commercial basis under ITTOIA 2005 ss 130, 138 and 140 or under ICTA 1988 ss 381 and 384 and the Partnerships (Restrictions on Contributions to a Trade) Regulations SI 2005/2017, confirming the decision of the First-tier Tribunal at FTT (2012) SFTD 1. A trade that involved transactions which were intended to produce a loss in net present nature teams with no compensating collateral benefits was not conducted on a commercial basis. 74

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Huitson v Revenue and Customs Commissioners (2015) UKFTT 448 (TC) 1.118 The taxpayer, Mr Huitson, was a UK-resident electrical engineering consultant who entered into a tax avoidance scheme marketed by tax consultants in the Isle of Man, through a trust in the island settled by the taxpayer in which he was an income beneficiary. The trust became a partner in an Isle of Man partnership which contracted with Mr Huitson to provide his services for an annual fee of £15,000. He was also a beneficiary of the trust which was not taxable under the UK/IOM double taxation treaty until ITTOIA  2005 s  858 was amended with retrospective effect. Mr Huitson’s argument that he was not entitled to a share of the income of the partnership but to a share of the profits. HMRC successfully argued that ‘income’ and ‘profits’ were, in this context interchangeable.

Acornwood LLP and Others v Revenue and Customs Commissioners (2016) UKUT 361 (TCC) 1.119 The ‘Icebreaker’ limited liability partnerships were an attempt to increase the trading losses claimed by the partnerships. The participants paid 20% and borrowed 80% from a bank, on full recourse terms. The LLPs took 100 and paid 5 to a management company as fees and paid 95 to the principal exploitation company such as Shamrock or Centipede of which 90 was paid to a production company producing the end product such as music, CD, book etc. The production company agreed to acquire a share of the exploitation revenues for say 80 which was put on deposit as collateral for the issue of a letter of credit the interest on which matched the payments by the LLP to the lending bank. The First-tier Tribunal disallowed the 80 as not wholly and exclusively incurred for the purposes of the LLP’s trade and was of a capital not income nature. The balance of 15 (95–80) was wholly or partly allowed as an expense to be apportioned over the expected life of the scheme. Icebreaker 1  LLP  v RCC  (2011)  STC  1078 was considered. The 80 of the 95 was ostensibly paid for the services of Shamrock etc to secure a guaranteed income stream. Shamrock only needed 10 of the balance of 15 to secure the production. The secured 80 was included to increase the apparent size of the investment in the production. The decision of the First-tier Tribunal at (2014)  SFTD  694 was affirmed.

Hargreaves v Revenue and Customs Commissioners (2016) EWCA Civ 174 1.120 In this case the Court of Appeal held that HMRC had issued a Discovery Assessment against the taxpayer for 2000/1 and an in time assessment for 2001/2. 75

A Useful Relationship The taxpayer argued that HMRC had to establish at a separate preliminary assessment that the discovery assessment was validly made under TMA 1970 s 29. However it was held that there was no right to a separate hearing to determine whether the conduct condition in TMA 1970 s 29(4) or the officer condition in TMA 1970 s 29(5) was satisfied. It is a case management decision for the Firsttier Tribunal and is not governed by any right on behalf of the taxpayer.

R W L Horton v M G Henry (2016) EWCA 989 1.121 In the Court of Appeal case of R  W  L  Horton, the appellant, as trustee in bankruptcy of M G Henry, respondent, who was judged bankrupt on 18 December 2012 and was 61 years old at the time of the case in April 2016, as at October 2014 the respondent became entitled to draw benefits from a Self-Invested Pension Plan (SIPP) including a lump sum of 25% of the amount crystallised as a tax free lump sum. The value of the SIPP was £848,022.76 as at October 2014 and the 25% tax free lump sum was about £212,005 plus recurring drawdown on annuity payments. Mr Henry became bankrupt on his own petition on 18 December 2012. The official receiver’s schedule of creditors at 22  March 2013 was in excess of £6.5 million, which was disputed by Mr Henry who acknowledged indebtedness of £387,075. Section 159(5) of the Pension Scheme Act 1993 provided that the rights of a bankrupt to a guaranteed minimum pension under an occupational scheme did not vest in his trustee in bankruptcy and were unassignable under Pensions Act 1995 s 91. The Welfare Reform and Pensions Act 1999 (WRPA) applied similar provisions which are now excluded from the estate of the bankrupt. In this case it meant that none of Mr Henry’s rights in relation to his SIPP and the Phoenix Life policies vested in the appellant trustee in bankruptcy, ie Mr Horton. ‘Prior to bankruptcy, pensions are not protected, after bankruptcy they are’.

R on the Application of Walapu v RCC (2016) EWHC 658 (Admin) 1.122 In this case HMRC opened an enquiry into a taxpayer’s selfassessment return, in which a loss of £370,688 was reported and HMRC automatically repaid £106,016. HMRC subsequently issued an accelerated payment notice (APN) without making an assessment, to reclaim £106,842 under FA 2014 s 219. The scheme used had been notified under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. There is no statutory appeal which applies to the issuance of an APN, but can be challenged under the judicial review procedure. However in this case the ground of challenge was rejected and the application for judicial review failed. 76

A Useful Relationship

R (on the application of Sword Services Ltd and Others) v Revenue and Customs Commissioners (2016) EWHC 1473 (admin) 1.123 HMRC issued partner payment notices (PPNs) under FA  2014 Schedule 32 to pay to HMRC within 90 days the sum specified in the notices. It was held that ‘partnership’ included both general and limited liability partnerships. It was confirmed that there was no partnership form prescribed for a notice of enquiry and, so long as a taxpayer knew of HMRC’s decision to conduct an enquiry, that was sufficient.

R (on the application of City Shoes Wholesale Ltd and Others) v RCC (2016) EWHC 107 (admin) 1.124 This case involved employee benefit trust (EBT) schemes and following a conversation between their accountants, BDO and HMRC, applied between 30  August and 23  December 2013 to be registered under the Liechtenstein Disclosure Facility (LDF) in respect of their EBTs. HMRC advised that the full favourable treatment under the LDF would not be available as their EBTs were under enquiry by HMRC. This was challenged as an abuse of power by HMRC but failed as there was no guarantee or promise by HMRC. The full LDF benefits were only available to persons already registered under the LDF.

Revenue and Customs Commissioners v J P Whitter (Waterwell Engineers) Ltd (2016) EWCA Civ 1160 1.125 This case involved a relatively small company carrying on business as water well engineers and was registered for gross payments under FA 2004 s  66(1) which governed the Construction Industry Scheme. The company’s registration was kept under review by HMRC. It failed its reviews in 2009 and 2010 for late payment of PAYE, but retained its gross payments. In 2011 it again failed a review on account of late payments, of which five were of between 4 and 14 days, one of 40 days and one of at least 118 days. This time the appeal for mercy was ignored and HMRC refused the company’s appeal and this was upheld in the Court of Appeal.

Dyer and Another v RCC (2016) UKUT 381 (TCC) 1.126 This was a negligible value claim by the taxpayers which was refused on the basis that the shares acquired already had a negligible value 77

A Useful Relationship on acquisition, but unlike the film schemes this was a real business under which the company was owned by JD, the daughter of the taxpayer, who was the sole director of the company, which began trading in April 2005 under the name Jeremy Dyer London, and by the material date of 31 October 2007  JD had significant reputation in the fashion industry and a valuable trademark. The business was supported by the taxpayers and family trusts, amounting to some £800,000 at 31  October 2007. The loans were partially capitalised and issued to the taxpayers. In June 2008  JD moved to the USA and the company ceased trading in early 2009, and was subsequently struck off. The parents claimed capital losses but lost on the ground that the shares were worthless on acquisition and the negligible value claim under TCGA 1992 s 24 failed.

Routier and Another v Revenue and Customs Commissioners (2016) EWCA Civ 938 1.127 In this case it was confirmed that under the first limb of IHTA 1984 s  23 a charity had to be established under the law of some part of the UK, which it was not. Whether it was held on trust for charitable purposes only under the second limb of s 23 has yet to be considered.

Cyclops Electronics Limited and Another v Revenue and Customs Commissioners (2016) UKFTT 487 (TC) 1.128 Two taxpayer companies, Cyclops and Graceland provided bonuses to certain employees as loan notes which contained forfeiture provisions which applied in the unlikely event that the note holder died within one year of issue. The forfeiture clause was claimed to avoid PAYE and National Insurance charges as restricted securities under ITEPA 2003 s 423 and any tax charge on the employee’s receipt of the loan notes under s 425. However the court held that commercially irrelevant conditions could be ignored and the scheme failed, following UBA AG  v RCC and Deutsche Bank Group Services (UK) Limited v RCC (2016) STC 934.

Tottenham Hotspur Limited v Revenue and Customs Commissioners (2016) UKFTT 389 (TC) 1.129 In this case the football club persuaded two players on fixedterm contracts to leave the club and join Stoke football club in return for a termination payment. The payment was in return for the players’ agreement to the surrender of the players’ rights under the contract, which was by mutual agreement, rather than compensation for breach of contract. 78

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R (on the application of Ingenious Media Holdings Plc and Another) v RCC (2016) UKSC 54 1.130 The Supreme Court overturned the decision of the Court of Appeal (2015) STC 1357 in connection with HMRC’s lapse in its duty of confidentiality under Commissioners for Revenue and Customs Act 2005 s 18(1) by talking to journalists in confidence (which was broken) about the tax affairs of Ingenious Media Holdings Plc and Patrick McKenna. The Court held that HMRC’s breach of duty of confidentiality could not be justified by its stated goal of fostering good relationships with the financial press.

Six Continents Ltd and Another v Inland Revenue Commissioners and Another (2016) EWHC 2426 (ch) 1.131 Six Continents Ltd (6C) was incorporated in England and Wales in 1991 and received dividends from its wholly owned subsidiary incorporated and resident in the Netherlands. 6C had a wholly owned subsidiary (SCIH) in the Netherlands and was charged to UK corporation tax on the dividends received. However this was unlawful following test claimants in the FII Group Litigation v RCC (2013) STC 612 and 6C was entitled to a credit at the Dutch Standard rate of corporation tax on revaluation adjustments and dividends, which had arisen from the liquidation of a subsidiary of SCIH, and the refundable unlawful tax exceeded £7 million.

Samarkand Film Partnership No 3 and Others v Revenue and Customs Commissioners (2017) EWCA CW 77 1.132 The taxpayers were film scheme partnerships which acquired an interest in three films, as part of a single transaction that encompassed this acquisition and associated leaseback in return for fixed, increasing and guaranteed rental payments for a 15-year period. Agents which promoted the schemes, for a fee, acquired a film and sold it to the partnership and leased it back. Potential partners only had to pay 10% and borrowed 90% from an associated lender etc. The First-tier Tribunal found that the partnerships were not trading and the Court of Appeal held that the FTT’s decision could only be challenged on a point of law, which could not be faulted, following Eclipse Film Partner No  35  LLP  v RCC  (2015)  STC  1429 and Barclays Mercantile Business Finance Ltd v Maurson (Inspection of Taxes) (2005) STC1.

JSC Mezhdunarodniy Promyshlenniy Bank and Another v Sergei Pugachev and Others (2017) EWHC 2426 (Ch) 1.133 In this case it was held that Mr Pugachev was the settlor of five New Zealand trusts and all the assets were his beneficially, before they were 79

A Useful Relationship transferred into his son’s name acting as his father’s nominee. The true effect of the trust deed in this case, is to leave Mr Pugachev in control of the trust assets, they amount to a bare trust for Mr Pugachev, who is the beneficial owner. The amount claimed by the Mezhprom Bank, in liquidation, and the Deposit Insurance Agency as its liquidator is in excess of US$1 billion, from Mr Pugachev.

Seven Individuals v HMRC (2017) UKUT 132 (TCC) 1.134 This was another loss creation scheme involving the Icebreaker Limited Liability Partnerships where the members contributed some money and borrowed larger amounts to provide funds for a range of creative projects, which made significant losses in the first year to set against taxable income of the participants. However HMRC disallowed the main losses. The Upper Tribunal dismissed the appeals (2016) STC 2317. The seven individuals were each members of different LLPs and covered the years 2006/07 to 2009/10 and relief was claimed under ICTA 1988 ss 380 or 381 and ITA 2007 ss 66 or 74. The taxpayers lost on the basis that the schemes were not carried out on a commercial basis. Wannell v Rothwell (Inspector of Taxes) (1996)  STC  450  RCC, Samarkand Film Partnership (No 3) v RCC (2017) STC 926 Acornwood LLP and Others v RCC (2014) SFTD 694 were affirmed.

Trustees of the P Panayi Accumulation & Maintenance Settlements Case C-646/15 (2017) WLR (D) 600 1.135 In the Court of Justice of the European Communities, Four trusts (the Panayi trusts) were created in 1992 by Mr Panico Panayi, a Cypriot national, for the benefit of his children and other family members, to which he transferred 40% of Combos Enterprises Limited. Mr Panayi, who is the Protector, and his wife are not beneficiaries but were trustees together with KSL  Trustees Limited, a UK company which remained a trustee until 14 December 2005. Mr and Mrs Panayi left the UK to return to Cyprus. On 19 December 2005 the Panayi trustees sold the shares and reinvested the sale proceeds. HMRC opened enquiries and charged tax under TCGA  1992 s  80 on the deemed disposal, on 19  August 2004, on the emigration of the company from the UK. The taxpayers claimed exemption under the fundamental freedom of movement under EU law. The First-tier Tribunal decided to stay proceedings and refer to the case to the Court of Justice of the European Communities for determination. The Court held that the FEU Treaty relating to freedom of establishment precludes the taxation of unrealised gains in the value of assets held in trust, when the majority of the trustees transfer their residence to another Member State, but fails to permit payment of the tax payable to be deferred. 80

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Brain Disorders Research Limited Partnership (BDR) and Another v RCC (2017) UKUT 176 (TCC) 1.136 This scheme was similar to the Vaccine Research Limited Partnership v RCC  (2014)  UKUT  389 (TCC), (2015)  STC  179. In BDR  v RCC the partnership would in outline pay 100 to a Jersey company owned by a charitable trust (N Limited) which was said to be the amount which third-party providers would have charged for the research. However N Limited subcontracted the work to an Australian company BRC Operations Pty Limited (BRC) at a cost of 6 to undertake the actual research on behalf of the partnership and BRC licensed its existing intellectual property, patents and know-how for £1 and then licensed back to N Limited in return for royalties and sublicensed by N to BRC for 10% of the net royalties derived from the enhanced IP. BRC would retain 90% of the net revenues and 10% would flow through to N and on to the partnership. N Limited therefore had received 100 from the partnership and paid 6 for the BRC research and had 94 to pay in fees to secure the obligation to pay for the scientific research. BRC had paid 100 and the partners in BRC would claim capital allowances on 100. In real terms the figure paid to the partnership was £122,147,617. The partners borrowed £53,359,488 from Schroders and a similar sum from the Bank of Scotland. £7,760,427 was paid to BRC from the research. The scheme was held to be a sham but that did not necessarily imply dishonesty. The pretence was that 96 or 99 out of 100 might have been spent on research, not that it, in fact, was so spent. It was a tax avoidance or deferral scheme and not evasion. The First-tier Tribunal’s order for costs was disputed but remade by the Upper Tribunal. The taxpayer’s appeal was dismissed.

In RFC 2012 Plc (in liquidation) formerly the Rangers Football Club Plc (RFC) v Advocate General for Scotland (2017) UKSC 45 1.137 The House of Lords considered a tax avoidance scheme by which employers paid remuneration to their employees through an employee’s remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 National Insurance Contributions (‘NICs’). The scheme ran from 2001/02 and 2002/03 under ITCA 1988 s 19 and from 2003/04 to 2008/09 under ITEPA 2003 ss 6, 7 and 62. Reference was made to a purposive construction of tax law in Barclays Mercantile Business Finance Ltd v Mawson (2005) IAC 684 and W T Ramsay Ltd v IRC (1982) AC 300. In UBS AG v Revenue and Customs Commissioners (2016) IWLR 1005 Lord Reed explained, by reference to Ramsay, that: 81

A Useful Relationship ‘First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute.’ The Principal Trust, also known as the Remuneration Trust, received cash payments from employing companies in the Murray Group and created such trusts in accordance with the wishes of the employees who took part in the scheme. The sub-trusts in the name of the relevant employees borrowed from the Principal Trust with the intention that these loans would be repaid out of the beneficiary’s estate on death. However the House of Lords held that the sums paid to the Principal Trust were emoluments and taxable on the beneficiaries as such, under ITEPA 2003 ss 18 and 686, applying a purposive approach.

Lee and Another v Revenue and Customs Commissioners (2017) UKFTT 279 (TC) 1.138 This case related to the ‘round the world’ tax mitigation scheme under which assets pregnant with gains are migrated to a low-tax jurisdiction, in this case a no-tax jurisdiction ie Mauritius, which has a Double Tax Convention (DTC) with the UK but does not itself charge capital gains tax. However it was held that the DTC did not prevent the UK from taxing the UK resident trustees as they were not taxing a resident of Mauritius, who would have been treaty protected, see 1.139 below.

The Trevor Smallwood Trust: Smallwood v Revenue and Customs Commissioners (2010) EWCA Civ 778 (2010) STC 2045. 1.139 Under TCGA  1992 s  69 the trustees of a settlement are treated as a single continuing body of persons. The place of residence of the trustees was initially in Guernsey, but moved to Mauritius as STC (the Spread Trustee Company Limited, a Guernsey Company) which then resigned in favour of DTOS Limited, the Mauritian equivalent of a trust corporation and a novation agreement transferred STC’s rights and obligations under the option agreement with Vodafone to DTOS. The option agreement was amended under a variation agreement. Eight days later, on 20 March 2003, DTOS retired as trustee of the settlements and was replaced by two UK companies, Island Trustees Limited and Walbrook Trustees Limited, to which the rights and liabilities were transferred on 24 March 2003. It was claimed that the taxing rights were in Mauritius under TA 1988 s 788. However the Double Taxation Relief (Taxes 82

A Useful Relationship on Income) (Mauritius) Order 1981, SI  1981/1121 did not prevent the UK from taxing the gain as it was not taxing a resident of Mauritius; it was taxing the UK trustees and there was nothing in the DTC that prevented the UK from taxing UK residents.

R, On the application of Locke v Revenue and Customs Commissioners (2018) EWHC 1967 1.140 The claimant in R, claimed relief on interest paid on loans, used to provide money to Eclipse 10, a partnership involved in the acquisition and exploitation of film rights, under ICTA  1988 ss  353 and 362(i). In view of HMRC’s success in Eclipse Film Partner No 35 LLP v RCC (2015) STC 1429 the issue of a follower notice under Finance Act 2014 Part 4 and an accelerated payment notice requiring the disputed tax to be paid immediately, was upheld.

Revenue and Customs Commissioners v Parry and Others (as personal representatives of Stoveley, deceased) and Others (2017) UKUT 4 (TCC) 1.141 The deceased had transferred funds out of one pension scheme into another to prevent the possibility of her ex-husband or his new family from benefiting from the fund and that her sons would benefit from her estate as she had terminal cancer. She applied for the funds in the company (Morayford) registered pension scheme to be transferred into a personal pension plan in November 2006 and she died in December 2006. The funds in the pension plan were distributed to her sons in equal shares. HMRC made inheritance tax determinations on the sons as beneficiaries of the pension scheme death benefit on the basis that her omission to take lifetime pension benefits, as determined by the First-tier Tribunal. The Upper Tribunal in this case held that the proximate cause of the increase in the sons’ estates had been the decision of the scheme administrator not the death of the deceased and her failure to take lifetime benefits, therefore IHTA 1984 s 3(1) or 3(3) did not apply and the taxpayer’s appeal was allowed.

Netley v Revenue and Customs Commissioners (2017) UKFTT 422 (TC) 1.142 HMRC challenged the taxpayer’s claimed deduction for the value of shares for gift relief where a company had been formed in 2003 as a cash shell to attract companies seeking admission to trading on the Alternative Investment Market (AIM). The subscriber’s shares would be subject to a lockin for two years except for a disposal to a registered charity which agreed 83

A Useful Relationship to submit to the lock in. The company agreed to purchase two companies (FTL and IFTSSL) and issued a prospectus under which it placed a number of shares on the Alternative Investment Market (AIM) at 48p per share as Frenkel Topping Group Plc. The shares held by Mr Netley were immediately gifted to a charity and he claimed gift aid relief at 48p per share. HMRC issued a closure notice valuing the shares at 8p each as the open market value for tax purposes on the gift to charity under ITCA 1988 s 587B irrespective of whether the shares were quoted on a recognised stock exchange under TCGA 1942 s 272(3) as claimed by the taxpayer. The idea was to claim gift relief as a result of the premium arising on admission to AIM. AIM came into existence in June 1995 and originally referred to shares being listed and TCGA  1992 s  272(3) did not apply in calculating the market value as they were not included in the official UK list and were valued at 17.5p per share on the basis that a reasonably prudent purchaser, with the information available, might reasonably have been expected to pay 17.5p per share in the open market and therefore the appeal was allowed to that extent.

Saunders v Revenue and Customs Commissioners (2017) UKFTT765 (TC) 1.143 The Saudi Arabian resident taxpayer had a property in the UK from which she received rental income. On 15  November 2015 she made a loss of £6,395 on its sale. It was a non-resident capital gains tax disposal and she should have filed a non-resident capital gains tax disposal within 30 days of the disposal. She filed the return on 15 August 2016 and in spite of the loss HMRC claimed late filing penalties of £100 for late filing plus £900 at £10 a day and £300 for being six months late in filing. HMRC waived the £900 penalty. The taxpayer claimed reasonable excuse as she was unaware of the change in tax law. HMRC claimed it was her responsibility to stay up to date with UK tax law. As she had made a loss she was and had no obligation to file a non-resident CGT return and the appeal was allowed, applying McGreeny v RCC (2017) UKFTT 690 (TC).

Dawson-Domer and Others v Taylor Wessing LLP (TW) and the Information Commissioner as intervener (2017) EWCA Civ 74 1.144 This case involved a subject access request under the Data Protection Act 1998 (DPA) in which the appellants sought details of a number of Bahamian Trusts and relevant documents. The issues for determination were: (1) the extent of the legal professional privilege exemption; (2) Disproportionate effort, whether this would apply, as 84

A Useful Relationship the judge so held; (3) section 7; (4) discretion, whether nor not the judge would be entitled to refuse this in favour of the appellants because their real motive was to use the information against the trustees. The judge at first instance held against the appellants or these issues, subject to the Information Commissioner’s (IC) intervention. The Court of Appeal held that legal professional privilege is limited to documents so protected under English law so long as the request did not involve disproportionate effort, but it was wrong to decline to enforce the request because the appellants intended to use the information obtained in the Bahamian proceedings. The appeal was allowed and the matter remitted to the Chancery Division. The EU Data Protection Directive 95/46/CC was referred to, as were the relevant provisions of the Bahamian Trustee Act 1988.

HMRC v Personal Representatives of Staveley deceased (2017) UKUT 4 (TCC) 1.145 This was an Upper Tribunal decision overturning notices of determination to inheritance tax made by HMRC in respect of two alleged lifetime transfers made by Mrs Staveley, who died on 18  December 2006. The transfers were from one registered pension scheme, referred to as the s  32 policy, to another, the AXA PPP, and Mrs Staveley’s omission during her lifetime to take any benefits from AXA PPP (personal pension plan). The s 32 policy was a company scheme and the transfer was made following an acrimonious divorce. Mrs Staveley made her will in 2005 leaving her estate equally between her two sons, Mr Piney and Mr Staveley. C  Home & Co advised Mrs Staveley to transfer her s 32 policy to a personal plan, which she did. This was a disposition under IHTA 1984 s 32, which was a disposition for IHTA 1984 ss 2 and 5 which would have been a taxable disposition unless IHTA  1984 s  10 applied, as a disposition not intended to confer gratuitous benefit. The First-tier Tribunal had held that it was so intended, but as a transfer of PPP, the s 32 scheme, to another, the AXA PPP to prevent the former husband from benefiting from the policy, her motivation was to confer any benefit from the policy to her two sons and cut out the former husband, not to avoid tax.

Argyll & Bute Council v Josephine Gordon (2017) Scot SAC (Civ) 6 1.146 In this case the local authority took legal action to recover £42,750 in respect of care accommodation for a third party, under the Health and Social Security Adjudication Act, as having received a gratuitous alienation of an asset by a third party in order to avoid charges for accommodation provided by the Council. The defence was that the disposition in question was not made knowingly with the intention of avoiding accommodation charges of 85

A Useful Relationship £167,000 which were paid up to 10  January 2010. The amount claimed was for accommodation and care provided from 11 January 2010 to the death of the third party or 4 January 2013. The deceased went into the care home on 3 June 2005 and on 17 October 2005 her cottage, worth £95,000, was given to the deceased’s late husband and the respondent equally. The Court held that the deceased had not transferred assets knowingly and with the intention of avoiding charges and the local authority’s appeal was dismissed with costs.

Brain Disorder Research Ltd Partnership v Revenue and Customs Commissioners (2018) EWCA Civ 2348 1.147 This Court of Appeal case involved a scheme designed to allow substantial capital allowances for expenditure on medical research (which was subcontracted at a cost of £7.67 million) and obtaining tax relief for prepayments of interest of £68.6 million. The total capital of the partnership was £122 million largely made up of book borrowing and paid to a captive special purpose vehicle Neurology Ltd. £120 million was claimed as capital allowances. The partnership’s contributed capital of £122 million consisted of £106.7 million provided by bank loans and the balance by the partners. Whether or not the scheme was a sham was not decided, as it was irrelevant, as the expenditure was not qualifying expenditure because there was no trading.

Davies v RCC (2018) UKUT 130 (TCC) 1.148 The option holder was employed by Goldman Sachs and was granted unapproved employee share options which the taxpayer exercised in three tranches in 2005 and 2006 and he received shares which were immediately sold on the market. The taxpayer’s argument that TCGA 1992 s 144ZA did not apply, was incorrect, and the fact that the guarantor had discretion in the manner of the exercise, was irrelevant.

Trigg v RCC (2018) EWCA Civ 17 1.149 The taxpayer was a partner in a limited liability investment partnership that had purchased sterling-nominated bonds on the secondary market and sold them at a profit. The taxpayer argued that the bonds were qualifying corporate bonds (QCBs) and therefore tax free under TCGA 1999 s 117(1)(b). The bonds contained specific provisions that if the UK adopted the euro, the bonds would be converted to that currency. However TCGA  1992 s  117 was intended to encourage investment in British sterling-based securities such as gilts and loan stock. Sterling was held to mean sterling or whatever currency replaced it as the lawful currency of the UK. The effect of s 117(2)(b) was held by the Court of Appeal to treat redemption of a sterling bond in a different currency 86

A Useful Relationship as equivalent to redemption in sterling and the rate of exchange was the one prevailing at redemption.

Perrin v Revenue and Customs Commissioners (2018) UKUT 156 (TCC) 1.150 The taxpayer attempted to file her self-assessment relief for 2010/11 but failed to complete the final step in the submission process. She had similarly failed in the final submission for 2009/10 but the penalty was cancelled on appeal. For 2010/11  HMRC issued a £100 penalty on 15  February 2012 and warned her about the daily penalties. It took until 20  September before HMRC had a telephone conversation with the taxpayer following which she successfully submitted her return the next day. However the £100 fixed penalty and daily penalties totalling £900, which were raised by HMRC, were upheld on appeal.

McCormack and Others v Revenue and Customs Commissioners (2018) UKFTT 200 (TC) 1.151 In this case the appellants were persuaded to transfer funds from the registered pensions scheme (RPS) under FA 2004 s 153 to Salmon Enterprise Pension Scheme, also an RPS. SEPS made unauthorised member payments to the appellants and HMRC issued discovery assessments under TMA 1970 s 29 and raised unauthorised payments charges or surcharges under FA  2004 s  208 or s  209, following Charlton v RCC (2013) STC 866 and RCC v Hok Ltd (2013) STC 225. These charges were to recoup the tax relief on pension contributions and not a penalty and therefore the surcharge was not unreasonable and were upheld and the appeal dismissed.

GDF Suez Teesside Ltd (formerly Teesside Power Ltd) (TPL) v Revenue and Customs Commissioners (2018) EWCA 2075 1.152 TPL had contingent and unrealised, but valuable, claims against certain insolvent companies, the open market value of the claims was £200 million but in accordance with UK generally accepted accounting principles (GAAP) the claims had a carrying value of nil. TPL transferred the claims to a newly incorporated Jersey company (TRAIL) in exchange for fully paid ordinary shares, representing the value of the claims at £200 million. Trail subsequently received £243 million on the sale of those shares. The Court of Appeal held that TPL made a profit or gain on the disposals even if was not a profit or gain that GAAP required to be recognised, so TPL’s appeal was dismissed. 87

A Useful Relationship

Mackay v Revenue and Customs Commissioners (2018) UKUT 378 (TCC) 1.153 In this case the taxpayer, an Australian national, was not domiciled in the UK from 2005/06 to 2007/08 but was UK resident from January 2005 and was based in London until September 2007. He was granted share options in April 2006 and these were cancelled and in February 2007 he received a large payment as a result. 57% of this payment was remitted to the UK and subject to tax. The balance was also taxed on the basis of his period living in the UK although he left after two years and ten months during which he spent 118 nights outside the UK on business. His employment duties in the UK gave rise to a settled purpose of residing in the UK and he was held to be UK resident and taxable on the whole of the sale of the options, following Shoh v Barnett London BC (1983) IAU ER 226. His argument that the shares were in connection with his employment with a US entity which purchased a controlling interest in Instinct was not accepted by HMRC.

Beagles v Revenue and Customs Commissioners (2018) UKUT 380 1.154 This was a case involving a discovery assessment. A tax avoidance scheme was entered into in 2001/02 and on 1  August 2005 an officer of HMRC wrote to the accountants who had devised the scheme that it did not work as intended. The Upper Tribunal had held that a discovery was capable of becoming stale in Pattillo v Revenue & Customs Commissioners (2016) STC 2043. However HMRC did not raise a discovery assessment until January 2008 by which time it had become stale and could not be enforced.

Lewis v Tamplin (2018) EWHC777 (Ch) 1.155 In this case the claimants sought disclosure of documents and other information from the defendants, the trustees of the Tamplin Trust. It appears that the trustees were incorrectly advised that, under the trust for the children of two of the original beneficiaries the assets could not pass on intestate succession, but only by will or deed of appointment. The disputes which had arisen in this case were not simply academic as the trust’s asset was potentially developable land which could have a value in excess of £10 million.

Revenue and Customs Commissioners v Tagen and Another (2018) EWHC Civ 1727 1.156 The taxpayer failed to respond to an information notice under FA 2008 s  36, with a fixed penalty of £300 and £60 per day. The appellant taxpayer 88

A Useful Relationship had failed over a period of years to comply with many of his obligations as a taxpayer. HMRC applied to the Upper Tribunal for tax related penalties. On the taxpayer’s failure to comply with the income tax notices HMRC referred back to the Upper Tribunal which determined the appropriate penalty at £75,000 for income tax and for IHT a penalty of 100% of the tax presumed to be at risk of £1,171,000, which was reduced to £1,000,210. The only unpaid income tax was £1,250 for over-declared gift aid payments and £75,000 for income tax penalties. The Court of Appeal considered that the taxpayer’s conduct had been deplorable but it had not been dishonest and the Upper Tribunal’s penalties were set aside and replaced by £20,000 for failure to comply with the income tax notices and £200,000 for failure to comply with the IHT notice.

Ames v RCC, R (on the application of Ames) v RCC (2018) UKUT 190 1.157 The taxpayer purchased shares in a company which were eligible for EIS (Enterprise Investment Scheme) relief. He did not claim EIS relief on the gain as his taxable income was only £42 and the gains was covered by his personal allowance. He sold his shares for £330,200 and claimed EIS relief, which HMRC refused as TCGA 1992 s 150A(2) exempted the gain only if the (unnecessary) claim for income tax relief had been made. HMRC’s decision was quashed and referred back to HMRC for re-consideration.

RCC v Investec Asset Finance Plc and Another (2018) UKUT 69 (TCC) 1.158 The Upper Tribunal agreed with the FTT that the transaction entered into by IAF and IBP (the taxpayer’s financial trading companies) involved the acquisition of partnership interests and the making of capital contributions were short-term recurrent trading transactions. Issue 1 was whether the disputed expenditure was capital or revenue in nature (held, revenue). Issue 2 was whether the disputed expenditure should be disallowed as not incurred for the purposes of the leasing partnerships trades (held, capital). HMRC was allowed to raise issue 4 on closure notices in the alternative to issue 3 which was dismissed following Tower M Cashback LLP1 v Revenue and Customs Commissioners (2011) STC 1143. Issue 4 was left undetermined pending further submissions.

Reeves v Revenue and Customs Commissioners (2018) UKUT 293 (TCC) 1.159 The taxpayer was one of two founders of a limited liability partnership (Blue Crest) and he and his wife and children were non-UK resident since 89

A Useful Relationship 2007. In 2009 a UK-resident company (WHR) was found in which Mr Reeves was the sole shareholder and director and he gifted his interest in Blue Crest to WHR, the goodwill of the business was a UK chargeable asset, so the emigration of Blue Crest to Guernsey was a deemed disposal for capital gains tax under TCGA 1992 s 25 on which he claimed hold-over relief under TCGA 1992 s 165. HMRC argued that the transfer was caught by TCGA 1992 s 167(2) and ICTA 1988 s 416 so that the taxpayer’s gain would be attributed to his non-UK resident wife and children, who had nothing to do with WHR. This was disproportionate and the taxpayer’s appeal was allowed.

Tooth v RCC (2018) UKUT 38, (2018) STC 824 1.160 The taxpayer participated in a tax avoidance scheme in 2008/09 to set against his income in 2007/08. A discovery might have been made in 2009 but the discovery assessment made some five years later did not amount to a proper discovery. On making a discovery HMRC had to act expeditiously in making an assessment.

Atherton v Revenue and Customs Commissioners (2019) UKUT 41 TCC and Kerrison v Revenue and Customs Commissioners (2019) UKUT 8 TCC 1.161 These cases dealt with artificial tax avoidance schemes which failed, following Revenue and Customs Commissioners v Cotter (2013) STC 2480 and Land Securities Plc v Revenue and Customs Commissioners (2013) STC 1043 respectively.

BVB (2010) EWHC 3422 1.162 The parties in this case married in 2001 and separated in 2007. There were two children aged under seven. The husband settled various trusts in Jersey. The judge requested assistance from the Jersey trustees and the husband’s father which was not forthcoming. He considered that it was not unreasonable for the wife to consider housing in the SW1/SW3 area and that she could purchase reasonable accommodation for herself and the children and other expenses for £2.25 million and another £2.25 million would produce £85,000 per year for life, compared with the reasonable current owner level of expenditure of the wife and children of £135,000. The judge awarded £4.5 million and maintenance of the children of £15,000 per annum each until they ceased full time tertiary (first degree) education or attained the age of 17, whichever is the later.

90

A Useful Relationship The wife’s unpaid legal costs amounted to £323,000 of which the husband’s contribution was ordered to be £275,000, which ‘properly reflects the extent to which the husband has caused this litigation’.

Giulio Corrado v HMRC (2019) UKFTT 275 (TC) 1.163 In this case HMRC issued an Accelerated Payment Notice (APN) and a Follower Notice (FN) to Mr Corrado who had used the Working Wheels Avoidance Arrangement. Mr Corrado’s accountant telephoned HMRC’s enquiry and agreed the tax payable and asked for confirmation in writing. Mr Corrado objected to HMRC issuing a 50% FN penalty on the gross amount and accepted the closure notice. The FTT decided that Mr Corrado did what he thought was necessary to settle the dispute with HMRC, which the First-tier Tribunal thought was reasonable and cancelled the penalty.

Lily P Tang v HMRC (2019) UKFTT 0081 (TC) 1.164 In this case the taxpayer contended that funds held in Hong Kong in her name were held as bare trustee for family members and did not belong to her. HMRC did not believe this and raised discovery assessments for income tax and capital gains tax, including penalties, totalling £97,854.32, under TMA 1970 s 29. Mrs Tang is a midwife in the NHS and she and her husband have three children, she worked night shifts to look after the children, the youngest of whom was three years old. Her husband earned £35,000 to £40,000 as a bank clerk and they bought their house for £73,000 in 1998 with the benefit of a mortgage. HMRC jumped to conclusions when they discovered that the Standard Chartered Bank in Singapore had a deposit of over $900,000 in Mrs Tang’s name. The bank account in question belonged to the family and was held in Mrs Tang’s name for reasons of privacy. HMRC in July 2017 issued formal assessments for tax and penalties of £318,154.84 covering 1998/99 to 2015/16 even though Mrs Tang only had the money in her name from 2008. Mrs Tang had offered to pay HMRC £18,682 to get them off her back, payable over two years, which was rejected. Mrs Tang contended that the funds in question never belonged to her beneficially. HMRC ignored the fact that under English law a trust does not have to be in writing and may be made orally. It was held that Mrs Tang held the funds in bank accounts as trustee only on a bare trust for her parents-in-law and transferred the funds back to the parentsin-law as the beneficial owners in 2017 as Mrs Tang had no tax liability to report she did not fail to notify her non-existent liability. The assessments and penalties were cancelled and the appeal allowed. 91

Chapter 2

Main Trust Legislation

2.1 In this chapter, the main statutory provisions which impact on trusts and trustees, other than the Taxes Acts, are summarised. However, no such summary should be regarded as a substitute for the actual wording of the statute where relevant to an actual case. 2.2 In Appendix 1, the main trust legislation is reproduced, together with extracts from other important legislation, other than on taxation, affecting trusts.

THE TRUSTEE ACTS Trustee Act 1925 (TA 1925) 2.3 There has been no recent consolidation of trust legislation, and much of TA 1925 remains in force, although Part I (dealing with investments) has been replaced by TA 2000. TA 1925 sets out the general powers of trustees, including their appointment and discharge, the powers of the court and various general provisions.

Part II  General Powers of Trustees and Personal Representatives 12  Power of trustees for sale to sell by auction etc Where trustees have a trust for sale or power to sell trust property, they may do so in whole or part, subject to prior charges such as mortgages or with unencumbered title, by public auction or by private contract, subject to such conditions as to the title as the trustees think fit. Trustees also have power to vary a contract for sale and buy in at an auction or rescind the contract for sale and resell, without being liable for any loss. 13  Power to sell subject to depreciatory conditions Beneficiaries cannot complain about any conditions imposed on the sale by reason of their being unnecessarily depreciatory, unless this results in the sale 93

2.3  Main Trust Legislation proceeds being rendered inadequate, or it appears that the purchaser was acting in collusion with the trustee when the contract was made. 14  Power of trustees to give receipts Where a person transfers personal property such as money or investments to trustees a receipt in writing exonerates the transferor from any responsibility for loss arising on the application by the trustees of such assets. A sole trustee, other than a trust corporation, cannot give a valid receipt for the proceeds of sale or other capital money under a trust of land. Where there was more than one trustee however the receipt to be valid must be given by all the trustees. 15  Power to compound liabilities Trustees may accept property, real or personal, sever and apportion mixed trust funds, pay or allow claims on what they consider to be sufficient evidence, accept any composition or security for any debt, allow time for the payment of a debt or compromise or compound claims or submit them to arbitration, abandon or settle them. In such cases the trustee is not responsible for any loss so long as he has discharged the duty of care under TA 2000 s 1(1). 16  Power to raise money by sale, mortgage etc Trustees are authorised to mortgage trust property except for charitable trusts, or strict settlements under SLA 1925 unless they are the statutory owner. 17  Protection to purchasers and mortgagees dealing with trustees No purchaser or mortgagee is responsible for the application of funds transferred to the trustees on purchase or mortgage. 18  Devolution of powers or trusts Where two or more trustees hold powers or trusts and a trustee dies, the survivor or survivors may act until the appointment of new trustees. Where a sole trustee dies, the personal representatives of the trustee act, although this is subject to the trustee’s power to give receipts in s 14. 19  Power to insure This section was substituted by TA 2000 s 34 and now provides that the trustee may insure any property which is subject to the trust against risks of loss or damage due to any event, and entitles him to pay the premiums out of the trust fund. In the case of property held on a bare trust, this power is subject to any direction from the beneficiary that the property not be insured or as to the conditions upon which it may be insured. 94

Main Trust Legislation 2.3 It should be noted, however, that not only does the trustee now have a wide power to insure, but he also has, by TA  2000 Sch  1 para  5, a duty of care in relation to insurance, and must therefore exercise such care and skill as is reasonable in the circumstances, under TA  2000 s  1(1). Subject to any directions in the trust deed, a prudent trustee should normally ensure that all the trust property not held merely as nominee is fully insured for its current market value. 20  Application of insurance money for a policy kept up under any trust power or obligation This section deals with the application of proceeds of insurance where property is subject to a trust such as a strict settlement under SLA 1925. 22  Reversionary interests, valuations and audit Where the trust assets include a reversionary interest, on it falling into possession, or becoming payable or transferable, the trustees may agree the amount to which they are entitled, accept any authorised investments in or towards satisfaction of their rights, allow deductions for reasonable duties, costs, charges and expenses, and execute releases to the transferors. The trustees are not responsible for any loss so long as they have discharged their duty of care under TA  2000 s  1(1). Trustees are not obliged to charge such property or take proceedings unless instructed to do so by or on behalf of a beneficiary, and with an indemnity for the costs, although they do have a general responsibility to ensure that they collect everything due to them as trustees, so far as it is possible to do so. Trustees are empowered to ascertain and fix the value of any trust property which is then binding on the beneficiaries, so long as the trustees have exercised their duty of care under TA 2000 s 1(1). The trustees may have trust accounts audited but not more than once every three years, unless the nature of the trust or any special dealings in the trust property make a more frequent audit reasonable. The trustees may determine whether the audit costs are to be paid out of capital or income but, in the absence of such exercise of their discretion, the costs attributable to capital will be borne by capital, and those attributable to income by income. A beneficiary may insist on an audit not more than once every three years, unless he bears the costs, provided that the proposed auditor is a solicitor or accountant who is acceptable to the trustees and, in the absence of such agreement, the audit is carried out by the Public Trustee (PTA 1906 s 13). 24  Power to concur with others Where a trust is entitled to an undivided share in any property, the trustees may act in conjunction with persons having an interest in other shares in the 95

2.3  Main Trust Legislation property, even if they have an interest in another fiduciary capacity or in their own right in other shares in the property. 25  Delegation of trustee’s functions by power of attorney A trustee may by power of attorney delegate all or any of the trusts, powers and directions vested in him as trustee for a period of up to 12 months. The donor of the power of attorney must give written notice to any person entitled to appoint a new trustee and each of the existing trustees, although failure to comply will not invalidate the attorney’s act so far as a third party is concerned. The required form of the power of attorney to delegate the trustee’s functions is as follows: ‘This general trustee power of attorney is made on…………….[ date ] by……………………[ name of one donor ] of………………………….. [ address of donor ] as trustee of…………………..[ name or details of one trust ]. I appoint…………………..[ name of one donee ] of………………………….. [ address of donee ] to be my attorney [ if desired the date on which the delegation commences or the period for which it continues (or both) ] in accordance with section 25(5) of the Trustee Act 1925.’ (To be executed as a deed.) The donor remains liable for the attorney’s acts or defaults as if they were his own. The attorney may exercise the powers of the trustee; when the attorney has been appointed under SLA 1925 notices have to be given to the personal representatives and tenant for life as well as the trustees. 26  Protection against liability in respect of rents and covenants Where a trustee is liable for any rent, covenant or agreement under a lease or rent charge, or under an authorised guarantee agreement under the Landlord and Tenant (Covenants) Act 1995, and everything due is paid for or provided for up to date, he may, without incurring any personal liability, distribute to the beneficiaries. This does not affect the lessor’s right to trace any claim through to the recipients of the trust property. 27  Protection by means of advertisements The trustees of a settlement contemplating a distribution to the beneficiaries may give notice, by advertisement in the (London) Gazette and in the local newspaper of the area in which the land is situated, requiring any person claiming an interest in the property to give the details of his claim within a stated time period, being not less than two months. Such a notice protects the trustees from any claim of which they were unaware, on making a distribution after the time fixed by the notice, but trustees still have to make the usual 96

Main Trust Legislation 2.3 diligent searches, and a person with a valid claim may follow the property into the hands of the beneficiary to whom it has been distributed. 28  Protection in regard to notice A trustee is not deemed to have received notice in respect of one trust or estate merely because he has received notice in relation to another trust for which he acts.

Maintenance, advancement and protective trusts 31  Power to apply income for maintenance and to accumulate surplus income during a minority The statutory power of maintenance and accumulation under this section is very often incorporated into a trust deed, with or without modification. It provides that, during the infancy of a beneficiary, the trustees may, at their sole discretion, pay to his parent or guardian any income of the trust for the beneficiary’s maintenance, education or benefit, so long as it is reasonable, notwithstanding that the beneficiary may also be entitled under another trust fund or if some other person is bound by law to provide for his maintenance or education. Once the beneficiary has reached the age of 18, the trustees must pay him the income to which he is entitled, even if his interest is not yet vested. Until 30 September 2014 this was subject to the proviso in sub-section (1), that the trustees have to have regard to the age of the infant and his requirements and generally to the circumstances of the case, and in particular where income is available from more than one fund, to ensure that a proportionate part only of the income of each fund is used for the child’s maintenance, education or benefit. As this could be an onerous task, it is common for the proviso to be disapplied in the trust deed. A common form of wording was: ‘Section 31 of the Trustee Act 1925 will have effect as if: (a) The words in sub-section 1(1) “as may in all the circumstances be reasonable” were deleted and in their place the words “as the Trustees may think fit” were substituted (b) The words from “Provided that” to the end of sub-section 1 were deleted.’ With effect from 1  October 2014 the Inheritance and Trustees’ Powers Act 2014 (ITPA 2014) ss 8 and 10 makes this amendment by statute in relation to trusts created or arising on or the exercise of any power on or after that date. Income not distributed has to be accumulated by investing it, and the profits from so investing it until the child reaches the age of 18 or marries under that age, if his interest then becomes vested, or where he becomes absolutely entitled to the property from which the income arose, will be held for the 97

2.3  Main Trust Legislation beneficiary absolutely, but only if he acquires a vested interest at that date or later. Otherwise, the accumulations of income are held as an accretion to capital. During infancy, accumulations from one period may be treated as income for a subsequent period as if it were income arising in the current year, so that, for example, income might be accumulated during the child’s early years and then used to pay school fees where these are in excess of the current year’s income. Where the child has only a contingent interest, he is only entitled to the intermediate income if the trust deed so specified. This section also applies to a vested annuity as if it were income of property held by the trustees to pay the income to the annuitant although, in this case, the accumulations of income during infancy are held for the annuitant absolutely. As these provisions only apply to vested or contingent interests, they do not apply to discretionary beneficiaries. 32  Power of advancement Trustees may advance capital from the trust, in such manner as they may in their absolute discretion see fit, to any person entitled to an interest in the trust capital whether absolutely or contingently. It does not matter that the beneficiary’s interest might be defeated by a subsequent power of appointment or reallocation, or be diminished if further beneficiaries are born or appointed. Until 30  September 2014 there was a proviso, which is often excluded by the trust deed, which limited the amount of the advancement to one half of the presumptive or vested share of the beneficiary in the trust property. This limitation was removed from 1  October 2014 by ITPA  2014 ss  9 and 10, which also made a number of changes to the wording to bring it up to date for trusts whenever created or arising, or on the exercise of a power exercised on or after that date which does not apply to the requirement to bring into account prior distributions, except for trusts created or arising on or after 1  October 2014. The money so advanced is brought into account as part of his entitlement. An advancement must not prejudice the life tenant or other beneficiaries, unless they are of full age and consent in writing, nor does it apply to capital money arising under SLA  1925. The advance must be for the benefit of the beneficiary (Re Pauling’s Settled Trust [1964] Ch 303), but benefit is widely construed and can include a potential saving in taxation (Pilkington v IRC [1964] AC 612). 33  Protective trusts Under these provisions, it is possible to draft a trust deed under which the principal beneficiary has a protected life interest, which means that, if he were to become bankrupt or compound with his creditors, his entitlement to the income ceases, and the trustees then hold the trust funds on discretionary trusts for the maintenance or support or otherwise for the benefit of the principal beneficiary and his or her spouse and children or remoter issue, or the principal beneficiary and the persons who would benefit under the trust deed on his 98

Main Trust Legislation 2.3 death. Such trusts were originally aimed at spendthrift beneficiaries or those involved in high-risk businesses. It is not possible for the settlor of a protective trust also to be the principal beneficiary, and it is important that the life interest is determinable upon the bankruptcy or other relevant event, in order not to be considered a device to defeat creditors.

Part III  Appointment and Discharge of Trustees 34  Limitation of the number of trustees Where there is a settlement creating trusts of land, there must not be more than four persons who are named as trustees, except in the case of charitable or other purpose trusts. 35  Appointments of trustees of settlements and trustees of land Under sub-section (1), in the case of a strict settlement under SLA 1925 the trustees of the land shall, unless the court orders otherwise, also be the trustees of the proceeds of sale of the land. 36  Power of appointing new or additional trustees Where a trustee dies, remains out of the UK for more than 12 months, wishes to be discharged from his duties, refuses to act, or is incapable of acting or is unfit to act, he may be replaced by whoever is nominated for the purpose of appointing new trustees in the trust instrument or, if there is no such person, by the continuing trustee or trustees or by the personal representative of the last surviving or continuing trustee. This also applies where the trustee is removed under a power contained in the trust instrument or where a trust corporation has been dissolved. Where a trust has no more than three trustees, the person nominated to appoint new trustees in the trust deed or, if there is no such person, the existing trustees may appoint additional trustees. An additional trustee acts in exactly the same way as if he had originally been appointed by the trust deed. Where a trustee becomes incapable by reason of mental disorder within the meaning of MHA 1983, he can only be replaced with the leave of the Court of Protection. 37  Supplemental provisions as to appointment of trustees Subject to any statutory limitation on the number of trustees, further trustees may be appointed. It is possible to have a separate set of trustees, not exceeding four, for the purpose of holding trust real estate. It is possible to have a single trustee to replace a sole trustee where land is not involved. In other cases, a sole trustee must be a trust corporation, in order for the retiring trustee to be discharged, or there must be at least two trustees. This can be a trap when a trust is exported, as an overseas trust company is not a trust corporation. A trust 99

2.3  Main Trust Legislation corporation is the Public Trustee or a corporation either appointed by the court to act as trustee or automatically entitled to do so because it is incorporated in the UK and has issued capital of at least £250,000, of which at least £100,000 has been paid up in cash (Public Trustee Rules 1912 (SR & O 1912/348) rule 30, as amended). It is, therefore, necessary in such cases to ensure there are at least two trustees in the new jurisdiction, either personal or corporate (TA 1925 s  37(1)(c)); otherwise, the change in trustees would be invalid and the trust would remain resident in the UK (Jasmine Trustees Ltd and Others v Wells & Hind (a firm) and Another (2007) EWHC 38 (Ch)). The necessary steps have to be taken to vest the trust property in the new trustees. A  sole trustee other than a trust corporation cannot be appointed unless able to give valid receipts for all capital money arising under the trust, ie where the trust does not contain any land (TA 1925 s 14(2)(a)). 38  Evidence as to a vacancy in a trust The deed appointing the new trustee, containing a statement to the effect that the previous trustee has remained out of the UK for more than 12 months, refuses or is unfit to act, is incapable of acting, or is entitled to a beneficial interest in the property in possession, shall be conclusive evidence of that fact, in favour of the purchaser of the legal estate in land, and any appointment or vested declaration consequent on the appointment shall be valid in favour of such a purchaser. 39  Retirement of trustee without a new appointment A  trustee who wishes to retire and does not have to be replaced may be discharged, provided there are at least two other trustees or a trust corporation remaining. 40  Vesting of trust property in new or continuing trustees It is normally possible, in the deed of appointment of a new trustee, to include a declaration to the effect that any trust property shall vest in the trustees, including the new trustee, by virtue of the deed, without requiring any further conveyance or assignment. Interestingly, even if it does not contain such a declaration, it operates as if it had. Similarly, a deed by which a retiring trustee is discharged under TA 1925 s 39 or TLATA 1996 s 19 may contain a declaration by the retiring and continuing trustees, or other person empowered to appoint trustees, that the deed shall operate to vest the trust property in the continuing trustees, and this will also apply even where the deed does not specifically include such a declaration. These provisions do not normally apply to lands conveyed by way of mortgage for securing money, or to land held under a lease which contains covenants against assignment without consent, or stocks or shares and other property only transferable in accordance with statutory rules. 100

Main Trust Legislation 2.3

Part IV  Powers of the Court Appointment of new trustees 41  Power of court to appoint new trustees The court has an overriding power to appoint new trustees (but not an executor or administrator) where it is found inexpedient, difficult or impractical so to do without the assistance of the court. 42  Power to authorise remuneration The court may fix the remuneration where it appoints a corporation other than the Public Trustee to be a trustee, either solely or jointly with another person. 43  Powers of new trustee appointed by the court The court appointee shall be treated in all respects as if it were an original trustee appointed by the trust instrument. Vesting orders 44  Vesting orders of land The court may make an order vesting any interest in land in trustees appointed by the court, or where trustees are otherwise unable to act, or where it appears to the court expedient so to do. 45  Orders as to contingent rights of unborn persons The court may make an order releasing an interest in land from the contingent rights of unborn persons, who, on coming into existence, would be beneficiaries, or may vest such interest in any person on behalf of future beneficiaries. 46  Vesting order in place of conveyance by infant mortgagee The court may make a vesting order releasing or disposing of an interest in land where a mortgagee is an infant. 47  Vesting order consequential on order for sale or mortgage of land Where a court directs the sale or mortgage of any land, the person with the legal estate is treated as if he were a trustee, and the court may vest the land in a purchaser or mortgagee or any other person. 48  Vesting order consequential on judgment for specific performance etc Where a judgment is given for specific performance on a contract for the sale of land, the court may declare the legal owner to be a trustee, and may make a vesting order taking into account the rights of unborn persons. 101

2.3  Main Trust Legislation 49  Effect of vesting order A vesting order made by the court has the same effect as if the land had been duly conveyed to the trustees. 50  Power to appoint person to convey The court may, instead of making a vesting order, appoint a person to convey the land or release a contingent right, which has the same effect. 51  Vesting orders as to stock and things in action Where a trustee is unable or unwilling to transfer stocks and shares, shares in registered ships or choses in action, the court may make an appropriate vesting order. 52  Vesting orders of charity property The court may make vesting orders over interests in land, stocks and shares and choses in action held by a charity. 53  Vesting orders in relation to infant’s beneficial interest The court may, in looking after the interests of an infant, appoint a person to whom to convey property or transfer assets or hold the income thereof for the benefit of the infant. 54  Jurisdiction in regard to mental patients The High Court, and not the authority having jurisdiction under Part VII of MHA 1983, will make appropriate orders where a trustee becomes of unsound mind. A receiver has concurrent authority to implement such court orders. 55  Orders made upon certain allegations to be conclusive evidence Vesting orders properly made based on a trustee’s alleged incapacity are conclusive evidence of the allegation upon any question as to the validity of the order. 56  Application of vesting order to property out of England The court may make a vesting order extending to any part of ‘Her Majesty’s dominions’ except Scotland. 57  Power of court to authorise dealings with trust property Where the court considers it expedient to do so, and the trust deed does not contain the appropriate powers, the court may empower the trustees to deal with the trust property and direct the manner in which it is to be dealt with. 102

Main Trust Legislation 2.3 58  Persons entitled to apply for orders An order for the appointment of a new trustee, or in relation to trust property, may be brought by or on behalf of any beneficiary. 59  Power to give judgment in the absence of a trustee Where a trustee defendant cannot be found, the court may give judgment as if he had been duly served and represented in the action. 60  Power to charge costs on trust estate The court may order the costs and expenses of any application to be paid out of the trust funds or by other persons that the court thinks just. 61  Power to relieve trustee from personal liability A  trustee who may be in breach of trust, but who has acted honestly and decently and ought fairly to be excused, may be relieved of personal liability by the court. In practice, a trustee contemplating legal action on behalf of the trust should obtain the leave of the court or be at risk for the costs of the action (Re Beddoe [1893] 1 Ch 547). 62  Power to make beneficiary indemnify for breach of trust Where a trustee commits a breach of trust at the request of or with the consent in writing of a beneficiary, the court may, if it thinks fit, require the beneficiary to indemnify the trustee. 63  Payment into court by trustees The trustees may, by a majority, vote to pay trust funds into court, which might be the only option where trustees are required to act unanimously but cannot agree. The court may order such a payment into court at the request of the majority, without the concurrence of the others. The court may order payment or delivery of money or securities held by third parties into court. 63A  Jurisdiction of county court The county court has jurisdiction for various provisions, as listed, within the applicable county court monetary limits.

Part V  General Provisions 64  Application of Act to Settled Land Act trustees TA  1925 applies also to trustees of a strict settlement for the purposes of SLA 1925. 103

2.4  Main Trust Legislation 66  Indemnity to banks etc Banks and others may rely on court orders without making further enquiry. 67  Jurisdiction of the court Court means the High Court or a county court. 68 Definitions Various terms are defined. 69  Application of Act TA 1925 applies not only to trusts but also, where appropriate, to executorships and administrationships. 70  Enactments repealed 71  Short title, commencement, extent TA 1925 applies to England and Wales only.

Variation of Trusts Act 1958 (VTA 1958) 2.4 The court has very wide powers under VTA 1958 to deal with real or personal property held on trust, arising at any time, under any will, settlement or other disposition, and to approve any arrangement varying or revoking all or any of the trusts or enlarging the powers of the trustees or managing or administering any of the trust property on behalf of any person incapable of assenting by reason of infancy or other incapacity, or any person who may become entitled under the trusts at a future date, or on the happening of a future event or any person unborn, or any discretionary beneficiary under protective trusts where the interests of the principal beneficiary have not failed or determined. Except in the last case, the court must be satisfied that the arrangements are for the benefit of the beneficiary. These powers do not limit the general power to authorise dealings in trust property under SLA 1925 s 64 or TA 1925 s 57 or under Part VII of MHA 1983. However, the Act does not encompass the creation of an entirely new trust, re: T’s Settlement Trusts (1964) Ch 158. In Wright v Gater (2012) STC 256 an application to vary a trust arising on intestacy was made on paper, with a very tight timescale, in order to avoid an inheritance tax liability. The judge pointed out that his position was made very difficult by the dual capacity of the claimants and his inability to crossexamine them. Edward Greenstreet died intestate on 28 October 2009 and his estate of £514,600 passed to his son Kieran, who died intestate in May 2010 104

Main Trust Legislation 2.6 leaving an estate of £6,000 in respect of his own assets. Under the intestacy rules the aggregated estates of father and son passed on Kieran’s death to a statutory trust under s 47 of the Administration and Estates Act 1928, to his three-year-old son Rory, resulting in an inheritance tax liability of £89,000. The application to vary the disposition was made under the Variation of Trusts Act 1958. Rory’s unmarried mother, Ellen Wright, and Michael Greenstreet as personal representatives of Kieran sought a variation of the statutory trust to make Edward the settlor as his estate was not subject to inheritance tax due to the double nil rate band. However, Ellen did not want her son Rory to inherit at age 18 and suggested he should inherit at age 30, accumulating all the income in the meantime. To make the IHT saving it had to be completed within two years of Edward’s death. On 26 October the judge approved a revised arrangement on behalf of Rory as a variation under which he would be entitled to the trust income at age 18, 10% of the capital at age 21 and the balance at age 25.

Trustee Investments Act 1961 (TIA 1961) 2.5 This Act has largely been repealed, so far as England and Wales is concerned, by TA 2000 Sch 4. The remaining sections are interpretations of references to trust property and trust funds. Property includes real and personal property of any description, including money and things (choses) in action but it does not include an expectancy until it falls into possession. Property in the hands of the trustees shall constitute a separate trust fund only so far as it is held on trusts which are not identical to those on which any other property is held.

Perpetuities and Accumulations Act 1964 (PAA 1964) 2.6 As a general matter of public policy, it is not possible in the UK to put money into a private trust, ie in practice a non-charitable trust, for an unlawful period or to accumulate income indefinitely. This started as a common law rule and developed into the concept of ‘lives in being plus 21 years’ as the maximum period for a private trust. This was normally worded on the basis of all vesting of an interest taking place within ‘21 years of the death of the last survivor of all the descendants of King George V now living’, usually known as the ‘life in being’ provision. PAA 1964, which applied to instruments taking effect on or after 16 July 1964, substituted definite periods for a number of common law rules. This Act was replaced by the Perpetuities and Accumulations Act 2009, and s 13 was repealed, but only in relation to instruments taking effect on or after the commencement day, 6 April 2010, other than wills executed before that day. PAA 1964 provides: 105

2.6  Main Trust Legislation 1  Power to specify perpetuity period A trust may specify a perpetuity period not exceeding 80 years. 2  Presumptions and evidence as to future parenthood It is presumed, for perpetuity periods based on the ability of a person to have a child, that a male can have a child at the age of 14 or over but not under that age, and that a female can have a child at the age of 12 or over but not under that age, and is to be presumed to be incapable of bearing a child once over the age of 55. This extends to adopted children, legitimisation or other means of acquiring a child. The court has an overriding ability to make such orders as it thinks fit if, in any particular case, a person does have a child outside these age ranges. 3  Uncertainty as to remoteness Where a trust would otherwise be void on the ground that an interest might not become vested until too remote a time, it is not void until it becomes obvious that the vesting must in fact occur beyond the permitted period, at which time any vesting beyond the permitted period becomes void (known as the ‘wait and see’ principle). This applies also to powers of appointment, powers, options or other rights. 4  Reduction of age and exclusion of class members to avoid remoteness Where a beneficiary becomes entitled at a specified age greater than 21, which would fall outside the perpetuity period, the required age is reduced, so that the greatest age that falls within the perpetuity period is substituted. Class members who could cause the trust to fail for remoteness are automatically excluded by s 4(4). 5  Condition relating to death of surviving spouse Early vesting also takes place where a disposition is limited by reference to the death of the survivor of a person in being at the start of the perpetuity period, and any spouse of that person. This Act will continue to apply to instruments taking effect or wills executed before the Perpetuities and Accumulations Act 2009 came into force. 6  Saving and acceleration of expectant interests A disposition is not void for remoteness merely because it is dependent on a prior void interest and may be accelerated accordingly. 7  Powers of appointment A power of appointment is usually treated as a special power. 106

Main Trust Legislation 2.7 8  Administrative powers of trustees The rule against perpetuities does not prevent trustees dealing with trust property or otherwise in the administration of the trust. 9  Options relating to land The rule against perpetuities does not apply to an option over a reversionary interest. 10  Avoidance of contractual and other rights in cases of remoteness The purchaser of an interest void for remoteness has no remedy for its lack of effect. 11  Rights for enforcement of rent charges The rule against perpetuities does not apply to powers or remedies or for recovering the payment of annual sums which are rent charges under LPA 1925 ss 121 or 122. 12  Possibilities of reverter, conditions subsequent, exceptions and reservations The rule against perpetuities does apply to certain reversions and resulting trusts. 13  Amendments of section 164 of Law of Property Act 1925 This section is repealed by PAA 2009 ss 15, 21 and the Schedule. 14  Right to stop accumulations Beneficiaries where all are sui jurice can, under the rule in Saunders v Vautier (1841) 4 Beav 115, bring an accumulation period to an end; but, where future born children could be beneficiaries, this could prevent such an action. In determining whether any future children are to be taken into account, the assumptions of possible parenthood in s 2 are applied. The restrictions on accumulations apply wherever there is a power to accumulate income, whether or not there is a duty to exercise that power and whether or not it extends to income arising on the investment of accumulated income. 15  Short title, interpretation and extent

Perpetuities and Accumulations Act 2009 (PAA 2009) 2.7 The Perpetuities and Accumulations Act 2009 received Royal Assent on 12 November 2009 but mainly has effect from 6 April 2010, in respect to 107

2.7  Main Trust Legislation instruments taking effect on or after that day, other than wills executed before that day.

Application of rule against perpetuities 1  Application of the rule The rule is perpetuitous although this Act applies only to the estates, interests, powers and rights created by trusts or will. 2  Exceptions to rule’s application The rule does not normally apply to charities or relevant pension schemes. 3  Power to specify exceptions The Lord Chancellor may by statutory instrument provide that the rule against perpetuities does not apply in cases as specified. 4  Abolition of existing exceptions A number of existing exceptions to the rule against perpetuities are no longer needed and cease to apply. 5  Perpetuity period The perpetuity period, for the trust and wills to which the Act applies, is 125 years and no other period.

Perpetuities: miscellaneous 6  Start of perpetuity period The perpetuity period starts when the instrument creating the power takes effect, except in the case of a relevant pension scheme where the perpetuity period starts when the member concerned became a member of the scheme. 7  ‘Wait and see’ rule The rule against perpetuities does not affect an estate or interest in property unless and until it becomes certain that the estate or interest will not vest within the perpetuity period. If this were to happen, it does not affect the validity of anything previously done in relation to the estate or interest. If it becomes clear that the rule will be broken, the estate, interest, right or power becomes void for perpetuity, but this does not affect anything done during the ‘wait and see’ period. 108

Main Trust Legislation 2.7 8  Exclusion of class members to avoid remoteness A gift made in favour of a group of people would be void if all possible members of a class of beneficiaries were not ascertainable during the perpetuity period. Under this section, all those members who qualify during the perpetuity period may benefit and, if there are still potential members of the class at the end of the perpetuity period, they may become excluded if it becomes apparent that an interest will be void for perpetuity. If certain potential members are included in the class, they are excluded unless that would exhaust the class which does not affect anything done during the ‘wait and see’ period. 9  Saving and acceleration of expectant interests An estate or interest is not void for remoteness merely because it is dependent on one which is so void, and this may result in a valid interest being accelerated on the failure for remoteness of the prior estate or interest. An estate or interest arising under a resulting trust on the determination or a determinable interest is void for perpetuity, the determinable estate or interest becomes absolute. 11  Powers of appointment A special power of appointment is any power other than one exercisable by one person only who is of full age and capacity and who could exercise that power in his own favour, that is a general power of appointment tantamount to ownership. The power of appointment exercisable by will is a special power unless it could be exercised only by one person in favour of his personal representatives. 12  Pre-commencement instruments: period difficult to ascertain Where a perpetuity period in a trust is stated to be by reference to lives in being, and the trustees believe it is not reasonably practicable to ascertain whether those lives have ended and therefore whether the perpetuity period has ended, and they execute an irrevocable deed to this effect, the perpetuity period becomes 100 years and no other period for all purposes.

Accumulations 13  Abolition of restrictions Where trustees are authorised or required to accumulate income, thereby converting it into capital for trust purposes, the limit of the accumulation period to 21 years in LPA 1925 ss 164–166, as amended by PAA 1964 s 13, does not apply to instruments taking effect before the Act came into force or 109

2.7  Main Trust Legislation wills made before that date. In such cases, the 21-year statutory accumulation period continues to apply. The accumulation period after that provision comes into force is therefore the same as the perpetuity period. 14  Restrictions on accumulation for charitable trusts In the case of a charitable trust, the accumulation period is 21 years, unless a court or the Charity Commission for England and Wales specifies otherwise.

Application of statutory provisions 15  Application of this Act The provisions of this Act generally apply to an instrument taking effect on or after the commencement day, except for a will executed before that day. 16  Limitation of 1964 Act to existing instrument PAA 1964 continues to apply to instruments or wills taking effect or made before commencement day, and PAA 1964 ss 5A and 5B are inserted accordingly. 17  The Crown The provisions of this Act apply to Crown interests subject to the rule against perpetuities but do not extend the application of the rule. 18  Rule as to duration not affected Non-charitable purpose trusts, such as for the maintenance of gravestones, are not affected by the Act so that the permitted period continues to be a life or lives in being plus 21 years, or 21 years if there is no relevant life in being. 19  Provision made otherwise than by instrument An oral trust is treated as if it were made by a written instrument made on the commencement of the trust. 20 Interpretation Various terms are defined. 21 Repeals Repeals to the existing law as specified in the Schedule take effect on the day on which the Act comes into force, except for a will executed before that date. 110

Main Trust Legislation 2.9 22 Commencement The main provisions of the Act come into force on the day specified by the Lord Chancellor by statutory instrument. 23 Extent This Act extends to England and Wales only. 24  Short title

Recognition of Trusts Act 1987 (RTA 1987) 2.8 This Act brings into UK law the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on Their Recognition. It is extended to include any trusts arising under the law of any part of the UK or by virtue of a judicial decision, whether in the UK or elsewhere. In Arts 15 and 16 of the Convention, the UK confirms that the usual conflict of law provisions take precedence over the Convention. The UK ratified the Convention on 17  November 1989 and it came into force on 1  January 1992. The UK ratification was on behalf of the United Kingdom of Great Britain and Northern Ireland, the Isle of Man, Bermuda, the British Antarctic Territory, the British Virgin Islands, the Falkland Islands, Gibraltar, St Helena, the St Helena dependencies, South Georgia and the South Sandwich Islands and the United Kingdom sovereign base areas of Akrotiri and Dhekelia on the island of Cyprus. On 30  March 1990, the UK extended the Convention to Hong Kong, the Bailiwick of Jersey, the island of Guernsey (but not the islands of Alderney and Sark) and the Turks and Caicos Islands. The Convention continues to apply to Hong Kong from 1 July 1997 as the Hong Kong Special Administration of the People’s Republic of China. The UK construes the Convention as applying to any country or territory which has its own system of law, whether a party to the Convention or not. The Schedule to the Act reproduces Arts 1–15, para 1 of Art 16, and Arts 17, 18 and 22 of the Convention.

Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition 2.9 The Hague Convention arises from the Hague Conference on Private and International Law and is intended to deal with the institution of the trust, which is known to certain member States of the Conference, most often States of common law, but which is unknown in the majority of the civil law States of the members of the Conference. For the States which have 111

2.10  Main Trust Legislation trusts, the principal interest is obviously to have the trusts created under their laws recognised in the countries which do not have this institution. However, the common law States would also find the conflict rules of the Convention useful, given that their national systems of private international law differ in this field. There has never been any intention to introduce the trust into the civil law countries, but simply to furnish their judges with the instruments which are appropriate to grasp this legal device. Since the institution is not provided for in their substantive laws, they do not have rules of private international law to govern it, and they are therefore reduced to seeking laboriously to introduce the elements of trusts into their own concepts. The Convention puts at their disposal conflict of laws rules for trusts, it then indicates what the recognition of a trust should consist of, but also the limits of this recognition. The Hague Convention has been ratified by Australia, Canada, Hong Kong, Italy, Liechtenstein, Luxembourg, Malta, Morocco, Netherlands, San Marino, Switzerland and the UK, and originally came into force on 1 January 1992. 2.10 A  case involving the Hague Convention was the Canadian case of Royal Trust Corporation of Canada v AS (W)S  and Others (2004) 6  ITELR  1082. This concerned a trust created in Quebec but administered from Alberta, where it was registered with the tax authorities, the trustees had their head office, and the trust assets were situated. The court held that Alberta was a proper forum to hear the trustees’ application to vary the trust and for advice and directions. The trust deed specified that it was to be interpreted according to the laws of Massachusetts and, since this involved a jurisdiction outside Canada, the Hague Convention applied and the trust was governed by the law of Massachusetts in accordance with Article  6 of the Convention. The question of jurisdiction followed the English cases of Re Ker’s Settlement Trusts [1963] Ch 553 and Re Paget’s Settlement, Baillie v De Brossard [1965] 1 All ER 58. The law of Massachusetts as a civil law jurisdiction (like Quebec) would treat a trust as a separate legal entity, not an equitable law relationship. Nonetheless, the parties chose not to produce evidence of the Massachusetts law, in the absence of which the law of Alberta applied, following Chaplin v Boys [1971]  AC  356, where it was stated that ‘in the absence of proof of foreign law the lex fori (the law of the jurisdiction in which the case is brought) will apply. Thus the parties may either tacitly or by agreement choose to be governed by the lex fori if they find it advisable to do so’. 2.11 Although it has not been widely ratified, the Hague Convention is useful in determining the likely treatment of trusts in foreign jurisdictions, but it should be remembered that Art 19 provides that nothing in the Convention shall prejudice the powers of States in fiscal matters. 112

Main Trust Legislation 2.11

Chapter 1  Scope Article 1 This Convention specifies the law applicable to trusts and governs their recognition. Article 2 The term ‘trust’ refers to the legal relationships created inter vivos or on death by a settlor when assets have been placed under the control of a trustee for the benefit of a beneficiary, or for a specific purpose. A trust has the following characteristics: (a) The assets constitute a separate fund and are not a part of the trustees’ own estate. (b) Title to the trust assets is in the name of the trustee or nominee for the trustee. (c) The trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and by law. The settlor may retain certain rights and powers and the trustee may have rights as a beneficiary, which are not necessarily inconsistent with the existence of a trust. Article 3 The Convention only applies to trusts created voluntarily and evidenced in writing and therefore does not extend to trusts created by operation of law or by judicial decision unless so extended under Art 20. The UK, through RTA 1987 s 1, has extended the Convention in this manner so far as the UK is concerned. The explanatory report by Alfred E Von Overbeck on the Hague Convention suggests (at para  51) that the Convention would extend to a resulting trust which arises in favour of the settlor where the purposes of an express trust have been fulfilled, but the trustees continue to hold certain assets under a resulting trust. The trust instrument does not have to be in writing, but if not itself written down must be evidenced in writing. Article 4 The Convention does not deal with the initial validity of a trust and whether or not it meets the requirements of a valid trust under the laws of the jurisdiction in which it is established. Nor does it deal with whether or not assets have been properly transferred to the trustees. Any problems of this nature will be dealt with under the law in which the trust is established and the asset transferred and, if different, dealt with under the normal conflict of laws rules. 113

2.11  Main Trust Legislation Article 5 The Convention does not apply where the applicable law specified by Chapter 2 of the Convention does not provide for trusts of the type involved.

Chapter 2  Applicable law Article 6 The settlor is free to choose the law under which the trust is to be governed expressly or by implication. In the unlikely event that the law chosen by the settlor does not provide for trusts or the category of trust involved the choice is ineffective and Art 7 applies. Article 7 Where no applicable law has been chosen a trust should be governed by the law with which it is most closely connected. This is ascertained from the place of administration designated by the settlor, the situs of the trust assets, the place of residence or business of the trustee and the objects of the trust and the places where they are to be fulfilled. Article 8 The law specified by Art 6 or 7 governs the validity of the trust, its construction, its effect and the administration of the trust including the appointment, resignation and removal of trustees, the capacity to act as a trustee and the rights and duties of trustees, the right to delegate, the power to administer and deal with trust assets and grant security. It covers powers of investment, restrictions on the duration of the trust under a rule against perpetuities or the power to accumulate income. It also governs relationships between trustees and beneficiaries and their personal liabilities, variation or termination of the trust, the distribution of trust assets and the duties of the trustees to account for their administration. Article 9 It is possible for a separable aspect of the trust such as administration to be governed by a different law so that, for example, a trust established in the British Virgin Islands may be administered from Jersey. Article 10 Such a dual law aspect of a trust is only available where the law applicable to the validity of the trust so allows. 114

Main Trust Legislation 2.11

Chapter 3  Recognition Article 11 A  trust properly constituted under the applicable law is to be recognised as a trust. This implies, as a minimum, that the trust property constitutes a trust fund, but the trustees may sue and be sued and appear before a notary or public official in their capacity as trustees. It also implies that the personal creditors of a trust have no recourse against the trust assets and that the trust assets do not form part of the trustee’s estate on his insolvency or bankruptcy, and do not form part of his or his spouse’s matrimonial property nor part of his estate on death. It also means that trust assets may be recovered from the trustee following a breach of trust where trust assets have been mingled with the trustee’s own assets. Rights and obligations of any third party holder of trust assets depend on the law applicable to an asset under the ordinary conflict of law rules and will often be the law of the territory where the asset is situated. A trustee should be able to register trust assets in his capacity as trustee, so that the existence of the trust is disclosed so far as this is not inconsistent with the law of the State where registration is sought. Article 13 No State is bound to recognise a trust where the significant elements, such as the habitual residence or nationalities of the settlor or beneficiaries or location of the assets, are more closely connected with the State which does not have the institution of the trust, or the category of trust involved, even though the choice of applicable law of the place of administration and the habitual residence of the trustee are in a valid trust jurisdiction. For example, France would not be bound to recognise a trust created in, say, the Isle of Man where the beneficiaries and the trust assets were both in France. Article 14 The Convention is not intended to prevent States from recognising trusts and they may introduce laws favourable to the recognition of trusts, as Monaco has done.

Chapter 4  General clauses Article 15 The Convention does not overrule the ordinary conflict of law rules on, for example, the protection of minors and incapable parties, the effects of marriage, succession rights, forced heirship rules, the transfer of title and security interests in property, the protection of creditors and of third parties acting in good faith. If these rules prevent the trust from being recognised, the courts will try to give effect to the object of the trust by other means. 115

2.11  Main Trust Legislation Article 16 Certain laws of immediate application, such as those which are intended to protect the cultural heritage of a country, public health, certain vital economic interests, the protection of employees or of the weaker party to another contract, will be dealt with under the laws of the appropriate jurisdictions such as where real estate is sited, irrespective of rules of conflict of laws, and the Convention makes no attempt to override these provisions. In some cases it may be appropriate for the laws of immediate application of a third State to have effect where there is a sufficiently close connection with such a State. Countries are allowed to disapply the third State for laws of immediate application and the UK has done so in its ratification of 17 November 1989 and RTA 1987 Sch 2. Article 17 In the Convention the word ‘law’ means the domestic law of a State. Article 18 The Convention is disregarded when it is manifestly incompatible with public policy. Article 19 The Convention does not prejudice the powers of States in fiscal matters. It was necessary to state in the Convention that tax law would not be affected. Indeed, if the Convention appeared to allow the evasion of certain taxes by means of trusts, its chances of ratification would have been seriously compromised. Article 20 Any contracting State may, at any time, declare that the provisions of the Convention would extend to trusts declared by judicial decisions and the UK has done so under RTA 1987 s 1(2). Article 21 Recognition of trusts may be confined to those governed by the law of a contracting State. For example, a trust in Bermuda or the British Virgin Islands would be in a contracting State for this purpose. But one in the Bahamas or the Cayman Islands would not. Article 22 The Convention applies to trusts regardless of the date on which they were created, although a contracting State may reserve the right not to apply the 116

Main Trust Legislation 2.11 Convention to trusts created before the date on which, in relation to that State, the Convention enters into force. Article 23 References to applicable law for a federal State are to the law in force in the territorial unit in question. For example, in the British Isles the relevant laws are those of England and Wales, Scotland, Northern Ireland, the Isle of Man, Jersey and Guernsey, but not Alderney or Sark. Article 24 If a federal State has territorial units with different trust laws it is not bound to apply the Convention to any internal conflict of laws. Article 25 The Convention does not affect any other international agreement to which a contracting State becomes a party even if it contains provisions on matters governed by the Convention.

Chapter 5  Final clauses Article 26 The only reservations allowed are under Arts 16, 21 and 22, as explained above, although a reservation may subsequently be withdrawn. Article 27 The Convention may be signed by members of the Hague Conference on Private International Law at the time of its 15th session and deposited with the Ministry of Foreign Affairs of the Netherlands. Article 28 Any other State may accede to the Convention after it has entered into force, and Malta did so on 31 December 1995 with effect from 1 March 1996. Article 29 States with two or more territorial units may, at the time of signature, declare that the Convention shall extend to all their territorial units or only to one or more of them, and may modify this declaration by submitting a further declaration at any time. If a State makes no such declaration, the Convention extends to all territorial units of that State. The territories for which the UK has ratified the Convention are set out in the summary to RTA 1987. 117

2.12  Main Trust Legislation Article 30 The Convention entered into force on 1 January 1992. Thereafter, the Convention enters into force for States ratifying it on the first day of the third calendar month after deposit of the notice of ratification etc. Article 31 A  contracting State may denounce the Convention by formal notification to the Ministry of Foreign Affairs in the Netherlands, which then takes effect six months after the notification is received or such later date as is specified in the notification. Article 32 The Ministry of Foreign Affairs of the Netherlands must notify the member States of signatures and ratifications etc.

Settled Land Act 1925 (SLA 1925) 2.12 New strict settlements have not been possible to create since 31  December 1996 under Trusts of Land and Appointments of Trustees Act 1996 s  2(1). However, such trusts continue to exist often owning very substantial landed estates. 2.13 Under SLA 1925 the legal title to the estate will normally be vested in the life-tenant and he is therefore trustee of both the legal title and the statutory powers under SLA 1925 and has all the powers of management and sale so long as there are SLA trustees in place and must have regard to the other beneficiaries’ interests. Although the life-tenant owner may sell the property at arm’s length he has a duty to obtain the best price and would be liable to the other beneficiaries were he not to do so. He does not need the permission of the trustees to sell but must inform them of the sale and they must remove the restriction on title registered with the Land Registry but he must ensure that the trustees receive the proceeds of sale to use in accordance with the trust terms. The beneficiaries’ interests in the trust would over-reach on sale of the land to the sale proceeds. A problem with the strict settlement is that the life-tenant has to pay for any improvement to the land, over and above repairs paid for by the trustees, and cannot charge the trust assets to fund the improvements. Where a strict settlement ceases to hold land or chattels included therein, as heirlooms, they cease to be settled land and if further land etc is acquired it is a trust of land under TLATA 1996. 118

Main Trust Legislation 2.16

Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996) 2.14 Under LPA  1925 and SLA  1925, land could only be held by more than one person as a trust for sale or a strict settlement. Joint ownership either as tenants in common or joint tenants, where the interests are concurrent, was held on a trust for sale. Under a trust for sale, the land has to be sold unless the trustees unanimously agree to postpone the sale, which meant in practice that if, for example, two co-owners fell out, either could effectively enforce the sale of the property by refusing to agree to the postponement (LPA 1925 ss 34 and 36). 2.15 One of the problems of leaving land to persons in succession is that SLA 1925 would automatically apply unless it was specifically stated that the land was to be held on trust for sale (SLA 1925 s 1). Strict settlements were therefore not infrequently created purely by accident, often through homemade wills, resulting unintentionally in the highly complex and expensive-torun strict settlement (Bannister v Bannister [1948] 2 All ER 133). Problems could arise in relation to a trust for sale where property was put into the name of one of the purchasers (Bull v Bull [1955] 1  All ER  253). Williams and Glyns Bank v Boland [1981]  AC  487 confirmed that an undivided share in land can only take effect in equity behind a trust for sale. Bare trusts, where land was held by one person for another absolutely, are not dealt with as trusts under LPA  1925 or SLA  1925. A  court may order a sale of property under TLATA  1996 ss  14 and 15 if it considers it appropriate to do so following Wilkinson v Chief Adjudication Officer (2000)  EWCA  Civ 88 and Begum v Hafiz (2015) EWCA Civ 801. 2.16 LPA 1925 s 2 allowed a purchaser of land to acquire good title without enquiring into the equitable interests in detail, by providing that a conveyance to a purchaser of a legal estate of land shall overreach any equitable interest or power affecting the estate. Under LPA  1925 s  27 a purchaser was not concerned with any trusts affecting the land, provided that the capital money was paid to at least two persons or a trust corporation, as trustees, although payment to a sole personal representative was sufficient (LPA 1925 s 27(2)). This overreaching machinery did not, however, apply to a bare trust. The effect of overreaching is to transfer the rights of beneficiaries from the land itself to the proceeds of sale of the land. TA 1925 s 14 prevents a single trustee other than a trust corporation from giving a valid receipt for the proceeds of sale of land. The ability of the overreaching provisions to defeat all equitable interests arose in City of London Building Society v Flegg [1988] AC 54, where property was held in a single name. However, the beneficiary in occupation could defeat the purchaser following Hodgson v Marks [1971] 2 All ER 684. TLATA 1996 substitutes the concept of a trust of land for a trust for sale, and prevents the creation of any further strict settlements under SLA 1925. 119

2.17  Main Trust Legislation 2.17 The concept of a trust of land is very widely defined and would include bare trusts, statutory trusts and implied, resulting or constructive trusts. A trust of land differs from a trust for sale in that there is no duty to sell, with the power to retain, but an equal power to sell or retain, although this itself could give rise to problems where one co-owner wishes to sell and the other to retain the property. An express trust for sale is still possible, in which there is an implied power to retain. In some cases, an express trust for sale would prevent deadlock, by requiring the property to be sold in the absence of a unanimous agreement to retain. 2.18 TLATA  1996 generally enhances the rights of beneficiaries as compared with trustees, including a consultation process, rights to occupy and the abolition of the doctrine of conversion, which means that beneficial rights in a trust of land consists of real property. Existing strict settlements, under SLA  1925, may continue. TLATA  1996 also gives trustees wider powers of investment and management and the opportunity to purchase property for occupation by a beneficiary. Part II of TLATA  1996 also gives limited powers to beneficiaries to change trustees where they are all sui juris and unanimous.

Part I  Trusts of Land Introductory 1  Meaning of ‘trust of land’ Trusts of land are defined as any trust or property which consists of or includes land and ‘trustees of land’ are trustees of a trust of land. The definition includes all trusts whenever created except land to which the Universities and College Estates Act 1925 applies. Settlements and trusts for sale as trusts of land 2  Trusts in place of settlements The Act came into force on 1  January 1997 under the Trusts of Land and Appointment of Trustees Act 1996 (Commencement) Order 1996 (SI 1996/2974) and thereafter it became impossible to create a strict settlement under SLA 1925, but this does not outlaw existing strict settlements nor any changes to them, or settlements derived therefrom unless the deed otherwise provides. If there is no relevant property in a strict settlement, ie  land and heirlooms within SLA 1925 s 67(1) then it ceases to be a strict settlement and becomes a normal trust. Under Sch 1 an attempt to create a strict settlement by transferring land to minors does not pass legal title but creates a trust in favour of the purported transferees. Land held on charitable, ecclesiastical or public trusts is not deemed to be settled land under SLA 1925 even if it was 120

Main Trust Legislation 2.18 prior to 1 January 1997. It is not possible to create an entailed interest after 1 January 1997 and an attempt to do so results in the property being held in trust absolutely for the intended beneficiary. Where a strict settlement ceases to be so because of lack of relevant property, any subsequent property required under the settlement is held in trust for the beneficiaries. Schedule 1 introduces consequential provisions. 3  Abolition of doctrine of conversion Other than in the case of a pre-existing will trust, where land is held by trustees subject to a trust for sale it is not regarded as personal property. 4  Express trusts for sale as trusts of land In spite of anything to the contrary in the trust deed, trustees are given an absolute right to postpone the sale of land, and are not personally liable as a result of postponing the sale of land in the exercise of their discretion for an indefinite period. 5  Implied trusts for sale as trusts of land Schedule 2 is introduced to treat land held on trusts for sale as a trust of land without a duty to sell, and modifies the following provisions: LPA 1925 ss 31, 32, 34 and 36; LPA 1925 Sch 1; and AEA 1925 s 33. Functions of trustees of land 6  General powers of trustees The trustees of land have all the powers of an absolute owner, including the power to convey the land to beneficiaries of full age and capacity, and the beneficiaries or the court shall do whatever is necessary to secure that the land so vests. The trustees of land have power to acquire land under TA 2000 s 8, having regard to the rights of the beneficiaries and not in contravention of any order made under any other statute or rule of law or equity, which includes any order of any court or the Charity Commissioners. Trustees of land must exercise a duty of care under TA  2000 s  1 when exercising their powers to acquire or dispose of land. 7  Partition by trustees Trustees may partition land among beneficiaries absolutely entitled, and may convey the partitioned land either absolutely or in trust, and whether or not subject to any legal mortgage raised to providing equality money for the partition, but the trustees require the consent of the beneficiaries to the partition. Trustees must discharge any liability encumbering the land or otherwise give effect to it. Where land is absolutely vested in a minor, the trustees may act on his behalf and hold the land in trust for him. 121

2.18  Main Trust Legislation 8  Exclusion and restriction of powers The powers in ss 6 and 7 above can be disapplied by the trust deed, or made conditional on consent, except in the case of charitable, ecclesiastical or public trusts and subject to any restriction in any other act. 9  Delegation by trustee The trustees may delegate any of their functions as trustees of the land to an adult beneficially entitled to an interest in possession, by way of power of attorney. Interests of third parties dealing with the beneficiary are protected and the power of attorney must be given by all the trustees jointly, but may be revoked by any one of them or on the appointment of a new trustee. The power of attorney is automatically revoked if the donee ceases to be a beneficiary. Delegation under these provisions may be for any period or indefinite but cannot be an enduring power within the meaning of the EPAA 1985. When exercising the functions of the trustees the beneficiary has the same duties and liabilities as a trustee. 9A  Duties of trustees in connection with delegation etc Trustees, in delegating their functions over the land, must exercise a duty of care under TA 2000 s 1 and, unless the delegation is irrevocable, they must keep it under review and if appropriate give directions to the beneficiary or revoke the delegation. A trustee of land, provided that he has exercised the duty of care, is not liable for any act or default of the beneficiary. Consents and consultation 10 Consents Where a consent is required by the trustees in respect of a trust of land, any two beneficiaries giving consent will be sufficient. This does not apply to trustees of land held on charitable, ecclesiastical or public trusts. Where the beneficiary required to give a consent is under age, his consent is not required so far as the purchaser is concerned, but the trustees have to obtain the consent of the parent or guardian. 11  Consultation with beneficiaries Adult beneficiaries should be consulted by the trustees in exercise of any function relating to the land and so far as is consistent with the general interest of the trust, the trustees must give effect to the wishes of the majority of the beneficiaries by value. This does not apply to a pre-1 January 1997 will trust, or where the trust deed provides otherwise or where the land is to be conveyed to the beneficiaries 122

Main Trust Legislation 2.18 under s 6(2). Nor does it apply to a trust created prior to 1 January 1997 unless so provided in a supplemental deed executed by the settlor. Right of beneficiaries to occupy trust land 12  The right to occupy A beneficiary entitled to an interest in possession in land subject to a trust of land is entitled to occupy the land if so provided by the trust deed, or if the trustees are holding the land for his occupation, although these provisions do not apply if the land is either unavailable or unsuitable for occupation and is subject to s 13. 13  Exclusion and restriction of right to occupy Where two or more beneficiaries are prima facie entitled to occupy the land under s 12, the trustees may restrict the entitlement of one or more but not all of them, provided that they are acting reasonably. They have to take into account the intentions of the person who created the trust, the purpose for which the land is held and the circumstances and wishes of each of the beneficiaries. The trustees may impose obligations on the beneficiary such as paying the expenses in respect of the land, or assume other obligations in relation to any activity on the land, or to pay compensation to excluded beneficiaries or cause them to forego other benefits to which they would otherwise be entitled. They cannot, however, dispossess a beneficiary in occupation without the consent of that beneficiary or the court. Powers of court 14  Applications for order A trustee or beneficiary of a trust of land may apply to the court for an order relating to the exercise by the trustees of their functions, or declaring the nature or extent of a person’s interest in property. 15  Matters relevant in determining application The court, in making an order under s 14 must have regard to the intentions of the settlor, the purpose for which the property is held, the welfare of any minor who is or might occupy the land as his home, and the interests of any secured creditor or beneficiary. On an application under s 13 the court must have regard to the circumstances and wishes of each of the beneficiaries except in the case of a transfer of the land to beneficiaries under s  6(2), or an application by a trustee in bankruptcy under IA 1986 s 335A. A court may order a sale of property under TLATA 1996 ss 14 and 15 if it considers it appropriate to do so, following Wilkinson v Chief Adjudication Officer (2000) EWCA CW 88 and Bagum v Hafiz (2018) EWCA CW 801 (inserted by Sch 3). 123

2.18  Main Trust Legislation Purchaser protection 16  Protection of purchasers The purchaser of land which has been subject to a trust is not concerned to see that the trustees have complied with any requirement imposed on them unless the purchaser has actual notice of a contravention. Where the powers of the trustees are limited by the trust deed the trustees must take all reasonable steps to bring the limitation to the notice of the purchaser, but if they fail to do so it does not invalidate the conveyance to the purchaser who has no actual notice of the limitation. Where land is conveyed to the beneficiaries the trustees must execute a deed declaring that they are discharged from the trust in relation to the land, and if they fail to do so the court may make an order requiring them to do so, but the purchaser is entitled to assume that the land is not subject to the trust unless he has actual notice that the trustees were mistaken in believing that the beneficiaries were of full age and entitled to the property, although this section does not apply to registered land. Supplementary 17  Application of provisions to trusts and proceeds of sale The application for a court order applies to a trust and proceeds of sale of land as it applies to a trust of land. A trust of proceeds of sale of land is property which includes the proceeds of a sale of land or property representing such proceeds, which excludes a strict settlement (including heirlooms) but includes other trusts. 18  Application of parts to personal representatives Provisions relating to trustees, apart from ss  10, 11 and 14, apply with appropriate modification to personal representatives.

Part II  Appointment and Retirement of Trustees 19  Appointment and retirement of trustee at instance of beneficiary Where there are adult beneficiaries absolutely entitled to the property subject to a trust, and there is no person nominated for the purpose of appointing new trustees by the trust deed, the beneficiaries may direct a trustee or trustees to retire and to appoint a new trustee or trustees as directed provided that reasonable arrangements have been made for the protection of the retired trustee and there will, after his retirement, be either a trust corporation or at least two trustees to perform the trust, and either another person is to be appointed on his retirement or the continuing trustees consent to his retirement. The retiring trustee makes a deed declaring his retirement and he is deemed to have retired and be discharged from the trust. The remaining trustees will do 124

Main Trust Legislation 2.19 whatever is necessary to vest the trust property in the ongoing trustees, subject to the limitation of the trustees to four in the case of a trust of land. 20  Appointment of substitute for incapable trustees A notice directing a trustee to retire may be given to the receiver of a trustee incapable by reason of mental disorder from exercising his functions as trustee, or to his attorney, or to a person authorised under Part VII of MHA 1983. 21 Supplementary The administrative arrangements for directions being given by beneficiaries are set out.

Part III  Supplementary 22  Meaning of beneficiary Beneficiary is defined. 23  Other interpretation provisions Various terms are defined by reference to LPA 1925. 24  Application to Crown The Act applies to the Crown but not to affect or alter the descent, devolution or nature of the estates and interest of land vested in the Crown, the Duchy of Lancaster or the Duchy of Cornwall. 25  Amendments, repeals etc Schedule  3 sets out the minor or consequential amendments, and Sch  4 the repeals. 27  Short title, commencement and extent The Trusts of Land and Appointment of Trustees Act 1996 came into effect on 1 January 1997.

Trustee Delegation Act 1999 (TDA 1999) 2.19 TDA  1999 enables a trustee of a trust of land to appoint his coowner his attorney, either under a trustee power of attorney under TA  1925 s  25, an enduring power of attorney under EPAA  1985, or a general power of attorney under PAA 1971 s 10, overruling Walia v Michael Noughton Ltd [1985] 1  WLR  1115. It also prevents EPAA  1985 being used to usurp the functions of a trustee. It also replaces the trustee power of attorney under 125

2.19  Main Trust Legislation TA  1925 s  25 and gives limited rights to attorneys to appoint new trustees, but protects the two-trustee rule for the receipt for capital monies to overreach equitable interests.

Attorney of trustee with beneficial interest in land 1  Exercise of trustee functions by attorney A  co-owner as trustee can appoint his co-owner as his attorney. The donee of a power of attorney can act in relation to land or the sale proceeds of land or income from land provided that the donor had a beneficial interest in the land, proceeds or income, unless the instrument creating the power of attorney provides otherwise. This only applies whether the attorney is regarded as exercising a trustee function not where he is acting under a trustee delegation power. These provisions only apply where the power of attorney has been entered into after the commencement of the Act, on 1  March 2000 by the Trustee Delegation Act 1999 (Commencement) Order 2000 (SI 2000/216). 2  Evidence of beneficial interest An appropriate statement signed by the attorney is conclusive evidence of the donor’s beneficial interest in the property and therefore the attorney’s ability to act as against a purchaser. 3  General powers and specified forms The general prohibition under PAA 1971 s 10(2) for an attorney exercising a function as trustee etc is made subject to TDA 1999 s 1. 4  Enduring powers, repealed by Mental Capacity Act 2005

Trustee delegation under section 25 of the Trustee Act 1925 5  Delegation under section 25 of the Trustee Act 1925 A new section replaces the original TA 1925 s 25 6  Section 25 powers as enduring power, repealed by Mental Capacity Act 2005

Miscellaneous provisions about attorney acting for trustee 7  Two-trustee rules Where two or more trustees are required to give a valid receipt for capital monies or to overreach an interest or power, the requirement is not satisfied by 126

Main Trust Legislation 2.20 a relevant attorney, who is an attorney of two or more trustees, acting alone, unless the relevant entity is a trust corporation. 8  Appointment of additional trustee by attorney An attorney acting under a registered power under EPAA 1985 s 6 may appoint an additional trustee or trustees where he intends to exercise any function of the trustees under TDA 1999 s 1(1) or substituted TA 1925 s 25. 9  Attorney acting for incapable trustee A  new trustee may be appointed, or an incapable trustee discharged, by an attorney acting under an enduring power of attorney.

Authority of attorney to act in relation to land 10  Extent of attorney’s authority to act in relation to land The attorney appointed on or after 1 March 2000 may act in relation to land unless the deed appointing him provides otherwise.

Supplementary 11 Interpretation 12  Repeals, in accordance with the Schedule 13  Commencement etc

Trustee Act 2000 (TA 2000) 2.20 TA 2000 imposes a statutory duty of care on trustees, and although it can be disapplied it is unlikely that many trust deeds will actually do so. It also provides a number of default powers of investment, which are particularly useful where, for example, a statutory trust arises on intestacy or a new settlement fails to incorporate a full range of express powers of the trustees or where an old settlement incorporates limited and unsatisfactory powers. A well-drafted express trust is likely to continue to give the trustees all the powers included in TA 2000, eg see Society of Trust and Estate Practitioners Standard Provisions, first and second editions. The Act does not outlaw trustee exculpation clauses; although the Trust Law Committee produced a consultation paper against clauses exonerating professional trustees from negligence or, in many cases, anything other than fraud, such clauses remain effective (Armitage v Nurse [1998] Ch 241). 127

2.20  Main Trust Legislation

Part I  The Duty of Care 1  The duty of care A  trustee in carrying out his duties must exercise such care and skill as is reasonable in the circumstances having regard in particular to any special knowledge or experience that he has or claims to have and, if a professional trustee, to any special knowledge or experience that it is reasonable to expect such a person to have. This is referred to as the duty of care, and came into effect on 1 February 2001 (SI 2001/49). 2  Application of duty of care Schedule 1 provides when the duty of care applies to a trustee, ie when exercising the powers of investment or review of investments, when exercising power to acquire land or in relation to land, and on the appointment of agents, nominees or custodians, and in reviewing their actions, in particular selecting who is to act and in determining the terms on which he is to act, and in the preparation of a policy statement governing asset management functions. It applies generally to asset management functions and insurance. It also applies to trustees valuing reversionary interests or other trust property. The duty of care does not apply if it appears from the trust instrument that it is not meant to apply.

Part II  Investment 3  General power of investment A  trustee may make any kind of investment that he could make if he was absolutely entitled to the assets of the trust, which is called the general power of investment. This general power does not permit a trustee to make investments in land, other than in loans secured on land, as the acquisition of land is dealt with in Part III below. 4  Standard investment criteria When exercising any power of investment a trustee must have regard to the standard investment criteria, ie  the suitability to the trust of proposed investments, and the need for diversification in so far as is appropriate to the circumstances of the trust. The trustee must from time to time review the investments of the trust and consider whether they should be varied. 5 Advice A trustee must obtain and consider proper advice before exercising any power of investment or when reviewing whether the investment should be varied unless he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so. Proper advice is from a person reasonably believed by the trustee to be qualified to give it. 128

Main Trust Legislation 2.20 6  Restriction or exclusion of this Part etc The general power of investment is in addition to the trustees’ existing powers and subject to any restriction or exclusion imposed by the trust deed or by law. 7  Existing trusts Trustees’ investment powers contained in a deed made before 3 August 1961 do not restrict the trustees’ general power of investment, nor does a provision in the trust authorising investments under TIA 1961.

Part III  Acquisition of Land 8  Power to acquire freehold and leasehold land A trustee may acquire freehold or leasehold land in the UK as an investment for occupation by a beneficiary or for any other reason. 9  Restriction or exclusion of this Part etc The power to acquire land is in addition to powers otherwise conferred on trustees but is subject to any restriction imposed by the trust deed or by law. 10  Existing trusts The power to acquire land applies to all trusts other than strict settlements under SLA 1925 or a trust to which the Universities and College Estates Act 1925 applies.

Part IV  Agents, Nominees and Custodians Agents 11  Power to employ agents Trustees may delegate to any person as their agent matters other than (except in the case of a charitable trust) decisions as to whether or in what way any assets of the trust should be distributed, whether trust expenses should be borne by income or capital, or the appointment of a new trustee or the power to delegate or appoint a person as nominee or custodian, which must be done by the trustees themselves. In a charitable trust, the trustees’ delegable functions are carrying out the trustees’ decisions, the investment of assets, the raising of funds, other than by means of a trade which is an integral part of the trust’s charitable purposes, or any other function prescribed by an order made by the Secretary of State. 129

2.20  Main Trust Legislation 12  Persons who may act as agents Trustees may authorise a trustee to be an agent but may not authorise two or more persons to exercise the same function, unless they act jointly, but a beneficiary cannot be an agent. The agent can also be a nominee or custodian. 13  Linked functions etc An agent must abide by the statutory rules applicable to his task, so that the investment agent must follow the standard investment criteria relating to the trust. An agent who is an expert does not have to take advice in his area of expertise and an agent dealing with trust land has no duty to consult beneficiaries or give effect to their wishes, but the terms of his appointment must not prevent the trustees from complying with their statutory duties to consult, under TLATA 1996 s 11(1). 14  Terms of agency Trustees can fix the terms of engagement and remuneration of the agent but unless it is reasonably necessary must not permit the agent to appoint a substitute or restrict his liability or to have a conflict of interest. 15  Asset management: special restrictions Agents carrying out asset management functions must have an agreement which is evidenced in writing and the trustee must have prepared a policy statement that gives evidence as to how the function should be exercised, and the agent must agree to follow the policy statement or any revision or replacement thereof. The policy statement must ensure that the asset management will be in the best interests of the trust, and must be in, or evidenced in, writing. Asset management functions are those relating to the investment of the trust assets and the acquisition, management or disposing of trust property. Nominees and custodians 16  Power to appoint nominees Trustees may hold trust assets, other than settled land under SLA 1925, in the name of a nominee whose appointment must be in, or evidenced in, writing. These provisions do not apply to the trust having a custodian trustee or assets vested in the official custodian for charities. 17  Power to appoint custodians Trustees have an unfettered right to appoint a person to act as a custodian in relation to trust assets, to undertake the safe custody of the assets, or of any documents or records concerning the assets. The appointment must be in or evidenced in writing but does not apply to a custodian trustee. 130

Main Trust Legislation 2.20 18  Investment in bearer securities The trustees must appoint a person to act as custodian of bearer securities, unless the trust deed provides otherwise, and such appointment must be in, or evidenced in, writing. This section does not apply where there is a custodian trustee. 19  Persons who may be appointed as nominees or custodians A nominee or custodian must be a person carrying on a business which includes such activities, or be a body corporate controlled by the trustees, or one recognised under AJA 1985 s 9. The company is controlled by trustees if they have voting control or have powers to secure that the affairs of the company are conducted in accordance with their wishes under ITA 2007 s 995. The trustees of a charitable trust must follow the advice of the Charity Commissioners concerning the selection of a custodian or nominee. Appointees may include a trustee if it is a trust corporation, or two or more trustees to act as joint nominees or joint custodians. Nominees may also be custodians or agents and vice versa. 20  Terms of appointment of nominees and custodians The trustees may fix the remuneration and terms of engagement of a nominee or custodian but must not, unless it is reasonably necessary to do so, permit a nominee or custodian to appoint a substitute or restrict their liability or have a conflict of interest. Review of and liability for agents, nominees and custodians etc 21  Application of sections 22 and 23 Sections 22 and 23 apply where trustees have appointed an agent, nominee or custodian unless these are inconsistent with the trust instrument. 22  Review of agents, nominees and custodians etc The trustees must keep under the review the arrangements under which an agent, nominee or custodian acts, and to exercise any power of intervention they may have, if necessary. They must also keep the policy statement under review. 23  Liability for agents, nominees and custodians etc A trustee is not liable for any act or default of an agent, nominee or custodian, unless he has failed to comply with his duty of care, and the same applies to any duly appointed substitute. 131

2.20  Main Trust Legislation Supplementary 24  Effect of trustees exceeding their powers The fact that a trustee has exceeded his power in authorising an agent or appointing a nominee or custodian does not invalidate the authorisation or appointment. 25  Sole trustees These provisions also apply to sole trustees except that a trust corporation does not need to appoint a custodian for bearer securities. 26  Restriction or exclusion of this Part etc The ability of trustees to appoint agents, nominees or custodians is in addition to any other powers they have at law, or under the trust instrument, but may be restricted or excluded by the trust deed. 27  Existing trusts These provisions apply to trusts whenever created.

Part V  Remuneration 28  Trustee’s entitlement to payment under trust instrument Provided that the instrument provides for trustees to be paid, a trust corporation or professional trustee is entitled to receive payment for his services. A trustee of a charitable trust who is not a trust corporation and is not a sole trustee can only be paid to the extent that a majority of the other trustees have agreed that he should be paid. A payment to a trustee is treated as remuneration for services and not as a gift from the trust for the purposes of WA 1837 s 15 and AEA 1925 s 34(3). 29  Remuneration of certain trustees A trust corporation that is not a trustee of a charitable trust is entitled to receive reasonable remuneration out of the trust funds, as is a professional trustee, unless the trust instrument deals with his entitlement to remuneration or it is covered by any other legislation. It also applies where a trustee has appointed an agent, nominee or custodian. 30  Remuneration of trustees of charitable trusts The Secretary of State may make regulations to provide for the remuneration of trustees of charitable trusts who are trust corporations or act in a professional capacity. At the time of writing no such regulations have yet been produced. 132

Main Trust Legislation 2.20 31  Trustee’s expenses A trustee is entitled to be reimbursed from the trust funds, or may use the trust funds, to pay expenses properly incurred by him when acting on behalf of the trust, whether or not an agent, nominee or custodian has been appointed. 32  Remuneration and expenses of agents, nominees and custodians Trustees are authorised to pay reasonable remuneration to, and reimburse the expenses of, an agent, nominee or custodian whose terms of engagement entitle him to be remunerated. 33 Application The provisions relating to trustees’ remuneration apply to trusts whenever created, but not to the administration of estates where the death occurred before the Act came into force on 1 February 2001.

Part VI  Miscellaneous and Supplementary 34  Power to insure This section substitutes a new power to insure in TA 1925 s 19. 35  Personal representatives This Act applies to personal representatives administering an estate, as well as to trustees with appropriate modifications, such as references to the trust instrument being references to the will, and to beneficiaries, the persons interested in the due administration of the estate, or in relation to the occupation of trust property by a beneficiary under TA  2000 s  8(1)(b) to a person beneficially interested in the estate. The remuneration of the personal representative is treated as an administration expense and takes priority over preferential debts in an insolvent estate under IA 1986 Sch 6, except in the case of a death occurring before 1 February 2001. 36  Pension schemes Pension schemes established under a trust, and subject to the law of England and Wales, are within only some of the provisions of this Act. The duty of care in Part I and the provisions relating to acquisitions and investment in land in Parts II and III do not apply. The provisions relating to the appointment of agents exclude the employer or associate of an employer from being an agent. The provisions relating to nominees and custodians do not apply to the trustees of a pension scheme. 37  Authorised unit trusts Parts II, III and IV do not apply to authorised unit trusts under FSA 1986 s 78. 133

2.20  Main Trust Legislation 38  Common investment schemes for charities etc Parts II, III and IV do not normally apply to common investment schemes under Charities Act 1993 s 24 or 25. 39 Interpretations Various terms are defined. 40  Minor and consequential amendments etc Schedules 2 (minor and consequential amendments), 3 (transitional provisions and savings) and 4 (repeals) are enacted. 41  Power to amend other Acts A Minister of the Crown may make such amendments to any Act, including an Act extending to places outside England and Wales, as appears to him appropriate in connection with the investment and acquisition of land provisions in Part II or III. Before doing so, in relation to a local, personal or private Act, the Minister must consult any person who appears to be affected. Such an order is exercisable by statutory instrument. 42  Commencement and extent The Act came into force on 1 February 2001 by order made by the Trustee Act 2000 (Commencement) Order 2001 (SI 2001/49). Generally the Act applies to England and Wales only. 43  Short title This Act may be cited as the Trustee Act 2000. The alterations to existing statutes made by Sch 2 are included in the commentary on those Acts, where appropriate, or are otherwise outside the scope of this book.

SCHEDULES Schedule 1 application of duty of care to trustee for Investment Acquisition of land Agents nominees and custodians Compounding of liabilities Insurance Reversionary inserts, valuations and audits Exclusions of duty of care. 134

Main Trust Legislation 2.21 The duty of care does not apply if or in so far as it appears from the trust investment that the duty is not meant to apply.

Schedule 2 Minor and consequential amendments These are made to the Trustee Investments Act 1961 and the Charities Act 1993 and a number of other Public General Acts, in particular the Settled Land Act 1925, the Trustee Act 1925, the Land Registration Act 1925 the Administration of Estates Act 1925 and the Trusts of Land and Appointment of Trustees Act 1996.

Schedule 3 Transitional provisions and savings Amendments are made to the Trustee Act 1925, the Trustee Investments Act 1961 and the Cathedrals Measure Act 1963.

Schedule 4 The Trustee Investment Act 1961 is amended by repeals to ss 1 to 3, 5, 8, 9, 12, 13 and 16(i). The Charities Act 1993 is amended by repeals to ss 70 and 71. Other repeals to various acts are listed.

TRUSTS (CAPITAL AND INCOME) ACT 2013 2.21 This Act applies to new trusts, ie those created or arising on or after 1 October 2013, or for certain charitable trusts 1 January 2014.

1  Disapplication of Apportionment etc. rules The statutory and equitable apportionment rules in the Apportionment Act 1870 s 2 which provide for income to accrue from day to day is replaced for new trusts by recognising the entitlement to income as it arises. This also disapplies for such trusts, unless specifically applied, the equitable apportionment rules (s 1(2)) as follows: (a)

The first part of the rule known as the rule in Howe v Earl of Dartmouth (which requires certain residuary personal estate to be sold);

(b) The second part of the rule (which withholds from a life tenant income arising from certain investments and compensates the life tenant with payments of interest); 135

2.22  Main Trust Legislation (c) The rule known as the rule in re Earl of Chesterfield’s Trusts (which requires the proceeds of the conversion of certain investments to be apportioned between capital and income); (d) The rule known as the rule in Allhusen v Whittell (which requires a contribution to be made from income for the purpose of paying a deceased person’s debts, legacies and annuities). These complex rules are usually specifically disapplied in most recent trusts. Trustees still have the power to sell assets that they would previously have had a duty to sell. Section 2 classifies certain corporate distributions as capital rather than income for all trusts unless there is a contrary intention in the trust deed. The distributions so treated are those in the course of a demerger within CTA  2010 ss  1076–1078, which are exempt distributions. The Secretary of State can specify by order other tax-exempt distributions by companies which are to be treated as capital by trustees. Section 3 gives trustees power to compensate income beneficiaries where there has been a tax-exempt distribution classified as capital if there would probably otherwise have been an income distribution. The trustees could alternatively transfer trust property to the income beneficiary which would be a capital receipt of the income beneficiary. Section 4 allows a charity with a permanent endowment to invest on a total return basis by making a resolution to adopt a Charity Commission total return investment scheme, under the Charities Act 2011 ss 104A or 104B and regulations made thereunder. Section 5. Sections 1–3 bind the Crown. This Act applies only to England and Wales.

WILLS, FAMILIES AND ESTATES 2.22

Acts dealing with family and inheritance law are set out below.

Wills Act 1837 (WA 1837) 2.23 Important provisions of the WA 1837 that are still in force include s 9, which provides that no will shall be valid unless it is in writing and signed by the testator, or by some other person in his presence and by his direction, and it appears that the testator intended by his signature to give effect to the will and 136

Main Trust Legislation 2.24 the signature is made or acknowledged by the testator in the presence of two or more witnesses present at the same time, and each witness either attests and signs the will or acknowledges his signature in the presence of the testator but not necessarily in the presence of any other witness, but no formal attestation shall be necessary. It is, however, common to have an attestation clause such as ‘signed by the said … [testator] in our joint presence and attested by us in his/ her presence and that of each other’; together with the signature, address and occupational status of the witnesses. In Allen and Others v Emery and Another (2005) 8 ITELR 358, the question of whether an elderly testator was lacking testamentary capacity was considered, and the court held that Mrs Cooper, the testatrix, had the mental capacity to make the will which she had and that there was no evidence of any undue influence. However, in Re Rowinska (dec’d); Wyniczenko v Plucinska-Surowka (2006) 8 ITELR 385, the court refused to admit the will to probate where there was an allegation of forgery of the testatrix’s signature. That allegation failed but the will had been prepared by the carer of the testatrix and witnessed by two of his friends, and the court was not convinced that the testatrix had known of and approved the contents of the will. The judge concluded, ‘I am far from satisfied that Maria Rowinska knew that what she was signing was a will which left her entire estate to Stanislaw Wyniczenko. I am not accordingly satisfied that she knew and approved the contents of the will. I find against the will and refuse to admit it to probate.’ Wills Act 1837 s 18A is amended by the Law Reform (Succession) Act 1995 s  3 so that on dissolution or annulment of marriage the appointment of the spouse as executor is to take effect as if the former spouse had died on the date on which the marriage is dissolved or annulled and any property devised or bequeathed to the former spouse is similarly treated as if the former spouse had died on that date. 2.24

Other sections still in force and of relevance include the following:

11  Soldiers’ and mariners’ wills excepted A soldier on actual military service and a mariner at sea, even if aged under 18, may dispose of his personal estate through a hand-written (holograph) but unwitnessed will (see Wills (Soldiers and Sailors) Act 1918). 15  Gifts to an attesting witness to be void A person who attests the execution of a will cannot take any benefit from the will and nor can his or her spouse although it does not invalidate any other aspect of the will. This provision is modified by WA 1968 s 1, which provides that, if the will is duly executed without the potential beneficiary’s attestation and without that of any other such beneficiary, the intended beneficiary’s attestation can be ignored and he or his spouse can benefit under the will. 137

2.24  Main Trust Legislation 18  Wills to be revoked by marriage, except in certain cases A will is automatically revoked by the testator’s marriage (or civil partnership (s  18B)) but a power of appointment is not. A  will made in contemplation of a marriage (or civil partnership (s  18B)) which subsequently takes place is valid. 18C  Effect of dissolution or annulment of marriage on wills Where a testator is divorced or his marriage (or civil partnership (s  18B)) annulled after he has made a will, it takes effect as if the former spouse or civil partner had died on the date the marriage (or civil partnership (s 18C)) was dissolved or annulled. 20  No will to be revoked otherwise than as aforesaid or by another will or codicil or by destruction A will can only be revoked or amended by a formal revocation, new will or codicil executed in accordance with s 9 or s 11, or by destruction. 21  No alteration in a will shall have any effect unless executed as a will A will can only be altered by a proper codicil executed in accordance with s 9 or s 11. 22  No will revoked to be reviewed otherwise than by re-execution or a codicil to revive it Execution in accordance with s 9 or s 11 is necessary. 24  A will shall be construed to speak from the death of the testator 25  A residuary devise shall include estates comprised in lapsed and void devises Where property is devised but fails as a result of the prior death of the devisee or for some other reason, such property is included in the residuary devise contained in the will or otherwise falls into residue. This applies subject to any contrary intention in the will. 26  A general devise of the testator’s lands shall include … leasehold as well as freehold interests Unless a contrary intention appears in the will. 27  A general gift shall include estates over which the testator has a general power of appointment 138

Main Trust Legislation 2.27 33  Gifts to children or other issue who leave issue living at the testator’s death shall not lapse Where a child dies before the testator his or her issue will share their deceased parent’s inheritance, known as taking per stirpes (through the stem). This includes illegitimate and posthumous children en ventre sa mere at the testator’s death.

Married Women’s Property Act 1882 (MWPA 1882) 2.25 This Act originally gave married women the right to own property and to sue in their own name, for the first time. The main practical effect these days is in relation to insurance policies effected by a husband in favour of his wife under MWPA 1882 s 11, enabling her to claim on a policy on her husband’s death even though not a contractual party to it. MWPA 1882 s 17 enables the court to ascertain the property rights of spouses or of couples who were previously engaged to be married. In such cases, it would be normal for resulting trust principles to determine the beneficial interest of the spouse based on her contribution to the purchase price of the matrimonial home. There may also be arguments under constructive trust principles which would take into account non-financial contributions to the marriage. See MPPA 1970 ss 37 and 39.

Domicile and Matrimonial Proceedings Act 1973 (DMPA 1973) 2.26 The portion of this Act which is of relevance is Part I, which deals with domicile.

Husband and wife 2.27 1  Abolition of wife’s dependent domicile The domicile of a married woman, after the coming into force of this section, by s 17(5) on 1 January 1974, is ascertained by reference to the same factors as in the case of any individual capable of having an independent domicile as opposed to one the same as that of her husband by virtue only of marriage. However, where a woman was married on or before 1 January 1974 and had acquired her husband’s domicile by dependence, she is treated as retaining that domicile as a domicile of choice until it is changed by acquisition or revival 139

2.28  Main Trust Legislation of another domicile, ie her domicile prior to marriage does not automatically revive. This section extends to England and Wales, Scotland and Northern Ireland. 3  Age at which independent domicile can be acquired A person becomes capable of having an independent domicile when he attains the age of 16 or marries before that age. This section applies to England and Wales and Northern Ireland but not to Scotland, where the age of independent domicile is also 16 under the Family Law (Scotland) Act 2006 s 22. Prior to this section and until 31 December 1970, the age of independent domicile was 21. Subsequently, under the Family Law Reform Act 1969 s  1(1) it was 18 until 31 December 1973 in England and Wales and Northern Ireland. A child aged between 16 and 18 on 1 January 1974 became capable of an independent domicile on that date. 4  Dependent domicile of child not living with his father Where the father and mother are alive but living apart, the child’s domicile while dependent shall be that of his mother, if he has his home with her and no home with his father, or has had a home with her and has not since had a home with his father. If the mother dies, the child retains her domicile at death if he had acquired his mother’s domicile and has not since had a home with his father. Illegitimate and posthumous children still have their mother’s domicile while dependent. Where the child has been adopted, the father and mother are the adoptive father and mother. This section applies to England, Wales, Scotland and Northern Ireland. The remainder of this Act deals with jurisdiction in matrimonial proceedings and is therefore outside the scope of this book.

Inheritance (Provision for Family and Dependants) Act 1975 (IPFDA 1975) 2.28 Under s  1 of this Act, certain dependants of a deceased who was domiciled in the UK (including spouses, ex-spouses who have not remarried, children and long-term partners) have a right to claim, within six months of the grant of probate, as determined under ITPA 2014 s 7 and Schedule 3 as an unlimited grant, that the deceased has not made reasonable provision in his or her will or under the intestacy rules. Domicile in England and Wales of the deceased used to be vital (Agulian and Another v Cyganik [2006] EWCA Civ 129). A claim for family provisions may now be made where the deceased died domiciled outside the UK but left property or dependants in the UK (ITPA 2014 s 6 and Schedule 2). The court may order income or capital of the deceased’s estate to be paid or transferred to the claimant if and so far as it thinks fit. Any such order is effective as from the date of death, and effectively amends the 140

Main Trust Legislation 2.30 will or intestacy rules for all purposes including taxation. An attempt, within six years before death, to defeat applications for financial provisions is unlikely to succeed (ss 10–13). IPFDA 1975 is amended by the Law Reform (Succession) Act 1995 s 2 to allow a cohabitee living as husband or wife of the deceased to apply for financial provision from the estate.

Matrimonial Proceedings and Property Act 1970 (MPPA 1970) 2.29

Two sections of this Act are of relevance.

37  Contributions by a spouse in money or money’s worth to the improvement of property Substantial contributions to the improvement of property in money or money’s worth by a husband or wife may increase the proportionate beneficial interest in the property to an extent that may seem just, unless there is an express or implied agreement to the contrary. 39  Extension of section 17 of the Married Woman’s Property Act 1882 An application for a share in the former matrimonial home can be made within three years of the marriage being dissolved or annulled.

Administration of Estates Act 1925 (AEA 1925) 2.30 AEA 1925 is still the main Act which deals with the administration of a deceased’s estate, whether testate or intestate.

Part III  Administration of Assets 32  Real and personal estate of deceased are assets for payment of debts The real and personal estate, whether legal or equitable, of the deceased, including any property over which he has a general power of appointment, are assets for the payment of his debts. Any person to whom such assets are transferred and who disposes of them in good faith passes good title but is liable to the value of the assets disposed of. 33  Trust for sale Where a person dies intestate as to any part of his estate, it should be held in trust by his personal representatives with power to sell it under the Trustee Act 2000. Personal representatives should use any money from the proceeds of 141

2.30  Main Trust Legislation disposal of assets to pay funeral, testamentary and administration expenses, debts and other liabilities and any balance should be used to pay any pecuniary legacies bequeathed by the will. Pending payment the trustees may invest the monies which become the residuary estate of the intestate and subject to the provisions contained in the will if any. 34  Administration of assets Where the estate is solvent, assets are applied in payment of liabilities in accordance with AEA 1925 Sch 1 Part II in the following order: (i) property undisposed of by will, subject to a retention to fund any pecuniary legacies; (ii) property not specifically devised or bequeathed, subject to retention of underpaid pecuniary legacies so far as not already provided for; (iii) property specifically appropriated, devised or bequeathed for the payment of debt; (iv) property charged with or devised or bequeathed, subject to a charge for the payment of debt; (v) the fund, if any, retained to meet pecuniary legacies; (vi) property specifically devised or bequeathed rateably according to value; (vii) property appointed by will under a general power rateably according to value; (viii) the will may vary this order of application. 41  Powers of personal representative as to appropriation A  personal representative may appropriate any part of the real or personal estate towards satisfaction of any legacy which does not prejudice the interests of any specific legatee or devisee. Consent of the donee or his trustees is required. 42  Powers to appoint trustees of infant’s property Where an infant becomes absolutely entitled under a will or an intestacy to a devise or legacy or share of the residue, the personal representatives may appoint trustees to hold the assets for the benefit of the infant.

Part IV  Distribution of Residuary Estate 46  Succession to real and personal estate on intestacy This section is amended by the ITPA  2014 which sets out the manner in which the residuary estate of an intestate shall be distributed, absolutely 142

Main Trust Legislation 2.31 or on statutory trusts, in favour of issue and other classes of relatives of intestates. The statutory trusts referred to for intestates under AEA 1925 s 46, as amended, are held in trust in equal shares for any child or children of the intestate living at the date of death who obtain the age of 18 years or marry under that age and, if they predecease the intestate, their issue taking their parent’s share equally per stirpes. The statutory powers of advancement and maintenance and accumulation of surplus income under TA 1925 ss 31 and 32 apply, although when an infant marries he is entitled to give a valid receipt for the income of his share or interest. Personal representatives may permit any infant with a contingent interest who would inherit on reaching the age of 18, or marrying under that age, to have the use and enjoyment of any personal chattels subject to such conditions as the personal representatives may consider reasonable. If the children of the intestate fail to obtain a vested interest by dying without issue before their parent, the intestate is treated as having died without leaving issue and the intestacy rules applied accordingly. Where part of the residuary estate of the intestate is held on statutory trusts for relatives other than issue, the residuary estate is shared equally among the members of the class with similar statutory powers of advancement and maintenance and accumulation of surplus income and ability to allow a beneficiary to have the use and enjoyment of any personal chattels as it applies to children of the intestate. 48  Powers of a personal representative in respect of interests of surviving spouse Personal representatives may raise the money to redeem the surviving spouse’s life interest by using the remainder of the estate, other than personal chattels, as security in the same way as they are permitted to charge the residue to raise the fixed sum due to the surviving spouse under the intestacy rules. 49  Application to cases of partial intestacy The personal representative under the will becomes a trustee for the assets undisposed of by will to hold them in accordance with the beneficiary’s rights under the intestacy rules.

Intestates’ Estates Act 1952 (IEA 1952) 2.31 Section 5 states that under IEA 1952 Sch 2, where the residuary estate of the intestate comprises the matrimonial home, the surviving spouse or civil partner may require the personal representative to appropriate the property in specie under AEA  1925 s  41 in or towards satisfaction of the surviving 143

2.32  Main Trust Legislation spouse’s interest in the estate of the intestate. This right may be exercised within 12 months of representation being taken out in respect of the intestate’s estate but not after the death of the surviving spouse and must be notified to the personal representatives in writing or to the court. During this 12-month period the personal representative cannot sell or dispose of the matrimonial home without the surviving spouse’s written consent unless it is needed to pay debts of the deceased.

Wills Act 1963 (WA 1963) 2.32

Sections 1 and 2 of this Act are of interest.

1  General rule as to formal validity A  will is treated as valid if executed in accordance with the law in force in the territory where at the time of its execution or the testator’s death he was domiciled, had his habitual residence or was a national. 2  Additional rules A will executed on board a vessel or aircraft is valid if executed in accordance with the law in force where the vessel or aircraft is registered or most closely connected and, if it relates to immovable property such as real estate, if it is executed in accordance with the law in force in the territory where the property was situated. Such a will may include a power of appointment if it conformed to the law governing the essential validity of the power.

Inheritance and Trustees’ Powers Act 2014 (ITPA 2014) 2.33 This Act amends the Administration of Estates Act (AEA) 1925 s 46 and the intestacy rules with effect from 1 October 2014, by redefining the fixed net sum, personal chattels, adoption and contingent interests, the presumption of prior death, the Inheritance Provision for Family and Dependents Act (IPFDA) 1975, q.v., the date when representation is first taken out, the power to apply for maintenance and, the power of advancement under TA 1925 s 32, and minor and consequential amendments.

INTESTACY RULES England and Wales 2.34 The applicable statute is AEA 1925 s 46 as amended by the Inheritance and Trustees’ Powers Act 2014, for deaths on or after 1 October 2014. 144

Main Trust Legislation 2.34 Surviving relative(s)

Person(s) entitled to the estate

Person(s) entitled to grant of letters of administration

1 Spouse or civil partner only

Surviving spouse or civil partner absolutely

Surviving spouse or civil partner

2 Spouse or civil partner and issue

(a) Surviving spouse or civil partner takes:

Surviving spouse or civil partner and one other person

(i) personal chattels, all tangible moveable property other than money or property used solely or mainly for business purposes or held solely as investment, (ii) £250,000 index linked under IPTA 2014 Sch 1 inserting AEA 1925 Sch 1A (iii) half the residuary estate (b) Issue take half the residuary estate at age 18 in equal shares per stirpes

3 Issue

Issue at age 18 in equal shares per stirpes

Issue

4 Parent(s)

Parent(s) in equal shares

Parent

5 Brother(s) and/or sister(s) of the whole blood and/ or issue of such who predeceased the intestate

Parent(s) in equal shares, Brother or sister or issue etc brother(s) and sister(s) and (and one other person) or issue at age 18 in equal shares per stirpes

6 Brother(s) and/or sister(s) of the half blood and/or issue of such who predeceased the intestate

Half brother(s) and sister(s) Half brother or sister or and/or issue at age 18 in issue etc (and one other equal shares per stirpes person)

7 Grandparent(s)

Grandparent(s) in equal shares

145

Grandparent

2.34  Main Trust Legislation Surviving relative(s)

Person(s) entitled to the estate

Person(s) entitled to grant of letters of administration

8 Uncle(s) and/or aunt(s) of the whole blood and/ or issue of such who predeceased the intestate

Uncle(s) and aunt(s) and/ or issue at age 18 in equal shares per stirpes

Uncle or aunt or issue etc (and one other person)

9 Uncle(s) and/or aunt(s) of Such uncle(s) and aunt(s) Such uncle, aunt or issue etc the half blood and/or issue and/or issue at age 18 equal (and one other person) of such who predeceased shares per stirpes intestate 10 No relative as mentioned above

The Crown as bona vacantia

The Crown

Notes 1

Where a decree of judicial separation is in force and the separation is continuing at the date of death, the estate of the intestate devolves as if his or her surviving spouse or civil partner were dead.

2

‘Issue’ includes issue through all degrees: (a)

Illegitimate children took no interest before 1926; between 1926 and 1970 on the death of his or her mother, provided no legitimate issue survived her, an illegitimate child took such interest as if he or she had been born legitimate; after 1970, an illegitimate child has the same right of inheritance of his or her parent’s estate as a legitimate child.

(b)

Adopted children: from 1949 on the death of the adopter his or her estate devolves as if the adopted person had been born in wedlock and was not the child of any person other than his or her adopters. An adopted person is deemed to become the brother or sister of the whole blood of the other lawful or adopted children of the adopters; of the half blood, in other cases. This now applies also to a child adopted after the death of a parent.

(c)

Legitimated children take as if legitimate save as to real or personal property devolving with a dignity or title of honour.

3

The sum payable to the surviving spouse must be paid out of capital with interest specified in ITPA 2014 s 1(3) and (4).

4

In the event that a minor beneficiary under the distribution of aforesaid dies before attaining the age of 18 and without leaving issue capable of taking his share by substitution, the distribution of the estate is completed as if such deceased beneficiary had predeceased the intestate.

5

TA 1925 ss 31 and 32 will apply to any fund in which under the foregoing rules there subsist minority or life interests. 146

Main Trust Legislation 2.35 However, people who die with less than £250,000 in assets will not be affected by the changes made in 2014. Cohabiting partners have no automatic right to receive anything from the estate, regardless of how long they have lived together, or even if they had children together, if they were neither married nor in a civil partnership with the deceased. So the only way to ensure that part, or all, the estate will go to a partner is to marry them, or make a will. For deaths prior to 1  October 2014 the rules were set out in the 4th edition.

Scotland 2.35 The relevant statute is the Succession (Scotland) Act 1964 as amended by the Law Reform (Parent and Child) (Scotland) Act 1986 and, for deaths on or after 1 June 2005, under the Prior Rights of Surviving Spouse (Scotland) Order 2005 (SI 2005/252). 1  Spouse and issue survive Spouse receives, as a prior right, the dwelling house owned by the predeceasing spouse if the surviving spouse was ordinarily resident there. Where house value exceeds £473,000 (net of any securities) the surviving spouse would instead receive that amount. Also the furniture and plenishings within the dwelling house up to a value of £29,000 and £50,000 of the balance. Note In either case, if the property is jointly owned then relevant values are halved, eg a jointly owned house and contents worth £946,000 and £58,000 respectively would remain with a surviving spouse. (1) prior right: £50,000; (2) legal rights: one-third share of any remaining moveable estate. Issue receives residue remaining after satisfaction of surviving spouse’s prior and legal rights. 2  Spouse survives without issue Spouse receives: (1) prior right: as above; (2) prior right: £89,000; (3) legal rights: one half share of any remaining moveable estate. 147

2.36  Main Trust Legislation Remainder distributed to: (1) parents, and brothers/sisters or their issue; half to each class; or (2) brothers/sisters or their issue if no surviving parents; or (3) parents if no surviving brothers/sisters. 3  Spouse survives but no issue, parents, brothers or sisters or their issue Whole estate to surviving spouse. 4  No spouse survives Estate held for the following in the order given, with no class of beneficiaries participating unless all those in a prior class have predeceased. (i)

issue of deceased;

(ii) parents, and brothers/sisters or their issue: half to each class; (iii) brothers/sisters or their issue if no surviving parents; half blood postponed to full blood; (iv) parents if no surviving brothers/sisters; (v) husband or wife or civil partner; (vi) uncles/aunts or their issue; (vii) grandparents; (viii) great uncles/aunts or their issue; (ix) remoter ancestors; (x) no limit of remoteness in succession although in practice if impossible to trace any relative of intestate then whole estate falls to Crown as ultimus haeres administered by Queen’s and Lord Treasurer’s Remembrancers.

INTERESTS IN LAND Law of Property Act 1925 (LPA 1925) 2.36 LPA  1925, as amended, still forms the foundation for the purchase and sale of land in England and Wales. Only those sections which have a bearing on trusts have been summarised. 1  Legal estates and equitable interests The only possible legal interests in land are freehold, ‘an estate in fee simple absolute in possession’ or leasehold, ‘a term of years absolute’. The only 148

Main Trust Legislation 2.36 interests or charges in or over land which may exit are an easement, a right or privilege in or over land indefinitely or for a fixed term, a rent charge, either perpetual or for a fixed term, a charge by way of legal mortgage, any other similar charge on land not created by an instrument, such as an equitable mortgage arising from the deposit of title deeds, rights of entry by a landlord or holder of a rent charge. All other interests are equitable interests. A legal estate cannot exist in an undivided share in land where there are joint tenants as opposed to tenants in common and cannot be held by an infant. 2  Conveyances overreaching certain equitable interests and powers A conveyance to a purchaser of a legal estate in land overreaches any equitable interest or power if the conveyance is made under SLA 1925 or is made by trustees approved or appointed by the court or a trust corporation or the conveyance is made by a mortgagee or personal representative or the conveyance is made under an order of the court. Equitable interests which cannot be overreached are an equitable mortgage protected by a deposit of documents, benefit of any covenant or restriction of user, any equitable easement, liberty or privilege, the benefit of any contract and an equitable interest protected by registration under the Land Charges Act 1925, subject to exceptions. 3  Manner of giving effect to equitable interests and powers Equitable interests and powers in or over land are enforceable against the owner of the legal estate either under this section or under SLA 1925 subject to the rights of a legal mortgagee or powers of a personal representative. The holder of an equitable interest may be entitled to the legal estate and require the legal owner to convey the land to him, which can be enforced by the court and, in the case of refusal, a court may make a vesting order transferring or creating a legal estate in favour of the holder of the equitable interest. This does not affect a purchaser of a legal estate taking free from an equitable interest or power. 4  Creation and disposition of equitable interests Interests in land validly created, which are not legal estates, are equitable interests and may be disposed of, including a contingent, executory or future equitable interest in land, a possibility coupled with an interest in land, or a right of entry. 20  Infants not to be appointed trustees Infants cannot be appointed trustees of any settlement or trust and any such purported appointment is void. 24  Appointment of trustees of land A person having power to appoint new trustees of land must appoint the same trustees as those of any trust of the proceeds of sale of the same land. The purchaser, however, is not concerned to see that this has been complied with. 149

2.36  Main Trust Legislation 27  Purchaser not to be concerned with the trusts of the proceeds The purchaser of a legal estate from trustees of land is not concerned to see that the trusts are duly complied with. However, the sale proceeds can only be paid to at least two persons as trustees, or to a trust corporation as trustee. Although a sole personal representative can give a valid receipt for other capital money not related to the sale. 31  Trust of mortgaged property where right of redemption is barred Where the mortgagor’s right of redemption is lost through foreclosure or otherwise, the mortgagee applies the income from the property in the same manner as interest paid on the mortgage debt would have been applicable, and if the property is sold to apply the net proceeds of sale after payment of costs and expenses in the same manner as repayment of the mortgage debt would have been applied, in other words to repay the loan plus outstanding interest and account to the mortgagor for the balance. 33  Application of Part I to personal representatives The provisions relating to trustees of land apply also to personal representatives holding land in trust but without prejudice to their rights and powers for purposes of administration. 34  Effect of future dispositions to tenants in common Where land is conveyed to persons in undivided shares and those persons are of full age the conveyance shall operate as if the land had been expressly conveyed to the grantees or the first four grantees named in the conveyance as joint tenants in trust for all the persons interested in the land. 36  Joint tenancies Where a legal estate in land is held in trust for persons as joint tenants it would be held in like manner as if the persons were tenants in common, but not so as to sever the joint tenancy in equity. No severance of a joint tenancy of a legal estate, so as to create a tenancy in common, is permissible although this does not affect the rights of a joint tenant to release his interest to the other joint tenants, or to sever a joint tenancy in an equitable interest. 52  Conveyances to be by deed Conveyances of a legal estate in land must be made by deed. 53  Instruments required to be in writing An equitable interest in land can only be created or disposed of by writing signed by the person creating or conveying it or his duly authorised agent. A  declaration of trust relating to land must be evidenced in writing 150

Main Trust Legislation 2.37 by the settlor or by his will, and a disposal of an equitable interest must be in writing signed by the disponor or his duly authorised agent. These requirements do not affect the creation or operation of resulting implied or constructive trusts. 136  Legal assignment of things in action An absolute assignment by writing signed by the assignor of any debt or other legal thing (chose) in action of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law to pass and transfer the legal right to such debt or thing in action or legal and other remedies. 137  Dealing with life interests, reversions and other equitable interests In dealing with an equitable interest in settled land or a trust of land or the proceeds of sale of such land the persons to be served with notice shall be the trustees. 164  General restrictions on accumulation of income The provisions in LPA 1925 have been amended and extended by PAA 1964 s 13. 175  Contingent and future testamentary gifts to carry the intermediate income The contingent or future specific devise or bequest of property, whether real or personal, and contingent residuary devise of freehold land or residuary devise of freehold land to trustees on trust for persons whose interests are contingent or executory shall, subject to the maximum accumulation period, carry the intermediate income of that property from the date of death of the testator, unless the income or any part of it is otherwise expressly disposed of. 198  Registration under the Land Charges Act 1925 to be notice Registration of any instrument or matter on a register kept under LCA 1972 or any local land charges register is deemed to constitute actual notice of such instrument or matter.

Settled Land Act 1925 (SLA 1925) 2.37 SLA  1925 was mainly aimed at landed estates which tend to pass from generation to generation within a single family. Under SLA  1925 a settlement was created by executing two deeds, namely a vesting deed and trust instrument. The legal estate in the land is vested in the equitable life tenant in trust for himself and other persons beneficially 151

2.38  Main Trust Legislation interested under the settlement. However, all capital monies arising from the estate are paid to a second set of trustees called the Settled Land Act Trustees who hold them on similar trusts for the statutory owner and other beneficiaries. The object of SLA  1925 was to enable the beneficial owner to have a free hand in the development and management of the property for the benefit of the beneficiaries and tenants of the estate, but with the protection of the corpus of the fund by the requirement that any capital monies be paid to the Settled Land Act trustees. Under TLATA 1996 s 2, no further Settled Land Act settlements can be set up after 1 January 1997, although existing settlements may continue.

Powers of Attorney Act 1971 1  Execution of powers of attorney 2.38

A power of attorney must be created by the donor executing a deed.

3  Proof of instruments creating powers of attorney Photocopies duly certified by a solicitor, notary public or stockbroker and signed by the donor are valid. 4  Powers of attorney given as security The power of attorney may be irrevocable and may be given to secure a proprietary interest of the donee of the power, or the performance of an obligation owed to the donee. A  power of attorney may also be given to a person entitled to a proprietary interest. The company’s articles commonly create the company as attorney for the shareholders to enforce pre-emption rights on sale. 5  Protection of donee and third persons where power of attorney is revoked A donee of a power of attorney who acts after it has been revoked does not incur any liability if at the time he did not know that the power had been revoked, and any dealings with a third party who does not have knowledge of the revocation will be binding. 6  Additional protection for transferees under Stock Exchange transactions It is conclusively presumed in favour of the transferee of quoted securities that the power had not been revoked if a statutory declaration to that effect is made by the donee on or within three months of the date of transfer. 152

Main Trust Legislation 2.39 7  Execution of instruments by donee of power of attorney The donee of a power of attorney who is an individual may execute any instrument with his own signature and do other things in his own name and anything so done shall be as effective as if it had been done by the donor. 10  Effective general power of attorney in specified form A general power of attorney in the form set out in Sch 1 or to the like effect, shall operate to confer authority on the donee on behalf of the donor to do anything that can lawfully be done by an attorney, which excludes functions which the donor does as trustee or personal representative or as life tenant or statutory owner under SLA 1925, subject to TDA 1999.

Sch 1  Form of general power of attorney for purposes of s 10 The statutory form is: This general power of attorney is made this……..day of…………….by AB ……………………[the donor] of…………………………..[address] I appoint…………………………CD of (address) and EF of (address) and severally to be my attorney(s) in accordance with section 10 of the Powers of Attorney Act 1971. Signed as a deed by the said……………………[donor] Signature of witness Name of witness Address

Enduring Powers of Attorney Act 1985 (EPAA 1985) 2.39 The problem with the power of attorney is that, if the donor of the power becomes of unsound mind, the power of attorney is automatically revoked. However, under EPAA  1985 an enduring power of attorney may continue. Enduring powers of attorney have been superseded by lasting powers of attorney under the Mental Capacity Act 2005, which received Royal Assent on 7 April 2005 and repealed the EPAA 1985 with effect from 1 October 2007. MCA 2005 ss 9–14 and Sch 1 set out the new provisions. Existing enduring powers of attorney continue to have effect under MCA 2005 Sch 4. Lasting powers of attorney may deal with the donor’s personal welfare as well or property and affairs. 153

2.39  Main Trust Legislation 1  Enduring power of attorney to survive mental incapacity of the donor Where an individual created a power of attorney which was an enduring power under the Act, it was not revoked by the subsequent mental incapacity of the donor; however, the donee could not act under the power once the donor had become mentally incapacitated until the power had been registered or as directed or authorised by the court. There was an exception for action taken to maintain the donor or prevent loss to his estate or to maintain himself or others to the extent that the donor might be expected to provide for their needs. 2  Characteristics of an enduring power An enduring power had to be in the prescribed form and executed in the prescribed manner by the donor and attorney and incorporate at the time of execution by the donor the prescribed explanatory information. The form of the enduring power of attorney was set out by regulations. This section set out some of the requirements for an enduring power and those instruments which could not create an enduring power. 3  Scope of authority of attorney under enduring power An enduring power may confer general authority to do on behalf of the donor anything which can lawfully be done by an attorney, except that the power to make gifts is limited. Such authority may, however, be limited to enable the attorney to act only in relation to part of the donor’s property and to do specified things on the donor’s behalf. 4  Duties of attorney in event of actual or impending incapacity of donor This section sets out the actions which the attorney has to take if he has reason to believe that the donor is becoming mentally incapable, in particular to make an application to the court for the registration of the instrument creating the power. 5  Functions of the court prior to registration The court may anticipate registration and exercise any power which would become exercisable on registration. 6  Functions of the court on application to registration The procedure for registration is set out in this section. Where a receiver has been appointed under Part VII of MHA 1983, registration will be refused. 7  Effect and proof of registration etc The effect of the registration is that the power of the attorney continues as previously. 154

Main Trust Legislation 2.41 8  Functions of court with respect to registered powers The court may determine any question as to the meaning or effect of the instrument and give directions and otherwise oversee the operation of the power. 9  Protection of attorney and third persons where power invalid or revoked An attorney acting under a power that has been revoked is not liable if he did not know of its revocation and any transactions with third parties, without notice of any defect, remain valid. Supplementary Sections 10–13 deal with the applications of the MHA 1983 provisions, the application to joint and several attorneys and the power of the Lord Chancellor to modify pre-registration requirements and interpretations and definitions. Schedule 1 sets out the procedure for notification prior to registration, the duty to give notice to relatives and the donor, the contents of notices etc. Schedule 2 sets out further protection of the attorney and third persons, and Sch 3 deals with joint, and joint and several, attorneys.

Mental Capacity Act 2005/Lasting Power of Attorney Regulations 2007, 2009 and 2013 (LPAR) 2.40 Mental Capacity Act 2005 ss  9–14 introduced lasting powers of attorney, the detailed provisions of which are in Schedule 1 and in the Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guardian Regulations 2007 (SI 2007/1253) (LPAR 2007). These regulations came into force on 1 October 2007, and no new enduring powers of attorney may be created after the commencement of MCA 2005 s 66(1)(b), ie 30 September 2007.

Mental Capacity Act 2005 (MCA 2005) 2.41

The Mental Capacity Act 2005 dealt with lasting powers of attorney.

9  Lasting powers of attorney A lasting power of attorney can provide for the donee to make decisions on matters concerning the donor’s personal welfare and the donor’s property and affairs. There may be separate donees for personal welfare, and property and affairs. The power is not created unless it complies with the proper form and is registered, which can be done any time before it is acted upon. 155

2.41  Main Trust Legislation 10  Appointment of donees A  donee must be an individual who has reached 18 or, if the power relates only to the donee’s property and affairs, a trust corporation. The instrument may appoint donees to act jointly, jointly and severally, or jointly in respect of some matters and jointly and severally in respect of others; and, if it does not so specify, they must act jointly. 11  Lasting powers of attorney: restrictions The donee cannot restrain the donor unless he reasonably believes that the donor lacks capacity or that it is necessary in order to prevent harm to the donor and the act is proportionate. 12  Scope of lasting powers of attorney: gifts The attorney’s power to make gifts is limited to reasonable gifts on customary occasions such as weddings or anniversaries, birthdays etc. 13  Revocations of lasting powers of attorney etc The donor can revoke a lasting power of attorney at any time when he has capacity to do so. 14  Protection of donee and others if no power created or power revoked Where an instrument has been registered as a lasting power of attorney but is defective, so that a lasting power of attorney was not created, a donee who acts upon it is not personally liable unless he knew that the lasting power had not been created or he is aware of circumstances that would have terminated his authority to act as a donee. The purchaser from the donee nevertheless secures good title if the transaction was completed within 12 months of the date of registration, or the purchaser makes an appropriate statutory declaration. Schedule 1 sets out the formalities required to make a lasting power of attorney and for the registration, cancellation of registration and records of alterations in registered powers. LPAR 2007 sets out the forms for creating a lasting power of attorney (LPA). Separate forms are required for a property and affairs LPA and a personal welfare LPA, and the donor can appoint up to five individuals as his or her attorney for each type of LPA. An LPA must be signed by the donor and his signature witnessed, and an independent person must complete a certificate confirming that the donor understands the purpose of the LPA and what it means, and is making it on his or her own free will, and there is nothing to prevent the LPA being created. 156

Main Trust Legislation 2.42 LPAR 2007 also sets out the requirements for registration, changes to the LPA following registration, and the procedures for registering an enduring power of attorney made under the EPAA 1985. It also specifies the duties of the public guardian, who is responsible for establishing and maintaining the registers of LPAs. Regulations were amended by the Lasting Powers of Attorney, Enduring Powers of Attorney and Public Guardian (Amendment) Regulations 2009 (SI  2009/1884) and 2013 (SI2013/506) (LPAR  2009, 2013 respectively) amending the forms required and shortening the various time limits, etc.

Partnership Act 1890 (PA 1890) 2.42 A partnership, which is the relation which subsists between persons carrying on a business in common with a view of profit, can result in partners becoming trustees in certain cases. 13  Improper employment of trust property for partnership purposes If a trustee who is also a partner employs trust property in the business, his fellow partners are not liable for the trust property to the beneficiaries unless they have notice of the breach of trust, although the beneficiaries can trace the assets diverted and recover them from the firm if still in its possession or under its control. 20  Partnership property Partnership property must be held exclusively for the purposes of the partnership and in accordance with the partnership agreement. A legal estate or interest in land cannot be held by more than four persons and is therefore held by those partners who are legal owners in trust for the partners generally, according to their rights. Merely because land is owned by one or more of the partners it is not necessarily partnership property and may be dealt with for the benefit of the co-owners. 29  Accountability of partners for private profits Partners must account to the firm for any benefit derived without the consent of the other partners for any transaction concerning the partnership or the use of the partnership name or business connection. 30  Duty of partner not to compete with firm If a partner without the consent of the other partners carries on a competing business he must account for and pay over all the profits of that business. 157

2.43  Main Trust Legislation

Bankruptcy Act 1914 (BA 1914) 2.43 This Act was repealed and replaced by the Insolvency Act 1985 consolidated into the Insolvency Act 1986. Where a trustee has been made bankrupt as a result of a breach of trust, he will not have any further liability when he obtains his discharge from the bankruptcy unless the breach of trust was fraudulent. Section 42, which prevented debtors transferring assets to a trust to avoid creditors, was repealed and replaced by IA 1986 ss 339–342 and ss 342–425. Section 122, replaced in the UK by IA 1986 s 426(5), is still in force in certain colonial or former colonial territories, and requires every British court having jurisdiction in bankruptcy or insolvency to come to each other’s aid. This was invoked in Al Sabah v Grupo Torras SA  (2004) 7  ITELR  531 to enforce a Bahamian bankruptcy order in the Cayman Islands.

Insolvency Act 1986 (IA 1986) 2.44 IA  1986 provides a number of situations in which the transactions may be set aside by the court in the interests of creditors. 339  Transactions at an undervalue Where an individual is adjudged bankrupt and has within the relevant time, as defined by s  341, entered into a transaction at an undervalue the trustee in bankruptcy may apply to the court for an order to restore the position to what it would have been if the individual had not entered into the transaction. A transaction at undervalue includes a transaction with a person in consideration of marriage or a civil partnership, which in other circumstances would be valuable consideration. An undervalue is defined as a gift for no consideration or a transaction for inadequate consideration where the value in money or money’s worth is significantly less than the value in money or money’s worth provided by the transferor. 340 Preferences Where a bankrupt has given a preference to any person, the trustee in bankruptcy may apply to the court for an order restoring the position to what it would have been had that preference not been given. A  preference is widely defined as anything done in favour of the creditor of the bankrupt or a surety of guarantee of his debts or other liabilities which puts that person in a better position in the event of the debtor’s bankruptcy than he would have been in had that action not been taken, and with the intention of so doing. There is a presumption that there is an intention of preferring a creditor or surety who is associated with the 158

Main Trust Legislation 2.44 bankrupt. The fact that the action was taken in pursuance of a court order does not of itself prevent it constituting a preference. 341  Relevant time under sections 339–340 A transaction at an undervalue is made at a relevant time if it is made within five years prior to the day of the presentation of the bankruptcy petition on which the individual is adjudged bankrupt. A preference which is not a transaction at an undervalue is given at a relevant time if to an associate within two years prior to the day of presentation of the petition and in other cases within six months prior to that day. Where a transaction at undervalue is given more than two years before the day of presentation of the bankruptcy petition, or it is potentially a preference, it is not within a relevant time unless at the time of the transaction or preference the bankrupt was insolvent or became insolvent in consequence of the transaction or preference. There is a presumption of insolvency in relation to any transaction at an undervalue with an associate other than one whose only association is by reason of being an employee. A person is insolvent if he is unable to pay his debts as they fall due or the value of his assets is less than the amount of his liabilities taking into account contingent and prospective liabilities. 342  Orders under sections 339 and 340 A court order under these provisions may provide for any property transferred or acquired out of the proceeds of the sale of property so transferred to be vested in the trustee in bankruptcy. It may also release or discharge any security given by the bankrupt or sums paid or to be repaid to his trustee in bankruptcy to reimpose the obligations of any surety or guarantor which were released or discharged by the transaction or preference, or the discharge of any obligation imposed as a result of his actions. The beneficiary of the transaction or preference may as a result of such order prove in the bankruptcy. A court order, however, cannot prejudice the interests of a purchaser in good faith and for value, nor will it require a beneficiary of a transaction or preference in good faith and for value, who was at the time a creditor of the individual, to repay unless he was party to the transaction or payment at a time when he was a creditor of the subsequent bankrupt. There is a presumption of lack of good faith where the recipient had notice of the fact that the individual entered into the transaction at an undervalue, or it amounted to a preference, and that the bankruptcy petition had been presented or the individual had been adjudged bankrupt or was an associate of, or connected with, the recipient of the transaction or preference. These provisions replace those of BA 1914 s 42 and there is no requirement to prove any intention to defraud creditors. 342 A–F Excessive pension fund contributions may be recovered. 159

2.45  Main Trust Legislation 423  Transactions defrauding creditors Where a person enters into a transaction for the purpose of putting assets beyond the reach of a person who is making or may at some time make a claim against him, or of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make, and there is a transaction at undervalue, the court may make such order as it thinks fit for restoring the position to what it would have been had the transaction not been entered into and protecting the interests of the victims of the transactions. It is this provision which makes asset protection trusts difficult to sustain in the UK. A victim of a transaction is a person who is capable of being prejudiced by it. 424  Those who may apply for an order under section 423 An application for an order under s 423 will only be made where the debtor has been adjudged bankrupt or is a company being wound up or subject to administration by the Official Receiver, the trustee in bankruptcy or the liquidator or administrator of the company, but only with leave of the court by a victim of the transaction. Where there is a voluntary arrangement, the supervisor of that arrangement may apply for an order as may a victim of the transaction, whether or not bound by the arrangement. In any other case the application for an order may only be made by a victim of the transaction. Any application is treated as made on behalf of every victim of the transaction re Butterworth (1882) 19 Ch 588. 425  Provision which may be made by order under section 423 The remedial order the court may make is similar to that under s 342.

CHARITABLE TRUSTS Charitable Uses Act 1601 (CUA 1601) 2.45 Charities Act 2011 (CA  2011) defines a charity as an institution established for charitable purposes and subject to the control of the High Court for England and Wales. Charitable purposes means purposes which are exclusively charitable according to the law of England and Wales. For the statute law on what are charitable purposes prior to CA 2006 it was necessary to go back to the preamble to the CUA 1601 which provides as follows: ‘Whereas Lands, Tenements, Rents, Annuities, Profits, Hereditaments, Goods, Chattels, Money and Stocks of Money, have been heretofore given, limited, appointed and assigned, as well by the Queen’s most excellent Majesty, and her most noble Progenitors, as by sundry other well-disposed Persons; some for Relief of aged, impotent and poor People, some for Maintenance of sick and maimed Soldiers and Mariners, Schools of 160

Main Trust Legislation 2.46 Learning, Free Schools, and Scholars in Universities, some for Repair of Bridges, Ports, Havens, Causways, Churches, Sea-banks and Highways, some for Education and Preferment of Orphans, some for or towards Relief, Stock, or Maintenance for House of Correction, some for Marriages of poor Maids, some for Supportation, Aid and Help of young Tradesmen, Handicraftsmen and Persons decayed, and others for Relief or Redemption of Prisoners or Captives, and for Aid or Ease of any poor Inhabitants concerning Payments of Fifteens, setting out of Solders and other Taxes; which Lands, Tenements, Rents, Annuities, Profits, Hereditaments, Goods, Chattels, Money and Stocks of Money, nevertheless have not been employed according to the charitable Intent of the Givers and Founders thereof, by reason of Frauds, Breaches of Trust and Negligence in those that should pay, deliver and employ the same …’ References to charities within this definition are to be construed as references to a charity under CA 2011 Sch 7 para 1.

Charities Act 2011 (CA 2011) 2.46

The contents of Parts 8–10 are summarised below.

Part 8  Charities accounts, reports and returns (sections 130–176) These sections give the charity trustees the duty of maintaining adequate accounting records and preparing an annual statement of account, which may require to be audited and to produce an annual report subject to exemptions for very small charities. These provisions provide for public inspection of annual reports and annual returns to be made to the Charity Commission and provide offences for failure to comply and give the Commissioner powers to set financial thresholds.

Part 9  Charity trustees, trustees and auditors (sections 177–192) These sections define ‘charity trustees’, specify those disqualified from being charity trustees or trustees of a charity and the power to waive disqualification. There are records of persons removed from office and criminal and civil consequences of acting while disqualified. They also deal with remuneration of charity trustees and trustees if they or a connected person receive unauthorised remuneration or benefits and indemnity insurance. The Commission has power to relieve trustees and auditors from liability and the Court may grant relief to auditors and trustees of unincorporated charities. 161

2.47  Main Trust Legislation

Part 10  Charitable Companies etc (sections 193–203) These sections define a charitable company, which must disclose its charitable status and failure to do so may have civil or criminal consequences. A charitable company may not alter its objects without the prior written consent of the Charity Commissioner. Consent is required for acts which would require approval by the members of a company were it not a wholly-owned subsidiary of another body corporate and for contracts or transactions with directors. The Commission may apply to restore a company to the register of companies. Charitable Incorporated Organisations (CIOs) (ss  204–250) is a new form of incorporated vehicle designed to provide some of the benefits of being a company without some of the burdens. A foundation CIO is where the voting members are also the charity trustees. An Association CIO is one where there are individual members who are not trustees. A  CIO may be formed from scratch or an incorporated or unincorporated charity may be converted into a CIO. An industrial and provident society will also be able to convert. Each CIO will have a registered charity number.

Charitable Trusts (Validation) Act 1954 (CTVA 1954) 2.47 This Act enabled charities in existence before 16  December 1952 to achieve their charitable objects if these would not otherwise have been exclusively charitable.

Recreational Charities Act 1958 (RCA 1958) 2.48 This Act provided that the provision of facilities for recreation or other leisure-time occupation provided in the interests of social welfare for the public benefit may be regarded as charitable, provided that the facilities are primarily intended for the disabled or the disadvantaged or are to be made available to the members or female members of the public at large. In particular these provisions apply to the provision of facilities at village halls, community centres and women’s institutes, now Charities Act 2011 ss 5 and 6.

Pensions Act 2004 2.49 This Act came into effect from September 2005 to replace the Pensions Act 1995 as the Minimum Funding Requirement (MFR) in the 162

Main Trust Legislation 2.51 1995 Act had proved insufficient to provide the benefits promised by the schemes. The 2005 Act introduced a scheme-specific statutory funding objective (SFO) to allow more flexibility while protecting members’ benefits. A  Pensions Regulator was established with powers to require sponsoring companies to fund their pension liabilities in full, and where necessary adopt an appropriate funding strategy to compel the companies to fully fund their pension liabilities.

Financial Services and Markets Act 2000 2.50 This Act was amended by the Financial Services Act 2012 and the Bank of England and Financial Services Act 2016. The Financial Conduct Authority was founded to establish regulated activities and make it a criminal offence to engage in investment activity in the UK unless it is issued or approved by an authorised firm or exempt under a Financial Promotions Order.

Criminal Finances Act 2017 Overview of the Act 2.51

The Act is in four parts.

Part 1 deals with the proceeds of crime, money laundering, civil recovery, enforcement powers and related offences and creates a range of new powers for law enforcement agencies to request information and seize monies stored in bank accounts and mobile stores of value. Part 2 ensures that relevant investigatory, money laundering and civil recovery powers are extended to the Terrorism Act 2000 (TACT) and the Anti-terrorism, Crime and Security Act 2001 (ATCSA) as well as the Proceeds of Crime Act 2002 (POCA). Part 3 creates two new corporate offences of failure to prevent facilitation of tax evasion. Part 4 includes minor and consequential amendments to POCA and other enactments.

Corporate failure to prevent tax evasion There are various statutory offences of ‘fraudulently evading’ taxes. Beyond these statutory offences of fraudulent evasion, there is a common law offence 163

2.51  Main Trust Legislation of cheating the public revenue, committed by a person who engages in any fraudulent conduct that tends to divert funds from the public revenue. It is also a crime deliberately to facilitate another person’s tax evasion. The above offences are committed where a person is knowingly concerned in, or takes steps with a view to, the fraudulent evasion of a tax owed by another. Moreover, like any offence, it is a crime to aid and abet another person to commit a tax evasion offence. As such where a banker, accountant, or any other person, deliberately facilitates a client to commit a tax evasion offence, the banker or accountant commits a crime. Previously, where a banker or accountant criminally facilitated a customer to commit a tax evasion offence, the taxpayer and the banker or accountant committed a criminal offence but the company employing the banker or accountant did not. Even in cases where the company tacitly encouraged its staff to maximise the company’s profits by assisting customers to evade tax, the company remained safely beyond the reach of the criminal law. The offences in Part 3 hold these organisations and corporations to account for the actions of their employees. This power gives effect to the former Prime Minister’s commitment to legislate following the International Consortium of Investigate Journalists’ (ICIJ) publication of what are known as the ‘Panama Papers’. Rather than focusing on attributing the criminal act to the company, the offences focus on – and criminalise – the company’s failure to prevent those who act for or on its behalf from criminally facilitating tax evasion when acting in that capacity. Therefore, where a person acting for or on behalf of a relevant body, acting in that capacity, criminally facilitates a tax evasion offence by another person, the relevant body would be guilty of the corporate failure to prevent the facilitation of tax evasion offence, unless the relevant body can show it had in place reasonable prevention procedures (or that it was not reasonable to expect such procedures). The new corporate offences cannot be committed by individuals: they can only be committed by ‘relevant bodies’, that is, legal persons (companies and partnerships). Moreover, they are only committed in circumstances where a person acting for or on behalf of that body, acting in that capacity, criminally facilitates a tax evasion offence committed by another person. Thus where the taxpayer commits a tax evasion offence contrary to the existing criminal law, and a person acting for or on behalf of the relevant body also commits a tax evasion facilitation offence contrary to the existing law by criminal law, and a person acting for or on behalf of the relevant body also commits a tax evasion facilitation offence contrary to the existing law by criminally facilitating the taxpayer’s crime, the relevant body commits the new offence. However, absent an existing offence at the taxpayer and associated person level, the new 164

Main Trust Legislation 2.51 offences cannot be committed. Where a company’s staff member commits a tax fraud in relation to another’s tax without facilitating another, the offence is not committed. It is an offence to unreasonably fail to prevent the criminal facilitation of tax evasion, not tax evasion itself. The new offences do not make companies responsible for the crimes of their customers (unless those who act for or on behalf of the company criminally facilitate such crimes). Nor are the new offences committed: (a) Where the taxpayer engages in aggressive avoidance falling short of fraudulent evasion or is otherwise non-compliant. (b)

Where the person acting for or on behalf of the relevant body inadvertently or negligently facilitates the taxpayer’s fraudulent evasion of tax.

(c) Where the taxpayer’s fraudulent evasion is facilitated by a person who is not acting for or on behalf of the relevant body at the time of doing the facilitating act (eg  if an employee, in their private life, criminally facilitates his or her partner’s fraudulent evasion of their tax; or where a sub-contractor criminally facilitates tax fraud when working for an entirely different contractor during work unconnected to the relevant body). The new offences are only about ensuring that relevant bodies have reasonable procedures to prevent those acting for or on behalf of the relevant body from criminally facilitating the fraudulent evasion of tax, when acting in that capacity. (d) Every time somebody acting for or on behalf of the relevant body criminally facilitates another’s tax crime (only reasonable procedures, not fool-proof procedures are required: a risk-based, rather than zero tolerance, approach is adopted). (e) Where tax evasion offences are currently being committed by those acting for or on behalf of a company, the new offences require nothing more than for that company to have reasonable procedures in place to prevent such offences being committed by those acting for on its behalf.

Commentary on provisions of the Act Chapter 4: Enforcement powers and related offences Extension of powers Section 17: Serious Fraud Office Section 17 introduces Schedule 1, which makes a series of technical amendments to a number of provisions in POCA, in order to allow SFO officers to directly 165

2.51  Main Trust Legislation access the asset preservation powers under Parts 2 and 4 of POCA, the civil recovery powers under Part 5 and the investigation powers in Part 8. Schedule 1 contains the consequential amendments to POCA. The inclusion of SFO staff in the ‘appropriate officer’, ‘senior officer’ and ‘senior appropriate officer’ definitions under various provisions grant them direct access to asset preservation powers in confiscation proceedings, recovery of cash and investigatory powers. Section 18: Her Majesty’s Revenue and Customs: removal of restrictions Officers of HMRC currently have various powers to enable them to investigate crimes, such as the power of arrest or the power to apply for a search warrant. However, these powers are unavailable in relation to offences committed against certain functions of HMRC (typically former Inland Revenue functions). Section 18 seeks to remove such restrictions, enabling officers of HMRC to use their existing criminal investigation powers in relation to crimes relating to any of HMRC’s functions. Sub-section (2) removes the current restriction within Criminal Law (Consolidation) (Scotland) Act 1995 (CLCSA) s 23A that prevents HMRC from using its criminal powers for offences relating to prohibitions and restrictions or the movement of goods. This gives officers of HMRC in Scotland criminal powers in relation to crimes involving prohibitions and restrictions or the movement of goods similar to those currently enjoyed by officers of HMRC in England and Wales and Northern Ireland. Sub-section (3), (4) and (5) remove restrictions on the use of HMRC’s criminal investigation powers in relation to offences relating to functions of HMRC that are functions previously held by the Inland Revenue. Sub-section (3) amends the definition of ‘officer of law’ in Criminal Procedure (Scotland) Act s 307. Sub-section (4) amends the proceeds of Crime Act 2002 to remove the restrictions on the exercise of the powers contained in ss 289, 294, 375C and 408C, so that these powers can be used when investigating crimes related to former Inland Revenue functions for which they are currently unavailable. Sub-section (5) amends Finance Act 2007 to remove the specified restriction at s  84, enabling HMRC officers to use their criminal investigatory powers from the Police and Criminal Evidence Act 1984 in relation to certain former Revenue functions in relation to which they are not currently available. 166

Main Trust Legislation 2.51 Section 19: Her Majesty’s Revenue and Customs: new powers Section 19 makes amendments to POCA s 316 in relation to England, Wales and Northern Ireland to include HMRC in the definition of ‘enforcement authority’. This allows a member of staff of HMRC to bring forward civil recovery proceedings under Chapter 2 of Part 5 of POCA against property or any person who they think holds recoverable property. ‘Recoverable Property’ is defined in POCA ss 304–310 and essentially means the proceeds of crime or property that directly represents such. The amendment provides HMRC with the powers to bring civil recovery proceedings (s 243) and to make applications in connection with civil recovery proceedings such as: property freezing orders (s 245A) and interim receiving orders (s 246). The inclusion of HMRC staff in the definition of ‘appropriate officer’ and ‘senior appropriate officer’ in POCA s 378 allows them to apply for the orders and warrants to build a case for civil recovery proceedings. They are officers for the purposes of a ‘civil recovery investigation’, see POCA s 341.

167

Chapter 3

Trust Formalities

LEGAL CAPACITY 3.1 Under the Family Law Reform Act (FLRA) 1969 s  1(1) a person acquires legal capacity on reaching the age of 18, provided that he is not suffering from mental incapacity. He becomes sui juris and capable of creating a trust over any assets that he owns. Even where an asset is non-assignable so that the legal ownership cannot be transferred to trustees it may nonetheless be possible to create a trust of the beneficial ownership under a declaration by which the owner declares that he holds the asset in trust for the beneficiaries. A common example is a personal pension policy, retirement annuity policy or occupational pension scheme, the rights to which are non-assignable but which are commonly held in trust for the surviving spouse or children. However it is necessary to ensure that all possible steps have been taken to give rise to a valid transfer, Zeital v Kaye (2010) EWCA Civ 159. 3.2 Where a receiver has been appointed under the Mental Health Act 2007 (MHA) or a deputy under the Mental Capacity Act 2005 ss 19–21 this would prevent the patient creating a trust (Re Marshall [1920] 1 Ch 284), but the court could create a trust over the patient’s property and it could create a will on behalf of the patient. A purported trust can be set aside if the settlor did not understand what he was doing (Re Beaney [1978] 1 FLR 770; Simpson v Simpson [1992] 1 FLR 601). 3.3 A minor can create a valid trust over assets which he holds legally or beneficially but he must be old enough to understand what he is doing, otherwise the trustees merely hold the assets on a resulting trust for the settlor, not under the terms of the purported trust. A trust created by a minor is, however, voidable at any time until he becomes 18 and for a short period thereafter, and if he does not repudiate the trust it becomes binding (Edwards v Carter [1893] AC 360). 3.4 A  trust of personal property held outright can be created orally by a simple declaration that the owner is holding the assets in trust for a beneficiary (Petty v Petty (1853) 22  LJ  Ch  1065; Rowe v Prance [1999] 169

3.5  Trust Formalities 2  WTLR  249). The obvious problem with an oral declaration of trust is evidencing the clear intention to create a trust, which is a prerequisite of a valid trust (Re Kayford [1975] 1 WLR 279), and a trust is normally created by a trust deed under which the settlor specifically transfers assets to trustees to hold in accordance with the trusts set out in the deed for the beneficiaries specified therein. A  trust is usually created by way of a deed, as it is a gift with no consideration but, following the Law of Property (Miscellaneous Provisions Act) (1989)  LP(MP)A  s  1, no longer has to be under seal. The normal wording is ‘signed and delivered as a deed by the said (settlor) in the presence of (Witness, name, address and occupation)’. It is quite common to transfer only a nominal sum to the trustees in the first instance with the intention of adding further property to the trust in due course. In some cases, however, the trust will contain a schedule of assets transferred to the trustees. Although most trusts are created by way of a deed signed by the settlor some are evidenced by a declaration of trust signed by the trustees under which they acknowledge receipt of assets, normally as specified in a schedule, to hold on the trusts specified in the deed. A  declaration of trust does not identify the settlor on the face of the document, although the trustees will need to know the source of the funds and the identity of the settlor in order to avoid breaching the money laundering regulations under the Proceeds of Crime Act 2002 the Money Laundering Regulations 2017 and the AntiMoney Laundering (Amendment) Regulations 2019. 3.5 It is not unusual for a settlor to decide to transfer assets into trusts for beneficiaries and to make a formal declaration to that effect, appoint trustees, and create a written trust instrument and then transfer the assets to the trustees. The question then arises as to whether the formal written trust is preceded by an oral trust of personalty which could be important for taxation purposes in determining the date at which the assets ceased to be beneficially owned by the settlor. 3.6 A testamentary trust can only be created by a valid will, which under the Wills Act (WA) 1837 s 9 is normally required to be in writing and duly attested. It is not unknown for a trust to be set aside as an invalid will, as a result of which a trustee becomes an executor de son tort and liable for inter-meddling in the estate (Re Pfrimmers Estate [1936] 2  DLR  460; Anderson v Patten [1948] 2  DLR  202 (Canadian cases); and IRC  v Stype Investments (Jersey) Ltd, re Clore (dec’d) [1982]  STC  625). A  professional adviser who fails correctly to establish a valid trust for his client may be liable not only to the settlor but also to the intended beneficiaries (White v Jones [1995] 2 AC 207; Hooper v Fynmores (2001) The Times, 19 July; Estil v Cowley Swift & Kitchen [2000]  WTLR  417). A  testator with a terminal illness affecting his brain functions could not make a valid will, but his cohabitee was entitled to reasonable financial provision under the Inheritance (Provision for Family and Dependants) Act 1975 (Baker v Baker and Another [2008] EWHC 977 (Ch)). 170

Trust Formalities 3.9

TRUSTS OF LAND 3.7

LPA 1925 s 53 provides as follows:

‘Instruments required to be in writing (1) Subject to the provisions hereinafter contained with respect to the creation of interests in land by parole— (a) no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by his agent thereunto lawfully authorised in writing, or by will, or by operation of law; (b) a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will; (c) a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will. (2) This section does not affect the creation or operation of resulting, implied or constructive trusts’. 3.8 Under LPA 1925 s 53(1)(a), an interest in land can only be transferred in writing, and section 52 of that Act normally requires a transfer of legal estate in land to be by deed. Unregistered land is transferred by deed, registered land by the appropriate land transfer form under Land Registration Rules 1925 r 98. The absence of the necessary document causes the transfer to be void, although if the transfer is to trustees the writing need not extend to the particulars of the trusts on which it is to be held (Re Tyler’s Fund Trusts [1967] 1 WLR 1269). 3.9 LPA 1925 s 53(1)(b) requires a trust over land, which under LPA 1925 s  205 would include leasehold property as well as freehold, easements and other interests in land, to be evidenced in writing. For this purpose the trust itself does not have to be in writing and an oral trust is sufficient, provided that there is the appropriate written evidence, eg  as in Childers v Childers (1857) 1 De G & J 482 where the evidence was contained in a letter, and in McBlain v Cross (1871) 25 LT 804 in a telegram. The trust dates from the oral declaration, not from the date of the evidence (Foster v Hale (1798) 3 Ves 676). The absence of written evidence in this case, however, does not make the transfer void but merely unenforceable, which means it remains valid unless and until the absence of writing is specifically raised by one of the parties involved. It also means that the necessary written evidence can be provided at any time, and does not have to be contemporary, but it must emanate from the settlor. 171

3.10  Trust Formalities 3.10 Section 53(1)(c) requires a transfer of an equitable interest to be in writing, and the question arises as to whether this refers to an equitable interest in land or generally. It seems from Grey v IRC  [1960]  AC  1 that a verbal direction of an equitable interest in pure personalty is insufficient, as it was required to be in writing. This decision was followed in Oughtred v IRC [1960] AC 206. 3.11 Section 53(1)(c) only applies on the transfer of an existing equitable interest and not on the creation of an equitable interest by a declaration of trust (Stamp Duties Comr v Livingstone [1965] AC 694). It is not always easy to see whether there is an assignment of an existing equitable interest required to be in writing under section 53(1)(c) or the creation of a new interest, eg a beneficiary creating a subtrust over his beneficial interest in favour of a third party, as in Grainge v Wilberforce (1889) 5 TLR 436, and see Chinn v Collins [1981] AC 533. 3.12 Section 53(2) provides that the requirement for writing does not apply to the creation or operation of resulting, implied or constructive trusts, which would seem to apply to an oral assignment of an equitable interest under contract, which would result in a constructive trust in favour of the purchaser (Lysaght v Edwards (1876) 2 Ch D 499) and a disclaimer (Re Paradise Motor Co [1968] 1 WLR 1125). 3.13 The sort of problems that can arise where insufficient attention is given to the trust formalities are vividly illustrated in Vandervell v IRC (1966) 43  TC  519 and in Re Vandervell’s Trusts (1970) 46  TC  341. Mr Vandervell wanted to endow a Chair in Pharmacology at the Royal College of Surgeons, and did so by transferring shares to the College, subject to the College granting an option to repurchase the shares for a nominal £5,000. Substantial dividends were paid on the shares, and the court decided that because the option had not been transferred to a specific trust it was held on a resulting trust for Mr Vandervell and he was therefore still liable to surtax on the dividends received by the Royal College of Surgeons. The Revenue had argued that, because the shares were actually in the legal name of the bank to whom they had been transferred as security, there had been a transfer of an equitable interest that was void under LPA 1925 s 53(1)(c). The House of Lords held that this was not so as Mr Vandervell actually controlled both the legal and beneficial interest in the shares and there was therefore no separate equitable interest, the bank being his mere nominee. There was no transfer of a separate equitable interest required to be in writing. Although the trustees of the Children’s Trust exercised the option in 1961, on behalf of the Children’s Trust, there was no express declaration of the trusts on which the shares were to be held and there was therefore still a resulting trust in favour of Mr Vandervell who was charged to surtax until January 1965 when there was a formal transfer of his interests to his Children’s Trust. The absence of writing cannot be relied upon to support a fraud. In Bannister v Bannister [1948] 2 All ER 133, two 172

Trust Formalities 3.16 cottages were sold on the basis that the vendor could continue to occupy one of them rent free for as long as she wished. As the conveyance did not refer to this right of occupation, the owner sought to have her evicted, but failed. The court held that his conduct was fraudulent, and upheld the vendor’s claim that the plaintiff held the cottage in which she was living on trust for her for her lifetime.

INCOMPLETE TRUSTS 3.14 Where a trust has been created, either by a valid declaration of trust by the settlor or a transfer to trustees, it becomes binding on all the parties. The settlor, therefore, cannot change his mind and request the return of the trust property (Re Bowden [1936] Ch 71), and a beneficiary can take the necessary steps to enforce the trust (Fletcher v Fletcher (1844) 4 Hare 67), as can the trustee (Gold v Hill (1999) 1 ITELR 27). 3.15 If, however, a trust is incompletely constituted, the mere fact that the settlor had intended to benefit the beneficiary is not enough unless he has given valuable consideration, as equity will not assist a volunteer, ie someone who has not given consideration for the benefit that was to have been conferred upon him (T  Choithram International SA  v Pagaroni (2000) The Times, 30 November). A gift by way of cheque is only completed when the cheque is cleared during the lifetime of the drawer (Curnock v IRC [2003] WTLR 955). Money or money’s worth amounts to valuable consideration. In the case of a marriage settlement there is valuable consideration if it is made before, and in consideration of, the marriage or in pursuance of an antenuptial agreement conditional on the marriage taking place, with a view to encouraging or facilitating the marriage. This then becomes valuable consideration (Re Densham [1975] 1  WLR  1519). The marriage consideration includes the children of the marriage and their issue (Pullan v Koe [1913] 1 Ch  9), and the children of former marriages of either party living with the children of the marriage (A-G  v Jacobs-Smith [1895] 2  QB  341). A  contractual agreement to assign subsequently acquired property may be enforced (Collyer v Isaacs (1881) 19 Ch D 342). 3.16 As the majority of trusts involve gratuitous acts by the settlor in favour of the beneficiary, it is important that all necessary actions are taken to transfer the ownership of the trust assets to the trustees, as the beneficiaries, being mere volunteers, cannot take action to remedy any defects (Milroy v Lord (1862) 4 De GF & J 264). What constitutes a proper transfer of the property depends on its nature. Land, or any interest therein, must be transferred either by deed (in the case of unregistered land, under LPA 1925 s 52(1)) or by the appropriate land transfer form, and duly registered in the name of the trustees (in the case of registered land, under Land Registration Rules 1925 r 98). Leaseholds must also be transferred by deed, except in the case of leases for 173

3.17  Trust Formalities less than three years within LPA 1925 s 54(2). Chattels may be transferred by delivery, being an unequivocal transfer to the trustees to hold on the specified trust (Re Cole [1964] Ch  175). A  physical transfer is not necessary where the asset is specified in the trust deed (Jaffa v Taylor Gallery Ltd (1990) The Times, 21 March). Stocks and shares must be transferred by way of a properly executed share transfer form with the shares registered in the trustee’s name, under CA 2006 ss 770, 772, 773, except in the case of bearer shares transferred by delivery. 3.17 Choses in action may be assigned in writing under LPA 1925 s 36, which requires express notice in writing to be given to the debtor, trustee or other person from whom the assignor would have been entitled to claim. Such an assignment is made subject to equities having priority over the right of the assignee, which might enable there to be an effective assignment in equity in appropriate cases. Where the settlor merely declares himself to be holding the assets in trust for the beneficiaries, the intention to create an irrevocable trust must be unequivocally shown (Jones v Lock (1865) 1 Ch App 25; Paul v Constance [1977] 1 WLR 527). 3.18 An absolute assignment of a chose in action must relate to the entire interest of the settlor (Harding v Harding (1886) 17 QBD 442). If the provisions of LPA 1925 s 136 are not followed, it may or may not be an effective transfer in equity, but without consideration the courts cannot perfect an imperfect gift (Olsson v Dyson (1969) 120 CLR 365). If, however, the assignment is of part of the debt or other chose in action and therefore not within LPA 1925 s 136, it may still be effective in equity, following Re McArdle [1951] Ch 669. Absence of notice to the assignor, as required by LPA 1925 s 136, is not fatal in equity as it is not part of the transfer and, under the rule in Re Rose, below, it would not prevent the assignment being enforced in equity (Millroy v Lord (1862) 4 De GF & J 264). In Re Ralli’s Will Trust [1964] Ch 288 a covenant to transfer after acquired property into trust was not assigned in accordance with the covenant but came into the possession of the trustee in his capacity as executor, and it was held that this completed the gift into settlement and was not held as part of the covenant or estate. 3.19 Under the rule in Re Rose [1952] Ch  499, the transfer becomes completed in equity once the transferor has done everything required by him to complete the transfer of title to the trustees. If, therefore, a share transfer is submitted to a company for registration, the transfer will be effective in equity from the date of submission, even though the company may take several weeks or months to register the transfer, thereby passing legal title to the trustees. Re Rose was followed in Mascall v Mascall [1984] LS Gaz R 2218 although these decisions are difficult to reconcile with the earlier case of Re Fry [1946] Ch 312. Interestingly, it appears that a gift can be perfected on death by appointing the intended donee as executor (Strong v Bird (1874) LR 18 Eq 315; Re Stewart [1908] 2 Ch 251). 174

Trust Formalities 3.22 3.20 A covenant under seal to settle property into trust is enforceable (Hall v Palmer (1844) 3 Hare 532) but specific performance, which is an equitable remedy, would not be awarded (Jeffreys v Jeffreys (1841) Cr & Ph 138). The remedy for an actual breach of covenant in such circumstances is therefore damages (Re Parkin [1892] 3 Ch 510). It would appear, however, that following Re Pryce [1917] 1 Ch  234 a covenant to settle after acquired property or similar assets would not give rise to a claim for damages (Re Kay’s Settlement [1939] Ch  329), although it is by no means certain that, had the trustees merely claimed damages for breach of covenant, they would have succeeded (Cannon v Hartley [1949] Ch 213). A trust of a promise may be enforceable if there is an intention to create such a trust (Fletcher v Fletcher (1844) 4 Hare 67). A voluntary covenant to assign future property was not enforceable (Re Ellenborough [1903] 1 Ch 697). This contrasts with the case where there is a covenant to transfer future property for value, which is enforceable (Tailby v Official Receiver (1888) 13 App Cas 523).

DONATIO MORTIS CAUSA 3.21 A gift in contemplation of death is given on terms that the donee only becomes absolutely entitled to the property on the donor’s death on which it is conditional. If the donor does not die but survives, he may recover the property given away. The personal representatives may be required to perfect a donatio mortis causa following the donor’s death (Birch v Treasury Solicitor [1951] Ch 298). A donatio mortis causa must be intended to be conditional on death (Gardner v Parker (1818) 3 Madd 184). It must be made in contemplation of death (Agnew v Belfast Banking Co [1896] 2 IR 204). The property must actually be passed to the donee and accepted by him (Bunn v Markham (1816) 7 Taunt 224). The property must be capable of passing by way of donatio mortis causa, ie normally personalty. Land is now considered to be capable of being the subject of a donatio mortis causa (Sen v Headley [1991] Ch 425). A cheque that has not been cashed cannot be donatio mortis causa, as the cheque is automatically revoked on the drawer’s death (Re Beaumont [1902] 1 Ch 889). Stocks and shares may constitute a valid donatio mortis causa (Staniland v Willott (1852) 3 Mac & G 664) although there are contrary decisions. For the transfer of a chose in action, the deposit of documents may be sufficient (Birch v Treasury Solicitor [1951] Ch 298). A gift of car keys was sufficient to transfer title in Woodard v Woodard [1991] Fam Law 470.

SECRET TRUSTS 3.22 A secret trust arises when a person leaves property in a will on the strength of an undertaking by the donee that he will hold the property in trust for another beneficiary (McCormick v Grogan (1869)  LR  4  HL  82). Secret trusts can also arise on intestacy (Sellack v Harris (1708) 5 Vin Arb 175

3.23  Trust Formalities 512  PL  31). On the face of it, a fully secret trust appears to be an absolute gift to the donee, but may be enforced by the beneficiary if its existence can be proven, which is not always easy. By definition, a secret trust depends on evidence contrary to that required for a normal testamentary gift and is therefore contrary to WA 1837 (Re Fleetwood (1880) 15 Ch D 594; Chin and Another v Hansiede and Others (2009) 11 ITELR 1009; Sutherland Estate v Nicoll Estate (1944) SCR 253). 3.23 A half secret trust is where the will refers to the gift being in trust but does not identify the beneficiary or the terms of the trust (Blackwell v Blackwell [1929] AC 318). 3.24 The normal rules of probate govern the vesting of the assets to the secret trustee, who is then governed by trust law in the application of the legacy held in trust for the beneficiaries. The existence of the secret trust must be communicated to the legatee, who must accept that he will hold the property on trust for a third party, and he will be deemed to agree unless he positively refuses (Paine v Hall (1812) 18 Ves 475). If the existence of the secret trust has not been communicated to the legatee who is to hold the legacy on trust prior to the death of the donor, the legatee takes the legacy beneficially (Wallgrave v Tebbs (1855) 2 K & J 313). 3.25 In the case of a half secret trust, the legatee is identified as taking the property as trustee by the will. The legatee must have agreed to hold the legacy on trust before the will is made or at the time of it being made, on the authority of Re Keen [1937] Ch 236, although this does not make any sense in the light of the situation with the fully secret trust, where it is held that the legatee only has to agree prior to the testator’s death. The onus on proving the existence of a secret trust rests on the beneficiary (Re Snowden [1979] Ch 528).

PRECATORY TRUSTS 3.26 A  precatory trust is where assets are left to a beneficiary in such circumstances that it is clear from the will, read as a whole, that a trust was intended. A  mere desire, wish, recommendation, hope or expression of confidence that a donee will use the gift in a certain way does not imply a trust unless, on construing the will as a whole, the court comes to the conclusion that a trust was intended (Re Williams [1933] Ch 244; Re Green [1935] WN 151). The importance of looking at the precatory words in context was emphasised in Comiskey v Bowring-Hanbury [1905] AC 84. It is common to leave certain assets to the executors to hold in trust for beneficiaries in accordance with a letter of wishes left by the testator, which is treated as giving rise to an enforceable trust under which the executors hold as the trustees to distribute the said assets to the named beneficiaries in accordance with the letter of wishes. This is convenient, particularly in larger estates. 176

Trust Formalities 3.28

LETTERS OF WISHES 3.27 A  letter of wishes is normally regarded as just that, a confidential indication of how the settlor would like the trustees to exercise their discretion but not binding upon them (Bank of Nova Scotia Trust Co (Bahamas) Ltd v Nelia Racart de Barletta (1985, unreported), and is referred to in J Wadham Willoughby’s Misplaced Trust (2001, Gostick Hall Publications) p  144). A letter of wishes is not a trust document and normally need not be disclosed to a beneficiary (Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405), unless the court orders disclosure (Breakspear and Others v Ackland and Another [2008] EWHC 220 (Ch), or the trustees so decide in the interests of the beneficiaries and the sound administration of the trust (ibid, paras 62, 63, doubting the Hartigan decision). Despite the letter of wishes, the trustees must exercise their discretion with real and general consideration (Imperial Group Pension Trust Ltd v Imperial Tobacco Co Ltd [1991] 2 All ER 597). They need not give their reasons for their decisions, but if they do, they may be subject to review by the court (Re Beloved Wilke’s Charity (1855) 3 Mac & G 444 and the New Zealand cases of Blair v Vallely and Blair [2000]  WTLR  615 and Craddock v Crowhen [1995] 1 NZSC 40, 331). A letter of wishes setting out how the settlor would like the trustees to exercise their discretion is not a formal document and does not impose any legal obligations and can be changed from time to time. The trustees are entitled to take account of the settlor’s wishes as so expressed, but are required to have regard to the discretions given to them under the trust and the needs of other beneficiaries etc (Re Abacus (CI) Ltd (Trustee of the Esteem Settlement) Grupo Torras SA  v Al Sabah (2003) 6 ITELR 368; Abacus Trust Co (Isle of Man) v Barr (2003) 5 ITELR 602). In the latter case, under the then interpretation of the rule in Hastings-Bass (1975) Ch 25 (CA) it was held that although the wishes of the settlor had been misinterpreted by or on behalf of the trustees the distributions so made were voidable not void, contrary to the decision in Abacus Trust Co (Isle of Man) Limited v NSPCC (2001) STC 1344.

CO-OWNERSHIP 3.28 Land, and indeed other assets, may be held by a number of owners on terms whereby each co-owner owns a specified proportion of the total, ie the property is held jointly as tenants in common. Each such co-owner has an interest in the property, which is part of his estate and may be sold or transferred as if it were a separate asset. Alternatively, the property may be held as coowners on a joint tenancy, which means that the co-owners do not have an asset which can be separately disposed of, and which on the death of one of the joint tenants passes to the other or others by survivorship, jus accrescendi, and does not form part of the estate dealt with by will or under the rules of intestacy. A joint tenancy held by the joint tenants beneficially may be severed very simply by serving a notice on the other joint tenants under LPA 1925 s 36(2). 177

3.29  Trust Formalities 3.29 Prior to 1  January 1997, real property held jointly, whether as tenants in common or as joint tenants, was held on a statutory trust for sale, but under Trusts of Land and Appointment of Trustees Act (TLATA) 1996 s 5 and Sch 2 such holdings are now held as trusts of land with a power to sell and a power to retain. Only if there is an express trust to that effect may land be held on trusts for sale, with a statutory power to postpone the sale under TLATA 1996 s 4. As there is no duty to sell without an express trust to that effect, the possibility of deadlock, with one party wishing to sell and the other wishing to retain the property, is a problem, considered in Bagum v Hafiz and Another (2015) EWCA Civ 801 and (2016) Ch 421. There may, therefore, still be advantages in having an express trust for sale, for jointly owned property. 3.30 LPA 1925 s 34 provides that, where land is expressed to be conveyed to any persons in undivided shares, then it is deemed to be held as joint tenants for the grantees, or the first four named in the conveyance if there are more than four grantees. Where the co-owners are not holding beneficially because they are holding in trust, it is not possible to sever the joint tenancy, but one of the co-owners can release his interest to the other joint tenants (LPA 1925 s 36(2)). 3.31 Where property is bought, and the purchase proceeds are provided by two or more parties, even though the property is acquired in the name of only one of them, they are deemed to be equitable tenants in common in proportion to the amount paid by each of them (Bull v Bull [1955] 1 QB 234; Williams & Glyn’s Bank v Boland [1981] AC 487). Contributions to income rather than capital do not give the payer any interest in the property (Savage v Dunningham [1974] Ch 181). 3.32 A claim to be equitable tenants in common fails where the property is actually conveyed into the names of the owners as joint tenants, in which each joint holder was entitled to an equal share in the proceeds of the sale of the property, irrespective of their initial contributions (Goodman v Gallant [1986] Fam 106).

RESULTING TRUSTS 3.33 A  resulting trust arises where the settlor has made a transfer of property, but does not divest himself of his entire interest in that property. Resulting trusts were considered in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961. Brown-Wilkinson LJ identified two sets of circumstances where a resulting trust arises: (i)

Where A makes a voluntary transfer to B, or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B. There is a presumption that A did not intend to make a gift to B, and the money or property is held on trust for A (if he is the 178

Trust Formalities 3.34 sole provider of the money) or in the case of a joint purchase by A and B in shares proportionate to their contributions. (ii) A may transfer property to B on express trusts, but the trusts declared may not exhaust the whole beneficial interest (Re Vandervell’s Trusts (No  2) [1974] Ch  269). If, however, the settlor had expressly or by necessary implication abandoned any interest in the trust property, there may be no resulting trust, the undisposed equitable interest vesting in the Crown as bona vacantia (Re West Sussex Constabulary’s Widows, Children and Benevolent (1930) Fund Trusts [1971] Ch 1). 3.34 In cases where there is an apparent resulting trust, this is only a presumption which can be rebutted if, for example, there is evidence to show that a gift was intended. For a discussion on resulting trusts and the presumption of advancement, see the Canadian case of Pecore v Pecore and Another (2007) 9 ITELR 873. In the corresponding case of Madsen Estate and Another (2007) 9 ITELR 903, the court held on the facts of this case, in giving a judgment on the same day, that as in Pecore v Pecore, there was no presumption of advancement on a gift by a father to an adult child but that, in this case, the presumption of a resulting trust in favour of the joint account holder on the father’s death was rebutted. The mere purchase in the name of another, in the absence of any intention to the contrary, is sufficient to give rise to a resulting trust in favour of the provider of the purchase consideration (Dyer v Dyer (1788) 2 Cox Eq Cas 92; Ali v Khan and Others [2002] EWCA Civ 974). It also applies where the property is purchased in joint names, as in Bull v Bull [1955] 1 QB 234 and in Fowkes v Pascoe (1875) 10 Ch App 343. Stock purchased in the joint names of a woman and the son of her widowed daughter-in-law was held, in the circumstances, to have been intended as a gift of the property held as joint tenants, not held on a resulting trust. Where a husband and wife buy a property on mortgage, which is paid off by their joint efforts, then the property, if held in the sole name of the husband, would be held partly on a resulting trust for the wife (Cowcher v Cowcher [1972] 1  WLR  425). The transfer of property into the name of another implies a resulting trust for the transferor in the absence of evidence of there being a gift to the transferee (Re Vinogradoff [1935] WN 68). However, in the case of land there is no presumption of a resulting trust where property is conveyed by one party into the name of another, in view of LPA 1925 s 60(3). This again is a rebuttable presumption, and in Hodgson v Marx [1971] Ch 892 a resulting trust was held to exist. However, in the Singapore High Court in Re Estate of Chong Sui Kum (dec’d) (2005) 8 ITELR 318, it was held that the presumption of advancement applied between a mother and her adult children in that case. 179

3.35  Trust Formalities 3.35 A  failure to dispose of the entire beneficial interest gave rise to a resulting trust in Re Abbott Trusts Fund [1900] 2 Ch 326. Failure of an express trust because, for example, of a beneficiary failing to survive to obtain a vested interest, can give rise to a resulting trust in favour of the settlor. Similar results follow where surplus funds remain after the objects of the trust have been covered (Re Gillingham Bus Disaster Fund [1958] Ch 300). In cases where a surplus exists but there is no resulting trust, the surplus becomes bona vacantia and belongs to the Crown (Cunnack v Edwards [1896] 2 Ch 679). If a loan is made for a specific purpose which is frustrated, there is a resulting trust in favour of the lender (Barclays Bank v Quistclose Investments [1970] AC 567).

ADVANCEMENT 3.36 There may, however, be a presumption of advancement, ie that there is an outright gift in favour of the transferee. This is likely to apply where a husband conveys property to a wife (Thornley v Thornley [1893] 2 Ch  229; Dunbar v Dunbar [1909] 2 Ch  639) but not vice versa (Mercier v Mercier [1903] 2 Ch 98), although such presumption is very easily rebutted in these egalitarian days (Pettitt v Pettitt [1970] AC 777). A transfer of property from a father to a child carries with it a presumption of gift (Shephard v Cartwright [1955] AC 431; Re Roberts [1946] Ch 1), but not from mother to child (Bennet v Bennet (1879) 10 Ch D  474). It does not normally apply to more remote relatives unless the donee is standing in loco parentis, as in Ebrand v Dancer [1680] 2 Cas in Ch 26, which was a transfer to a grandchild where the child’s father was dead. The doctrine of advancement is now regarded as a doctrine of last resort, following McGrath v Wallis [1995] EWCA Civ 14. A presumption of advancement was denied in the Singapore case of Lai Min Tet v Lai Min Kin (2004) 7 ITELR 148, which held that, in the circumstances, there was a resulting trust in favour of the transferor. A similar decision was reached in Ali v Khan [2002] EWCA Civ 974. An illegal purpose cannot be used to rebut a presumption of advancement (Re Emery’s Investment Trusts [1959] Ch 410; Gascoigne v Gascoigne [1918] 1 KB 223).

CONSTRUCTIVE TRUSTS 3.37 It is arguable that a fully secret trust is a constructive trust; indeed, in Ottaway v Norman [1972] Ch 698 an oral, fully secret, trust of land was enforced in spite of the fact that LPA 1925 s 53(1)(b) requires express trusts to be in writing, which does not apply under LPA 1925 s 53(2) to resulting, implied or constructive trusts. Most constructive trusts, however, arise by operation of law, not as a result of any intention of the settlor as in an express trust. In normal circumstances, such trusts arise because of some act on the part of a person as a result of which he acquires property which, in all conscience, was due to somebody else. In such circumstances, there may well be a constructive 180

Trust Formalities 3.40 trust in favour of the dispossessed (Thorpe v HMRC  [2009]  WTLR  1269). There is a useful review of the law in Paragon Finance Plc v DB Thakerar & Co (a firm) [1998] EWCA Civ 1249. The House of Lords in Stack v Dowden (2007) 9  ITELR  815 considered a conveyance of a house into the joint names of a co-habiting but unmarried couple without any express declaration of beneficial interests. It was held that ‘if a party wishes to show that the beneficial ownership is different from the legal ownership … this is achieved by taking sole beneficial ownership as the starting point in the first case and by taking joint beneficial ownership as the starting point in the other.’ In this context, joint beneficial ownership means that the shares are presumed to be divided between the beneficial owners equally. So, in a case of sole legal ownership, the onus is on the party who wishes to show that he has any beneficial interest at all and, if so, what that interest is. In a case of joint legal ownership, the onus is on the party who wishes to show that the beneficial interests are divided other than equally. In this case, the cohabitation lasted from 1993 to 2002 and resulted in four children. On the facts in this case and taking into account the contributions by the parties, the Court of Appeal ordered that the net proceeds of sale of the family home be divided 65% to 35% in favour of Ms Dowden, and the House of Lords supported this allocation. 3.38 One of the bases of a constructive trust is where a statute is used to perpetrate a fraud, in the equitable rather than the criminal sense. For example, a purchaser of land subject to a mortgage (as trustee for the mortgagor), who subsequently treated the land as his own, was bound by the trust, notwithstanding the absence of the appropriate writing required by law (Rochefoucauld v Boustead [1897] 1 Ch 196). However, in Midland Bank Trust Co Ltd v Green (No 1) [1981] AC 513 there was no constructive trust where a husband sold a farm to his wife to defeat their son’s option, which had not been properly registered under LCA 1925, as the purchaser had not made any representation to the son. 3.39 The existence of a constructive trust enables the beneficiary to recover the property if still held by the trustee (Boardman v Phipps [1967] 2 AC 46). This would not be possible where their asset had been sold to a bona fide purchaser for value without notice (Bassett v Nosworthy (1673) Cas Temp Finch 102) but it would allow the proceeds to be traced (Re Halletts Estate (1880) 13 Ch D  696). If tracing is unsuccessful, a personal action may be brought against the constructive trustee (Re Montagu [1987] Ch 264; see also Cusack & Cotton v Scroop (Isle of Man) IOFLR 68/409). 3.40 Where a person acts in breach of a fiduciary relationship, such as a trustee in making a profit which should have gone to the trust, he would be accountable under a constructive trust (Ex p Lacey (1802) 6 Ves 625). This would also apply where there was a solicitor–client relationship (Finers v Miro 181

3.41  Trust Formalities [1991] 1 WLR 35), a director in relation to a company (Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378), principal and agent, or partnership (Clegg v Edmondson (1857) 8 De GM & G 787). Employees owe a fiduciary duty to their employers (Canadian Aero Services v O’Malley (1973) 40 DLR (3d) 371). Agents, however, are only constructive trustees if they are merely negligent (Williams-Ashman v Price [1942] Ch 219) as it would be unconscionable for them to retain funds due to their principal which cannot be paid because of liquidation (Wallace & Heis v Shoa Leasing (Singapore) Pty Ltd [1999] 2 WTLR 301). An innocent donee of trust property is not a constructive trustee, but is subject to the true beneficiaries’ rights of tracing (Re Diplock [1948] Ch 465). A third party who knowingly receives trust property may be responsible for its proper application, as a constructive trustee (Baden Delvaux v Société Générale [1993] 1  WLR  509n). A  common form of constructive trust arises on unauthorised remuneration of trustees (Robinson v Pett (1734) 3  P  Wms 249) or a secret commission (Williams v Barton [1927] 2 Ch 9). A bona fide purchaser for value without notice of the beneficiaries’ interest would acquire a proper title to the assets (Bassett v Nosworthy (1673) Cas temp Finch 102) but not if he had actual or constructive notice (Nelson v Larholt [1948] 1 KB 339). 3.41 The proceeds of crime, direct or indirect, may be held on constructive trust, eg property obtained by theft (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961; Barret v McCormack (1999) 4 ITELR 1). There is, however, no general principle that money stolen or paid as a result of accident, mistake or fraud will be held on constructive trust by the recipient (Shalson & Others v Russo and Others (Mimran and Other Part 20 Claimants) (2003) 8 ITELR 435). This case reviews in some depth the case law relating to tracing. 3.42 Where parties, usually a husband and wife, enter into reciprocal wills on the understanding that neither will revoke the will without the other’s consent, this would not give rise to a constructive trust, although there could be a breach of contract if one of them revokes while both are alive (Stone v Hoskins [1905] P 194), but if one party has died the other may not subsequently revoke his will and a constructive trust arises for the benefit of those entitled under the mutual wills (Re Cleever [1981] 1 WLR 939). 3.43 A  constructive trust can arise on the sale of land from the date contracts are exchanged until completion, and if, contrary to the contracts, the vendor sells the land to a third party, the displaced purchaser may claim the proceeds as held on constructive trust for him and retain any profit over and above the original contract price (Lake v Bayliss [1974] 1 WLR 1073). The doctrine of proprietary estoppel can apply where the owner of land can be held to be subject to a constructive trust in favour of a third party, who has acted to his detriment in the belief that he would have an interest in the property, eg where a person works without wages for a landowner on the understanding that he will inherit the estate (Re Basham [1987] 1 All ER 405). In the absence 182

Trust Formalities 3.47 of evidence of some agreement to acquire a proprietary right, however, no constructive trust arises (Lloyds Bank Plc v Rosset [1991] 1 AC 107). Where there is a constructive trust, the basis on which the parties share in the property is by no means clear (Drake v Whipp [1996] 1 FLR 826). 3.44 A common case where a constructive trust arises is where two parties live together as husband and wife and purchase a property in the name of one of them with each contributing to the cost and running expenses. The case of Oxley v Hiscock (2004) 6 ITELR 1091 concerned just such an unmarried couple and the court held that in the circumstances of this case it was appropriate to take into account both the fact that one party had provided nearly twice as much for the original price of the property as the other but the running expenses were paid for approximately equally. The Court of Appeal therefore held that a fair division of the proceeds of sale was 60% to one party and 40% to the other. See also Webster v Webster and Others [2009] WTLR 339 and Stack v Dowden [2007] UKHL 17.

PERPETUITIES 3.45 In England the common law developed to prevent property being tied up for many generations to come by introducing a rule against perpetuities, ie to prevent property being held in trust forever. Under common law, it was originally the situation that the trust could not continue for more than the life of someone alive at the time of the disposition (Duke of Norfolk’s Case (1681–5) 22 ER 931 and other citations). This was in due course amended to allow the life in being to reach majority, and became 21 years after the death of someone alive at the time of the creation of the trust. Obviously one practical problem was to determine on which life the rules should be based and it became common practice to refer to the last to die of the descendants of George V alive at the time of the disposition, on the assumption that this would be relatively easily ascertained in practice, it presumably being assumed that the assassination of the entire Royal family, as happened in Russia in 1917, was unthinkable in England and Wales. 3.46 The rule against perpetuities is generally not considered unreasonable, although not all trust jurisdictions have such a rule. The common law rules often gave rise to problems in practice, particularly as they assumed that anyone alive was capable of procreating, and class gifts, say, to children, could fail on the theoretical possibility, however practically unlikely, that another member of the class could be born. The rules therefore were substantially amended by PAA 1964 which came into force on 16 July 1964 and applied to every trust or similar instrument taking effect on or after that date. 3.47 PAA 1964 s 1 allowed the trust instrument to specify the number of years, not exceeding 80, for the duration of the trust, except in the case of an option relating to land, which is limited to 21 years by PAA 1964 s 9. It also 183

3.48  Trust Formalities provides presumptions as to future parenthood, ie that a male can have a child at the age of 14 or over, a female at the age of 12 or over but not over the age of 55 years, subject to evidence to the contrary. If, in spite of this, the child is born outside these age ranges the High Court may make such order as it thinks fit for justice to be done. 3.48 Instead of a gift being void for remoteness under the rule against perpetuities, as applied to common law (Re Moore [1901] 1 Ch 936), PAA 1984 s  3 adopts a ‘wait and see’ approach, and a gift is therefore assumed to be valid until it becomes established that the vesting would not occur, or a general power of appointment would not be exercisable within the perpetuity period. Where a number of years up to 80 is not used in the trust deed, or it is not valid under common law, eg by adopting the royal lives in being plus 21 years approach, reference may be had to the life of the donor if living, the donees, the parents or grandparents of donees or anyone having a prior interest, such as a life tenant (PAA 1964 s  3(5)). In the absence of any such a person the perpetuity period is 21 years (PAA 1964 s 3(4)(b)). 3.49 Where a disposition is limited by reference to a person obtaining an age exceeding 21 years, which would make it void for remoteness, the age is reduced to such lesser age in excess of 21 which would cause a disposition to be valid (PAA 1964 s 4). Similarly a disposition relating to the death of a surviving spouse is limited to a period which would come to an end immediately before becoming void for remoteness (PAA  1964 s  5). An interest expectant on an interest which has become void is not itself void automatically (PAA 1964 s 6) and a power of appointment is treated as a special power unless it is a general power given to one person (PAA 1964 s 7). The power of trustees to act in spite of the rule against perpetuities is enshrined in PAA 1964 s 8. The rule does not apply to rent charges and does not give rise to a contractual right to restitution for its lack of effect, if void (PAA 1964 ss 11 and 10). 3.50 The Perpetuities and Accumulations Act 2009 has reformed the rule against perpetuities by introducing a fixed period of 125 years during which equitable interest must vest which however apply only to instruments made after the introduction of the change of law and to appointments made under existing powers of appointment after 6 April 2010. The accumulation period is the same as the perpetuity period, ie 125 years instead of 21 years where this Act applies (see 2.7).

ACCUMULATIONS 3.51 Accumulation is reinvesting the income within the trust rather than distributing it to beneficiaries. If the income is to be accumulated longer than the perpetuity period it is void ab initio, but otherwise the periods for which accumulations can validly be made are prescribed by LPA 1925 s 164 as: 184

Trust Formalities 3.55 (a)

the life of the settlor;

(b) 21 years from the death of the settlor; (c) the minority or respective minorities of the beneficiaries living or en ventre sa mere at the death of the settlor; (d) the minorities or respective minorities of the persons directing the accumulation; (e) 21 years from the making of the disposition, or the minority of any person in being at that date (added by PAA 1964 s 13). The trust instrument can choose the accumulation period which is normally limited to 21 years under PAA  1964 s  13(1)(a), or 125 years where the Perpetuities and Accumulations Act 2009 applies, see 2.7. 3.52 As with the perpetuity period, the accumulations period is not the same in all jurisdictions which recognise trusts. Jersey, for example, has both a perpetuity and accumulation period of 100 years from the date of the trust, whereas other jurisdictions, such as Panama, have no perpetuity or accumulation periods at all. If the assets were situated outside the UK, such as shares in foreign companies, the foreign perpetuity and accumulation periods would apply, even if the companies own assets in the UK which could be used by a UK resident settlor, as there is no requirement for him to settle a trust under English law. 3.53 Historically, the perpetuity and accumulation periods of a life in being plus 21 years and 21 years equated to the age of majority. Although this was reduced to 18 by FLRA 1969 s 1, there has been no change in the perpetuity or accumulation period, except where PAA 2009 applies.

VESTING 3.54 Property is vested in someone if they have an absolute entitlement to it, now or at some specific time in the future.

CONTINGENT INTERESTS 3.55 A contingent interest is one which may occur but has not yet occurred and is not absolutely certain to occur, as opposed to a future vested interest, which is certain to occur. Death is not a contingency because it is bound to occur, so that a settlement on A for life and then to B for life with remainder to C is a vested interest of A, who is currently in possession, and C who has a vested interest in the remainder, but B has a contingent interest which will only become a vested interest if he outlives A. A vested interest can, at least in theory, 185

3.56  Trust Formalities be sold, even if it is a future interest and not in possession, but a contingent interest may not happen at all and therefore is normally unmarketable. 3.56 A vested interest merely requires a beneficiary to be in existence and identifiable as such, and the extent of his interest must be ascertainable, and nothing further needs to happen before he becomes entitled to that interest, whether in possession or in the future. If, however, an interest is contingent on marriage, which may never happen, it is not vested until the event occurs. 3.57 A gift to a class, such as to children or to grandchildren, is contingent until no future members of the class could arise, taking into account the statutory assumptions on parenthood in PAA 1964 s 2. Normally an interest becomes vested on reaching a specified age, such as 18 or 25, although it is not uncommon to have a vested interest in the income of the trust and leave the appointment of capital to the discretion of the trustees, which may, in turn, be subject to a minimum age. 3.58 A  contingency is anything which is not absolutely bound to occur such as surviving to the vesting age. What the rule against perpetuities requires is that the contingency in question could not possibly occur after the end of the perpetuity period. There can obviously be no requirement that the contingency actually occurs or it would not be contingent. If the beneficiary has a contingent interest and the contingency does not occur the interest merely fails. The interest may be conditional, eg  in Re Tuck’s Settled Trust [1978] Ch  49 the Court of Appeal upheld a condition that the beneficiary’s interest would be forfeited on a marriage to a person other than an approved wife of Jewish blood, as this could be precisely determined. This contrasts with Clayton v Ramsden [1943] AC 320 where forfeiture on marriage to a person not of Jewish parentage and of the Jewish faith was void for uncertainty. In Blathwayt v Lord Cawley [1976] AC 397 the Court upheld a forfeiture clause which applied if a beneficiary became a Roman Catholic, in the sense that it was not held to be void on grounds of public policy, but it was not actually applicable on the proper construction of the clause. A condition that the beneficiary continues to use the names and arms of a particular family was upheld in Re Neeld [1962] Ch 643. 3.59 A conditional interest is usually regarded as a contingency which is under the control of the beneficiary, eg  on condition that he marries. Other conditions not contrary to public policy are also likely to be enforced by the courts.

VARIATION OF TRUSTS 3.60 The court has an inherent jurisdiction to vary a trust, which is likely to be used to give the trustees greater administrative or management powers, 186

Trust Formalities 3.63 if required, for the proper running of the trust (Re New, Re Leavers [1901] 2 Ch  534). It will not, however, rearrange beneficial interests (Chapman’s Settlement Trusts [1954] AC 429) except to the extent of allowing the trustees to use income required to be accumulated for the maintenance of the settlor’s minor children. There is statutory power given to the court in TA 1925 s 57 to widen the powers of investment, which was used in Trustees of the British Museum v A-G  [1984] 1  All ER  337. The Court approved an extension of trustee’s powers under TA  1925 s  57 in Anker-Petersen v Anker-Petersen (1991) 16  LS  Gaz R32 and NBPF  Pension Trustees Ltd v Warnock-Smith and Others [2009] WTLR 447. The statutory power of advancement can be used to resettle on new trusts for the beneficiaries (Pilkington v IRC  (1962) 40 TC 416). 3.61 Where all the beneficiaries are sui juris, and are in agreement, they can bring the trust to an end under the rule in Saunders v Vautier (1841) Cr & Ph 240. All the beneficiaries have to agree, whether their interests are vested or contingent, but if any of the beneficiaries are minors or mentally incapacitated it is not possible to vary the trust. Prior to TLATA  1996 s  19 beneficiaries could not, even if all were sui juris and in agreement, force the resignation of a trustee and the appointment of one of their choice without bringing the trust to an end under the rule in Saunders v Vautier (Re Brockbank [1948] Ch 206; Re Kirkpatrick (deceased), Bunns v Steel and Others (2005) 8 ITELR 597). The rule in Saunders v Vautier does not normally apply to pension funds (Buschan and Others v Rogers Communications Inc and Others (2006) 9 ITELR 73 and Thorpe v Revenue and Customs Commrs [2010] EWCA Civ 339 [2010] STI 1439)). 3.62 The court is empowered to make a vesting order for the maintenance, education or benefit of an infant beneficially entitled to any trust property (TA 1925 s 53). The court also has a power, in the case of a strict settlement under SLA 1925 s 64, to authorise the tenant for life to effect any transaction which, in the opinion of the court, would be for the benefit of the settled land or for the persons interested under the settlement. 3.63 The court has power under VTA 1958 s 1 to give consent to a trust variation on behalf of an under-age beneficiary and possible future beneficiaries, but it does not have a general discretionary power to vary trusts (Re Hoult’s Settlement [1969] 1 Ch 100; Goulding v James [1997] 2 All ER 239). In D (a Child) v O  (2004) 7  ITELR  63 the court, under VTA  1958 s  1, varied the statutory power of advancement under TA 1925 s 32 to remove the limitation of no more than half of the presumptive or vested share in capital by way of advancement so that, if necessary, the whole of the child’s share could be advanced to pay for her education. Under VTA 1958 s 1 the court may extend the perpetuity period by substituting the statutory period under PAA 1964 s 1 of up to 80 years (Re Holt [1969] Ch 100) or PAA 2009 s 5 of 125 years or, prior to PAA  2009 coming into force, the common law period of a life in 187

3.64  Trust Formalities being plus 21 years, without creating a resettlement (Wyndham v Egremont [2009] EWHC 2076 (Ch); Roome v Edwards [1981] STC 96; Re T’s Settlement [1964] 1 Ch 158; IRC v Holmden [1968] AC 685; Goulding v James [1997] 2 All ER 239). 3.64 The court also has jurisdiction under MHA 1983 and MCA 1973 to vary trusts. The court would normally be unwilling to approve the variation in a trust to the financial detriment of a person not sui juris (Re Tinker’s Settlement [1960] 3 All ER 85n), except in exceptional circumstances, eg where a person was wealthy but mentally ill and would be likely to have approved the variation had she been sui juris (Re CL [1969] 1 Ch 587), or in the interests of family harmony (Re Remnant’s Settlement Trusts [1970] 2 All ER 554). 3.65 An attempt to move the jurisdiction of the trust to Jersey for tax avoidance purposes failed in Re Weston’s Settlements [1969] 1 Ch  223. It has been held that it was to an individual’s benefit to have a guaranteed income from the trust instead of merely remaining a discretionary beneficiary (Re Clitheroe’s Settlement Trusts [1959] 3 All ER 789). However, variations for tax avoidance purposes have been approved in a number of cases, including in relation to capital taxes (Re Drewe’s Settlement [1966] 2  All ER 844n; Re Lloyd’s Settlement [1967] 2 All ER 314n; Ridgwell and Others v Ridgwell and Others [2007]  EWHC  2666 (Ch)), or in respect of income (Re Sainsbury’s Settlement [1967] 1  All ER  878). The court has approved a change in the jurisdiction of trusts, where the beneficiaries have already moved to the new jurisdiction (Re Seale’s Marriage Settlement [1961] 3 All ER 136; Re Windeatt’s Will Trusts [1969] 2 All ER 324). A move to Guernsey was approved in Re Chamberlain (1976) 126 New Law Journal 104 where the beneficiaries had no connection with Guernsey but were not domiciled or resident in England. However, where the proposed arrangements amounted to a conspiracy to defraud the Inland Revenue the court, not surprisingly, refused to approve the arrangements (Re Michelham’s Will Trusts [1964] Ch 550). In Barclay v Smith (2016) EWHC 2010 (Ch) a cricket club that went to court to appoint trustees, who so wished, for a further five-year period where the initial appointment for five years had expired. 3.66 In the Jersey case of Re The A  Trust; FM  v ASL  Trustee Company Ltd (2006) 9  ITELR  127, it was held that the Jersey court had jurisdiction to vary the terms of a trust in order to give effect to a foreign judgment in the interests of comity. Where the trustees had submitted to the jurisdiction of the foreign court voluntarily, the trustee may be said to have agreed to be bound by its decision (Compass Trustees Ltd (Trustees of the Eiger Trust) v McBarnett (2002) 5 ITELR 44; CI Law Trustees v Minwalla [2005] JRC 099). Where, however, the trustee has not voluntarily submitted to the jurisdiction of the foreign court, it was entirely within the discretion of the Jersey court 188

Trust Formalities 3.69 whether or not to enforce the foreign court order. In this case, the settlor was a Liechtenstein Anstalt and the husband in the matrimonial dispute who, together with the wife and children, was a beneficiary and had wilfully failed to maintain his wife and children; the court considered that it was in the interests of justice that all the assets of the trust should be made available for the exclusive benefit of the wife and children.

PROPER LAW 3.67 A well-drafted trust deed will normally state explicitly the governing law, although it may be implicit in the fact that reference is made to English trust law that the proper law of the trust is English. As has been shown above, the courts will only approve a change in the proper law of the trust where they think it appropriate to do so. It is, however, often considered appropriate to have a specific clause in the trust deed allowing the trustees to resign in favour of foreign trustees and to change the proper law of the trust to a new jurisdiction. This may well have tax implications, as explained in 10.4–10.5 and it is important to remember that a transfer to a single foreign corporate trustee will almost certainly fall foul of TA  1925 s  37(2), as it would probably not be a trust corporation, and a sole trustee is prohibited. It is, therefore, necessary to transfer to at least two overseas trustees to secure a valid emigration of a trust. 3.68 Some trusts, particularly foreign trusts, contain what is known as a flee clause which provides that, if an attempt is made by the trust jurisdiction to change the law to expropriate property or introduce or increase taxes in relation to the trust, the jurisdiction of the trust automatically passes to trustees in another jurisdiction. This is quite common with Hong Kong trusts prior to 1997, when the terms of the transfer of the colony to the People’s Republic of China had not been finalised. It is also said that a number of trusts automatically fled from Bermuda on the assassination of the Governor some years ago, and it took months before they could be returned, as the assassination was actually an isolated incident and not the beginning of civil unrest, which was one of the triggering factors in a number of flee clauses being used. 3.69 A  flee clause makes sense only where the assets are not in the jurisdiction of the existing proper law, as there is not much point in having the automatic appointment of trustees in another jurisdiction if the assets themselves are left behind to be expropriated. However, where the assets are investments it may well be possible to have the trust and trustees in one jurisdiction automatically fleeing to another, although it may be necessary to ensure that the new trustees’ ability to deal with the assets has already been established. This could be done, for example, through the assets being vested in nominees, or through an investment company which need not be situated in either of the trust jurisdictions. 189

3.70  Trust Formalities

PROTECTORS 3.70 Another method for the settlor to try and ensure that the trustees carry out his wishes, while still preserving the considerable flexibility of a discretionary trust, is to include a protector whose powers and duties are set out in the trust deed. The protector is not himself a trustee but is frequently a personal friend of the settlor, with an intimate knowledge of the family and the settlor’s wishes. The protector’s powers are usually those of veto under which the appointment or advancement to a particular beneficiary may require his consent. In some cases this veto extends to the disposal of certain trust assets such as shares in the family company or family estates. In some cases, the protector is given power to remove or appoint trustees. Protectors are particularly common in overseas discretionary trusts where the trustees are unlikely to be known personally to the settlor. The nature of a protector was considered in the Isle of Man case of Steele v Paz (1993–5) MLR 102 in which it was stated: ‘… nevertheless his (the protector’s) role in my opinion is that of assisting in the administration of the trust. He is there to express to the trustees the settlor’s wishes as to how the trust is operated … It is clear as regards his powers he would owe a fiduciary duty to the beneficiaries (and not to the settlor) as to how those powers would be exercised. Thus it was accepted by all parties that the protector could not refuse to exercise a power because the settlor wished this to happen. The protector must bona fide consider the exercise of his powers from the point of view of the beneficiaries under the trust.’ 3.71 In this particular case the problem was that the trust deed had not named the protector, and it was held that this deficiency was curable and ‘the court could, and if necessary should, appoint a protector in the same circumstances as it would appoint a trustee, if a trustee was never appointed or declined to act’. It has long been accepted that the court will not allow a trust to fail for want of a trustee (Underhill & Hayton, Law of Trusts and Trustees, 16th edition, p 77), except where it is of the essence of the trust that the trustees selected by the settlor and no-one else shall act as trustees (Re Lysaght [1966] Ch 191). The court has an inherent jurisdiction to remove a protector from a trust for due cause. In the Jersey case of Re The Frieburg Trust, Mourant & Co Trustees Ltd v Magnus (2004) 6 ITELR 1078 the protector had defrauded the trust and was removed by the court on the application of the trustees. Under the trust deed, the trustees had a power to appoint a new protector and could act alone if there was no protector. The court did not appoint a new protector, leaving the trustees free to make decisions without fetter. This was merely an extension of the court’s inherent power to remove a trustee for due cause (eg in Baudains v Heaume (1886) 211 Ex 379). 3.72 A  protector’s power to appoint and remove trustees is a fiduciary power, which means it cannot be exercised in his favour to appoint himself a 190

Trust Formalities 3.73 trustee. This was confirmed by the Bermuda Supreme Court in Von Knieriem v Bermuda Trust Co Ltd and Grosvenor Trust Co Ltd EG Nos 154 and 162 of 1994, following the English case of Re Skeats’ Settlement (1889) 42 Ch D 522. A protector must not have any responsibility for the day-to-day management, otherwise his fiduciary position may be construed to be enlarged into that of the trustee – JG  Goldsworth, The Nature and Use of Trusts, Trusts and Trustees, Vol 2, No 5. Exceptionally, beneficiaries may be appointed protectors to look after their own interests and not in a fiduciary capacity (Rawson Trust v Perlman (Bahamas) Eq No 194 of 1984). 3.73 The powers and duties of a protector were considered in the matter of The Bird Charitable Trust and The Bird Purpose Trust, Basel Trust Corporation (Channel Islands) Limited v Ghirlandina Anstalt and Others [2008]  WTLR  1505. This case confirmed that the power to appoint new or additional trustees is normally to be regarded as a fiduciary power, even where the power is conferred upon someone who is not a trustee, eg  a protector (para 80). The judge stated that ‘it is a question of construction of the particular trust deed as to whether a particular power of a protector is fiduciary or not. It may well be the case that in relation to a particular trust some powers of a protector are fiduciary and others are personal’ (para  82). The further cases referred to at paras 86–89 included Re Freiburg Trust (2004) JRC 056; Alhamrani v Russa Management [2005] JLR 236; Rawcliffe v Steele [1993– 95] MLR 426; and Re Circle Trust, HSBC International Trustee Ltd v Wong [2007] WTLR 631. In these cases, the powers of the protector were held to be fiduciary. However, in Re Z Trust [1997] CILR 248 the Grand Court of the Cayman Islands held that a power conferred on the management committee (comprising two beneficiaries and one non-beneficiary of the trust) to amend the terms of the trust with the agreement of the settlor was a personal and not a fiduciary power. The Jersey court continued (at para 90), ‘in our judgment the role of the protector in relation to the charitable trust is a fiduciary one. There is no indication from the trust deed that the powers of the protector are to be regarded as personal powers.’ The court also held that the power of appointing a successor protector was also a fiduciary power (para 91). Such fiduciary powers ‘can only be exercised in good faith in the best interest of the trust of the beneficiaries as a whole’ (para 92). So far as the purpose trust was concerned, the trust deed provided in clause 14(4)(a) that ‘the protector shall not owe any fiduciary duty towards any person interested under the trust for any act or omission or commission of the protector in relation to the powers given to the protector by the trust’. The court was not called upon to determine whether or not this was a fiduciary power as it held that, in the circumstances of the case, the appointment of Ghirlandina Anstalt as protector and the appointment or intended appointment of additional non-Jersey trustees were valid. In Davidson v Seelig (2016) EWHC 549 (Ch) it was fanciful to suppose the court would be willing to remove the trustees, who had the confidence of the claimants and their adult children and there was no evidence that the trustees were guilty of misconduct. 191

3.74  Trust Formalities

Elections 3.74 A  donee to whom property is left under a will, which also leaves assets already owned by the donee to a third party, must elect whether to take the legacy under the will and give up the property already owned, to the third party, or renounce the legacy and keep the existing property (Re Mengel’s Will Trust [1962] 2 All ER 490). An election often arises because of joint ownership of property where one of the joint owners purports to dispose of the entire property (Re Gordon’s Will Trust [1978] 2 All ER 969). If the electee decides to keep the property which he already had, the legacy or gift is used to benefit the third party instead of the legatee or donee. An election can also arise in connection with a joint tenancy where, on the death of one of the joint tenants, it passes to the other by survivorship. If, as not infrequently happens, the joint tenant misunderstands the law and purports to leave by will his joint interest in the property to a third party and also leaves a legacy to the joint tenant taking the property under survivorship, the joint tenant would have to choose between the legacy and giving a joint interest in the property to a third party (Re Dicey [1957] Ch 145). If, however, the testator merely gives the asset away during life and omits to amend his will, there is no question of election as the gift causes the legacy to adeem, ie the legacy is cancelled because it is not part of the testator’s estate.

MISTAKE AND RECTIFICATION 3.75 The courts have a general power to rectify documents where there has been a common mistake by both parties (Frederick E Rose (London) Ltd v William H Pimm & Co Ltd [1953] 2 QB 450; RS Briggs v Integritas Trust Management (Cayman) Ltd v Others 1988–89 CCR 456; AMP (UK) Ltd v Barker (2000) 3 ITELR 414; Re the Westbury Settlement (2001) 3 ITELR 699). Rectification only relates to what is actually in the document, and the true intentions of the parties must remain (Green v Cobham [2002] STC 820). In Re the Peach and Dolphin Trust (2004) 7 ITELR 570 the Jersey court confirmed that: ‘the test for rectification is well established and the court has to be satisfied on three matters: (i)

that a genuine mistake has been made so that the trust does not reflect the true intention of the settlor;

(ii) there must be full and frank disclosure; and (iii) there must be no other practical remedy.’ See also Re the MJB/SJB Amethyst Trust (2002) 5 ITELR 372. If there is a mistake, eg by the trustees in executing a deed of appointment on the wrong day, it may be possible to apply to the court to have the document 192

Trust Formalities 3.77 declared void ab initio, as happened in the case of Abacus Trust Co (Isle of Man) Ltd v National Society for the Prevention of Cruelty to Children [2001] STC 1344, where the trustees were entering into a tax-avoidance flipflop scheme, the final part of which had to take place after 5 April 1998. The deed of appointment was executed by the trustee on 3  April 1998, contrary to the advice of counsel, and the court held that, as the trustees were obliged to take into account the fiscal consequences of their actions, they could not have meant to sign the deed of appointment on 3 April, and it was therefore void. This followed the principle in Re Hastings-Bass (dec’d), Hastings v IRC  [1974]  STC  211. The Hastings-Bass principle was further applied in Burrell and Another v Burrell and Another [2005] EWHC 245 (Ch); Mettoy Pension Trustees Ltd v Evans [1991] 2  All ER  513; and Stannard v Fisions Pension Trust Ltd [1991] PLR 224; and, in Jersey, in Re The Green GLG Trust [2002] 5  ITELR  590 and Re Howe Family No  1 Trust [2009]  WTLR  419). The relief is not, however, automatic (Breadner v Granville-Grossman [2001] Ch 523, [2000] 4 All ER 705). (Re The Toland Trust, the Pennywise Trust and the Sequential Trust (2006–7) 9  ITELR  321.) However, in Abacus Trust Co (Isle of Man) Limited v Barr (2003) 5 ITELR 602 the High Court held that decisions of the trustees were voidable not void. 3.76 The mere fact that a document has unintended tax consequences is not of itself a basis for rectification (Re Strain (dec’d), Allnutt and Another v Wilding and Others (2006) 9 ITELR 381, where rectification was refused). A mere clerical error, however, was corrected in Re Craig (dec’d), Price and Others v Craig (2006) 9 ITELR 393. The Hastings-Bass principle was applied in Jersey, which resulted in the transactions being set aside with retrospective effect in Re the RAS1 Trust (2006) 9 ITELR 798. 3.77 Another case in which the trustees were rescued under the HastingsBass principle was Re Bedford Estates Sieff and Others v Fox and Others (2005) 9  ITELR  93. In this case, the judge summarised the Hastings-Bass principle in the following terms (at para 119): ‘where trustees act under a discretion given to them by the terms of the trust in circumstances in which they are free to decide whether or not to exercise that discretion but the effect of the exercise is different from that which they intended, the Court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account or taken into account considerations which they ought not to have taken into account. I have expanded the formula … to include expressly the proposition that the trustees are not acting under an obligation … it does not seem to me that the principle applies only in cases where there has been a breach of duty by the trustees or by their advisers or agents … if the principle is 193

3.78  Trust Formalities satisfied (the conclusion that) the act in question is voidable rather than void is attractive but seems to me to require further consideration in the light of earlier authorities. I am in no doubt that as a general proposition, fiscal consequences are among the matters which may be relevant for the purpose of the principle. There are limits to what trustees have to consider in such a situation … the Hastings-Bass principle … only applies to acts of fiduciaries.’ 3.78 In Tax Bulletin 83 (June 2006), p 1294, HMRC warned that it is now likely that there will be cases in the future where HMRC would wish to be joined or to intervene in order to resist an application of the principle in a particular case, or to seek to influence the development of the principle in a particular direction. In Gresh v (i) RBC Trust Company Ltd and (ii) HM Revenue & Customs (HMRC) No 42/2009 (16 September 2009), the Court of Appeal in Guernsey allowed an appeal from the Royal Court (No 25/2009) and held that HMRC had a direct interest in the subject matter of the action which was not an attempt to enforce a foreign revenue claim, and it was just and convenient to decide the issue between HMRC and Mr Gresh and they were allowed to be joined as an intervenor. Mr Gresh was refused leave to appeal to the Privy Council. The Royal Court of Jersey came to a different conclusion in Seaton Trustees Limited (unreported, 19 March 2009). 3.79 In Re Butlin’s Settlement Trusts, Butlin v Butlin [1976] 2 All ER 483, it was stated that: ‘rectification is available not only in a case where particular words have been added, omitted or wrongly written as a result of careless copying or the like. It is also available where the words of the document were purposely used but it was mistakenly considered that they have a different meaning as a matter of true construction. In such a case … the court will rectify the wording so that it expresses the true intention.’ This was considered in Re Strain (dec’d), Allnutt and Another v Wilding and Others (2007) 9 ITELR 806, where £550,000 was paid to a discretionary trust when it should have been paid to an interest in possession trust. The settlor’s mistake was not as to the language, terms, meaning or effect of the settlement. His only mistake was that a payment of the £550,000 would be a potentially exempt transfer. A  mistake about the potential fiscal effects of a transaction was held in this case not to be grounds for rectification. 3.80 In the Isle of Man case of Samuel George McBurney v Elizabeth Mary McBurney and Betsom Trust [2009] WTLR 1489, a transfer into a discretionary trust by recent immigrants from the UK was set aside by the court for mistake, as the settlor would be deemed domiciled in the UK under IHTA 1984 s 267 and therefore give rise to an inheritance tax charge. The judge relied on the Isle of Man case of Clarkson v Barclays Private Bank and Trust (Isle of Man) 194

Trust Formalities 3.83 Ltd [2007]  WTLR  1703 and another case involving IHTA  1984 s  267, and the English cases of Ogden and Another v The Trustees of the R H S Griffiths (2003) Settlement [2008] WTLR 685. In Ogilvie v Littleboy (1897) 13 TLR 399 the Court of Appeal approved setting aside a transaction where there was ‘some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to them’. This unconscionability principle was approved by the House of Lords in Ogilvie v Allen (1899) 15 TLR 294. This was followed in Gibbon v Mitchell [1990] 1 WLR 1304 which, however, suggested that the fiscal consequences of a transaction might not be sufficient to set it aside for mistake, if they related to anticipated desirable tax consequences which failed to flow. Sieff v Fox [2005] WTLR 891, however, confirmed that unexpected fiscal consequences might be taken into account in considering whether a transaction could be set aside, if they were sufficiently serious. If a transaction is set aside for mistake under the principle of unconscionability and the exercise of the jurisdiction is discretionary, ‘it must follow that if as a matter of discretion, relief is refused, the impugned transaction will stand. If it stands it will have the effect it purports to have. I do not see how such a result is possible unless the impugned transaction is voidable rather than void ab initio’, per Lewison J in Ogden v Griffiths [2008] WTLR 685. 3.81 It has long been recognised that monies paid under a mistake of fact could be recovered (Admiralty Comrs v National Provincial and Union Bank Ltd (1922) 127  LT  452), and the House of Lords has held that money paid under a mistake of law, previously considered on the authority of earlier cases at first instance to be irrecoverable, could in fact be recovered (Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349). 3.82 The court has a wide power to order the delivery and cancellation of void documents to avoid confusion (Hayward v Dimsdale (1810) 17 Ves 111). In Barclays Private Bank & Trust (Cayman) Ltd v Chamberlain and Others (2006-07) 9 ITELR 302, the trustees made a transfer in ignorance of a change in the UK tax law which was, therefore, held to be avoidable under the rule in Hastings-Bass and should be avoided ab initio. A similar decision was reached in A and Others v Rothschild Trust Cayman Ltd (2006) 9 ITELR 307, which also reviewed earlier cases, such as Abacus Trust Co Ltd Isle of Man v NSPCC [2001] STC 1344; Re Bedford Estates, Sieff v Fox (2005) 8 ITELR 93; Mettoy Pension Trustees Ltd v Evans [1991] 2  All ER  513; and Green v Cobbam [2002] STC 820. 3.83 However, the Supreme Court in Pitt v Holt; Futter v Futter (2013)  STC  1148 considered and redefined the Rule in Hastings-Bass (re: Hastings-Bass, Hastings-Bass v IRC (1974) STC 211), which depended on the trustees breach of duty in the performance of something which was within the scope of their powers, not in doing something which they had no power to do at all. Therefore, in order for their actions to be set aside, the inadequacy of the trustees’ deliberations had to be sufficiently serious as to amount to a breach of 195

3.84  Trust Formalities fiduciary duty in order for the court to intervene. If the trustees, acting within the scope of their powers followed professional advice which turned out to be wrong, the court would not set aside their decisions. A mistake as to the tax consequences of the actions taken, as opposed to a mistake as to the legal character or nature of a transaction, could not be set aside. 3.84 Lord Walker referred to the decision in Melloy Pension Trustees Ltd v Evans [1991] 2 All ER 513 concerning trustees, and other fiduciaries, who make decisions without giving consideration to relevant matters which they ought to have taken into consideration. 3.85 Lord Walker also referred to Re Barr’s Settlement Trusts, Abacus Trust Co (Isle of Man) v Barr [2003] 1 All ER 763 and Sieff v Fox, Re Bedford Estates [2005] 3 All ER 693, quoting Lloyd LJ, at 127: ‘It seems to me that the principled and correct approach to these cases is, first, that the trustees’ act is not void, but that it may have been voidable. It will be voidable if, and only if, it can be shown to have been done in breach of fiduciary duty on the part of the trustees. If it is voidable, then it may be capable of being set aside at the suit of a beneficiary, but this would be subject to equitable defences and to the court’s discretion. The trustees’ duty to take relevant matters into account is a fiduciary duty, so an act done as a result of a breach of that duty is voidable. Fiscal considerations will often be among the relevant matters which ought to be taken into account. However, if the trustees seek advice (in general or in specific terms) from apparently competent advisers as to the implications of the course they are considering taking, and follow the advice so obtained, then, in the absence of any other basis for a challenge, I would hold that the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, in such a case I would not regard the trustees’ act, done in reliance on that advice, as being vitiated by the error and therefore voidable.’ 3.86 In Futter, the solicitor trustee was not in breach of his fiduciary duty as a result of incorrect tax advice from a member of his firm. 3.87 In Pitt v Holt, Mrs Pitt as receiver of her incapacitated husband was in a fiduciary position but had not failed in her duty when the professional advice she had relied on turned out to be wrong. 3.88 Both appeals were therefore dismissed so far as they relied on the Hastings-Bass rule. However, Lord Walker considered whether a mistake had been made, stating ‘forgetfulness, inadvertence or ignorance is not, as such, a mistake but can lead to a false belief or assumption which the law will recognise as a mistake’. 196

Trust Formalities 3.96 3.89 With reference to mistakes about tax HMRC’s assertion that such a mistake cannot in any circumstances be relied on was rejected, and IHTA 1984 s  150 was referred to which encompasses transfers set aside as voidable or otherwise defeasible. 3.90 The Supreme Court refused to allow the appellants in Futter v Futter to raise the issue of mistake for the first time on a second appeal and it was ‘hardly an exercise in good citizenship’, being a tax avoidance scheme which had gone wrong. 3.91 In Mrs Pitt’s case there was only £6,259 left in the trust on Mr Pitt’s death. HMRC’s objection to setting aside the SN trust was not accepted and the trust was set aside on the ground of mistake. 3.92 In Shroder Cayman Bank and Trust Company Limited v Schroder Trust AG, FSD  122/2014, Cayman Grand Court, 9  March 2015, the court applied the principle under the law of mistake, following Pitt v Holt; Futter v Futter. 3.93 Jersey, however, on 16 July 2013, approved the Trusts (Amendment No 6) (Jersey) Law 201, which sought to clarify the doctrine of mistake under Jersey law, and specified those cases where the trustees actions were voidable or void. In a case in Guernsey, HSC Trustees Limited v Camperio Legal and Fiduciary Services Plc, the court held that Guernsey would probably follow English law and set aside the trustees’ actions which had been taken without any advice at all, which was a clear breach of their fiduciary duty. 3.94 In the Bermudan case of Re F Trust, Re A Settlement (2015) SC (Bda) 77 Civ (2015) 18 ITELR 459 the settlor appointed a UK a trustee without taking advice and the trustees made a voluntary disclosure to the UK tax authorities and applied to the Supreme Court in Bermuda to set the appointment aside which was agreed. 3.95 In Gresh v RBC  Trust Company (Guernsey) Ltd a distribution was made by a pension fund as a lump sum to a beneficiary which therefore did not qualify as a pension and the Guernsey Royal Court did not consider it appropriate to set aside the distribution of 1.4 million which resulted in a UK tax charge of £500,000 in judgment 6/2016, confirmed in Gresh v RBC Trust Company (Guernsey) Ltd & HMRC, in the Guernsey Court of Appeal, 16 September 2019, leaving the UK pension funds tax advisers’ professional indemnity insurers to pick up the tab. 3.96 In Van der Merwe v Goldman (2016) EWHC 700 CH the High Court set aside on grounds of mistake a transfer and a settlement and transfer on 24 and 27 March 2006 in ignorance of the change in the UK tax law with effect from 6 April 2006, under IHTA 1984 s 267(1)(b). This changed the domicile 197

3.97  Trust Formalities rules which affected Mr and Mrs Van der Merwe who were both domiciled in South Africa, but from that date would be deemed domiciled in the UK. Mr Van der Merwe was advised to transfer his half share of the house in Oxford where they lived into an interest in procession settlement in the UK, which was a transfer of value. Ultimately it agreed that the court would set aside all the transactions and the house would be transferred back into the joint name of Mr and Mrs Van der Merwe.

RECEIVERS 3.97 Where money has been lent to a trust, normally on mortgage, the mortgagee would generally have a right to foreclose on the land, and in some cases appoint a receiver or administrative receiver over the trust assets. Alternatively, a creditor could apply to the court for the appointment of a receiver (Owen v Holmon (1853) 4 HL Cas 997) or a case may be brought on the suit of a beneficiary where an executor or trustee is apparently misapplying or mismanaging assets. 3.98 Trustees themselves may apply to the court for the appointment of a receiver, eg to assist the orderly realisation of assets in a partnership in which they have been partners, with other parties or where they themselves are mortgagees over property or debenture holders in a company.

198

Chapter 4

Powers and Duties of Trustees

MONEY LAUNDERING 4.1 Before a trustee can accept assets into a trust, it is necessary to consider the provisions of the Proceeds of Crime Act 2002 (PCA  2002) as amended by the Serious Organised Crime and Police Act 2005 (SOCPA  2005), the Terrorism Act 2000, Proceeds of Crime Act 2002 (Amendment) Regulations 2007 (SI 2007/3398), the Money Laundering Regulations 2007, SI 2007/2157 (MLR  2007) and the Money Laundering (Amendment) Regulations 2015 (SI  2015/11), largely with effect from 1  July 2005 (SI  2005/1521) and, in particular, the money laundering provisions contained therein. PCA  2002 is a substantial piece of legislation containing 462 sections and 12 schedules, which was enacted on 24  July 2002. The Sanctions and Anti-Money Laundering Act (SAMLA) 2018, enables sanctions to be imposed for the purpose of compliance with United Nations and other international obligations for national or international peace and security or for the purposes if furthering the prevention of terrorism. This involves power to make sanctions regulations, subject to court reviews. Schedule  1 applies to trade sanctions, Schedule  2 to money laundering, terrorist financing etc and Schedule  3, consequential amendments. 4.2 The functions of the director of the Asset Recovery Agency (ARA) were transferred to the Serious Organised Crime Agency (SOCA) by Serious Crimes Act 2007 (SCA 2007) s 74 and Sch 8, with effect from 1 April 2008. SOCA has both criminal and civil powers to reduce harm caused to individuals and communities in the UK by organised crime. The civil asset recovery powers previously exercised only by the ARA have been extended to SOCA, Revenue and Customs Prosecution Service, Crown Prosecution Service, Serious Fraud Office and the Public Prosecutor Northern Ireland. The Revenue powers to disclose information includes to the Criminal Assets Bureau in Ireland and any specified public authority in the UK or elsewhere under SCA 2007 s 85. The regulation of the investigatory powers of HMRC is covered by SCA 2007 Sch 12, which extends the authorisation to interfere with property etc, in the Police Act 1997, to an officer of Revenue and Customs, and the Regulation of Investigatory Powers Act 2000 is amended to extend the powers for the issue of interception warrants and intrusive surveillance to HMRC. Apparently, the 199

4.3  Powers and Duties of Trustees ARA cost £60 million to set up and run, and recovered only £8 million from criminals. The inclusion of the director of Revenue and Customs Prosecutions as an enforcement authority by SCA 2007 Sch 8 para 91(2)(a), coupled with the information and inspection powers in FA 2008 Sch 36, is likely to mean in practice that most tax investigations will be dealt with by HMRC rather than SOCA, although SOCA has taken over the powers previously given to the ARA in PCA 2002 ss 317–326 by SCA 2007 s 74(2) and Sch 8 paras 92–99. 4.3 The money laundering provisions are set out in PCA 2002 Part 7. The offences are: •

concealing (ss  327–329), otherwise than in the course of litigation (Bowman v Fels [2005] EWCA Civ 226);

•

failure to disclose (ss 330–332);

•

tipping-off: regulated sector (ss 333A–333E) inserted by the Terrorism Act 2000 and Proceeds of Crime Act (Amendment) Regulations 2007 (SI 2007/3398), which repealed s 333; and

•

prejudicing an investigation (s 342).

The penalties are in s 334. 4.4 The offence of concealing, disguising, converting or transferring criminal property includes concealing or disguising the ownership, source, location or disposition of property unless appropriate disclosure has been made and consent given under s  335 or s  336. The disclosure procedures are set out in ss  337–339 and the interpretation in s  340. PCA  2002 s  328 makes it an offence to be involved in an arrangement knowing or suspecting that it facilitates the use or acquisition of criminal property by another person, unless the appropriate disclosure has been made. A criminal dealing with his ill-gotten gains is likely also to commit the offence of acquisition, use and possession of criminal property, within s 329, unless the appropriate disclosure has been made. It is up to the defendant to prove his innocence on the balance of probabilities. It seems probable that the challenges will be made to these provisions on the basis of the Human Rights Act 1998. 4.5 Money laundering now applies not just to drug money but the laundering of the proceeds of any criminal conduct. Failure to disclose does not require an active decision not to disclose, mere negligence where there are reasonable grounds to suspect that an offence has been committed is sufficient. It should be noted that criminal conduct for these purposes is conduct which (a) constitutes an offence in any part of the United Kingdom or (b) would constitute an offence in any part of the United Kingdom if it occurred there, unless it was not a criminal offence in the territory in which it took place, or was covered by legal professional privilege under PCA 2002 s 340(2). If, therefore, a potential client was setting up a trust and there were reasonable 200

Powers and Duties of Trustees 4.10 grounds to suspect that he was or had been evading foreign taxes, it would be an offence not to disclose to a constable, customs officer or nominated officer, ie  his employer’s money laundering reporting officer (MLRO). If it were merely suspected that the client had been guilty of a foreign exchange control offence this would not be reportable, as there is no longer any such offence within the UK. In practice, disclosure is normally made to SOCA (previously National Criminal Intelligence Service (NCIS)) by the employer’s MLRO (SOCPA 2005 s 1). 4.6 One of the problems arising from the money laundering offences is that they carry a severe penalty of a fine and/or up to 14 years’ imprisonment. There was originally no de minimis limit, so a reasonable suspicion that even the smallest sums come within the wide definition of criminal property in PCA  2002 s  340(3) was reportable. This could have led to SOCA being overwhelmed by disclosures of petty amounts, and so the threshold amounts were introduced in PCA 2002 s 39A inserted by SOCPA 2005 s 103. 4.7 Disclosure is required where the business is in the regulated sector as defined by PCA 2002 Sch 9, as amended, which includes managing, safeguarding and administering investments, which would therefore encompass most of the activities of trustees. A person appointed to give advice about the tax affairs of another person is included within the regulated sector by Proceeds of Crime Act 2002 (Business in the Regulated Sector and Supervisory Authorities) Order 2007 (SI 2007/3287) para 1(m), audit and accountancy by para 1(k) and 1(l), and trust services under para 4(d). 4.8 The remaining provisions of PCA 2002 relate to: investigations into money laundering, in Part 8 (ss 341–416); insolvency and the interrelationship between confiscation and insolvency proceedings, in Part 9 (ss 417–434); the disclosure and exchange of information provisions, in Part 10 (ss 435–442); cooperation with other enforcement agencies in Part 11 (ss  443–447); and miscellaneous and general matters, in Part 12 (ss 448–462). 4.9 The easiest way for professional advisers to try and avoid running into problems under these draconian provisions is by having strict compliance procedures, and ensuring that partners and staff are fully trained as to their responsibilities under these provisions. 4.10 The offence of tipping-off under PCA 2002 s 333A, or prejudicing an investigation under s  342, occurs where a person knows or suspects that a disclosure has been made and passes that information to another party in circumstances likely to prejudice any investigation arising from the disclosure. This does not apply to a professional legal adviser giving advice in relation to actual or contemplated legal proceedings or those involved in litigation (Bowman v Fels [2005] EWCA Civ 226). The maximum penalty for tippingoff is five years’ imprisonment and/or a fine. 201

4.11  Powers and Duties of Trustees 4.11 Anti-Money Laundering Guidance for the Accounting Sector was published by the Consultative Committee of Accountancy Bodies (CCAB) in August 2008, and revised in August 2017. 4.12 On 9  July 2018 the European Parliament published the 5th AntiMoney Laundering Directive (5th AML) (EU) 2018/843, which extends to include virtual currencies and custodian wallet providers on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. It applies to auditors, external accountants, tax advisers and trust or company service providers, amongst others (Art 2(3)(a), (c)). 4.13 For the purposes of this Directive, ‘beneficial owner’ is defined in the case of legal entities, such as foundations, and legal arrangements, such as trusts which administer and distribute funds under Art 3(6)(b), as: (i)

where the future beneficiaries have already been determined, the natural persons who are the beneficiaries of 25% or more of the property of a legal arrangement or entity;

(ii) where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of persons is that in whose main interest the legal arrangement or entity is set up or operates; (iii) the natural persons who exercise control over 25% or more of the property of a legal arrangement or entity. 4.14 Article 28 of the Directive requires a prohibition of disclosure leading to tipping off about a money laundering report to the relevant national authority (SOCA in the UK). 4.15 The 5th Anti-Money Laundering Directive comes into force on 10 January 2020. On 9 July 2018, the amendment of the European Union (EU) Anti-Money Laundering Directive (5th AMLD) entered into force. The AMLD obligates certain entities to fulfil customer due diligence requirements when they conduct business transactions and have in place policies and procedures to detect, prevent, and report money laundering and terrorist financing. The amendment: •

brings custodian wallet providers and virtual-currency exchange platforms within the scope of the AMLD;

•

interconnects the national central beneficial ownership registers;

•

enhances access to these registers;

•

lowers thresholds for the use of anonymous prepaid cards;

•

establishes centralised mechanisms to identify holders of payment or bank accounts; and 202

Powers and Duties of Trustees 4.16 •

sets stricter standards for financial transactions with high-risk third countries.

Definitions of virtual currencies and custodian wallet providers The amendment defines ‘virtual currencies’ as ‘a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically’. A  ‘custodian wallet provider’ is defined as ‘an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies’ (5th AMLD Art 1, para  2(d)). As previously mentioned, the new rules extend the customer due diligence requirements to custodian wallet providers and virtual-currency exchange platforms. 4.16 Another change to improve transparency concerns the national central beneficial ownership registers in the EU  Member States. Beneficial owners are defined as ‘any natural person(s) who ultimately owns or controls the customer, and/or natural person(s) on whose behalf a transaction or activity is conducted’ (5th AMLD Art 3, para 6). The amendment requires that the central beneficial ownership registers for corporate or other legal entities are available to any member of the general public (5th AMLD  Art 1, para  15(c)). The previous version of the AMLD made access for members of the general public dependent on demonstrating a legitimate interest (4th AMLD Art 30, para 5). Information on beneficial owners of trusts will for the first time be available to the general public, but only to those who show a legitimate interest (5th AMLD Art 1, para 16(d)). Previously, only competent authorities, Financial Intelligence Units, and entities subject to the customer due diligence rules were granted access to beneficial ownership information on trusts (4th AMLD Art 31, para  4). When a trust is the beneficial owner of an entity, information will be accessible to persons that file a written request (5th AMLD  Art 1, para 16(d)). Furthermore, in order to facilitate cooperation and information exchange between the Member States, the amendment requires Member States to connect their central registers via the ‘European Central Platform’ (5th AMLD Art 1, para15(g)). The interconnection of the central registers via the European Central Platform must be completed by 10 March 2021. (Ibid Art 1, para 42.) Beneficial ownership information must be available through the national registers and the interconnected European Central Platform for at least five years and no more than ten years after the entity has been removed from the register (Ibid Art 1, para 15(g)). 203

4.17  Powers and Duties of Trustees The amendment obliges EU Member States to establish centralised registries or electronic data retrieval systems to identify natural or legal persons holding or controlling payment accounts, bank accounts, and safe-deposit boxes (Ibid Art 1, para  19). The national Financial Intelligence Units (FIUs) must be allowed direct, immediate, and unfiltered access to that information. Technical aspects of the interconnection of the centralised registries is to be worked out by the European Commission by 26 June 2020 (Ibid). How these changes will affect the UK remains to be seen.

VESTING TRUST PROPERTY 4.17 The whole basis of a trust is that the settlor passes the legal title to trust assets to the trustees and the manner in which this is done depends on the assets. It is quite common to start the trust with a nominal transfer of funds, say £100, which is passed to the trustees by cheque, the trustees open a bank account in the name of the trust for which they are the signatories and the trust is now in existence. Further assets may be transferred to the trustees, which may be: (a)

physical assets such as works of art transferred by delivery;

(b) stocks and shares transferred by a stock transfer form duly stamped and registered with the company or issuer; (c)

a leasehold interest in property where the lease is assigned to the trustees, which may require the consent of the landlord; or

(d) a freehold property conveyed to the trustees in the normal manner. The tax consequences of such transfers into trust will be considered in later chapters. 4.18 MLR  2007 requires regulated businesses to put in place antimoney laundering measures to combat threats from crime, which may include tax evasion and terrorism. They must verify the client’s identity and, where appropriate, the beneficial owner of the client. In order to do so, it is necessary to take copies of documents such as a passport and utility bill and, in the case of companies, documents issued by a government department or agency or a court, including documents filed at Companies House or similar bodies overseas. In some cases of normal risk, electronic verification may be made, and the Treasury has approved Equifax, Experian and Core Credit for electronic verification. Due diligence will include assessing and monitoring the risk of money laundering or terrorist financing, and to take appropriate action, particularly in high-risk cases where the client is not personally known or where the operations are based in high-risk countries. The Financial Action Taskforce (FATF) has suggested that Iran and Democratic Peoples’ Republic 204

Powers and Duties of Trustees 4.21 of Korea, Algeria, Ecuador and Myanmar have deficiencies in their antimoney laundering systems requiring enhanced due diligence, and Pakistan, Turkmenistan, Sao Tome and Northern Cyprus are regarded as high-risk countries. The UK was originally intending to issue identity cards to enter or remain in the UK which would show the holder’s photograph, name, date of birth, nationality and immigration status and, as such, would be evidence to verify the client’s identity but this proposal was dropped. Regulated businesses must appoint a money laundering reporting officer (MLRO) who is responsible for submitting suspicious activity reports to SOCA. Sole practitioners must themselves act as MLROs. 4.19 The MLRO must report to SOCA knowledge or suspicion of any money laundering. The appropriate CCAB anti-money laundering guidance for the accountancy sector provides guidance in section 7, and in section 6 of the supplementary anti-money laundering guidance for the tax practitioner. The MLRO will, where it deems appropriate, send off a suspicious activity report to SOCA. 4.20 All staff who have contact with clients are required to have training for anti-money laundering and keep records of training activity on a regular basis, preferably annually. Records of due diligence must be kept for five years after the end of the relevant business relationship or completion of the relevant transaction. The CCAB recommend keeping copies of suspicious activity reports for five years. Accountancy firms and tax practitioners have to be supervised. The main accounting bodies and the Chartered Institute of Taxation are supervisory bodies for this purpose, and HMRC is also a supervisory body for those ineligible for, or not wishing to be supervised by, a professional body. HM Treasury have issued a list of jurisdictions outside the European Economic Area which are considered to have equivalent anti-money laundering legislation to the European Directive. 4.21 Once the transfer has been made to the original trustees, there is no need to revest the assets on a change in trustees, as this is effected by operation of law, under TA  1925 s  40. Under this section, a new trustee is appointed by deed, which automatically vests the trust property in the new trustee in addition to the continuing trustees. Conversely, where a retiring trustee is discharged under TA  1925 s  39 or TLATA  1996 s  19 without a new trustee being appointed, the trust property is automatically vested in the continuing trustees whether or not the deed of retirement contains a specific declaration to that effect. In either a deed of appointment or retirement it is possible to insert an express provision that the trust assets shall not vest in this way, but this would be most unusual. The automatic vesting does not apply to land conveyed by way of mortgage, a lease requiring the landlord’s consent, or to any assignment of registered stocks and shares (TA  1925 s 40(4)). In these cases, it will be necessary to re-register in the names of the new trustees. 205

4.22  Powers and Duties of Trustees 4.22 The court also has powers to make vesting orders under TA  1925 ss 44–56, as summarised in Chapter 2.

APPOINTMENT OF TRUSTEES 4.23 In most cases, the settlor will appoint the trustees in the trust deed, or will creating the trust, and the deed itself will normally contain instructions as to how existing trustees may retire or be replaced, or how new trustees may be appointed. This power is sometimes reserved to the settlor during his life, or may be given to the continuing trustees (with or without the permission of the protector, if there is one) or to the protector. If a trustee dies, as the trustees hold trust property as joint tenants the trust property vests in the continuing trustees automatically, and on the death of the last trustee the trust assets vest in his personal representatives under AEA 1925 s 1(2) and he, or they, may take on the trusteeship under TA  1925 s  18. If the personal representative does not take on the trusteeship, then the court has the power to appoint new trustees under TA 1925 s 41. The power to appoint and dismiss trustees is not property and may therefore be held by a bankrupt (Re Burton [1994] FCA 557 (Australia)). 4.24 TA  1925 s  36 supplements the provisions in the trust deed where necessary and, subject to any provisions to the contrary, provides that a new trustee may be appointed where a trustee is dead, or remains outside the UK for an uninterrupted period of more than 12 months (Re Walker [1901] 1 Ch 259) or desires to be discharged from all or any of his trusts or powers, or refuses to act, or is unfit to act, eg because of bankruptcy (Re Roche [1842] 2 Dr & War 287), is incapable, eg because of a mental disorder (Re East (1873) 8 Ch App 735) or is an infant. It should be remembered that these provisions are subject to the trust deed and where a deed only referred to a trustee becoming incapable of acting this did not include bankruptcy (Turner v Maule (1850) 15 Jur 761), although the court might substitute a new trustee in place of a bankrupt trustee under TA  1925 s  41(1). The power of appointing trustees under TA 1925 s 36(1) is given to those so nominated in the trust deed, or to the surviving or continuing trustees or to the personal representatives of the last surviving or continuing trustee. A trustee who has been removed under a power contained in the deed is treated as having died (TA 1925 s 36(2)). 4.25 A sole or last surviving executor intending to renounce may nonetheless accept the trusteeship, and will have to prove his title by reference to a grant of probate or letters of administration with the will annexed (Re Crowhurst Park [1974] 1 All ER 991). TA 1925 s 36 was modified by TLATA 1996 s 25 and Sch 3, and power to appoint new trustees is given to a person nominated in the trust instrument or, if there is no such person, the other trustees where there are no more than three trustees. This power may be delegated to an attorney under TDA 1999 s 1. Where a trustee is incapable within the meaning of MHA 1983 206

Powers and Duties of Trustees 4.29 and is also a beneficiary, he may not be replaced without leave of the authority having jurisdiction under Part VII of the 1983 Act. Supplementary provisions as to the appointment of trustees allow additional trustees and separate trustees for parts of the trust property held on particular trusts. The appointment of a sole trustee other than a trust corporation is not permitted where the trustee would not be able to give valid receipts for all capital monies arising under the trust. A sole trustee is, therefore, only possible where the trust is of pure personalty and does not contain English or Welsh land (LPA 1925 s 27(2)). An invalidly appointed trustee (a trustee de son tort) may be liable for a breach of trust and, if he has possession of trust property, he must account for this to beneficiaries, but he does not have the powers of the trustees conferred by the settlement and his purported acts are invalid (Jasmine Trustees Ltd and Others v Wells and Hind (a firm) and Another [2007] EWHC 38 (Ch), where the judge stated ‘anyone improperly appointed is not appointed at all and I fail to see how such a person can claim to exercise powers given to trustees under the deed’. 4.26 The court’s power to appoint new trustees under TA 1925 s 41 extends to cases where there never were any original trustees (Re Williams’ Trusts (1887) 36 ChD 231). This confirms the maxim ‘equity will not want for a trustee’, which was extended to a protector in Steele v Paz (1993–5)  MLR  102. The court may order a change of trustees in appropriate circumstances (Mercade & Shenk v Citibank (Bahamas) Ltd Eq No 1252). 4.27 The court also has power to authorise remuneration where it appoints a corporation other than the public trustee to act solely or jointly with other trustees (TA 1925 s 42). A trustee appointed by the court has, under TA 1925 s 43, the same powers as if he were appointed by the trust instrument. 4.28 The maximum number of trustees allowed is four in the case of trusts of land, except in the case of charitable and other such trusts (TA 1925 s 34). Where the trust instrument does not nominate a person to appoint new trustees, who is capable of doing so? The beneficiaries, if unanimous and sui juris, may give a direction to the trustees to retire and to appoint new trustees as specified. A  trustee so directed is entitled to an appropriate indemnity under TLATA s 19(3) and is required to do whatever is necessary to vest the trust property in the continuing and new trustees. In practice, it is likely that any such written direction will be by deed in order to take advantage of the vesting provisions in TA 1925 s 40. 4.29 Broadly similar powers are given to the beneficiaries to replace a mentally incapable trustee under TLATA  1996 s  20 and the supplementary provisions in s  21. The trust instrument may specifically exclude the beneficiaries’ powers to replace trustees under TLATA 1996 ss 19 and 20 and, for trusts created before 1 January 1997, the settlor, if still of full capacity, may exclude them by irrevocable deed. 207

4.30  Powers and Duties of Trustees

Qualification of trustees 4.30 Any trustee needs only to be sui juris. The appointment of an infant as trustee in relation to a trust of land is void under LPA 1925 s 20. A trustee may be an individual or a company. Many trusts have a custodian trustee, usually a substantial trust corporation, which holds the legal title to the trust assets, while the management is handled by individual trustees. A trust corporation must be incorporated under the law of the UK or another Member State of the EU, and be empowered to undertake trust business in England and Wales, and to have an issued capital of at least £250,000, of which at least £100,000 has been paid up in cash, or be incorporated by a special Act or Royal Charter.

Disqualification of trustees 4.31 The normal reason for disqualifying a trustee is discussed above under TA 1925 ss 36 and 41. The trustee need not accept the appointment and may disclaim at any time before taking up the appointment (Re Tryon (1844) 7 Beav 496) but not afterwards (Re Lister [1926] Ch 149).

Disclaimer 4.32 A  disclaimer would normally be by deed, but this is not essential. Termination obviously occurs on death of the trustee, with the property passing automatically to the remaining trustees as joint tenants. Any powers given to the trustees automatically pass to the survivors under TA 1925 s 18. Ultimately, if further trustees are not appointed, the trusteeship passes to the personal representatives of the last surviving trustee and if they do not take up the appointment themselves they may appoint new trustees. A  trustee may also retire by deed with the consent of the continuing trustees, under TA 1925 s 39. 4.33 In addition to its statutory powers, the court has an inherent jurisdiction to remove a trustee with or without appointing a new one in his place, which is rarely exercised but has been used where the relationship between the trustees and the beneficiaries has broken down or become acrimonious (Letterstedt v Broers (1884) 9 App Cas 371; Walker v Walker [2007] All ER (D) 418). 4.34 A trustee is in a position of trust and has a fiduciary duty not to permit a conflict with his own interests (Bray v Ford [1896] AC 44). If a conflict arises which is not of his own making, different considerations may apply (Sargeant v National Westminster Bank Plc (1990) 61 P & CR 518). 208

Powers and Duties of Trustees 4.38

TRUSTEES’ REMUNERATION 4.35 A  trustee, other than the public trustee, a custodian trustee or an independent trustee of a pension scheme, is not entitled to charge for his time and trouble (Robinson v Pett (1734) 3 P Wms 249) unless the settlement so provides (Willis v Kibble (1839) 1 Beav 559). Exceptions to this general rule are where a trustee has entered into a legally binding agreement with the beneficiaries who are sui juris or, exceptionally, by a trustee solicitor in court (Cradock v Piper (1850) 1 Mac & G 664) or where a court has specifically authorised remuneration or the trust property is abroad and the local courts customarily allow remuneration to trustees (Re Northcote’s Will Trusts [1949] 1  All ER  442). The trustees’ right to reimbursement of properly incurred expenses is now enshrined in TA 2000 s 31. 4.36 Most trust deeds provide for the remuneration of professional trustees, such powers being governed by TA  2000 s  28. This only applies to a charitable trust if the trustee is not a sole trustee and a majority of the other trustees have agreed that he should be paid. A  payment to the trustee is regarded as remuneration for services, not as a pecuniary legacy (TA 2000 s 28(4)). A trustee acts in a professional capacity if he does so in the course of a professional business which includes the provision of services in connection with the management or administration of trusts or any aspect thereof (TA 2000 s  28(5)). A  lay trustee is not entitled to remuneration unless specifically so authorised by the trust instrument; a lay trustee being a trustee who is not a trust corporation and who does not act in a professional capacity (TA  2000 s  28(6)). Remuneration authorised under TA  2000 s  28 applies to services rendered on or after 1 February 2001. 4.37 A trust corporation or trustee acting in a professional capacity other than the trustee of a charitable trust is entitled to receive reasonable remuneration, but in the latter case only if the other trustees have agreed in writing that he may be remunerated for his services or it is specifically provided for in the trust instrument or another enactment (TA 2000 s 29). This section reverses the previous rule that a trustee could only be remunerated if the trust deed specifically so authorised. It now means that a trust corporation or professional trustee can be remunerated unless the trust deed specifically prohibits this or the trust is a charitable trust. A sole professional trustee would not, under this provision, be entitled to remuneration as it requires the consent of another trustee or trustees. TA 2000 s 30 gives power to the Secretary of State to make regulations for the remuneration of trustees of charitable trusts who are trust corporations or act in a professional capacity, but no such regulations have yet been made or appear to be in contemplation. 4.38 Trustees appointing agents, nominees and custodians may pay their remuneration and expenses (TA 2000 s 32) in respect of services rendered or expenses incurred after 1 February 2001 (TA 2000 s 33). 209

4.39  Powers and Duties of Trustees 4.39 The trustees’ right to reimbursement of expenses under TA  2000 s 31 was previously contained in TA 1925 s 30. The right includes expenses paid on behalf of the trust (Dowse v Gorton [1891]  AC  190). The trustees’ expenses are a first charge on the income and capital of the trust (Stott v Milne (1884) 25 ChD 710). Such expenses include the cost of renewing leases (Ex p Grace (1799) 1 Bos & P  376), damages awarded against the trustees as owners of trust property (Re Raybould [1900] 1 Ch 199), and litigation costs (Walters v Woodbridge (1878) 7 ChD 504). It is, however, imperative to obtain permission from the court to engage in litigation in order to obtain indemnity for costs (Re Beddoe [1893] 1 Ch 547; STG Valmet Trustees Ltd v Brennon [2002] WTLR 273 (2001–02) 4 ITELR, CA 337; Bridge Trust v A-Gofr the Cayman Islands (2001–02) 4  ITELR  369, Grand Court). Failure to do so could leave the trustees personally liable for costs if they lost (Re England’s Settlement Trusts, Dobb v England [1918] 1 Ch 24). Exceptionally, the trustees’ indemnity extends beyond the trust assets where there is a single beneficiary of full age and absolutely entitled (Hardoon v Belilios [1901] AC 118). 4.40 The court can refuse the trustees permission to recover costs from the trust fund if the trustees have acted unreasonably (Lloyds Bank v Cola Cristal (Jersey) 1 OFLR 91). Beneficiaries may also claim for their costs to be borne by the trust they are suing (McDonald v Horn [1995] 1 All ER 961). In the Jersey case of Re the Carafe Trust (2005) 8 ITELR 29, it was held at pp 47 and 48 that: ‘Where a trustee is retiring but there is a dispute about fees the trustee is entitled to arrangements that will ensure that it receives any fees ultimately to be found to be due but it is not entitled to greater protection than is necessary. An escrow arrangement of the type proposed in this case will usually give a retiring trustee the required level of security.’ It was also pointed out that the trustee ‘erred in submitting a substantial fee note for the period 1998 to 2001 as late as January 2002 particularly as it had given no clear warning that this was the case. Good practice requires regular and timely billing so that all sides know where they stand’. It was also held that the trustees ‘should not have tried to obtain its fees surreptitiously no matter what the provocation. A  trustee must be open and transparent in relation to fees.’ It was also ‘wrong to say that services had been withdrawn. It would have been equally wrong to have threatened to withdraw services.’ ‘There was a wholly unacceptable delay in producing a breakdown of the 2002 fees.’ However, it was also held that the beneficiaries and the new trustee were wrong to have refused to particularise exactly which elements of the fees they objected to, especially since they had been provided with a very detailed breakdown. The action of the settlor in procuring the blocking of the account was unhelpful and led to the incurring of extra and unnecessary time and expense. The case was not helped by the fact that the settlor ‘clearly wished to continue to have substantial input on the management of the portfolio and to have direct access 210

Powers and Duties of Trustees 4.43 to (the Luxembourg bank) with a view to their acting in accordance with his wishes’. The trustee, on the other hand, was anxious to ensure that, as trustee, it had control of the trust assets (through the company) and, accordingly, was not willing to allow the Luxembourg bank to act on the instructions of the settlor. The bank ‘did not in fact always comply with these instructions and sometimes acted on the instructions of the settlor’. It is little wonder that the judge said: ‘at various pre-trial hearings the Court strongly encouraged the parties to settle the matter. Given the level of costs which have now been incurred we suspect that both parties will end up substantially out of pocket compared with the position which might have been achieved had there been a sensible compromise at an early stage.’ 4.41 In the case of the renewal of a lease in Keech v Sandford (1726) Sel Cas Ch 61, a lease was renewed by a trustee personally and, in Protheroe v Protheroe [1968] 1 WLR 519, a lease held by beneficial joint tenants gave rise to an opportunity to purchase the freehold reversion which was acquired by one of the joint tenants personally. In each case, the benefit of the acquisition was held in trust for beneficiaries of the trust or the joint tenants. 4.42 A trustee must not make a secret profit from his position as trustee (Boardman v Phipps [1967] 2  AC  46) or by way of directors’ fees from a company owned by the trust (Re Macadam [1946] Ch 73) unless so authorised by the trust instrument or otherwise so authorised. A  trustee may have to account for profits where he competes with a business carried on by the trust (Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443). Trustees also have to account for profits made from receipt of information, commission or even selling at normal commercial rates to a trust business (Barrett v Hartley (1866)  LR  2 Eq 789; Sugden v Crossland (1856)  CH  3 Sm & G). A trustee cannot acquire trust property for himself, whether or not for full value (Tito v Waddell (No  2) [1977] Ch  106; Roywest Trust v Nova Scotia Trust (Bahamas) Eq No 431 of 1985). This would also naturally apply to a purchase in the name of a nominee or company owned by the trustee (Re Sherman [1954] Ch 653; Re Thompson’ Settlement [1986] Ch 99). These prohibitions are subject to anything to the contrary in the trust instrument, but a trustee cannot immediately retire and then buy trust property (Wright v Morgan [1926] AC 788); although this does not apply to the tenant for life acquiring property from a strict settlement under SLA 1925 s 68. A trustee’s purchase of a beneficiary’s beneficial interest can be set aside if he abused his position in making the purchase (Dougan v MacPherson [1902] AC 197).

VOTING 4.43 Unless the trust deed specifically authorises trustees to act by majority, they must act unanimously (Re Butlin’s Settlement Trust [1976] 2 All ER 483) 211

4.44  Powers and Duties of Trustees except in the case of a charitable trust. This means that where assets are held on trusts for sale they must be sold unless the trustees unanimously favour postponement (Re Roth (1896) 74 LT 50). Similarly power to retain existing investments has to be exercised unanimously (Re Hilton [1909] 2 Ch  548). Trustees with discretionary powers should exercise them (Browne v Browne [1989 1 All ER 112). 4.44 Trust investments should be in joint names (Lewis v Nobbs (1878) 8 ChD 591). All trustees must, unless the settlement authorises otherwise, join in receipt for capital monies (Walker v Symonds (1818) 3 Swan 1). Receipts for capital monies on the sale of land must be made by two trustees or a trust corporation (LPA 1925 s 27(2)). The ability of a trustee to delegate either under TDA  1999 s  1 or TA  1925 s  25, as substituted by TDA  1999 s  5, does not enable him to delegate to a co-trustee who thereby acts as a sole trustee, to avoid the requirement that a receipt for capital monies on the sale of land must be given by two separate trustees (TDA 1999 s 7). Two trustees are required where capital monies are paid to the trustees arising from the sale of land under LPA 1925 s 27(2) or SLA 1925 ss 18(1)(c) and 94(1). The value of receipts for such capital monies cannot be given by a sole trustee (TA 1925 s 14(2)), and a conveyance must be made by at least two trustees under LPA 1925 s 2(1)(ii). A trust corporation may act alone.

TRUSTEES’ POWERS 4.45 Where power is given to the trustees to do certain things, it is up to the trustees to decide whether or not to exercise that power. Powers differ from duties, which the trustees must carry out. The trustees normally have a power of sale over land held as a trust of land under TLATA 1996. In the case of a strict settlement the power of sale belongs to the life tenant under SLA 1925 s 1. The trustees may hold land subject to an express trust for sale under TLATA 1996 s  11, with an implied power to postpone sales. Chattels are usually held by trustees on a trust for sale under the terms of a will, or on the death of a person intestate under AEA 1925 s 33, or on the trustees carrying out their duty of conversion into income-producing assets under Howe v Earl of Dartmouth (1802) 7 Ves 137. In the case of settled land, heirlooms settled to devolve with the settled land can only be sold by the life tenant with the consent of the court under SLA 1925 s 67. Chattels that are not heirlooms may be held on a trust for sale under LPA 1925 s 130, but may be sold only with the consent of the usufructuary, ie the user for the time being, if of full age (LPA 1925 s 130(5)). Obviously, trust investments are held under an implied power of sale, in view of the requirement to follow standard investment criteria. A trust of land under TLATA 1996 s 6 gives the trustees all the powers of an absolute owner, which obviously includes the power to sell or not to sell. TA 1925 gives trustees the power to sell trust property by public auction or by private contract and to raise money by sale, mortgage etc (TA 1925 s 16). Trustees have the power under 212

Powers and Duties of Trustees 4.48 TA 1925 s 14 to give receipts and, under s 19 of that Act, the power to insure trust properties including property held on a bare trust, subject to a contrary direction from a beneficiary, who must be sui juris. Trustees have the power to compound liabilities under TA 1925 s 15. Trustees’ powers devolve to the survivor on the death of a trustee under TA 1925 s 18, although a sole trustee cannot give a valid receipt for capital monies on the sale of land (TA 1925 s 14(2)). 4.46 Trustees are given wide powers to deal with reversionary interests under TA 1925 s 22, including having them valued and sold before falling in. The trustees’ power, individually, to appoint attorneys to act in their stead is given by TDA 1999, and the power to employ agents, nominees or custodians is given in TA  2000 ss  11–26. The delegation of a trustee’s functions by a power of attorney in TA  1925 s  25 has been substituted by TDA  1999 s  5. Trustees have a power to concur with other joint owners under TA 1925 s 24. They also have power to apply to the court for directions (Re Hart’s Will Trusts [1943] 2 All ER 557).

Administrative powers 4.47 A well-drafted trust deed sets out the powers which the trustees need to administer the trust effectively. These will normally determine the trustees’ power of investment and management of property. They may wish to hold joint property, to avoid holding a balance between income and capital, they may wish to accumulate income, permit a beneficiary to occupy trust property, apply trust capital, trade, borrow money, insure trust property, delegate their powers, deposit documents, appoint nominees, carry on the administration of the trust outside the UK, pay tax, give indemnities and security, invest in unquoted companies without getting involved in the management, appropriate trust property, accept receipts for charitable gifts, release powers, amend the statutory powers of maintenance and advancement in TA 1925 ss 31 and 32 dealing with minors. They may wish to make disclaimers, avoid apportionment of income, deal with conflicts of interest, trust powers, obtaining remuneration for trustees, limiting the liability of trustees, the manner in which trustees are to be appointed when they retire and ensure that the trustees’ administrative powers do not prevent the beneficiary obtaining an interest in possession in an accumulation and maintenance settlement. Exclusion of liability for negligence was accepted in Armitage v Nurse [1997] 3 WLR 1046 and Roywest Trust v Nova Scotia Trust (Bahamas) Eq no 431 of 1985, but not for gross negligence in Lutea Trustees v Orbis Trustees 2 OFLR 227 and Midland Bank Trust Co Ltd v FPS (1996) Jersey CA. In West v Lazard Brothers Co (Jersey) Ltd (No 2) [1993] JLR 165 the exoneration clauses in the trust deed were held to be void as being repugnant to the fundamental concept of a trust. 4.48 Standard wording for administrative powers is available from the Society of Trust and Estate Practitioners, based on drafts by James 213

4.49  Powers and Duties of Trustees Kessler. It is sufficient to put in a trust deed or will the following reference, ‘Administrative provisions, the standard provisions of the Society of Trust and Estate Practitioners (First Edition) shall apply with the deletion of paragraph 5. Section 11 of the Trusts of Land and Appointment of Trustees Act 1996 (Consultation with beneficiaries) which shall not apply.’ 4.49 Paragraph 5, which is deleted, referred to holding land on trusts for sale which was overtaken by TLATA 1996. Section 11 of the 1996 Act imposes duties of consultation inappropriate to a substantive trust. The powers to manage trust property are needed both to repair and maintain existing property and develop or improve it, as appropriate. A second edition of the Standard Provisions is now available (see Appendix 7).

Delegation 4.50 The power of delegation refers to delegation by an individual trustee, which is now dealt with in considerable detail in TDA 1999, which came into effect on 1 March 2000, and is summarised in Chapter 2. In the absence of specific powers to delegate, by statute or in the trust deed, the trustees may not do so. The agency concept of delegation prevents this (delegatus non potest delegare): a person to whom a power or duty is delegated may not himself delegate this to others.

Control over trustees’ powers 4.51 A beneficiary who is dissatisfied with the trustees’ actions may apply to the court for an order under TLATA  1996 ss  14 and 15. Alternatively, a beneficiary with an absolute vested interest in trust property may, under the rule in Saunders v Vautier (1841) 4 Beav 115, call for his share of the trust property to be distributed to him (Berry v Green [1938]  AC  575; Moss & Pearce v Integro 1  OFLR  427). Although the court will not interfere with the trustees’ discretion, exceptionally, with a discretionary trust, if all the discretionary beneficiaries band together, they could require the trustees to distribute the whole of the trust income to them jointly (Re Nelson [1928] Ch  920). The court will not interfere with the trustees’ bona fide exercise of their discretion (Gisborne v Gisborne (1877) 2 App Cas 300; Whishaw v Stephens [1970]  AC  508). Where the trustees act perversely (Re Lofthouse (1885) 29 ChD 921) or irrationally (Re Manisty’s Settlement [1974] Ch 17), or fail to consider whether or not to exercise a discretionary power (Klug v Klug [1918] 2 Ch  67), the court may require the trustees to reconsider the exercise of their discretion (Wain v Earl of Egmont (1843) 3 My & K 445). In Stannard v Fisons Pension Trust Ltd [1992] 1 IRLR 27 the court invalidated the exercise of a discretion where the trustees had based their decision on an out-of-date valuation. 214

Powers and Duties of Trustees 4.53 4.52 Because of the importance prior to the FA  2008 changes of the tax treatment of interest in possession and accumulation and maintenance settlements, it is not unusual to find an overriding provision that the life tenant must not be deprived of an interest in possession for IHT purposes (IHTA 1984 ss 49–57A). An interest in possession is a present right to the present enjoyment of something, and a power of accumulation is inconsistent with an interest in possession (Pearson v IRC  [1980]  STC  318). Similar provisions apply to a trust ceasing to be an accumulation and maintenance trust under IHTA 1984 s 71(1), or would cause a settlement to be an accumulation and maintenance or discretionary settlement under TCGA 1992 s 5. Previously, a similar override was used to prevent a settlement becoming an accumulation or discretionary settlement within TCGA  1992 s  5, which was repealed by FA  1998 s  165 when the CGT distinction between interest in possession trusts and other trusts as to the rate of CGT ceased to apply. Such a provision, therefore, is no longer needed. 4.53 The trustees, in addition to their statutory duty of care under TA 2000 s 1, must take control of the trust property and understand and follow the terms of the trust. They must also act impartially among the beneficiaries (Lloyds Bank v Duker [1987] 1 WLR 1324) and in the best interests of beneficiaries, not, for example, using the trust to promote some other cause (Cowan v Scargill [1985] Ch  270). Trustees must keep proper accounts and produce them to the beneficiaries when requested (Chaine-Nickson v Bank of Ireland [1976] IR 393; West v Lazard Brothers & Co (Jersey) Ltd (No 1) (1987–88) 1 OFLR 414; Re The Den Haag Trust (1997–98) 1 OFLR 495; and Bhander v Barclays Bank 1 OFLR 497). Beneficiaries who want copies of the accounts must pay for them (Re Watson (1904) 49 Sol Jo 54). Trustees may have the accounts audited; this is normally done no more than once every three years (TA 1925 s 22(4)). Apart from the trust accounts, beneficiaries are entitled to other trust documents only if they contain information about the trust which the beneficiaries are entitled to know, in which they have a proprietary interest, and which are in the possession of the trustees, but this does not extend to confidential information as to the exercise of the trustees’ discretion, such as minutes or correspondence (Re Londonderry’s Settlement [1965] Ch 918; O’Rourke v Darbishire [1920] AC 581; and the Cayman Island cases of In re Lemos Trust Settlement (1992–93) CILR 26; Lemos and Others v Coutts & Co (Cayman) Ltd (1992–93) CILR 5; and In re Ojjeh Trust (1992–93) CILR 348). The rights of discretionary beneficiaries to information was considered by the Privy Council in Crowswood Trust Ltd v Schmidt [2003] 3 All ER 76 and in Foreman v Kingston (2003) 6 ITELR 841. Although discretionary beneficiaries had a mere expectancy, they were entitled to have the trust property properly managed and to have the trustees account for their management. These rights were subject to the discretion of the court when trustees sought directions or beneficiaries sought relief against refusal by trustees to disclose. It certainly appears that a discretionary beneficiary is entitled to be aware that he is such a beneficiary (Chaine-Nickson v Bank of Ireland [1976]  IR  393; Murphy v 215

4.54  Powers and Duties of Trustees Murphy [1998] 3  All ER  1). However, in Murphy v Murphy 2  OFLR  125, the court held that a blameless trustee did not have to identify himself to the plaintiff, who only wanted the information in order to consider suing him. In Re The Avalon Trust (2006) 9  ITELR  450, following Re the Rabaiotti 1989 Settlement and Other Settlements (2000) 2 ITELR 763, the Jersey court approved the production by the trustees, in a discretionary beneficiary’s divorce proceedings, of the trust accounts and the trust deed, together in this case with the settlor’s current letter of wishes, as the wife was in possession of an earlier letter of wishes and it was undesirable that the English court should not be aware of the final letter of wishes, and disclosure of correspondence with the beneficiary in question, but not correspondence with other beneficiaries. 4.54 Trustees, in following the requirements of the trust, have a duty to distribute the trust property to those entitled to it. If in doubt, they should take professional advice and only apply to the court if all other avenues have failed (Re Allan Meyrick Will Trusts [1966] 1 WLR 499). 4.55 In cases of doubt as to who may be members of a class of beneficiaries, TA 1925 s 27 allows trustees to advertise in the London Gazette or, where there is land in the trust, to advertise in a newspaper circulating in the district where the land is situated, or to place such other advertisements or notices as would have been directed by a court, giving at least two months’ notice of an intended distribution. The court’s directions should normally be sought on the advertisement. If such actions fail to flush out all the beneficiaries, the trustees can go ahead and distribute to those known to them (Re Aldhous [1955] 1  WLR  459). A  beneficiary deprived of his share in such circumstances may seek to trace the property into the hands of those to whom it was distributed and try and recover it. In the Jersey case of Re The Internine Trust and the Intertraders Trust, Sheikh Abdullah Ali M Al Hamrani v Russa Management Ltd (2004) 7  ITELR  308, it was held that disclosure of trust documents was appropriate to parties who had been beneficiaries of a trust and might still be beneficiaries even though their precise status was not determined, to enable the court to exercise its supervisory powers and facilitate settlement of disputes. 4.56 If the trustees are due to distribute to a named beneficiary who cannot be found, they may apply to the courts for a presumption of death (Re Benjamin [1902] 1 Ch 723; Re Green’s Will Trusts [1985] 3 All ER 455).

TRUSTEES’ LIABILITIES 4.57 A trustee’s breach of trust is measured at common law by reference to what would be expected from an honest, diligent and prudent man of business dealing with his own affairs (Speight v Gaunt (1883) 9 App Cas 1; Learoyd v Whiteley [1887] App Cas 727). A professional trustee is expected to 216

Powers and Duties of Trustees 4.58 apply an even higher level of expertise to trust affairs (National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373; Bartlett v Barclays Bank Trust Co Ltd [1980] Ch  515). Where the statutory duty of care applies under TA 2000 s 1, a trustee is expected to exercise such care and skill as is reasonable in the circumstances, having regard in particular to any special knowledge or experience that he has or holds himself out as having, and if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. Where the trustee falls below these standards he may be liable to make good the loss, measured as the difference between what is left in the trust fund and what would have been had it not been for the trustee’s breach of duty (Nestlé v National Westminster Bank Plc [1994] 1 All ER 118; Re Mulligan [1998] 1 NZLR 481). In TA 1925 s 9 there is a limitation in respect of an advance of trust money on mortgage for inadequate security, where the liability is limited to making good the excess advance (not the whole amount), together with interest, but this only applies in respect of an advance made before 1 February 2000. Where the trustee, in breach of trust, has used trust money for his own private purposes, he must replace the capital appropriated together with the actual profit he has made by the use of the money, or, at the option of the beneficiaries, pay interest, simple or compound depending on the mood of the court, which fairly represents the profit usually made if invested in the manner in which it was actually used. This is a simple option, the beneficiaries cannot cherry-pick (Wallersteiner v Moir (No 2) [1975] 1 All ER 849). The loss continues until the trust fund is properly reinvested (Lander v Weston (1855) 3 Drew 389). In the New Zealand case of Macilster Todd Phillips Bodkins and Another v AMP  General Insurance Ltd (2005) 8 ITELR 15 a firm of solicitors sued their professional indemnity insurers where one of the partners, Mr Todd, had to pay the liabilities of an insolvent trust following his negligence. On the facts of the case it was held that the loss had been suffered due to the negligence of one of the partners and was covered by the policy. 4.58 Where the settlor acts as trustee, he is still liable for breach of trust (Drosier v Brereton (1851) 15 Beav 221). The trustee is also liable for costs, on the standard non-indemnity basis (Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] 2 All ER 92). The trustee is therefore liable for compensation, not damages. The trustees’ liability for compensation may be greater than their liability for damages for tort or breach of contract in that, for example, it is not limited by the concept of remoteness (Re Dawson [1966] 2 NSWR 211; Target Holdings Ltd v Redferns [1994] 2 All ER 337). The trustees’ defence may be that they were not responsible for the loss caused by their negligence, as it was not a direct or immediate consequence of that negligence. But in Caffrey v Darby (1801) 6 Ves 488 the court was not impressed by this argument, as in its view, if the trustees had not been negligent the assets would not have been exposed to the loss which occurred. Beneficiaries suing for breach of trust are seeking compensation for the trust fund, not on behalf of themselves. 217

4.59  Powers and Duties of Trustees A discretionary beneficiary may therefore sue, even though he himself has as yet suffered no loss. A trustee’s liability continues until restitution has been made (Bartlett v Barclays Bank Trust Co Ltd (No  2) [1980] 2  All ER  92). Again, unlike in damages, the fiscal effects of compensation are ignored (Re Bell’s Indenture [1980] 3 All ER 425 and Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] 2 All ER 92; contrasted with the damages case of British Transport Commission v Gourley [1956] AC 185). Where the trustees are in breach of trust, the fact that the loss is exacerbated by a collapse in the property market or negligent valuation of the property may be irrelevant if the breach of trust was the cause of the change in circumstances giving rise to the loss. The claimant has to show that the loss would not have happened had it not been for the breach of trust (Target Holdings Ltd v Redferns [1996] AC 421; Wight v Olswang (No 2) (2001) 3 ITELR 352). There has, however, to be a causal link between the loss and the breach of trust (Bishopsgate Investment Management Ltd v Maxwell (No  2) [1994] 1  All ER  261; Harrison v Randall (1851) 9 Hace 397; Re Massingbird’s Settlement (1890) 63 LT 296). The measure of compensation in Nestlé v National Westminster Bank [1994] 1 All ER 118 was the difference between what the fund of investments would have been worth had it been properly invested and had it achieved an average return over the period, compared with what it actually achieved as a result of being improperly invested. A beneficiary is entitled to trust his trustee, although if he continues to do so once he becomes aware of dishonesty he has only himself to blame for any further losses if he takes no action (Lipkin Gorman v Karpnale [1992] 4 All ER 331). The trustees’ liability for breach of trust is to compensate the trust for the loss, and does not contain any element of penalty (Guardian Ocean Cargoes v Banco de Brazil [1992] 2 Lloyd’s Rep 193). A trustee is not liable where the loss was inevitable, except to the extent that his action has increased the loss (Lord Gainsborough Watcombe Terra Cotta Co (1885) 54 LJ Ch 991; Re Miller’s Deed Trusts [1978] LS Gaz R 454). 4.59 It appears that the rate of interest implied in calculating compensation for negligence is based on the special investment account under the Court Funds Rules 1987, which is generally in line with that offered by National Savings (Jaffray v Marshall [1994] 1 All ER 143). Where, however, the trustee has misapplied the funds, he is deemed to have borrowed the money from the trust and is liable to pay the commercial rate of 1% above the bank base rate (Wallersteiner v Moir (No  2) [1975]  QB  373). However, if the trustee had actually received a higher rate he would be accountable for the profit (Re Emmets Estate (1881) 17 ChD 142). If as a result of breach of trust the trustee makes an unauthorised profit, he is accountable to the trust for that profit (Warman International Ltd v Dwyer (1995) 69 Al Jr 362; Movitex Ltd v Bulfield [1988] BCLC 104). 4.60 The liability of trustees is joint and several, where there is a joint default, whatever their individual levels of blame (Re Biddulph (1869) 4 Ch App 280). All the trustees would be sued (Re Jordan [1904] 1 Ch 260), although 218

Powers and Duties of Trustees 4.64 the liability, being several as well as joint, may be enforced against any one or more of them (A-G v Wilson (1840) Cr & Ph 1). Trustees are only liable for the net loss caused by a particular transaction, but a loss on one transaction cannot be compensated by gain on another separate one (Wiles v Gresham (1854) 2 Drew 258). 4.61 Where a trustee intermixes his own funds and trust funds and acquires property, the beneficiaries may elect to trace the funds into whatever they may have been converted (Re Hallett’s Estate (1880) 13 ChD 696), see 4.52–4.54. Where part of the funds came from the trustee’s own resources the beneficiaries and the trustees are treated as if they were co-owners (Re Tilley’s Will Trusts [1967] Ch 1179). The right to trace ceases where the property can no longer be identified, or is traceable into the hands of a third-party, bona fide purchaser of a legal interest for value without notice. 4.62 Where a court is satisfied that trust property is in danger, by reason of the active or passive misconduct of the trustees (Bell Talbot v Hope-Scott (1858) 4 K & J 139; Foley v Burnell (1783) 1 Bro cc 274), or where the trustees are residing outside the jurisdiction of the court (Dickins v Harris (1866) 14 LT 98), a beneficiary may apply to the court for an injunction compelling the trustees to do their duty, or restraining them from interfering with the trust property. A receiver may be appointed by the court in appropriate cases (Bennett v Colley (1832) 5 Sims 182). A trustee who admits to holding trust monies personally may be ordered to pay them into court (London Syndicate v Lord (1878) 8 ChD 84). 4.63 A  trustee who dishonestly misappropriates trust property could be guilty of theft under the Theft Act 1968, and if convicted could be ordered to pay compensation under Powers of Criminal Courts Act 1973 s 35. The test of dishonesty is whether the accused trustee must have realised that, by the standards of ordinary and decent people, what he was doing was dishonest (R v Ghosh [1982] QB 1053). 4.64 Theft is an offence under Theft Acts 1968 s 1. Other potential offences of a dishonest trustee dealt with under the Theft Act 1968 are: (a)

obtaining property by deception (s 15);

(b) obtaining a pecuniary advantage, services or evasion of liability by deception (s 16) and Theft Act 1978 ss 1 and 2; (c)

false accounting (s 17);

(d) publication of false, deceptive or misleading statements by officers of a body corporate or incorporated association (s 19); (e)

suppression of documents (s 20); and

(f)

making off without payment, Theft Act 1978 s 3. 219

4.65  Powers and Duties of Trustees If two or more co-trustees are involved, they may be guilty of conspiracy under Criminal Law Act 1977 ss 1–5 or the common law offence of conspiracy to defraud (Scott v Metropolitan Police Comr [1975] AC 819). 4.65 A trustee is not generally responsible for breaches of trust caused by his co-trustees (Townley v Sherborne (1634) Bridg J 35). If, however, he: (a) hands property to a co-trustee without seeing to its proper application (Walker v Symonds (1818) 3 Swan 1); or (b)

allows his co-trustee to receive trust property without making due inquiry into what he does with it (Wynne v Tempest (1897) 13 TLR 360); or

(c)

becomes aware of a co-trustee’s breach of trust and does nothing about it (Miller’s Trustees v Polson (1897) 34 SLR 798);

he is himself guilty of breach of trust. The statutory indemnity in TA 1925 s 30 was abolished by TA 2000 s 40. The trustee’s liability may be limited by the trust deed itself. A new trustee is not liable for breaches of trust committed before he became a trustee, but if he becomes aware of a breach he must take steps to remedy it (Re Strahan (1856) 8 De GM & G 291) and has a duty to review his predecessors’ actions (Harvey v Olliver (1887) 57 LT 239). Similarly, a trustee is not liable for breaches committed by his successors unless he retired in order to facilitate a breach (Head v Gould [1898] 2 Ch 250). 4.66 The Law Commission Consultation Paper No 171, Trustee Exemption Clauses, recognises that ‘the changed nature of the trust assets, the use of the trust for purposes never before envisaged, the extended powers given to trustees and the fear of increasingly litigious beneficiaries has led to the inclusion of ever wider exemption clauses in trust instruments’. It continues: ‘a typical trustee exemption clause may read as follows: “No trustee shall be liable for any loss or damage which may happen to the trust fund at any time or from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud.”’ The paper also points out that: ‘in 1998 in Armitage v Nurse [1997] 2  All ER  705, the Court of Appeal dispelled all doubts as to the validity of trustee exemption clauses which exclude liability for ordinary or even gross negligence. The Court held that a clause (similar to that set out above) could exclude the trustee from liability for loss or damage to the trust property “no matter how indolent, imprudent, lacking in diligence, negligence or wilful he may have been so long as he has not acted dishonestly”.’ It is now settled law in England and Wales that trustee exemption clauses can validly exempt trustees from liability for breaches of trust except fraud. 220

Powers and Duties of Trustees 4.69 The rights of a discretionary beneficiary are effectively a spes or hope of benefiting from the trust at some time. 4.67 The Law Commission believes that there is a very strong case for some regulation of trustee exemption clauses. They make a number of provisional proposals which would require legislation, including giving trustees the power to make payments out of the trust fund to purchase indemnity insurance to cover their liability for breach of trust instead of relying on exclusion clauses, and should not be able to claim indemnity from the trust fund. To prevent trustees avoiding these provisions by forming a trust under the law of another jurisdiction, it is recommended that any regulation of exemption clauses should be applicable to persons carrying on a trust business in England and Wales. The consultation period ended on 30  April 2003 and recommendations were published on 19  July 2006 and accepted by the Government on 14 September 2010. The report recommends that the trust industry adopt a non-statutory rule of practice and that this should be enforced by the regulatory and professional bodies. In Walker v Stones [2000] 4 All ER 412, trustees acting honestly but unreasonably for the benefit of the family, instead of the trust beneficiaries, were liable for breach of trust and were left uninsured on the basis that their action amounted to a fraud on a power, not professional negligence, and outside the business of the legal partnership. 4.68 The court has specific power in TA 1925 s 61 to relieve a trustee from personal liability if it appears to the court that he acted honestly and reasonably and ought fairly to be excused from the breach of trust, and for omitting to obtain the directions of the court in the matter in which he committed such a breach. The court may relieve him either wholly or partly from personal liability. A trustee must not merely be honest but must have acted reasonably (Re Turner [1897] 1 Ch 536). 4.69 A beneficiary who participated in a breach of trust, or subsequently affirmed it, acquiesced in it, or released the trustees from the breach, cannot make a claim against the trustees’ (Fletcher v Collis [1905] 2 Ch  24; Re Deane (1889) 42 ChD 9). A deed of release in connection with the trustees’ breach of trust is only effective if the beneficiaries knew what they were giving up under the deed (Re Garnett (1885) 31 ChD 1). Mere knowledge of a breach by a beneficiary is not acquiescence, although if it continues for a long period it is likely to be presumed acquiescence (Sleeman v Wilson (1871) LR 13 Eq 36). Where the breach was instigated by a beneficiary, the trustee may claim to have the beneficiary’s interest impounded to rectify the breach (Chillingworth v Chambers [1896] 1 Ch 685). Where the instigation is in writing the impoundment may be made under TA 1925 s 62. The beneficiary must have known that what he was instigating was in breach of trust (Re Pauling’s Settlement Trust (No 2) [1963] Ch 576). Claims against trustees may be statute barred under Limitation Act 1980 s 21, which provides a limitation 221

4.70  Powers and Duties of Trustees period of six years from the date on which the right of action accrued. It does not apply in cases of fraud or fraudulent breach of trust or property converted by the trustee (LA 1980 s 21(1)(a), (b)). The conversion provisions are limited, in the case of a trustee beneficiary, by Limitation Act 1980 s 21(2) to the excess over his proper share. Time runs from the date of the breach of trust, and not from the date the loss occurred (Re Somerset [1894] 1 Ch 231), except where fraud is involved, in which case time runs from when the fraud is reasonably discoverable (LA  1980 s  32). In the case of a remainderman, the limitation period does not commence until his interest falls into possession (Mara v Browne [1896] 1 Ch 199). A beneficiary under a disability, such as minority, has the limitation period extended to cover the period of disability (LA  1980 s  28). Where a claim is made against one trustee, contribution may be awarded in his favour against other trustees under the Civil Liability (Contributions) Act 1978, in such proportion as the court thinks just. Trustees who rely on a solicitor trustee to advise them may be given indemnity by the court, if reliance on the advice caused a breach of trust (Re Turner [1897] 1 Ch 536).

Tracing 4.70 A  beneficiary’s right to trace trust property is appropriate if he is unable to recover from the trustees (Re Diplock [1948] Ch  465). Tracing at common law may make it possible to recover assets but it only applies to somebody with legal ownership or the right of possession under a contract for bailment or hire purchase, and has no application in enforcing a beneficiary’s equitable interest under a trust. At common law the right to trace only exists as long as the asset remains identifiable and does not become part of a mixed fund, although precisely why the Court of Appeal in Re Diplock (1948) was unwilling to apply the identification rules in Devaynes v Noble, Clayton’s Case (1816) 1 Mer 572 is not clear. The much wider relief of equitable tracing applies where there is the appropriate fiduciary relationship, the property remains in a traceable form, and tracing it would not give rise to inequity. An ordinary contractual commercial relationship is not in any sense fiduciary (Goldcorp Exchange [1995] 1  AC  74; Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2  All ER  961). Where the money passes from the trustee, other than to a bona fide purchaser for value without notice, the assets can be traced into the hands of the donee (Agip (Africa) Ltd v Jackson [1991] Ch  547; Royal Brunei Airlines v Tan [1995] 3  WLR  64; Springfield Acres v Abacus [1994]  NZLR  503). If the donee has disposed of the property and received nothing in exchange, ie  he has consumed or spent it, tracing is not possible (see the Canadian case of Re Graphicshoppe Ltd (2005) 8  ITELR  561); but where the property has been mixed, equitable tracing is permitted (Re Tilley’s Will Trust [1967] Ch 1179). In effect, the beneficiaries have a claim over the whole of a mixed fund, and anything purchased with it, until the trust fund is repaid in full (Re Oatway 222

Powers and Duties of Trustees 4.73 [1903] 2 Ch 356). Where funds are mixed by an innocent donee, tracing may be applied pari passu with the donee’s own funds, or the first in first out rule in Devaynes v Noble, Clayton’s Case (1816) 1 Mer 572 may be applied (Re Stenning [1895] 2 Ch 433), unless this produces an inequitable result (Foskett v McKeown [1998] 2 WLR 298). 4.71 Where the funds of two or more trusts are mixed, in breach of trust, it is assumed that the trustee spent his own money first leaving the remaining balance available to the trustees (Re Hallett’s Estate (1880) 13 ChD 696). If, on the other hand, the assets are traced into assets which have appreciated in value, the trustee holds them on constructive trust for the beneficiary (Boardman v Phipps [1967] 2 AC 46). The innocent volunteer investing funds subsequently traced by a beneficiary is only required to return the amount he received in breach of trust, no account is required for any profit he may have made on it. Monies paid into an overdrawn account cannot be traced further (Bishopsgate Investment Management Ltd (in liquidation) v Homan [1995] Ch 211). Similarly, if the money is used by the volunteer to repay debts, there is nothing further to trace (Re Diplock [1948] Ch 465). Money lost gambling may be traceable to the gaming club (Lipkin Gorman v Karpnale [1992] 4 All ER 512). 4.72 Tracing cannot be enforced against a bona fide purchaser for value of the legal estate without notice (Re J Leslie Engineers Co Ltd [1976] 2 All ER  85). Tracing will also be refused where it would result in hardship or injustice, eg  where the money had been spent on improvements to property (Re Diplock [1948] Ch 465). An action against the recipient, instead of tracing to recover money wrongly paid, can only be made in connection with the administration of estates, eg  to enable a creditor to recover from legatees (Harrison v Kirk [1904] AC 1).

INCOME AND CAPITAL 4.73 The STEP administrative provisions do not require trustees to keep a balance between the conflicting interests of persons entitled to trust property in order to give the maximum flexibility in looking after the interests of the beneficiaries as a whole, without a redistribution of incoming monies and expenses between income and capital. Many trusts require just such a division which can give rise to innumerable problems. If a company issues bonus shares they are treated as part of the trust capital (Re Wright’s Settlement Trusts [1945] Ch 211; IRC v Blott [1921] 2 AC 171). Dividends applied in paying up share capital may be capital or income depending on the intention of the company, and were capital in Re Evans [1913] 1 Ch 23; IRC v Blott [1921] 2 AC 171; Bouch v Sproule (1887) 12 App Cas 385; Re Ogilvie (1919) 35  TLR  218; and IRC v Wright [1927] 1 KB 333, where it was the company’s intention to capitalise profits. 223

4.74  Powers and Duties of Trustees

The Trusts (Capital and Income) Act 2013. 4.74 This Act and the explanatory notes thereout, which are applicable only to England and Wales, came into force on 5 October 2013 and the Charity Commission ‘total return’ regulations on 1 January 2014. It provides that a new trust, one created or arising on or after the 5 October 2013 will treat entitlement to income as it arises and Appointment Act 1870 s 2 which treats income as accruing from day to day does not apply. The equitable apportionment rules in Howe v Earl of Dartmouth (1802) 32 ER 56, Re: Earl of Chesterfield’s Trusts (1883) 4 R 24, Allhusen v Whittell (1867) ER 4 Eq 295 (see 4.76–4.78) do not apply. They may sell but there is no requirement to do so. These provisions apply unless the trust instrument provides otherwise. A tax-exempt corporate distribution under CTA 2010 ss 1026–1078 or as otherwise provided is treated as a receipt of capital unless the trust instrument implies otherwise. There is power in s  3 to compensate an income beneficiary in such circumstances if it would otherwise have been an income distribution. Charities Act 2011, inserted ss 104A and 104B and regulations thereunder. In the Australian case of Wendt and Others v Orr (2005) 8 ITELR 523, where the trustees engaged in share trading, the profits were, in the circumstances of the case, income which was capable of encompassing profits derived from buying and selling shares for the purpose of making profits from those transactions. In the Trustees of the Mrs PL Travers Will Trust (2013) UKFTT 436 (TC) the Tribunal had to consider the tax consequences of the receipt of royalties by the trustees: ‘1. Mary Poppins, the children’s nanny with magical powers who appears and disappears mysteriously in the lives of the Banks family of Cherry Tree Lane, is an enduringly popular figure in children’s literature. She owes her popularity to a film produced by Walt Disney in the 1960s and a stage musical produced by Sir Cameron Mackintosh in 2004, but first of all to a set of children’s books written by Pamela Lyndon Travers – or PL Travers, as she styled herself on the title pages – over a period of nearly fifty years commencing in the 1930s. The issues we have to decide relate to the tax treatment, in the tax years from 2004–05 to 2008–09, of royalties from the stage musical in the hands of the trustees of PL Travers’ will trust. For the reasons we give in the Decision, we have concluded that those royalties were taxable at the higher rate applicable to trust income by virtue of the relevant income tax legislation insofar as they derived from an exclusive copyright licence granted by PL  Travers to Cameron Mackintosh Ltd (hereafter “CML”) but not insofar as they derived from a later assignment of the relevant copyright… ‘2. The issue arises in the following way. In 1994  PL  Travers made an agreement with CML and another company with a view to the writing and production of a stage musical about Mary Poppins; this was subject to the consent of Walt Disney Productions because of a term of an agreement in 224

Powers and Duties of Trustees 4.74 1960 relating to the Walt Disney film. Owing to a failure to reach agreement with Walt Disney Productions, the stage musical was not produced until 2004, after the trustees had intervened to break a deadlock between CML and Walt Disney. In the meantime PL Travers had died (aged 96 years) in April 1996, leaving a will which settled her literary estate upon a settlement, the beneficiaries of which were PL  Travers’ descendants and the Cherry Tree Foundation, a charity set up by her. Under the terms of the settlement the trustees were to pay out the income of the settlement to the beneficiaries for 80 years, at the end of which they were to distribute the capital among certain of the descendants of PL Travers alive at the time. ‘3. The stage musical “Mary Poppins” opened in the West End of London at the end of 2004. The trustees took the view that the trust’s receipts in respect of the musical (which we shall call “the CML royalties”) were capital and not income of the trust, and therefore were not to be distributed but preserved for 80 years. They also took the view that the CML royalties were liable to income tax at the basic rate only because they were not caught by section 686 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”). They prepared the trust’s tax returns accordingly. A note was included in a box in the returns (the “white space”) disclosing what had been done. In 2007 and subsequently, HMRC enquired into the returns and concluded that the payments were subject to tax at the higher rate applying to trusts by virtue of s 686 of ICTA 1988 or s 479 of the Income Tax Act 2007 which had replaced s  686. This appeal is against the decisions to that effect in respect of the tax years under appeal. ‘6. The provisions catch income in two categories of case: where it is to be accumulated and where it is payable at the trustees’ discretion. The issue in this case is whether the CML royalties are income that is to be accumulated. It was common ground between the parties that the decision of the Court of Appeal in Howell v Trippier [2004] EWCA Civ 885 [2004] STC 1245 is authority that the expression “income which is to be accumulated or is payable at the discretion of the trustees” in s 686(2)(a) of ICTA 1988 refers to receipts which are treated as income for the purposes of the law of trusts. The word “income” thus has a different meaning in sub-s (2)(a) from the meaning it has in the expression “income arising to the trustees” in the opening words of sub-s (1) and sub-s (2). In that expression it means income which the tax legislation regards as income and it is common ground that the royalties are such income, taxable at least at the basic rate. ‘8. The parties disagree as to whether the royalties are receipts which the law of trusts regards as income; they also disagree as to whether, if they are income, the manner in which the trustees are directed to deal with them amount in the circumstances to effecting an accumulation of income. ‘9. For the trustees Mr Michael Furness QC submits that the CML royalties are not income in trust law terms; this is for one or both of two reasons: (a) because such receipts have been held to be capital receipts for trust law 225

4.74  Powers and Duties of Trustees purposes or (b) because PL Travers’ will directs the trustees to treat them as capital, something which case-law indicates that a settlor is empowered to do. Alternatively, he submits, even if the receipts are income, the manner in which the trustees are required to deal with them does not amount to accumulating them in the trust law sense because the copyrights, having a limited life, are wasting assets and the building up of a fund (even if built up from income) to replace a wasting asset does not amount to an accumulation. ‘10. In this connection there is a dispute about whether the CML royalties derive from the 1994 agreement, made by PL  Travers in her lifetime, or from an agreement which is expressed as amending the 1994 agreement but was relied on as the effective source of the receipts; this was an agreement between the trustees and CML made in 2004 in parallel with an agreement between CML and Walt Disney Productions. The significance of this is that the case-law on which Mr Furness relies draws a distinction between royalties accruing to a settlement from licences or assignments of copyright effected by the settlor in his or her lifetime and royalties accruing from a disposal of copyright effected by the trustees themselves. ‘11. For HMRC  Mr David Yates submits that the CML royalties derive from the 1994 agreement, made by PL  Travers in her lifetime, giving them the character of income according to the case-law; moreover, they derive from the copyright in the Mary Poppins books, from which she received publication royalties from the outset, something which fortifies the conclusion that the royalties were income. Mr Yates contends that preserving them for the ultimate beneficiaries amounts to accumulating them; he adds that the division of the receipts between the legatees, the Cherry Tree Foundation and the trustees of the discretionary trust effected by the will does not amount to prudent provision against the wasting of the asset so as to escape being classified as an accumulation. The Law of copyright ‘12. It is convenient to preface our findings of fact with a brief summary of the English law of copyright, as restated with amendments in the Copyright, Designs and Patents Act 1988, about which there was no dispute. By sections 1(1) and 3(2), copyright is a property right which subsists in, among other things, original literary works once they have been “recorded”. In the case of a literary work, copyright subsists until 70 years from the end of the year in which the author dies. By section 16, a copyright owner has the exclusive right to do certain things (“acts restricted by copyright”); these include copying, issuing copies to the public, performing in public and making an adaptation – in each case, either of the work or of a substantial part of it. Adaptation expressly includes (section 21(3)) making a version of a nondramatic work (such as a Mary Poppins book) in which it is converted into a dramatic work (such as a stage show). Copying or performing an adaptation of a work is an act restricted by the copyright in the original work as well as 226

Powers and Duties of Trustees 4.75 by the copyright in the adaptation. Subject to limited statutory exceptions, the doing of any of these things by another person without the licence of the copyright owner is an actionable infringement. ‘82. The copyright will have had a monetary value, which in principle will have been highest when they first passed into the trust at her death, and at that point had the longest period remaining to run. In principle the value will have been the amount that a willing buyer would be prepared to pay in return for an assignment of the copyrights (insofar as not disposed of during her lifetime) and the concomitant right to exploit them and receive the fruits of exploitation. The monetary value may well be difficult to gauge – we do not know to what extent there exists a market in literary estates – but it would in principle be the net present value of the predicted stream of receipts from exploitation over the ensuing 70 years. ‘85. For the above reasons we allow the appeal in part. We decide (a) that payments received by PL  Travers’ trustees pursuant to clause 2 of the 1994 agreement (as amended) in respect of the period prior to the merger and assignment of rights pursuant to clauses 3 and 4 of the agreement are taxable at the rate applicable to trusts by virtue of s 686 of ICTA 1988 (or, in the unlikely event that the merger and assignment had not occurred prior to the change in legislation, at the trust rate by virtue of s 479 of the Income Tax Act 2007) but (b) that payments received by the trustees in respect of the period following the merger and assignment of rights are not so taxable. (They are therefore subject to income tax at the basic rate, deducted at source.)’ 4.75 Any payment from a company to its shareholders, other than as a repayment of share capital or other payment so treated by company law is likely to be an income dividend (Hill v Permanent Trustee Co of New South Wales [1930]  AC  720), although nowadays there can be exceptions to this general rule, as explained below. However, dividends paid out of capital profits are income (Re Doughty [1947] Ch  263; Re Harrison’s Will Trusts [1949] Ch 678; Re Sechiari [1950] 1 All ER 417; Re Kleinwort’s Settlements [1951] Ch  860). An English company making a distribution from a share premium account through a reduction of capital, under CA 1985 s 130, is a return on capital not a dividend. However, in some jurisdictions such as Jersey, the Isle of Man and the Cayman Islands dividends can be paid out of the share premium account as income. Payments on company restructuring sanctioned by the court, under CA  1985 s  425, may contain an interest element to the extent they relate to arrears of interest (Re Morris’s Will Trust [1960] 3  All ER 548). In Rae v Lazard Investments Co Ltd [1963] 1 WLR 555 it was held that ‘every distribution of money or money’s worth by an English company must be treated as income in the hands of the shareholders unless it is either a distribution in a liquidation, a repayment in respect of a reduction of capital (or a payment out of a special premium account) or an issue of bonus shares (or it may be, bonus debentures)’. Capital treatment would also appear to apply 227

4.76  Powers and Duties of Trustees to the purchase by a company of its own shares and declaration of a dividend immediately used to satisfy a contemporaneous call on unpaid share capital (Re Hatton [1917] 1 Ch 357).

Apportionment 4.76 Most pre-5 October 2013 trust deeds avoid statutory apportionment of income on a time basis under AA  1870 by providing that income and expenditure shall be treated as arising when payable and does not accrue from day to day. Otherwise a dividend relating to a period before a life tenant becomes entitled is credited to capital (Re Winder’s Will Trusts [1951] Ch 916). In addition to apportionment under AA  1870 there are a number of rules relating to equitable apportionment which apply in particular to trusts created by will, unless they are excluded by the will or trust instrument, as they usually are when these have been properly drafted. 4.77 The first branch of the rule in Howe v Earl of Dartmouth (1802) 7 Ves Jr 137, may require executors or trustees to convert unauthorised investments into authorised investments by selling and reinvesting the proceeds unless they are specifically empowered to retain them. The wide investment powers given by the Trustee Act 2000 Part I have made this rule otiose in most circumstances. 4.78 These equitable apportionment rules include, where there is a duty to convert, the proceeds of sale of the unauthorised investment, which will be apportioned between income and capital on the basis of the current yield on unauthorised investments; this is the second branch of the rule in Howe v Earl of Dartmouth (1802) 7 Ves Jr 137, which does not apply to freehold or leasehold property (Hope v d’Hedouville [1893] 2 Ch  361). The yield was fixed at 4% in Re Baker [1924] 2 Ch  271 and followed in Re Berry [1962] Ch  97. Where the trustees decide to postpone conversion, the property has to be valued at the date of death in order to fix the return to the life tenant (Re Parry [1947] Ch 23). In other cases where there is no power to postpone conversion, the investment would be valued one year from the testator’s death (Re Fawcett [1940] Ch 402). The life tenant’s income is taken from the actual income so far as possible, and if there is a shortfall it is made up from capital when the investment is sold. Conversely, any profit over and above the 4% accrues to the benefit of capital. It is not clear to what extent the 4% figure is cast in stone as, at various times, it has been well out of line with current yields on authorised investments. 4.79 Where the investment is an investment in expectancy, ie a reversionary interest which will fall into the estate on the death of the life tenant, it is probably a speculative asset which would be regarded as one where the trustees had a duty to convert, except that purely on the basis of investment criteria it might be better to wait until the life tenant dies and the interest falls in. The life tenant 228

Powers and Duties of Trustees 4.81 is compensated, on the authority of Re Earl of Chesterfield’s Trusts (1883) 24 ChD 643, by giving him 4% per annum compound interest, less income tax at the basic rate, on an amount which, together with that interest, would equal the amount actually received, from the date of death. This rule applies to other non-income producing assets, such as a debt (Re Duke of Cleveland’s Estate [1895] 2 Ch 542) or compensation for a refusal to grant planning permission (Re Chance [1962] Ch 593). The rule in Allhusen v Whittell (1867) LR 4 Eq 295 is designed to deal with the perceived inequality between a life tenant and remainderman where debts are paid some time after the date of death out of the residuary estate left in trust. If the debts were paid entirely out of capital, say a year after the date of death, the life tenant would have received excessive income, whereas if the income had been used to pay the debts the remainderman would have benefited at the life tenant’s expense. The rule therefore provides that the sum used to pay the debts has to be apportioned between income and capital on an equitable basis using the actual rate of interest, net of basic rate tax, for the years succeeding death (Re Oldham [1927] WN 113). The rule in Re Atkinson [1904] 2 Ch 160 requires trustees who invest in a mortgage or loan stock where there is a deficiency on realisation, to apportion the loss rateably between income and capital. A similar rule applies to a loss on an unauthorised investment (Re Bird [1901] 1 Ch 916). The rule in Re Joel [1967] Ch 14 applies to maintenance of children out of income where they are contingently entitled to trust capital on attaining a specified age. These equitable apportionment rules are complex in their calculation and capricious in their effect and are normally excluded by any well-drafted will or trust deed, if not excluded under the Trusts Capital and Income Act 2013; see 4.73. 4.80 There is normally no apportionment required merely because investments are sold or bought cum or ex dividend. Only dividends actually received are credited to income (Re Firth [1938] Ch  517; Hitch v Ruegg [1986] TL & P 62).

Scrip (stock) dividends 4.81 A simple scrip dividend is treated as capital in the hands of the trustees (Bouche v Sproule (1887) 12 App Cas 385). An enhanced scrip dividend, as opposed to a mere alternative of taking a scrip or cash dividend of the same value, normally gives rise to a capital receipt under trust law (Hawkins v Hawkins (1920)  SRNSW  550). The trustees may have power to pay out a capital sum to an income beneficiary corresponding to the amount of a cash dividend foregone in taking the enhanced scrip dividend. HMRC has accepted, in SP4/94, that Re Malam [1894] 3 Ch 578 may apply to such capital profits and the trustees can elect to allow the life tenant a lien over the bonus shares equivalent to the amount of the cash dividend, and then satisfy that lien out of cash from the capital account (see 4.84). If, however, the trustees take the view that the enhanced scrip dividend is no more than an ordinary dividend paid in 229

4.82  Powers and Duties of Trustees a way regarded as beneficial to the company, and therefore outside Bouche v Sproule (1887) 12 App Cas 385, the entire distribution would be income (Re Northage (1891) 60 LJ Ch 488; Re Tindal (1892) 9 TLR 24; Re Despard (1901) 17  TLR  478; Re Hume Nisbet’s Settlement (1911) 27  TLR  461, and would be taxable under ITTOIA 2005 s 409(1). 4.82 Scrip dividends, referred to as stock dividends in the Taxes Acts, are not treated as distributions (CTA 2010 s 1049) but are taxable as income of the shareholder or of the life tenant of an interest in possession trust, on the ‘cash equivalent’, grossed up at the dividend ordinary rate (7.5% for 2018– 19), which is then taxed at the taxpayer’s marginal rate with a non-payable tax credit at the dividend ordinary rate (ITTOIA 2005 ss 411(2), 414(1)). The ‘cash equivalent’ is the amount of the cash dividend which could have been taken instead of the scrip dividend, unless this is substantially different (15%, SP/A8) from the market value of the shares, in which case it is the market value (ITTOIA 2005 s 412(1)). 4.83 Where the scrip dividend is received by a discretionary trust (including an accumulation and maintenance trust, bereaved minor’s trust or age 18 to 25 trust) the ‘cash equivalent’ grossed up at the dividend ordinary rate, with a corresponding non-payable tax credit, will be subject to tax at the dividend trust rate 37.5% from 2013/14 (42.5% for 2010/11 to 2012/13) (ITA 2007 ss 9(2), 481(2); ITTOIA 2005 s 410(3); Howell & Morton v Trippier [2004] STC 1245; HMRC’s interpretation of this case is set out in RI 272). From 6 April 2016 the dividend tax credit is abolished and a tax-free dividend tax allowance of £5,000 is available to taxpayers. Dividend income above this amount will be payable at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. 4.84 Scrip dividends are treated as acquired by the recipient at the cash equivalent, as calculated for income tax under ITTOIA  2005 s  412 and for CGT purposes under TCGA 1992 s 142. 4.85 Enhanced scrip dividends are dividends where the bonus shares are issued at a price substantially below the market value. They were popular before the abolition of ACT but are no longer common. Arguably, scrip dividends are entirely capital, on the basis of Bouche v Sproule (1887) 12 App Cas 385, as are dividends consisting of loan stock and debenture stock, irrespective of the redemption date (Re Outen’s Will Trusts [1963] Ch  291; IRC  v Fisher’s Exors [1926] AC 395); but there are arguments both for income treatment (Re Northage (1891) 60 LJ Ch 488), or a fair apportionment under which the life tenant is advanced a capital sum equivalent to the value of the cash dividend forgone (Re Maclaren’s Settlement Trusts [1951] 2  All ER  414; Re Rudd’s Will Trusts [1952] 1 All ER 254) in other special circumstances. In such a case of apportionment, the payment to the life tenant should be a capital receipt, but HMRC treats such compensation payments as annual payments, subject to 230

Powers and Duties of Trustees 4.89 deduction of tax by the trustees at the basic rate and taxable on the life tenant as income (SP 4/94). If shares are transferred to the life tenant in specie, the CGT base value is the pro rata cost of the original shares under TCGA 1992 ss 126– 128. ITTOIA  2005 ss  409–414 and TCGA  1992 s  142 have no application in such circumstances. However, the amount distributed would be an income distribution taxable on the trustee at the trust rate, 45% for 2013/14 to 2019/20 (ITA 2007 s 9(2)), with no credit to the tax pool (ITA 2007 s 497). 4.86 Capitalised enhanced scrip dividends received by discretionary trusts (including accumulation and maintenance trusts, bereaved minor’s trusts or age 18 to 25 trusts) are deemed to have been taxed at the dividend ordinary rate (under ITTOIA 2005 ss 410(3), 414), but are not treated as accumulated income, being added to capital, and are therefore outside the provisions of ITA 2007 s 479 which subjects such income to the special trust tax rates. As ITTOIA  2005 s  410(3) applies, TCGA  1992 ss  126–128 are disapplied by TCGA  1992 s  142, and the trustee’s base value for CGT is the appropriate amount in cash under ITTOIA 2005 s 412.

Demergers 4.87 A  direct demerger, which involves the distributing company hiving off part of its business to a subsidiary and then distributing the shares by way of a dividend in specie, gives rise to an income receipt following Re Kleinwort’s Settlements [1951] Ch 860 and Re Sechiari [1950] 1 All ER 417, which may, however, be tax exempt under ICTA  1988 s  213(3)(a), subject to the anti-avoidance provisions and meeting the requirements of ITA  2007 s  925, CTA  2010 ss  1028, 1086–1090. Although there is no income tax charge where the demerged shares are transferred to a life tenant CTA 2010 ss 1075–1080 (ICTA 1988 s 213(3)(a)), there is a problem where the demerged shares are distributed to beneficiaries of an accumulation and maintenance or discretionary trust. The trustees will have to pay tax at the trust rate under ITA 2007 s 479, but there is no credit to the tax pool arising from the demerger. 4.88 Although a demerger is normally treated as a reorganisation under TCGA  1992 ss  126–130, by TCGA  1992 s  192(2) the life tenant and the trustees are not the same person and, therefore, TCGA 1992 s 127 prevents the tax-free reorganisation rules applying. The life tenant therefore acquires the shares at market value for CGT purposes under TCGA 1992 s 17(1)(a). 4.89 In an indirect demerger, under CTA 2010 ss 1075–1080, according to which shares in the new company are issued direct to the shareholders of the old companies, the receipt would normally be capital (Sinclair v Lee [1993] Ch 497). Where in an indirect demerger the shares are classified as capital, it is treated as a reconstruction for CGT purposes under TCGA 1992 ss 135 and 136, subject to TCGA 1992 ss 137 and 138. The reorganisation of share capital provisions 231

4.90  Powers and Duties of Trustees in TCGA 1992 ss 126–130 apply, and under TCGA 1992 s 127 the original cost of the shares is apportioned to the holdings in the demerged companies in proportion to their market values. If, exceptionally, the shares are distributed to a life tenant of an interest in possession trust, he would have a nil base value of his shares, as there has been no disposal of the shares on his acquisition.

Purchase of own shares 4.90 A  purchase by a company of its own shares under Companies Act 2006 (CA  2006) ss  684–737 is capital for trust purposes, by analogy with a reduction of share capital under CA 2006 ss 641–653 (Rae v Lazard Investments Co Ltd [1963] 1 WLR 555). However, it is a distribution for tax purposes under CTA 2010 ss 1000–1017 for the amount paid on the shares, including any share premium, unless it qualifies for capital treatment under CTA 2010 ss 1029–1048. As a distribution, any income element is dealt with under ITTOIA 2005 ss 382–388. 4.91 In order to qualify for capital treatment for tax purposes, the company has to be a trading company or member of a trading group and the repurchase has to be for the benefit of the trade, not for a tax avoidance purpose or to discharge an IHT liability (CTA  2010 s  1033)). Capital treatment is not available to non-resident trustees (ICTA 1988 s 220(1)). There are a number of conditions which have to be met under CTA 2010 ss 1035–1043 clearance is available under CTA 2010 s 1044. 4.92 The share sale proceeds are chargeable gains of the vendor shareholders, except to the extent that they have been treated as an income distribution and therefore excluded under TCGA 1992 s 37(1). As the capital element is usually small, the original subscription price, compared with the proceeds, most of which is charged as income, often produces a loss for CGT purposes in these cases. It is frequently possible to have a share buy-back treated as an income distribution by deliberately breaching the conditions in CTA 2010 ss 1035–1043, with little additional tax under ITTOIA 2005 ss 382– 388, followed later by a buy-back which qualifies for capital treatment giving rise to a capital gain covered by the capital loss on the earlier distribution.

Reduction of share capital 4.93 For tax purposes, a formal reduction of share capital under CA 2006 ss 641–653 is a part disposal of shares for the capital element under TCGA 1992 s 122 (1), ie the amount subscribed for the shares including any share premium, and the balance is an income distribution under CTA  2010 ss  1003–1017, ICTA  1988 s  209(2)(b) and is dealt with under the usual dividend taxation rules in ITTOIA 2005 ss 382–388. 232

Powers and Duties of Trustees 4.97 4.94 Obviously, a profit on the disposal of investments accrues to capital. Where shares are purchased cum dividend, on receipt the dividend is carried to capital not paid as income (Re Sir Robert Peel’s Settled Estates [1910] 1 Ch  389), but conversely there is no apportionment of income where shares are sold cum dividend (Scholefield v Redfern (1863) 2 Drew & Sm 173; Re Henderson [1940] 1 All ER 623). A STEP clause enables the trustees to take a broader view of their responsibilities in providing the maximum amount to the income beneficiaries while preserving the real value of capital for the remaindermen.

PAYMENT OF TAX 4.95 The ability of the trustees to pay tax should extend to liabilities not enforceable against them. Foreign tax claims would not normally be enforceable in the UK following Government of India v Taylor [1955] 1 All ER 292 and Brokaw and Shaheen v Seatrin UK Ltd and US Government [1971] 2 All ER 98. Within the European Union collection of foreign tax claims may be made under the Mutual Assistance Recovery Directive (76/308/EEC) as amended by Council Directive 2001/44/EC and applied by FA 2002 s 134 and Sch 39 (as modified by SI 2005/1479). It might, however, be a problem for beneficiaries living in the overseas jurisdiction if the tax was not paid. There are also provisions under UK legislation, eg TCGA 1992, where chargeable gains are assessed on the settlor who has a right of recovery under TCGA 1992 Sch 5 para 6. If, for example, the trust has emigrated, there may be no legal requirement to reimburse the settlor but not to do so would be unreasonable, and the trustees could justify the payment provided that they had power to do so, even where it was not in practice enforceable against them. Assistance given in a foreign tax investigation does not amount to enforcement of a foreign tax claim (Re State of Norway’s Applications [1989] 1 All ER 743; X v Blompied and Abacus, Jersey, 28 January 1994, M Grundy, Trusts Casebook (1998, ITPA) p 285). 4.96 There are similar provisions for income tax where the settlor is charged in cases where he retains an interest in the trust or payments are made to his minor children under ITTOIA 2005 s 624 or s 629. The right of recovery arises under ITTOIA 2005 s 646.

MAINTENANCE AND ADVANCEMENT 4.97 With regard to the statutory powers of maintenance and advancement in TA 1925 ss 31 and 32 as amended by Inheritance and Trustees’ Powers Act 2014, the deletions contained in most trust deeds refer to the proviso to s 31(1), which requires the trustees (before applying money for a minor beneficiary’s maintenance, education or benefit) to have regard to the age of the infant 233

4.98  Powers and Duties of Trustees and his requirements and generally to the circumstances of the case and in particular to whatever income, if any, is applicable for the same purposes; which potentially causes the trustees to have to make substantial enquiries generally regarded as inappropriate. However, ITPA 2014 s 8 amends s 31 and substitutes ‘as the trustees may think fit’. The deletion in TA 1925 s 32(1)(a) was the limitation to one half of the beneficiary’s presumptive or vested share in determining the maximum advancement or benefit which could be paid to him. Again, this was normally regarded as unduly restrictive and best deleted and left to the discretion of the trustees, and was deleted by ITPA 2014 s 9(3) (b) from 1 October 2014. 4.98 As explained at 4.57 et seq, the conflict of interest provisions, which apply to trustees on the basis of case law, are extremely onerous, and a limitation on these rules is often considered reasonable, provided that there is an independent trustee to make sure that any potential conflict is not abused.

INVESTMENT POLICY 4.99 Investment policy needs to be considered by the trustees in the light of the terms of the trust and their investment powers by statute and under the trust deed. Trustees must act fairly where there are different classes of beneficiaries, eg  a life tenant interested in maximising his income and a remainderman interested in maximising the capital left for his benefit on the death of the life tenant (Nestlé v National Westminster Bank Plc [1994] 1  All ER  118). There has been a gradual move away from the prescriptive investment powers originally contained in TA 1925 ss 1–11, which were relaxed by TIA 1961 and further relaxed by Trustee Act 2000 ss 3–10. 4.100 Trustee Act 2000 ss 1 and 2 and Sch 1 introduced a statutory duty of care on trustees when considering investments and the acquisition of land, as well as in other areas, although how in practice this duty of care differs from the previous obligation on trustees to act as prudent men of business remains unclear. Trustees claiming special knowledge or professional trustees have a higher standard of care, but this has always been the case (Bartlett v Barclays Bank Trust Co Ltd [1980] Ch  515). The duty of care is expressed in terms of requiring a trustee to exercise such care and skill as is reasonable in the circumstances (TA 2000 s 1(1)). 4.101 Trustee Act 2000 s 3 gives trustees a general power of investment and provides standard investment criteria in s  4. These criteria basically require the trustees to review the investments in the light of their suitability to the trust, and diversification insofar as is appropriate to the circumstances of the trust. This requirement to have regard to standard investment criteria cannot be avoided by any provision in the trust instrument, but it is doubtful whether this does more than codify the previous law (Nestlé v National Westminster Bank 234

Powers and Duties of Trustees 4.102 Plc [1994] 1 All ER 118). A trustee must normally obtain proper investment advice under Trustee Act 2000 s 5, but is subject to any restriction imposed by the trust deed and applies to existing trusts (ss 6, 7). The general powers of investment do not give the trustees power to invest in land and buildings, freehold or leasehold, which is given specifically by Trustee Act 2000 s 8 and applies to land acquired as an investment, for occupation by a beneficiary, or for any other reason, such as development. A power is given to acquire land throughout the UK and is not restricted to land in England and Wales. There is therefore no statutory default power to invest in land overseas, although investment in a land-owning company would be covered by TA 2000 s 3. The trust deed itself may allow investment in overseas real estate either expressly or by implication where, for example, the trustees may invest trust property in any manner as if they were beneficial owners, as in the Society of Trust and Estate Practitioners Standard Provisions 1st edition, para 3(1)(a), 2nd edition para 4.1. 4.102 The Law Commission Consultation Paper No 175, Capital and Income in Trusts: Classification and Apportionment, advocates trustees adopting a total return on investments policy and a statutory power of allocation between what have traditionally been income and capital beneficiaries, in order to preserve the appropriate balance between their interests. How this would be achieved in a year in which the value of the investments fell by more than the income received, or how the trust and beneficiaries would be taxed, is unclear. The Trusts (Capital and Income) Act 2013 s  4 specifically allows a total return investment policy for charities under the Charities Act 2011 ss 282–286 and 288–292.

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Chapter 5

Residence and Domicile

5.1 Two cornerstones of UK taxation are residence and domicile, which may affect the UK tax liabilities of the settlor, the beneficiaries and the trustees. Residence is based on physical presence in a territory and there may be different rules for different persons for different tax purposes. Domicile is a concept of international private law which identifies the jurisdiction with which a person has the closest connection, and governs the law relating to marriage and divorce, the legitimacy of children and devolution of the estate on death. Domicile is also important for UK tax purposes and, in addition to the general law concept of domicile, UK tax law introduces the concept of ‘deemed domicile’. Nationality in the UK is not normally important for tax purposes, except under certain double taxation agreements. Questions relating to residence and domicile are normally dealt with by HMRC specialists at HMRC – Trusts and Estates, Ferrers House, Castle Meadow Road, Nottingham NG2 1BB, tel: 0300 123 1072, which is part of the Charity, Assets & Residence office (CAR). CAR is at St John’s House, Merton Road, Bootle, Merseyside L69 9BB, tel: 0845 070 0042, or 00 44 151 210 2222 from outside the UK. HMRC practice in relation to residence and domicile, published in guidance RDR1 Residence, Domicile and the Remittance Basis, last updated in July 2018. This guidance applies from 6  April 2013 following the introduction of the statutory definition of residence for individuals by FA 2013 s 218 and Sch  45, and replaced HMRC’s previous guidance in HMRC6 ‘Residence, Domicile and the Remittance Basis’. HMRC6 continues to apply for tax years prior to 5 April 2013. The guidance contained in HMRC6 and its predecessor, booklet IR20, is not statutory but, in spite of the opening disclaimer that it has no legal force, can apparently bind HMRC following R  (on the application of Gaines-Cooper) v RCC  [2010]  EWCA  Civ 83. This overturned GainesCooper v RCC (2006) SpC 568, where the Special Commissioners held that, in determining an individual’s residence status, they must apply the law rather than the provisions of IR20. HMRC Brief 01/07 confirmed HMRC’s view that guidance in IR20 remained valid, notwithstanding the approach originally adopted in Gaines-Cooper. Although a number of important changes to the determination of residence for individual taxpayers were introduced by FA  2008, the question of residence continued to give rise to significant uncertainties. The statutory residence test applies from 6  April 2013 and despite its complexity has provided greater certainty to individuals over their

237

5.2  Residence and Domicile UK tax residence status. The concept of ordinary residence was abolished for 2013/14 and later years by FA 2013 s 219 and Sch 46.

INDIVIDUALS Residence after 6 April 2013 5.2 After a prolonged period of consultation, a statutory test of UK residence was introduced from 6 April 2013 (FA 2013 s 218 and Sch 45). 5.3 The statutory residence test comprises three parts; an automatic nonUK resident test, an automatic UK resident test and a ‘sufficient ties’ test. If the conditions of one test are met, the other tests do not need to be considered (ie if an individual falls to be treated as automatically non-UK resident under the test, there is no need to consider the other tests, and in particular the sufficient ties test can be ignored). In practical terms, it is therefore preferable to consider the automatic tests first and analyse the more complex concepts introduced by the sufficient ties test only if the automatic tests do not apply. References in paragraphs 5.4–5.12 are to FA 2013 Sch 45 unless otherwise stated.

Automatic non-UK residence 5.4 There are five automatic overseas, ie  non-UK residence, tests (para 11). An individual is automatically treated as non-UK resident in a tax year if he spends less than 16 days in the UK during the year (other than in the year of death) and he was UK resident in one or more of the preceding three years (para 12). The second non-UK residence test is that he was not resident in any of the three preceding tax years, and spent fewer than 46 days in the UK in the tax year in question, para 13. The post-2008 day count rules have been carried over into the statutory residence test, so that an individual will be treated as present in the UK on a particular day if he is present at midnight, unless he is merely in transit in the UK and does not undertake any activities not associated with his transit, such as meeting family or friends or carrying out work. Days of presence caused by circumstances beyond the individual’s control such as sudden illness are also ignored, although a maximum of 60 days in any one tax year can be disregarded under the exceptional circumstance rule. The third test where an individual will be regarded as automatically non-UK resident is if he carries out sufficient work overseas, there are no significant breaks from overseas work and he spends less than 91 days in the UK on which he does less than three hours work. Sufficient hours overseas are an average of 35 hours a week, para 14. 5.5 The remaining two automatic non-UK resident tests deal with the tax year in which the taxpayer dies. The fourth test provides that a taxpayer 238

Residence and Domicile 5.7 will not be UK resident in the year of death if he was non-resident in the two preceding tax years, and the number of days spent in the UK is less than 46 (para 15). The fifth test is that a taxpayer will not be UK resident in the year of death if he was non-resident in the preceding year, and split-year treatment applied to the tax year before that (para 16).

Automatic UK residence 5.6 There are four automatic tests of UK residence. A taxpayer will be considered automatically resident in the UK for a tax year if he is present in the UK for 183 days or more in that year (para 7). Under the second test, a person is resident in the UK if he has a home in the UK for 91 consecutive days or more (where at least 30 days of that period fall within in the tax year in question), is present there for some time on at least 30 days in the tax year, and during that 91-day period either he has no home overseas, or he has one or more such homes but each of them is a home at which he is present on fewer than 30 days in the tax year (para 8). If he has more than one home in the UK, each of them is looked at separately for this purpose. An individual will also be UK resident if he works full-time in the UK for a period of at least 365 days, all or part of which falls within the year, without a significant break (a break of more than 30 days, with exceptions for annual leave, sick leave and parental leave) (para 9). More than 75% of the days in the year when he works for more than three hours must be days when he does so in the UK. ‘Full time’ means an average of at least 35 hours per week.

Death 5.7 On death, a taxpayer will be considered UK resident in the year of death if he was resident under any one of the four automatic UK resident tests in each of the previous three tax years, and (assuming the taxpayer would not otherwise have been UK resident in the year of death) the preceding year was not a split year, and at the time of death, he had a home in the UK (para 10). ‘Home’ means a building or part of a building or, for example, a vehicle, vessel or structure of any kind. There must be a sufficient degree of permanence or stability for a building, etc to count as a home, echoing the concept of a ‘residence’ for capital gains tax purposes set down in Levene v IRC  (1928) 13 TC 486. The guidance published by HMRC states that ‘a person’s home is a place that a reasonable onlooker with knowledge of the material facts would regard as that person’s home’. The legislation states that a holiday home or temporary retreat is not a ‘home’ for the purpose of the residence tests, but the distinction between a home that is used sometimes as a holiday home and occasionally on a less casual basis, for example as a base when working outside the UK, is not clear. 239

5.8  Residence and Domicile

Sufficient ties 5.8 Where a taxpayer is neither resident nor non-resident under the automatic tests, residence is determined by reference to the ‘sufficient ties’ test, which looks at a number of UK ties together with days spent in the UK. A taxpayer will have a tie to the UK if the following tests apply (paras 17, 31): (1) Family tie – A person who has family resident in the UK has a family tie. Family members include a spouse, civil partner, unmarried partner or minor children. Minor children are excluded if the individual sees the child in the UK on fewer than 61 days in the tax year (paras 32, 33). A child aged under 18 who is in full-time education in the UK, and who would not be UK-resident if the time spent in full-time education were disregarded, is treated as non-resident for this purpose if he spends less than 21 days in the UK outside term time. Term time is defined as including half-term breaks. (2) Accommodation tie – A person who has accommodation in the UK that is available to be used by him for a continuous period of at least 91 days in a tax year has an accommodation tie if he spends at least one night there in the year (para 34). If the accommodation is the home of a close relative the ‘one night’ test is extended to 16 nights, to avoid an individual being treated as having accommodation available where, for example, he makes limited visits to stay with his parents. This tie does not require the individual to own the accommodation. Note that ‘accommodation’ is a wider concept than ‘home’ in the automatic UK resident test, and would include holiday homes and more temporary lodgings. For example, if the taxpayer were to make a hotel booking for a continuous term of at least 91 days in a tax year, the hotel room would constitute accommodation for this purpose. (3) Work tie – A  person who works, continuously or intermittently in the UK for at least 40 days in the relevant tax year, for at least three hours a day has a work tie, paras 35 and 36. In this context, ‘work’ encompasses everything in connection with work, including training and travel time. (4) 90-day tie – A person who has spent more than 90 days in the UK in either of the two preceding tax years has a 90-day tie. It is not necessary for the individual to have been UK resident in those years, only to have exceeded the 90-day threshold (para 37). (5) Country tie – Where a person has been UK resident in any of the three previous tax years and who spent more days in the UK measured at midnight than in any other single country in the tax year in question. This tie is relevant only to someone leaving the UK, making it more difficult to lose UK residence status than to acquire it (para 38). 240

Residence and Domicile 5.11

Day counting 5.9 The day counting rules applicable to the UK ties test include an additional anti-avoidance provision to counter the risk of abuse of the ‘midnight’ rule. The anti-avoidance rule will apply where the individual was resident in at least one of the preceding three tax years, has three or more ties with the UK and there were more than 30 days in the tax year in which the individual was present in the UK at some point during the day, but had left the UK at midnight. Where the anti-avoidance rule applies, all days spent in the UK above the first 30 days are counted as days of UK presence, irrespective of whether the individual was present in the UK at midnight. 5.10 Once the number of UK ties has been established for a particular tax year, the number of days spent in the UK will determine whether or not the individual is UK resident for that year. The day-count element of the UK ties test has to be considered slightly differently depending on whether the taxpayer is a ‘leaver’ or ‘arriver’ (paras 18–20). Arrivers Days spent in the UK

Impact of ties on residence status

Fewer than 46 days

Always non-resident

46–90 days

Resident if four ties (otherwise not resident)

91–120 days

Resident if three or more ties (otherwise not resident)

121–182 days

Resident if two or more ties (otherwise not resident)

183 days or more

Always resident

Leavers Days spent in the UK

Impact of ties on residence status

Fewer than 16 days

Always non-resident

16–45 days

Resident if four ties (otherwise not resident)

46–90 days

Resident if three or more ties (otherwise not resident)

91–120 days

Resident if two or more ties (otherwise not resident)

121–182 days

Resident if one or more ties (otherwise not resident

Split years 5.11 For leavers, split-year treatment will enable a taxpayer to be treated as non-UK resident from the date of departure if he leaves to work full time overseas, or leaves to live abroad and ceases to own a home in the UK and also spends fewer than 16 days in the UK. A person arriving in the UK will become UK resident from the date he acquires a home in the UK, or starts

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5.12  Residence and Domicile full-time work in the UK or comes to live in the UK. Split-year treatment will apply automatically, unless the taxpayer elects for it not to apply (paras 39–56). Accompanying spouses may also be able to claim split-year treatment, subject to certain conditions.

Commencement 5.12 The statutory residence test applies for all tax years from 2013/14. As a person’s residence position in the three preceding tax years may be relevant to the current year (eg  in relation to the automatic overseas test), there is a transitional provision which enables a taxpayer to elect for the new rules to apply to the assessment of their residence status in any one or more of the three preceding years before 2013/14. Key concepts are defined in paras 21–31. There are special charging rules for employment income (paras 57–73) and trading income (paras 74–91), capital gains (paras 92–101) and trustees (paras 102–108). There are anti-avoidance rules in paras 109–115 and consequential amendments in paras 116–159.

Residence before 6 April 2013 5.13 Prior to 6 April 2013 there was no statutory definition of ‘residence’ in the Taxes Acts, and HMRC practice (published in HMRC6 from 6 April 2009) was largely based on case law. It was normally necessary to be physically present in the UK at some time in the tax year in order to be resident. However, in Rogers v Inland Revenue (1879) 1 TC 255 a mariner who had a home in the UK was held resident even though he was not present in the UK at any time during the fiscal year. At law, a person resident in the UK for any part of the year is resident for the entire year (Neubergh v IRC [1978] STC 181; Mitchell v IRC (1933) 18 TC 108; Gubay v Kington [1984] STC 99). By concession (ESC A11), split-year treatment applied in certain circumstances. 5.14 Although it was possible to be resident in the UK in a year in which there was no physical presence, where the taxpayer was actually living abroad (in California) during the entire fiscal year he was held not to be resident in the UK (Reed v Clark [1985]  STC  323). The HMRC rule of thumb was that any person physically present in the UK for 183 days or more in the tax year was resident and there were no exceptions to this rule. However, in such circumstances the taxpayer could still be dual resident, if resident under the rules in another country, eg under US rules, a period of 183 days in the USA in a calendar year makes the person resident but the 183 days is calculated on the basis of 100% of the days in the calendar year, a third of the days in the preceding calendar year, and a sixth of the days in the year before that. Where there is residence in two countries, the taxpayer is either dual resident or treated as resident in one country and not the other for the purposes of a double taxation 242

Residence and Domicile 5.16 treaty (see below). A person resident in the UK under the 183-day rule could therefore be treated as non-resident under a double taxation treaty. 5.15 In counting the 183 days, days of arrival and departure were normally ignored for tax years up to and including 2007/08, except in the case of the concessionary split-year treatment under extra-statutory concession (ESC) A11 or D2. With effect from 6 April 2008, a day on which the individual was present in the UK at midnight was treated as a day of presence, subject to a limited exception for those in transit through the UK (FA 2008 s 24). A person was ordinarily resident where he or she normally lived. If this was outside the UK, the taxpayer may have been UK resident in the tax year through spending more than 183 days in the UK during the fiscal year, but not ordinarily resident as not normally living in the UK. 5.16

HMRC6 emphasised (at para 12.23) that:

‘The number of days you are present in the country is only one of the factors to take into account when deciding your residence position … You should always look at the pattern of your lifestyle when deciding whether you are resident in the UK. Things you should consider would include what connections you have to the UK such as family, property, business and social connections. Just because you leave the UK to live or work abroad does not necessarily prove that you are no longer resident here if, for example, you keep connections in the UK such as property, economic interests, available accommodation and social activities. For example, if you are someone who comes to the UK on a regular basis and have a settled lifestyle pattern connecting you to this country, you are likely to be resident here.’ HMRC6 stated (at para 2.2): ‘There are many different factors which will determine whether you are resident in the UK during a tax year. With one exception (explained in the next paragraph) it is not simply a question of the number of days you are physically present in the UK during a tax year although this is an important consideration. The only occasion when the number of days that you are physically present in the UK will determine your residence status is when you are here for 183 days or more during a tax year. If you are here for 183 days or more in a tax year, you are resident in the UK. There are no exceptions to this. You can also be resident in the UK if you are present here for fewer than 183 days in a tax year. This will depend on how often and how long you are here, the purpose and pattern of your presence and your connections to the UK. These might include the location of your family, your property, your work life and your social connections.’ 243

5.17  Residence and Domicile And at para 2.2.1: ‘When you count the number of days that you have been present in the UK during a tax year you must include all of the days in which you have been in the UK at the end of the day (that is, midnight). It is the number of days counted in this way that is important, not the number of visits you make to the UK. This applies from 6 April 2008. This is the general practice, but it will not necessarily be appropriate in all cases. If you spend very significant amounts of the year travelling internationally, you should keep a record both of the days you were present in the UK and of those days where you are here at midnight. Both will be factors when looking at the pattern and purpose of your visits. For tax years before 6 April 2008, you would not normally count any days on which you arrived in or departed from the UK.’ 5.17 A British subject who returned to the UK after living abroad for many years was held to be ordinarily resident on his return, in Elmhurst v IRC (1937) 21 TC 381. ‘Ordinarily resident’ meant that a person must have been habitually and normally resident in the UK apart from temporary or occasional absences of long or short duration (Shah v Barnet London Borough Council [1983] 1 All ER 226). 5.18 A  woman who was outside the UK from July 1919 until summer 1921, apart from four months staying in a hotel in 1920, was held to have remained ordinarily resident in the UK throughout (Reid v IRC  (1926) 10 TC 673). A British subject who had no fixed abode, but lived in the UK in hotels for between four and five months each year, was held to be both resident and ordinarily resident in the UK (Levene v IRC (1928) 13 TC 486). A widow who spent varying periods in the UK, from 40 to 177 days in each fiscal year, had been accepted as neither resident nor ordinarily resident for 1924/25, but for 1926/27 she was held to be both resident and ordinarily resident (Kinloch v IRC  (1929) 14  TC  736). A  director of a UK company who lived with his family in the Republic of Ireland was held to be resident in the UK in years in which he visited for 101 and 94 days respectively, generally staying at a hotel (Lysaght v IRC (1928) 13 TC 511). In Peel v IRC (1927) 13 TC 443 an average of 139 days spent in the UK each year by a British subject made him ordinarily resident, and a foreign national at school in the UK was held to be ordinarily resident in Miesgaes v IRC (1957) 37 TC 493. 5.19 The case law on those held to be resident includes a foreigner living in a yacht anchored in the UK (Bayard Brown v Burt (1911) 5 TC 667) and a foreigner with a hunting box available for his use in the UK, who stayed less than six months in any one tax year (Loewenstein v De Salis (1926) 10 TC 424). Conversely, a British subject living in hotels in the UK and abroad was held not to be resident in the UK in IRC  v Zorab (1926) 11  TC  289. A  similar 244

Residence and Domicile 5.21 decision was reached in IRC v Brown (1926) 11 TC 292, where the taxpayer had spent only two months in the tax year in the UK. A British actress making a temporary visit to the UK was held not to be resident in Withers v Wynyard (1938) 21 TC 724, but an Irish peer serving in the British Army and who lived in the UK in the course of his military duties was held to be resident, in Lord Inchiquin v IRC (1948) 31 TC 125. In Shepherd v RCC [2006] STC 1821 and Barrett v RCC [2008] STC (SCD) 268, the taxpayers both failed to establish that they had made a ‘distinct break’ with the UK which had resulted in their ceasing to be UK resident, as the courts found there was little difference in the pattern of their lives before and after leaving the UK. Conversely, in Grace v RCC [2008] STC (SCD) 531, the Special Commissioner held that a South African pilot who came to the UK to work and subsequently returned to Cape Town had left the UK for other than a temporary purpose, despite maintaining homes in both South Africa and the UK and continuing to work here. The Commissioner’s decision was overturned in the High Court ([2008]  EWHC  2708 (Ch)), where it was held inter alia that the taxpayer’s presence in the UK was not for a ‘temporary purpose’ as it formed a settled pattern of his life. The Court of Appeal in Grace v HMRC [2009] EWCA Civ 1082 referred the case back to the First-tier Tribunal. 5.20 ESC A11 applied where an individual came to the UK to take up permanent residence, or to stay for at least two years, or ceased to reside in the UK if he has left for permanent residence abroad. Liability to UK tax, which was affected by residence, was computed by reference to the period of his residence here during the year, provided that he was, prior to his arrival or after his departure, not ordinarily resident in the UK, except where on intended permanent emigration he actually returned to the UK before the end of the tax year following the tax year of departure. Under ESC A11 the fiscal year was split into two parts for income tax purposes: a period of residence for the part of the year spent in the UK, and a period of non-residence up to the day before the day of arrival or from the day following the day of departure. For capital gains tax purposes, the split-year treatment only applied, under ESC D2, when a person coming to the UK had not been UK resident in any of the five previous years of assessment and, if leaving the UK, was not resident or ordinarily resident for at least four of the seven fiscal years preceding the year of departure. 5.21 ESC A11 also applied where an individual went abroad under a contract of employment, and both the absence from the UK and the employment extended over a period covering a complete tax year and interim visits did not exceed 183 days in any tax year, or an average 91 days in a tax year (the average was taken over the period of absence, up to a maximum of four years). HMRC indicated that they would treat a day of presence as a day in which the taxpayer was present in the UK at midnight, except for limited exceptions relating to transit through the UK, although, in contrast to the 183-day test, there was no statutory basis for this. In these circumstances, the split-year 245

5.22  Residence and Domicile treatment could be applied. The limit on income chargeable on a non-resident individual under ITA 2007 s 811 did not apply to split-year periods. Leaving for permanent residence abroad implied a period of at least three years (IR20 para 1.6, HMRC6 para 8.1). 5.22 Short absences by somebody resident and ordinarily resident in the UK did not affect their resident status. This also applied to mobile workers in the UK who made frequent and regular trips abroad in the course of their employment or business (see Tax Bulletin, Issue 52, April 2001, pp 836 and 837). A  simple count of days of absence, including travelling days, was insufficient in these circumstances. 5.23 In order to be regarded as non-resident through working abroad, a taxpayer had to leave the UK to work full time under a contract of employment. In looking at the average number of days spent in the UK, days spent here because of exceptional circumstances were not counted (HMRC6 para  2.2). In such circumstances, the split-year conditions in ESC A11 were also met and the taxpayer was treated as non-resident and not ordinarily resident from the day after leaving to the day before return. ITA 2007 s 829 provided that an individual, who had been ordinarily resident in the UK, continued to be taxed as resident and ordinarily resident in the UK if he had left the UK for the purpose only of occasional residence abroad. In this connection, Reed v Clark [1985] STC 323 confirmed that an individual living and working abroad for a complete tax year was not, in such circumstances, absent for the purpose only of occasional residence abroad, and a similar decision was arrived at in IRC v Combe (1932) 17 TC 405 where a British subject was on a three-year apprenticeship with a US firm but spent substantial periods in the UK. 5.24 There were a number of tax cases involving the residence of taxpayers in the early 2000s. These include Robert Gaines-Cooper v RCC [2007] STC (SCD) 23 which was heard on 7 July 2006 by Special Commissioners Dr Nuala Brice and Charles Hellier. This case dealt with both residence and domicile issues, but only the domicile issues were appealed to the High Court in Robert Gaines-Cooper v RCC [2008] STC 1665 and the Court of Appeal refused leave to appeal. Shepherd v RCC  [2005]  STC (SCD) 644 was heard by Dr Nuala Brice on various dates between March and 20 June 2005, and was appealed to the High Court in Shepherd v RCC [2006] STC 1821 and heard by Lewison J on 12 May 2006. Barrett v RCC [2008] STC (SCD) 268 was heard by Adrian Shipwright between May and September 2007. Grace v RCC  [2008]  STC (SCD) 531 was heard by Dr Nuala Brice on dates up to 29  January 2008, and appealed by HMRC to the High Court, again before Lewison J, as RCC v Lyle Dicker Grace [2009]  STC  213 and the Court of Appeal in Grace v HMRC  [2009]  EWCA  Civ 1082. Genovese v RCC  [2009]  STC (SCD) 373 was heard by Special Commissioner John Clark on 18  March 2009. In the First-tier Tribunal decision in Hankinson v RCC [2009] UKFTT 384 (TC), the judge gave a lengthy judgment that the taxpayer was resident and ordinarily 246

Residence and Domicile 5.28 resident in the UK under domestic law and, under the UK/Netherlands double taxation treaty, that the discovery assessment was validly made and that the same conclusion would have been reached had IR20 bound the Tribunal. 5.25 Mr Gaines-Cooper’s non-residence claim was subject to judicial review, as was Davies and Another v RCC [2008] EWCA Civ 933, and both cases were heard together by the Court of Appeal in October 2009 (R  (on the application of Robert John Davies and Michael John James), R  (on the application of Robert Gaines-Cooper) v RCC [2010] EWCA Civ 83 (referred to here as ‘Davies, James and Gaines-Cooper CA’) but the taxpayer lost.

Temporary visitors 5.26 Prior to the introduction of the statutory residence test, a temporary visitor to the UK was not liable to tax on foreign income on remittances, unless he had spent 183 days in the UK in any tax year (ITA 2007 s 831). The 183day period in ITA  2007 s  831 was calculated exactly (Wilkie v IRC  (1951) 32 TC 495). Days of arrival and departure were generally ignored for periods prior to April 5, 2008. From 2008/09, the day of arrival was included as a day of presence in the UK for the purposes of the 183-day (ITA 2007 s 832) test, unless either the individual left the UK on the same day or the transit rule applied. HMRC adopt the same practice in relation to the non-statutory 91-day average test which applied for tax years up to 2012/13.

Ordinary residence 5.27 The concept of ordinary residence was abolished from 6 April 2013 by FA  2013 s  219 and Sch  46. As with residence (pre-6  April 2013), there was no statutory definition of ordinary residence and it was held in the case of Lysaght v IRC (1928) 13 TC 511 to be the converse of casual or occasional residence. It was therefore treated as meaning, in the normal course of events, that the taxpayer was resident for substantial periods of time in the UK. For example, in Kinloch v IRC (1929) 14 TC 736, it was held that a widow who lived mainly in hotels and had spent substantial periods in the UK to visit her son at school, was ordinarily resident. See also Peel v IRC (1927) 13 TC 443; Miesegaes v IRC (1957) 37 TC 493; Reid v IRC (1926) 10 TC 673 and Elmhirst v IRC (1937) 21 TC 381; also R v Barnet LBC Ex p Shah, The Times, July 21, 1980 and Cicutti v Suffolk CC, The Times, July 30, 1980.

Dual residence 5.28 Because the UK, in common with many other countries, will treat a taxpayer as resident in cases where he is habitually in the country for periods 247

5.29  Residence and Domicile of less than 183 days, it will be appreciated that it is perfectly possible for a taxpayer to be resident in two or more countries in the course of a single tax year, and thus become dual resident. This means that he may be liable to tax in both countries, perhaps on his worldwide income in both countries. This problem is frequently overcome under a double taxation treaty which is a bilateral agreement between the two countries in question, under which the taxpayer is regarded as fiscally resident in one country but not the other. This is frequently known as a tie-breaker clause and residence under such a provision depends on the country in which the taxpayer has the permanent home, or if in both countries, where his centre of vital interests (ie  his main social and economic interests) is; and if in both countries, in the country of which he is a national, unless he is a national of both countries or neither, in which case the tax authorities of both countries have to sort out his fiscal residence. This is one of the few cases where nationality has a bearing on UK taxation. 5.29 A double taxation treaty may also provide that income is taxable only in the country in which the taxpayer is resident or in which the income arises, which is particularly common in the case of rents from immovable property. The UK does not give an exemption to income that is subject to foreign tax under a treaty or local domestic law but will give a credit for UK income tax or capital gains tax on the same income or gain under TIOPA 2010 ss 2–6, 18, 134 where there is a double taxation treaty or s 790 where there is no treaty and the relief is given unilaterally. An international treaty normally overrules UK domestic legislation (Australian Mutual Provident Society v IRC (1947) 28 TC 388; TIOPA 2010 s 18 (TA 1988 s 788(3)).

Domicile 5.30 Domicile is the concept of English law used to determine the system of law with which a person is most closely connected in his private capacity and governs, for example, the legitimacy of children, marriage, divorce and the devolution of the estate on death by will or on intestacy. As such it is a concept of private international law and, unlike residence, a person can have only one domicile at any time, for any particular purpose. Domicile is a very important concept of UK taxation because a territorial system of taxation is applied to UK residents domiciled outside the United Kingdom of Great Britain and Northern Ireland, ie England and Wales, Scotland and Northern Ireland, each of which has its own system of law. (There is no general separate system of law for Wales.) The UK does not include the other British isles, ie the Isle of Man or the Channel Islands, Jersey and the Bailiwick of Guernsey. Where the tax legislation refers to domicile in the UK, eg  ITTOIA  2005 s  831(3) and ITEPA 2003 s 22 or IHTA 1984 ss 18, 48 and 267, it is generally thought that this refers to domicile in any of the constituent territories of the UK and does not create a separate transnational domicile in the UK itself. For UK tax purposes, it does not make a difference whether an individual is 248

Residence and Domicile 5.34 domiciled in England, Scotland or Northern Ireland. An interesting example of the effects of domicile on inheritance under different jurisdictions was Al’Bassam v Al’Bassam [2004]  WTLR  157. Recent tax cases before the Special Commissioners are Allen and Hateley (as executors of Johnson dec’d) v HMRC  [2005]  SWTI  1264, Shepherd v HMRC  [2005]  SWTI  1267 and Gaines-Cooper v RCC [2007] EWHC 2617 (Ch). 5.31 Domicile is not the same as nationality and a person can be domiciled outside the UK and still be a British citizen under the British Nationality Act 1981 as amended by the Immigration Asylum and Nationality Act 2006 and the Borders, Citizenship and Immigration Act 2009. British citizenship may be acquired by birth or adoption, descent, registration or naturalisation but is not normally of importance for UK tax purposes except in the case of the tie-breaker clause on residence in certain double taxation treaties. Other countries may not attach any importance to domicile, in the English law sense, for taxation treaties, but instead rely on either residence or citizenship or a combination of the two. 5.32 Domicile is linked to a system of law rather than a particular country so that a person is domiciled in, for example, Texas or California not the USA and New South Wales or Queensland not Australia; although there are exceptions in that, for example, divorce may be governed by federal law in some jurisdictions, such as Australia and Canada, not by state or provincial law. The cornerstone of domicile is the place where a person has their permanent home (Winans v A-G [1904] AC 287). Dicey & Morris on the Conflict of Laws (15th edition, Sweet & Maxwell, 2012) states: ‘A  person may be said to have his home in a country if he resides in it without any intention of, at present removing from it permanently or for an indefinite period. But a person does not cease to have his home in a country merely because he is temporarily resident elsewhere, and a person who has formed the intention of leaving a country does not cease to have his home in it until he acts according to that intention …’ 5.33 The English law of domicile is a common law concept, modified in the case of married women and children by Part I of the Domicile and Matrimonial Proceedings Act (DMPA) 1973. There have been proposals to reform the law of domicile following the English and Scottish Law Commissions’ reports (Nos 168 and 107) in 1987, and significant changes to the taxation of foreign domiciliaries have been introduced over recent years, first by FA  2008 for 2008/09 and later years and by F(No 2)A 2017 from 6 April 2017. 5.34 Just as a person cannot have more than one domicile for the same purpose at any one time, he cannot be without a domicile (Udny v Udny (1869) LR 1 Sc & Div 441; Bell v Kennedy (1868) LR 1 Sc & Div 307). Once determined, a person’s domicile remains until a new domicile is acquired. 249

5.35  Residence and Domicile Therefore, the burden of proving a change of domicile lies on those who assert it (Winans v A-G [1904] AC 287; Ramsey v Liverpool Royal Infirmary [1930] AC 588; Re Estate of Fuld (No 3) [1968] P 675). It appears that the change of a domicile of origin, like a change of a domicile of choice, may be proved on the balance of probabilities (Re Cartier [1952] SASR 280 at 291; Barlow Clowes International Ltd and Others v Henwood [2008] EWCA Civ 577 paras 84–95). Domicile for English purposes is determined in accordance with English law, not that of the foreign country involved (Collier v Rivaz (1841) 2 Curt 855; Re Annelsey [1926] Ch 692). A recent case confirming the adhesive nature of the domicile of origin is Cyganik v Agulian and Another [2006]  EWCA  Civ 129, which cites with approval the succinct statement in Re Estate of Fuld (No 3) (1965) 3 MER776 that ‘a domicile of choice is acquired when a man fixes voluntarily his sole or chief residence in a particular place with an intention of continuing to reside there for an unlimited time’. Longmore LJ commented (at para 53) that ‘all the cases state that a domicile of origin can only be replaced by clear, cogent and compelling evidence that the relevant person intended to settle permanently and indefinitely in the alleged domicile of choice’. He continued (at para 56), ‘it is easier to show a change from one domicile of choice to another domicile of choice than it is to show a change to a domicile of choice from a domicile of origin’. At para 58 he quoted Dr J H C Morris on the concept of domicile in the last edition of his Conflict of Laws (1984), which he wrote before he died: ‘Originally it was a good idea; but the once simple concept has been so overloaded by a multitude of cases that it has been transmuted into something further and further removed from the practicalities of life’. His Lordship commented, ‘This observation has not been preserved by subsequent editors … but it deserves to be’. 5.35 In Barlow Clowes International Ltd and Others v Henwood [2008] EWCA Civ 577, Lady Justice Arden (at para 96) stated: ‘I  would respectively disagree with the following dictum of Longmore LJ in Agulian … in so far as it lays down any general rule of law: “It is easier to show a change from one domicile of choice to another domicile of choice than it is to show a change to a domicile of choice from a domicile of origin”.’ Lord Justice Moore-Bick agreed, stating (at para 141): ‘I agree with Arden LJ that the weight of evidence required to displace the domicile of origin where that has revived merely by operation of law is no greater than that which is required to displace an existing domicile of choice.’ Arden LJ stated (at para  94) that ‘what evidence is required in a particular case will depend on the application of common sense to the particular circumstances’. 250

Residence and Domicile 5.38

Domicile of origin 5.36 A  legitimate child whose father is alive at birth takes his father’s domicile at the time of his birth (Udny v Udny (1869) LR 1 Sc & Div 441; Forbes v Forbes (1854) Kay 341). If the father has died at the date of birth, or if the child is illegitimate, he takes his mother’s domicile of origin at the time of the birth (Udny v Udny (1869)  LR  1 Sc & Div 441; Urquhart v Butterfield (1887) 37 ChD 357). The position in general law is different in Scotland, where legitimacy is no longer a factor in determining domicile for children under the age of 16 following the Family Law (Scotland) Act 2006, and a child’s domicile is considered to be wherever he has the closest connection. A  foundling has his domicile of origin in the country in which he was found (Re McKenzie (1951) 51  SRNSW  293). The domicile of origin can only be changed by adoption in which case the adoptive father’s domicile displaces the birth domicile, which otherwise remains throughout life, although it may be displaced by a domicile of choice. It will be appreciated that if a domicile of origin is not displaced, it may pass from generation to generation, such that the person in question need have no direct contact with the place of his domicile (Peal v Peal (1930) 46 TLR 645; Re O’Keefe [1940] Ch 124). 5.37 If a legitimate child is born after his parent’s divorce it is unclear whether his domicile of origin is that of his father or mother. Where the parents are separated the child has, as his domicile of origin, that of his father, but immediately acquires his mother’s domicile as a domicile of dependence (DMPA 1973 s 4). If the father has died at the time of the birth, it is assumed that the child acquires his mother’s domicile as a domicile of origin at birth. The adopted child is statutorily deemed to be a legitimate child of the adopters under the Adoption Act 1976 s 39(1),(5). A domicile of origin was held to be more difficult to displace than a domicile of choice in (Douglas v Douglas (1871) LR 12 Eq 617; Re James (1908) 98 LT 438) although this may no longer be the case; see 5.52 above. A person who leaves the country of his domicile of origin with the intention not to return, nonetheless retains his domicile of origin until it is displaced by a domicile of choice. F(No 2)A 2017 ss 29, 30 introduce a rule whereby a UK domicile of origin which has been displaced by a domicile of choice overseas reasserts itself for tax purposes if the individual subsequently becomes UK resident, notwithstanding that under general law the individual retains a non-UK domicile of choice. This applies for 2017/18 and later years.

Domicile of choice 5.38 A person who is legally capable of doing so, may acquire a domicile of choice in a territory by actually residing there and having the intention of staying permanently or indefinitely (IRC  v Duchess of Portland [1982] 251

5.39  Residence and Domicile Ch  314). There is no particular requirement as to length of residence in order to establish a domicile of choice, physical presence and intention being sufficient (Bell v Kennedy (1868)  LR  1 Sc & Div 307; Fasbender v A-G  [1922] 1 Ch  232; Miller v Teale (1954) 92 Ch  406). There is no requirement to own property in a territory in order to become domiciled there (Levene v IRC  [1928]  AC  217; Stone v Stone [1958] 1  WLR  1287; IRC  v Lysaght [1928]  AC  234). Physical presence as a visitor, rather than as an inhabitant, is insufficient to support a new domicile of choice (IRC v Duchess of Portland [1982] Ch 314). 5.39 The question of retaining property in the country of origin while maintaining a new domicile of choice is difficult, in that it may not be easy to show the requisite intention to reside permanently or indefinitely elsewhere while retaining a place of abode in the territory of the domicile of origin. If, however, the main residence is in the new territory and only a pied à terre is retained in the territory of the previous domicile, it may still be possible to prove the necessary intention to reside permanently or indefinitely in the new territory (Udny v Udny (1869)  LR  1 Sc & Div 441; Peters v Pinder (2009) 12 ITELR 137). A domicile of choice cannot be acquired by illegal residence (Re Abdul Manan [1971] 1 WLR 859; R v Governor of Pentonville Prison, ex p Azam [1974] AC 18). 5.40 An intention to stay in a country for a fixed period or for a definite purpose is insufficient to support a change in domicile (Gulbenkian v Gulbenkian [1937] 4 All ER 618). If a person leaves the country of the domicile of choice without having the intention to return, his domicile of origin revives unless or until a new domicile is acquired (Udny v Udny (1869) LR 1 Sc & Div 441; Bradfield v Swanton [1931] IR 446). Domicile of choice is not lost merely by giving up the residence without having the intention not to return (Bradford v Young (1885) 29 ChD 617), nor is a domicile of choice lost merely by giving up the intention to remain permanently or indefinitely without actually leaving (Zanelli v Zanelli (1948) 64 TLR 556). A vague intention to move is ignored (Re Estate of Fuld (No 3) [1968] P 675; IRC v Bullock [1976] 1 WLR 1178; Re Furse [1980] 3 All ER 838). A domicile of choice is not acquired where there is a definite intention to leave the country at some time, even though the date of leaving may be indeterminate (Jopp v Wood (1865) 4 De GJ & Sm 616; IRC v Bullock [1976] 1 WLR 1178). 5.41 The Court of Appeal had to consider Mr Henwood’s domicile in Barlow Clowes International Ltd and Others v Henwood [2008] EWCA Civ 577. This case revolved around whether or not Mr Henwood was domiciled in England and Wales on 19  December 2005, being the date on which the appellants presented a bankruptcy petition against him. Under Insolvency Act 1986 s 265 a bankruptcy order could only have been made against him by the courts in England and Wales if he was domiciled here on that date. Lord Justice Waller summarised the position as follows: 252

Residence and Domicile 5.42 ‘there is no issue that Mr Henwood had a domicile of origin in England. He then acquired a domicile of choice in the Isle of Man. Unlike a domicile of origin, a domicile of choice can simply be abandoned by giving up residence and no longer having the requisite intention or it can be abandoned by acquiring another domicile of choice. Mr Henwood’s case was abandonment by acquisition of another domicile of choice in Mauritius in 1992 but the evidence did not establish the acquisition of a domicile of choice in Mauritius in 1992. The evidence did however establish abandonment of his domicile of choice in the Isle of Man. Thus his domicile of origin revived. The evidence simply did not establish that Mr Henwood had ever finally made a choice as between France and Mauritius as to which if either was to be his permanent home … A domicile of choice can be abandoned and if abandoned the domicile of origin revived … because his domicile of origin revives there is no compulsion to find the acquisition of another domicile of choice. The question then is whether the evidence ever established that Mr Henwood thereafter acquired a domicile of choice anywhere and in particular whether he could establish Mauritius as opposed to France. The evidence did not establish the requisite intention.’ Lady Justice Arden (at para 118 onwards) stated: ‘I start with the position immediately following Mr Henwood’s departure from the Isle of Man in 1992. There can be no doubt that he would in all the circumstances have abandoned his domicile of choice there. He himself asserted that he no longer had the intention to reside there permanently or indefinitely. The evidence was that he went to Mauritius in 1992 to take up an offer of employment (which was not long-lived) and that he leased a property on an experimental basis. It would be absurd to suggest that immediately he left the Isle of Man Mr Henwood acquired a domicile of choice in Mauritius. He could only have acquired the relevant intention at some later date. Accordingly, at that point the default rule applied and Mr Henwood’s domicile was in law his domicile of origin … his evidence was that he would not have returned to live in England but the revival of a domicile of origin in these circumstances does not depend on any intention to reside … A person does not have to have a domicile of choice. In my judgment Mr Henwood failed to establish on a balance of probabilities that his domicile of choice was Mauritius.’ 5.42 Where a person becomes a naturalised citizen, this may be an indication of an intention to reside permanently or indefinitely, but it is not decisive. It is therefore possible to acquire a domicile of choice without becoming a naturalised citizen (Brunel v Brunel (1871)  LR  12 Eq 298; Winans v A-G  [1904]  AC  287). Conversely, taking up citizenship by means of naturalisation does not necessarily result in the acquisition of a domicile of choice (Wahl v A-G (1932) 147 LT 382; Re Estate of Fuld (No 3) [1968] P 675; Re Adams [1967]  IR  424). Naturalisation, however, cannot be ignored in 253

5.43  Residence and Domicile determining domicile (Bheekhun v Williams [1999] 2 FLR 229. However, for Mrs F and S2, personal representatives of F in F v IRC [2000] STC (SCD) 1, naturalisation, in the circumstances of the case, did not point to an intention to live in the UK permanently or indefinitely. It should be appreciated that statements made to the Home Office on naturalisation are available to HMRC, sometimes appearing inconsistent with a claim for the retention of a foreign domicile. In this case, it was decided that the statements to the Home Office were fuelled by a desperation to obtain a British passport and did not represent the deceased’s true intentions. On 30 September 2015 HM Treasury published ‘Reforms to the taxation of non-UK domiciles’, which proposes that from April 2017 those people who have been resident in the UK for 15 out of 20 years or had a UK domicile at birth will be deemed domiciled in the UK for all tax purposes. 5.43 In determining whether a person has acquired a domicile of choice in a new territory, every aspect of his lifestyle is potentially relevant in determining his intention. Residence by itself is unlikely to be sufficient to confirm the intention of remaining permanently or indefinitely (Ramsay v Liverpool Royal Infirmary [1930] AC 588). Case law on what may or may not give rise to a domicile of choice is extensive, but merely shows that each case has to be judged on its merits and no one factor is decisive. An individual who is alive and capable may give evidence as to his intention, but such statements are likely to be regarded by the court with a degree of scepticism. If, however, the declaration is entirely consistent with the facts, it could even be decisive (Wilson v Wilson (1872) LR 2 P & D 435). The motive in moving may itself give an indication of the intention. 5.44 A person may be physically present in a country through circumstances beyond his control, eg as a member of the armed forces or a diplomat, a prisoner or refugee, an employee seconded to the territory, an invalid, or person liable to deportation. In each case, physical presence in the territory is one part of the requirement for acquiring a domicile of choice, but the reasons for being there may make it unlikely that the intention has been formed to remain in the territory permanently or indefinitely, implying continued residence, once the requirement to be there has ceased. 5.45 A dependent person, normally a child, has the domicile of the person on whom he is dependent. Under DMPA  1973 s  3(1), the age at which a child ceased to have a domicile of dependence was reduced to 16 with effect from 1 January 1974. Before 1 January 1970, the age at which a child had a dependent domicile extended to 21 and was reduced to 18 by FLRA 1969 s 1(1). Prior to DMPA 1973, a married woman acquired her husband’s domicile on marriage. From 1 January 1974 this domicile could be retained as a domicile of choice and could, therefore, be changed independently of that of her husband. Mentally disordered people may also have a domicile of dependence. If there is 254

Residence and Domicile 5.50 no person on whom a child or mentally disordered person is legally dependent, then their existing domicile remains, until or unless they are able to exercise an independent domicile of choice. If a woman married after 1 January 1974, she may acquire her husband’s domicile as a domicile of choice or she may not, depending on the circumstances. Obviously, the marriage to the husband and where she is living is relevant to, but not determinative of, her domicile. Where spouses have different domiciles, it can lead to both tax advantages and disadvantages. The main disadvantage is the IHT restriction in IHTA 1984 s  18(2), which restricts the exempt transfer from a UK domiciled to a nonUK domiciled spouse in addition to the nil rate band, if unused, currently £325,000. 5.46 Legitimate unmarried children under 16 follow their father’s domicile as a domicile of dependence (Re Duleep Singh (1890) 6 TLR 385; Henderson v Henderson [1967] P 77). Children legitimated by their parent’s marriage would originally have the mother’s domicile as an illegitimate child, but acquire the father’s domicile on the parent’s marriage. 5.47 Where the child is illegitimate or the father is dead, the domicile of dependence is usually the same as that of the mother; orphans appear to be fixed with a domicile of dependence at the time of the last of their parents to die, until they reach the age of 16 or marry. An adopted child is treated in law as the legitimate child of his adoptive parents, and therefore acquires his adoptive father’s domicile of origin on adoption and follows his father’s domicile as a domicile of dependence. 5.48 Where the parents split up and the child has his home with his mother, and no home with his father, the child’s domicile is that of the mother. If the mother dies, the child retains her domicile at the date of death. In other cases, eg  where the child spends part of the time with each parent, he retains the father’s domicile as a domicile of dependence (DMPA 1973 s 4). 5.49 A  mentally disordered person cannot acquire a domicile of choice while he remains mentally disordered, and retains the domicile which he had when he began to be treated. A mentally disordered, dependent child retains his domicile of dependence beyond the age of 16. 5.50 The difficulty of displacing a domicile of origin with a domicile of choice is emphasised by cases such as Earl of Iveagh v Comrs [1930]  IR  386; IRC  v Cohen (1937) 21  TC  301; Re Clore (No  2), Official Solicitor v Clore [1984] STC 609; Re Lawton (1958) 37 ATC 216; Plummer v IRC [1987] STC 698; IRC v Duchess of Portland [1982] STC 149; Buswell v IRC [1974] STC 266; Anderson v IRC [1998] STC (SCD) 43; Gaines-Cooper v RCC [2007] EWHC 2617 (Ch). Cases where an English domicile of choice was held to be acquired include Steiner v IRC [1973] STC 547 and Re Furse, Furse v IRC [1980] STC 596. 255

5.51  Residence and Domicile 5.51 If a domicile of choice outside the UK is acquired and someone in such a situation then returns to the UK, the domicile of origin is likely to revive unless there is an intention not to return to the UK permanently or indefinitely. In Fielden v IRC  (1965) 42  TC  501 the English domicile of origin revived, but only several years after the return to the UK. In Re Shaffer, Morgan v Cilento [2004]  WTLR  457 the question was whether Sir Peter Shaffer had acquired a domicile of choice in Australia, having relocated there in 1982, or whether his English domicile of origin had not been abandoned or had been reacquired when he returned to England shortly before his death, having died in the UK. On the facts of this case, the Australian domicile of choice had not been abandoned. A  domicile of origin or choice acquired on marriage is not automatically displaced, with the domicile of origin reviving, on the death of the husband or the dissolution of the marriage (Re Wallach, Weinschenck v Treasury Solicitor [1950] 1 All ER 199; Faye v IRC (1961) 40 TC 103).

Deemed domicile before 6 April 2017 5.52 For IHT purposes, there has been a long-standing concept known as deemed domicile under which a person not domiciled in the UK at the relevant time, under the ordinary rules of domicile explained above, was nonetheless treated as domiciled in the UK, and not elsewhere, under IHTA 1984 s 267. This applied if he was domiciled in the UK within the three years immediately preceding the relevant time (IHTA 1984 s 267(1)(a)) or he was tax resident in the UK at any time in no fewer than 17 of the 20 years of assessment ending with the year of assessment in which the relevant time falls (IHTA  1984 s  267(1)(b)). Note that in the first case the three-year period commenced with the loss of a domicile within the UK under the ordinary rules, and ended with the third anniversary of that date, whereas the 17 out of 20-year period was by reference to years of assessment. Split-year treatment would have no application here, and a person resident at any time in a fiscal year would be deemed to be resident in that year, so the period of stay in the UK could be little more than 15 years for this provision to bite. Similarly, in order to escape this provision a period of non-residence of four complete fiscal years would have sufficed to start the clock again. 5.53 The deemed domicile provisions did not apply to certain UK securities held by non-domiciliaries under IHTA 1984 s 6(2) and (3) or such securities held by an interest in possession trust under IHTA 1984 s 48(4). Nor did they extend to the interpretation of certain old estates and gifts tax double taxation treaties under IHTA 1984 s 158(6) (IHTA 1984 s 267(2)). There was a specific exemption for non-domiciliaries at 9 December 1974 who have not subsequently acquired a UK domicile (IHTA  1984 s  267(3)). The ordinary income tax rules of residence apply (IHTA  1984 s  267(4)). The deemed 256

Residence and Domicile 5.57 domicile rules may be overridden by certain of the UK’s estate and gifts tax double taxation treaties. 5.54 From 6 April 2013 a person or his personal representative may elect to be treated as UK domiciled after seven years of UK residence or earlier if there is a UK domiciled spouse and an election is made under IHTA 1984 ss 261ZA and 261ZB or if the surviving spouse was UK domiciled.

Deemed domicile from 6 April 2017 5.55 A  consultation entitled ‘Reforms to the taxation of non-domiciles’ was published on 30 September 2015, stating: ‘The government intends that those individuals who live in the UK for a long time will pay UK tax on their personal foreign income and gains, as would an individual who is domiciled in the UK. The government also intends that any individual who is born in the UK and has a UK domicile of origin should not be able to claim non-domicile status while they are living in the UK, even if they have left the UK and acquired a domicile of choice in another country.’ 5.56 The September 2015 consultation document was followed by two policy papers in December 2015 and February 2016 entitled ‘IHT: Reforms to the Taxation of Non-domiciles’ and ‘Domicile: Income Tax and CGT’ respectively. At Budget 2016, the government confirmed its commitment to reforming the taxation of non-UK domiciliaries: ‘As announced at Summer Budget 2015, from April 2017 non-UK domiciled individuals (non-doms) will be deemed UK domiciled for all tax purposes after they have been UK resident for 15 of the past 20 tax years. Additionally, individuals who were born in the UK and who have a UK domicile of origin will revert to their UK domiciled status for tax purposes whilst resident in the UK. The government will also legislate to charge inheritance tax on all UK residential property indirectly held through an offshore structure from 6  April 2017. As set out at Summer Budget 2015, non-doms who have a non-UK resident trust set up before becoming deemed domiciled in the UK will not be taxed on income and gains retained in the trust. The government will legislate all non-dom reforms in Finance Bill 2017. Budget 2016 confirms that non-doms who become deemed-domiciled in April 2017 can treat the cost base of their non-UK based assets as being the market value of that asset on 6  April 2017. Individuals who expect to become deemed UK domicile under the 15 out of 20-year rule will be subject to transitional provision with regard to offshore funds to provide certainty on how amounts remitted to the UK will be taxed.’ 5.57 A  further consultation document ‘Reforms to the taxation of nondomiciles: further consultation’ was published in August 2016 and legislation 257

5.58  Residence and Domicile included in F(No  2) Act 2017 ss  29–30. The effect of the F(No  2)A  2017 changes is to expand the concept of deemed domicile to include not only inheritance tax but also income tax and capital gains tax. The deemed UK domicile rules apply irrespective of age and the deemed-domiciled status is not passed from a parent to their child. These changes mean that from April 2017 the £90,000 remittance basis charge will no longer be applicable. 5.58 There are two categories of deemed UK domicile applying from 6 April 2017. First, an individual who was born in the UK and having a UK domicile of origin will be deemed to be domiciled in the UK if they are UK resident for a tax year, notwithstanding that they have acquired a domicile of choice in another country (‘Condition A’ in ITA 2007 s 835BA(3), inserted by F(No 2)A 2017 s 29(1)). For inheritance tax purposes only (not income tax or capital gains tax), a one-year grace period applies, so that an individual will only be treated as deemed domiciled during the year of UK residence if they were also resident in the UK in either (or both) of the two tax years immediately preceding that year. Deemed UK domiciled status under Condition A is also significant from an income tax and capital gains tax perspective, as formerly domiciled residents who are deemed to be UK domiciled under Condition A are not eligible for the various ‘trust protections’ for foreign source income and gains arising to offshore trustees introduced for 2017/18 and later years as part of the reform of the taxation of non-UK domiciliaries. 5.59 From 6 April 2017, an individual who has been resident in the UK for at least 15 of the previous 20 tax years will regarded as deemed UK domiciled from the 16th tax year (Condition B, ITA  2007 s  835BA(4)). Condition B  deemed UK domiciliaries may benefit from certain trust protections for foreign source income and gains. These are described in more detail in Chapter 10. 5.60 For 2017/18 and later years, taxpayers who are deemed to be UK domiciled will be subject to income tax and capital gains on their worldwide assets in the tax year in which the income/gains arise. The remittance basis will not be available and overseas assets will be within the scope of inheritance tax.

Remittance basis from 6 April 2008 5.61 From 6 April 2008, a non-UK domiciled individual over the age of 18 who, from 6 April 2017 is not deemed to be UK domiciled must claim the remittance basis (ITA 2007 s 809B) through their self-assessment tax return each year, unless unremitted foreign income and gains for the tax year are below a de minimis threshold of £2,000, in which case the remittance basis will automatically apply (ITA 2007 s 809D). The remittance basis will also apply without the need to make a claim where the non-UK domiciled individual is either under the age of 18 during the relevant tax year, or has been resident 258

Residence and Domicile 5.65 in the UK for fewer than six out of the previous nine tax years, provided the individual does not have any UK source income or gains in the year and has not made a remittance of foreign income or gains (ITA 2007 s 809E). ‘Foreign income and gains’ comprise relevant foreign income (ITTOIA  2005 s  830), overseas earnings (ITEPA  2003 ss  22 and 26) and foreign chargeable gains (ITA 2007 s 809Z). 5.62 An annual charge applies for long-term resident non-UK domiciliaries over the age of 18 who claim the remittance basis of taxation (ITA  2007 s  809C). The remittance basis charge is £30,000 for non-UK domiciled individuals who have been resident in the UK for at least seven out of the previous nine tax years. For 2012/13 and subsequent years, the remittance basis charge increases to £50,000 for an individual who has been resident in the UK in at least 12 of the previous 14 tax years. From 2015/16 this charge increases to £60,000 and to £90,000 where a person has been UK resident for 17 out of 20 years. The £90,000 charge applied only for 2015/16 and 2016/17 following the introduction of the deemed UK domicile rules from 6 April 2017 by F(No 2)A 2017. It is the individual’s decision each tax year as to whether they wish to claim the remittance basis or suffer income and capital gains tax on their worldwide income and gains, however, for individuals with annual foreign income or gains in excess of the grossed up amount of the charge it will generally be to their advantage to claim the remittance basis and pay the charge. Remittances of foreign income and gains made during a tax year in which the individual chooses to be taxed on their worldwide income and gains on an arising basis will remain taxable in the year of remittance. There was a consultation in 2015 on whether to allow the remittance basis to be opted for on a three year instead of an annual basis, however, this was not pursued given the wider reforms to the taxation of non-UK domiciliaries introduced from 6 April 2017. 5.63 The remittance basis charge applies only where a claim is required for the remittance basis to apply; the charge is therefore not payable where the remittance basis applies automatically, such as where unremitted foreign income and gains are below the £2,000 de minimis threshold. 5.64 The remittance basis charge operates by treating as taxable on the arising basis sufficient unremitted foreign income or gains (net of any reliefs or deductions which may be due) to produce an additional tax liability for the year of the amount of the charge (ITA 2007 ss 809C, 809H). This additional liability on the ‘nominated’ foreign income and/or gains is subject to the same payment rules as any other tax due for the year, and is intended to be recognised as a payment of tax on income or gains for the purposes of double tax relief. 5.65 Where the ‘nominated’ foreign income or gains are subsequently remitted to the UK, no further tax will be charged on the remitted amount. However, there are detailed provisions specifying the order in which foreign 259

5.66  Residence and Domicile income and gains are treated as remitted, so that where the taxpayer remits nominated income or gains whilst other income or gains remain unremitted, the unremitted amounts are treated as having been remitted in priority to the nominated income/gains (ITA 2007 ss 809H and 809I). For 2012/13 and later years, where the cumulative total of nominated income and gains remitted to the UK up to the current year does not exceed £10, the above ordering rules do not apply. A remittance of foreign income and gains to pay the remittance basis charge is not treated as a taxable remittance if the payment is made directly to HMRC (ITA 2007 s 809V). 5.66 For tax years up to 2012/13, the remittance basis rules applied equally to foreign income (but not gains, which are taxed in the year they arise) of an individual who was UK resident but not ordinarily resident for a particular tax year. Ordinary residence was abolished from 6 April 2013, and from 2017/18 only non-UK domiciliaries who are neither deemed UK domiciled nor a formerly domiciled UK resident are able to claim the remittance basis. 5.67 Where an individual who has been resident in the UK for four out of the previous seven tax years becomes non-UK resident for a period of less than five complete tax years, foreign income remitted to the UK during the period of temporary non-residence will be subject to income tax in the tax year in which the individual returns to the UK (ITTOIA 2005 s 832A). 5.68 If a sizeable proportion of work is done overseas it may well be desirable for a non-UK domiciliary to enter into a foreign partnership within ITIOIA  2005 s  857 under which the income is taxable under ITTOIA  2005 Pt 8; or to enter into a contract of employment with a non-resident company, in which case the remuneration would be dealt with as earnings. This would be particularly appropriate in the case of a non-UK domiciled individual because in respect of income taxed under ITTOIA 2005 Pt 2 Ch 2, a non-UK domiciled individual has no advantage under UK tax law compared with a person domiciled in the UK being taxed on his worldwide profits, whereas remuneration from a non-resident company or partnership for services performed wholly abroad would be taxed only on remittance to the UK and not as the income arises (ITTOIA 2005 s 857; ITEPA 2003 ss 6, 7, 10, 20–41). Where the taxpayer has been resident in the UK for more than seven of the previous nine tax years, the advantage of taxation under the remittance basis must be balanced against the annual remittance basis charge cost of claiming it. Remittances from a ceased employment are taxable under ITEPA 2003 ss 17(1)–(3), 30(1)–(3). 5.69 Assessments on a remittance basis include not only direct remittances to the UK but also constructive remittances, such as the satisfaction of a debt incurred in the UK under ITTOIA 2005 s 833 or ITA 2007 s 809H. A cheque drawn on an American bank account was held to be a constructive remittance when sold to a UK bank (Thomson v Moyse (1960) 39  TC  291), as was a loan enjoyed in the UK (Harmel v Wright (1973) 49  TC  149). Remittances 260

Residence and Domicile 5.72 of the proceeds of foreign securities could be a remittance of capital if the securities were acquired before the taxpayer became resident in the UK (Kneen v Martin (1934) 19 TC 33), but not if purchased out of foreign income while the taxpayer was resident in the UK (Walsh v Randall (1940) 23 TC 55). There are specific provisions which treat a taxpayer as having made a remittance if money, property (such as artwork, antiques or cars) or services acquired using unremitted foreign income is brought into or otherwise used or received in the UK by or for the individual or another relevant person (ITA  2007 ss 809K–809Z6). A relevant person is: •

the individual themselves, that is, the person to whom the foreign income and gains belong;

•

the individual’s spouse or civil partner, or people living together as if they are spouses or civil partners;

•

the individual’s children or grandchildren under 18 years of age (this includes children/grandchildren of their spouse/civil partners);

•

trustees of a settlement, if the individual or other relevant person is a beneficiary of the trust;

•

close companies in which a relevant person is a participator (for example, a shareholder) and their subsidiaries; and

•

non-resident companies and their subsidiaries.

5.70 There are exemptions for assets brought into the UK for a temporary purpose, repair or for public display. Assets costing less than £1,000 and items for personal use (such as clothing, watches and jewellery) are also exempt from these remittance rules (ITA  2007 ss  809V–809Z6). The benefit of any exemption is lost if the asset is sold in the UK and a taxable remittance will arise at the time of sale. It should be noted that the above exemptions apply only to assets acquired out of unremitted foreign income: it does not extend to assets acquired out of unremitted foreign gains. 5.71 Transitional rules provided that assets acquired using untaxed foreign income and owned by the taxpayer or a relevant person at 11 March 2008 will not give rise to a remittance if brought into the UK at a later date, even if the asset was kept outside the UK on that date. Assets acquired using untaxed foreign income located in the UK at April 5, 2008 will also not give rise to a charge under the remittance basis for so long as the present owner retains the asset. 5.72 Specific rules apply dealing with remittances from funds comprising a mix of income or gains and capital (ITA 2007 ss 809P–809R). It had been HMRC’s practice to treat income as being remitted in priority to capital, on the basis that a person would exhaust their sources of income before utilising 261

5.73  Residence and Domicile capital, however, from 6 April 2008, the legislation provides a detailed process for identifying taxable remittances using broadly a ‘just and reasonable’ apportionment. A relaxation of the ‘mixed fund’ rules applied for 2017/18 and 2018/19 as part of the reforms of the taxation of non-UK domiciled individuals introduced by F(No  2)A  2017 ss  29–30 from 6  April 2017. The relaxation enabled individual taxpayers with funds comprising a mix of income, gains or capital to ‘cleanse’ the mixed fund by separating it into its constituent parts without crystallising a taxable remittance (F(No 2)A 2017 Sch 8 Pt 4). 5.73 If a non-UK domiciled individual is assessable on a remittance basis, it is important to ensure that, so far as possible, remittances to the UK are out of capital. This means that a taxpayer may require several bank accounts. The account containing his capital prior to becoming resident in the UK may be freely remitted. An account containing the proceeds of disposals of overseas investments could be remitted, but any chargeable gains element would be taxable on the remittance basis under TCGA  1992 s  12(1). However, the effective rate of tax applicable to capital gains may be less, as a result of the rate of tax of 10% (where entrepreneurs’ relief or investors’ relief applies) or 20% applying to gains (28% for gains on UK residential property and carried interest or 18% where gains fall within the basic rate threshold), than that applicable to income and, therefore, a remittance from such an account should normally be made in preference to a remittance of income, assessable under ITTOIA 2005 Pts 2–5. The capital gains tax rate for trusts is 20% (18%/28% for gains on UK residential property and carried interest) and distributions from offshore trusts may be liable to a surcharge; see 10.119 et seq.

Remittance basis up to 5 April 2008 5.74 There were no statutory rules concerning the ordering of remittances prior to the changes introduced from 6 April 2008. In HMRC’s view, where a remittance is made from a pre-2008 mixed fund, income is remitted in priority to capital in the absence of evidence to the contrary (RDRM36320, following Scottish Provident Institution v Allan (4 TC 409/591)). Planning opportunities for pre-2008 remittances included alienation of property, for example through the gift to a spouse who then makes a remittance to the UK (see Grimm v Newman [2002] EWCA Civ 1621). This strategy could be effective in avoiding a taxable remittance for the transferor provided no benefit arose to him/her from the spouse’s remittance. A remittance could also be avoided by remitting income to the UK after the source of the income had ceased, for example, by closing the overseas bank account which gave rise to interest income. Further, in order for there to be a remittance under the pre-2008 rules, the remitted funds had to take the form of cash. It was therefore possible to use offshore funds to acquire a non-cash asset such as a car and bring the asset to the UK without triggering a taxable remittance. The remittance rules introduced by Finance Act 2008 put an end to strategies such as these for remittances of 262

Residence and Domicile 5.78 income and gains after 6 April 2008, however the above provisions should be borne in mind where pre-2008 funds can clearly be identified.

Gifts overseas 5.75 In contrast to the position before 6 April 2008, a transfer of unremitted foreign income or gains to person falling within the category of ‘relevant persons’ will be treated as a taxable remittance by the taxpayer where cash, other property or services are brought into or provided in the UK (ITA 2007 ss 809L–809U). 5.76 Where the individual is not deemed to be UK-domiciled or a formerly domiciled UK resident, the gifts mentioned above can still be made free of inheritance tax, subject to the rules regarding UK residential property introduced by F(No  2)A  2017 s  33 and Sch  10 para  1 from 6  April 2017 (IHTA 1984 Sch A1). However, if the person is deemed domiciled in the UK for inheritance tax purposes under IHTA 1984 s 267, he would need to take advantage of the potentially exempt transfer provisions or other inheritance tax exemptions. 5.77 If a non-domiciled partner makes a gift from his (Jersey) bank account to his UK partners by transferring funds to their own (Jersey) bank accounts, such a gift would be excluded property for inheritance tax purposes. However, it would be necessary to ensure that the UK partners had not made a transfer of assets to the foreign partnership, or otherwise ITA 2007 ss 720–735 could cause the gifts to be assessable as income.

COMPANIES Company residence 5.78 A company incorporated in the UK is regarded for tax purposes as resident there under CTA 2009 s 14. This also applies to a company which is no longer carrying on any business or is being wound up outside the UK, if it was previously regarded as resident in the UK prior to cessation CTA 2009 ss 13– 15. CTA  2009 s  14 provides exceptions to this general rule, if immediately before 15 March 1988 a UK company was carrying on business but was not resident in the UK, either with Treasury consent or under the general consents under ICTA 1988 s 765, prior to 1 July 2009, FA 2009 s 37, Sch 17. If the company ceased to carry on business outside the UK, or ceased to be taxable in a territory outside the UK if it was resident abroad under a general consent, then it is treated as UK resident on the happening of either of those events (CTA 2009 Sch 2 para 13). Similarly, where a company was carrying on a trade before the commencement date, and emigrated pursuant to a Treasury consent, 263

5.79  Residence and Domicile it may be brought back into the UK tax net and treated as UK resident under CTA 2009 s 14 on cessation (CTA 2009 Sch 2 para 14). 5.79 The rule was again modified by CTA  2009 s  18(3) under which a UK incorporated company, which would not otherwise be regarded as resident in the UK for tax purposes, is treated as resident in another territory with which the UK has a double taxation agreement, where there is a tie-breaker clause giving priority to the company’s central management and control or place of effective management in the other territory (CTA 2009 s 18(1), (2)). In determining whether a company falls within these provisions and, although incorporated in the UK, is treated as resident outside the UK, it is assumed that the relevant claim for relief is made under the double taxation treaty and that such claim would give precedence to the overseas country (CTA  2009 s 18(4)). These provisions override CTA 2009 s 15 where a company became non-resident under these provisions for securing payment of outstanding tax. The company leaving a group provisions will not be triggered by reason of the fact that it ceased to be UK resident. Companies regarded as non-resident under CTA 2009 s 18 are known as treaty non-resident. 5.80 HMRC practice on company residence is given in SP  1/90 (INTM 120200), which provides (references updated) as follows: ‘Company residence 1

Residence has always been a material factor, for companies as well as individuals, in determining tax liability. But statute law has never laid down comprehensive rules for determining where a company is resident, and, until 1988, the question was left solely to the courts to decide. CTA 2009 ss 14, 15, Sch 1 introduced the rule that a company incorporated in the UK is resident here for the purposes of the Taxes Acts. Case law still applies in determining the residence of companies excepted from the incorporation rule or which are not incorporated in the UK.

A The Incorporation Rule 2

The incorporation rule applies to companies incorporated in the UK subject to the exceptions in CTA  2009 Sch  2 for some companies incorporated before 15 March 1988. Paragraphs 3 to 8 below explain how the Revenue interpret various terms used in the legislation.

Carrying on business 3

The exceptions from the incorporation test in CTA 2009 Sch 2 depend in part on the company carrying on business at a specified time or during a relevant period. The question whether a company carries on business is one of fact to be decided according to the particular circumstances of the company. Detailed guidance is not practicable but the Revenue take the view that “business” has a wider meaning 264

Residence and Domicile 5.80 than “trade”; it can include transactions, such as the purchase of stock, carried out for the purposes of a trade about to be commenced and the holding of investments including shares in a subsidiary company. Such a holding could consist of a single investment from which no income was derived. 4

A company such as a shelf company whose transactions have been limited to those formalities necessary to keep the company on the register of companies will not be regarded as carrying on business.

5

For the purposes of the case law test the residence of a company is determined by the place where its real business is carried on. A  company which can demonstrate that in these terms it is or was resident outside the UK will have carried on business for the purposes of CTA 2009 Sch 2.

“Taxable in a territory outside the UK” 6

A  further condition for some companies for exception from the incorporation test is provided by CTA  2009 Sch  2 para  15(1). The company has to be taxable in a territory outside the UK. “Taxable” means that the company is liable to tax on income by reason of domicile, residence or place of management. This is similar to the approach adopted in the residence provisions of many double-taxation agreements. Territories which impose tax on companies by reference to incorporation or registration or similar criteria are covered by the term “domicile”. Territories which impose tax by reference to criteria such as “effective management”, “central administration”, “head office” or “principal place of business” are covered by the term “place of management”.

7

A company has to be liable to tax on income so that a company which is, for example, liable only to a flat rate fee or lump sum duty does not fulfil the test. On the other hand a company is regarded as liable to tax in a particular territory if it is within the charge there even though it may pay no tax because, for example, it makes losses or claims double taxation relief.

“Treasury Consent” 8

Before 15 March 1988 it was unlawful for a company to cease to be resident in the UK without the consent of the Treasury. Companies which have ceased to be resident in pursuance of a Treasury consent, as defined in CTA  2009 Sch  2 para  15(1), are excepted from the incorporation rule subject to certain conditions. A  few companies ceased to be resident without Treasury consent but were informed subsequently by letter that the Treasury would take no action against them under the relevant legislation. Such a letter is not a retrospective grant of consent and the companies concerned cannot benefit from the exceptions which depend on Treasury consent. 265

5.80  Residence and Domicile B The Case Law Test 9

This test of company residence is that enunciated by Lord Loreburn in De Beers Consolidated Mines v Howe ((1905) 5  TC  198) at the beginning of the last century— “A company resides, for the purposes of income tax, where its real business is carried on … I regard that as the true rule; and the real business is carried on where the central management and control actually abides.”

10

The “central management and control” test, as set out in De Beers, has been endorsed by a series of subsequent decisions. In particular, it was described by Lord Radcliffe in the 1959 case of Bullock v Unit Construction Co (1959) 38 TC 712 at 738 as being— “as precise and unequivocal as a positive statutory injunction … I do not know of any other test which has either been substituted for that of central management and control, or has been defined with sufficient precision to be regarded as an acceptable alternative to it. To me … it seems impossible to read Lord Loreburn’s words without seeing that he regarded the formula he was propounding as constituting the test of residence.” Nothing which has happened since has in any way altered this basic principle for a company, the residence of which is not governed by the incorporation rule; under current UK case law such a company is regarded as resident for tax purposes where central management and control is to be found.

Place of “central management and control” 11 In determining whether or not an individual company outside the scope of the incorporation test is resident in the UK, it thus becomes necessary to locate its place of “central management and control”. The case law concept of central management and control is, in broad terms, directed at the highest level of control of the business of a company. It is to be distinguished from the place where the main operations of a business are to be found, though those two places may often coincide. Moreover, the exercise of control does not necessarily demand any minimum standard of active involvement: it may, in appropriate circumstances, be exercised tacitly through passive oversight. 12

Successive decided cases have emphasised that the place of central management and control is wholly a question of fact. For example, Lord Radcliff in Unit Construction said that “the question where control and management abide must be treated as one of fact or ‘actuality’” (1959) 38  TC  712 at 741. It follows that factors which together are decisive in one instance may individually carry little 266

Residence and Domicile 5.80 weight in another. Nevertheless the decided cases do give some pointers. In particular a series of decisions has attached importance to the place where the company’s board of directors meet. There are very many cases in which the board meets in the same country as that in which the business operations take place, and central management and control is clearly located in that one place. In other cases central management and control may be exercised by directors in one country though the actual business operations may, perhaps under the immediate management of local directors, take place elsewhere. 13

But the location of board meetings, although important in the normal case, is not necessarily conclusive. Lord Radcliffe in Unit Construction pointed out (1959) 38 TC 712 at 738 that the site of the meetings of the directors’ board had not been chosen as “the test” of company residence. In some cases, for example, central management and control is exercised by a single individual. This may happen when a chairman or managing director exercises powers formally conferred by the company’s Articles and the other board members are little more than cyphers, or by reason of a dominant shareholding or for some other reason. In those cases the residence of the company is where the controlling individual exercises his powers.

14

In general the place of directors’ meetings is significant only insofar as those meetings constitute the medium through which central management and control is exercised. If, for example, the directors of a company were engaged together actively in the UK in the complete running of a business which was wholly in the UK, the company would not be regarded as resident outside the UK merely because the directors held formal meetings outside the UK. While it is possible to identify extreme situations in which central management and control plainly is, or is not, exercised by directors in formal meetings, the conclusion in any case is wholly one of fact depending on the relative weight to be given to various factors. Any attempt to lay down rigid guidelines would only be misleading.

15

Generally, however, where doubts arise about a particular company’s residence status, the Revenue adopt the following approach— (i)

They first try to ascertain whether the directors of the company in fact exercised central management and control;

(ii) If so, they seek to determine where the directors exercise this central management and control (which is not necessarily where they meet); (iii) In cases where the directors apparently do not exercise central management and control of the company, the Revenue then look to establish where and by whom it is exercised. 267

5.80  Residence and Domicile Parent/subsidiary relationship 16 It is particularly difficult to apply the “central management and control” test in the situation where a subsidiary company and its parent operate in different territories. In this situation, the parent will normally influence, to a greater or lesser extent, the actions of the subsidiary. Where that influence is exerted by the parent exercising the powers which a sole or majority shareholder has in general meetings of the subsidiary, for example to appoint and dismiss members of the board of the subsidiary and to initiate or approve alterations to its financial structure, the Revenue would not seek to argue that central management and control of the subsidiary is located where the parent company is resident. However, in cases where the parent usurps the functions of the board of the subsidiary (such as Unit Construction itself) or where that board merely rubber stamps the parent company’s decisions without giving them any independent consideration of its own, the Revenue draw the conclusion that the subsidiary has the same residence for tax purposes as its parent. 17 The Revenue recognise that there may be many cases where a company is a member of a group having its ultimate holding company in another country which will not fall readily into either of the categories referred to above. In considering whether the board of such a subsidiary company exercises central management and control of the subsidiary’s business, they have regard to the degree of autonomy which those directors have in conducting the company’s business. Matters (among others) that may be taken into account are the extent to which the directors of the subsidiary take decisions on their own authority as to investment, production, marketing and procurement without reference to the parent. Conclusion 18

In outlining factors relevant to the application of the case law test, this statement assumes that they exist for genuine commercial reasons. Where, however, as may happen, it appears that a major objective underlying the existence of certain factors is the obtaining of tax benefits from residence or non-residence, the Revenue examine the facts particularly closely in order to see whether there has been an attempt to create the appearance of central management and control in a particular place without the reality.

19 The case law test examined in this Statement is not always easy to apply. The courts have recognised that there may be difficulties where it is not possible to identify any one country as the seat of central management and control. The principles to apply in those circumstances have not been fully developed in case law. In addition, the last relevant case was decided almost 30 years ago, and there have 268

Residence and Domicile 5.80 been many developments in communications since then, which in particular may enable a company to be controlled from a place far distant from where the day-to-day management is carried on. As the Statement makes clear, while the general principle has been laid down by the courts, its application must depend on the precise facts. C Double Taxation Agreements 20 In general our double taxation agreements do not affect the UK residence of a company as established for UK tax purposes. But where the partner country adopts a different definition of residence, it may happen that a UK resident company is treated, under the partner country’s domestic laws, as also resident there. In these cases, the agreement normally specifies what the tax consequences of this “double” residence shall be. 21 Under the double taxation agreement with the United States, for example, the UK residence of a company for UK tax purposes is unaffected. But where that company is also a US corporation it is excluded from some of the reliefs conferred by the agreement. On the other hand, under a double taxation agreement which follows the 1977 OECD Model Taxation Convention, a company classed as resident by both the UK and the partner country is, for the purposes of the agreement, treated as resident where its “place of effective management” is situated. 22

The commentary in Art 4 para  3 of the OECD  Model records the UK view that in agreements (such as those with some Commonwealth countries) which treat a company as resident in a state in which “its business is managed and controlled”, this expression means “the effective management of the enterprise”. More detailed consideration of the question in the light of the approach of Continental legal systems and of Community law to the question of company residence has led the Revenue to revise this view. It is now considered that effective management may, in some cases, be found at a place different from the place of central management and control. This could happen, for example, where a company is run by executives based abroad, but the final directing power rests with non-executive directors who meet in the UK. In such circumstances the company’s place of effective management might well be abroad but, depending on the precise powers of the non-executive directors, it might be centrally managed and controlled (and therefore resident) in the UK.

23

The incorporation rule in CTA  2009 ss  14, 15, Sch  1 determines a residence which supersedes a different place “given by any rule of law”. This incorporation rule determines residence under UK domestic law and is subject to the provisions of any applicable double taxation agreement. It does not override the provisions of a double 269

5.81  Residence and Domicile taxation agreement which may make a UK incorporated company a resident of an overseas territory for the purposes of the agreement (see paras 20 and 21 above).’ 5.81 The central management and control test is also applied in cases such as Calcutta Jute Mills Co Ltd v Nicholson (1876) 1 TC 83; Cesena Sulphur Co Ltd v Nicholson (1876) 1 TC 83; Imperial Continental Gas Association v Nicholson (1877) 1 TC 138; New Zealand Shipping Co Ltd v Stephens (1907) 5 TC 553 and New Zealand Shipping Co Ltd v Thew (1922) 8 TC 208; and Untelrab Ltd v McGregor (and related appeals) [1996]  STC (SCD) 1. This last case is interesting in that, what were previously non-UK incorporated and resident companies, were brought into the UK tax net by the appointment of UK directors and the resolution to hold future board meetings in the UK. Wood v Holden [2006]  STC  443 and News Datacom Ltd v Atkinson [2006]  STC (SCD) 732 contain a recent review of the relevant provisions. The importance of the role of the board as the ultimate controlling ‘brain’ of the company was emphasised in the case of Laerstate BV v HMRC [2009] SFTD 551, which was heard before the First-tier Tribunal. In that case, the role of the non-UK board was found to have been undermined by the UK resident sole shareholder who took the key strategic decisions regarding the company. The Tribunal found the board was merely following the shareholder’s directions, and did not operate as the ultimate controlling mechanism of the company. A contrary conclusion was reached by the Upper Tax Tribunal in Development Securities Plc and Others v HMRC [2019] UKUT 169 (TCC), where a number of Jersey-incorporated special purpose vehicles where set up by a UK parent company to carry out certain transactions designed to crystallise capital losses. Notwithstanding that the transactions the Jersey companies undertook were uncommercial, the Upper Tribunal held that the directors of the Jersey companies were required to act in the best interests of the shareholders, employees and creditors. In the absence of employees and creditors, it was only right that the directors acted in the interests of the UK parent company and carried out the transactions put to them. 5.82 The place where shareholders meetings are held is not necessarily the country of residence (A-G v Alexander (1874) LR 10 Exch 20). UK companies with overseas boards for specific purposes were held to be UK resident in American Thread Co v Joyce (1913) 6  TC  163 and in Egyptian Hotels Ltd v Mitchell (1915) 6  TC  542, although the overseas activities controlled by the foreign board in that case were held to be a foreign possession within Schedule D  Case V. It all depends on the relevance of the activities carried on by the directors in the UK or abroad (Aramyo Frincke Mines Ltd v Eccott (1925) 9 TC 445; John Hood & Co Ltd v Magee (1918) 7 TC 327 and Todd v Egyptian Delta Land and Investment Co Ltd (1928) 14 TC 119). In the latter case, the company’s only association with the UK was the appointment of a company secretary to comply with the requirements of the Companies Acts in the UK, and it was held to be non-UK resident. Companies can, under the central management and control test, be resident in more than one country 270

Residence and Domicile 5.84 (Swedish Central Rly Co Ltd v Thompson (1925) 9  TC  342; Union Corpn Ltd v IRC (1953) 34 TC 207). Most commonly, however, a company is dual resident by reason of being incorporated in a country which, as the UK now does, deems the place of incorporation to be determinative as to residence but is actually managed and controlled from another territory which, under the local rules or a double taxation treaty, treats the company as resident in that other territory. Dual residence can give opportunities for claiming deductions in both territories; conversely some double taxation treaties do not apply to dual resident companies. 5.83 A  company resident in the UK is in practice regarded as both resident and ordinarily resident (INTM120030). The only way in which a UK incorporated company can now become non-resident is under CTA 2009 s 18. In the view of HMRC, a shelf company formed by a company registration agent or professional firm and registered at their address has not yet established central management and control of their business anywhere, and has no residence other than under the incorporation rules, which would make a UK incorporated company resident in the UK (INTM120050). ‘Nowhere companies’ are those incorporated under a regime that recognises residence by reference to central management and control or some similar test, and which on this test are not resident in any particular country. UK incorporated nowhere companies have not been possible since 15 March 1993, under the incorporation rule, except for companies which became non-resident with Treasury consent under ICTA 1988 s 765 (INTM120050), prior to 1 July 2009. 5.84 Many double taxation treaties to which treaty non-residence may apply CTA  2009 s  18, refer to place of effective management rather than central management and control. Tax Bulletin, Issue 14, 14 December 1994 stated: ‘The term “place of effective management” has not been considered by UK courts. The commentary to the OECD model tax convention explains that it is the place where the company is actually managed. In practice, effective management is normally found in the same place as central management and control, but that is not always the case. In considering the place where the company is effectively managed, it is necessary to have regard to all the relevant facts including the organisation of the company and the nature of its business and to decide where it is, in substance, actually managed. In particular where the central management and control of a company was transferred from or to the UK, for instance by changing the place where decisions of the Board were made, it would not necessarily follow that the place of effective management would also be transferred, for instance if the place from which the company was actually managed remained the same.’ There is nothing to stop a company incorporated outside the UK becoming resident in the UK under the central management and control rule, subject to any double taxation treaty provisions (INTM120060). 271

5.85  Residence and Domicile 5.85 The provisions which inhibited the issue of shares by non-resident subsidiaries of UK resident companies under ICTA 1988 s 765 were repealed by FA 2009 s 37 and Sch 17 and replaced by reporting requirements. There are also tax charges that may arise on a company ceasing to be UK resident, as a capital gains exit charge is imposed by TCGA 1992 s 185, and there may be charges arising under CTA 2009 ss 162–170 or CTA 2009 ss 41 and 289, and arrangements have to be made for paying any tax that may be due under TMA 1970 ss 109B–109F. These provisions are, however, outside the scope of this book. There are also restrictions on dual resident companies as regards setting off losses by way of group relief, and carrying forward losses. Group chargeable gains may be chargeable and there may be capital allowance charges. These and other related provisions are outside the scope of this book but see the annual Corporation Tax publication by Bloomsbury Professional for further details.

Impact of company residence on trusts 5.86 The main importance of company residence for the purposes of trusts is twofold: first, where the company is a trustee, it is obviously relevant for the purposes of determining the residence of the trust; and, second, many trusts hold investments through underlying investment companies, and the tax liability of the trustees, the settlor and the beneficiaries can depend on the residence of such companies. In many cases, the company owning such investments is fairly passive, and it becomes extremely important to see whether the board has real control over the company, or is made up of what HMRC formerly referred to as ‘stooge directors’ recruited simply to give the appearance of control, although the reference has now been removed from the current International Manual (INTM120120). Stooge or nominee directors can give rise to serious trouble and there have been a number of criminal cases where taxpayers and their professional advisers, resident both in the UK and abroad, have been successfully prosecuted by HMRC under the common law offence of cheating the Public Revenue which was specifically preserved by Theft Act 1968 s 32. The offence of cheating the Public Revenue can be committed by an omission to act as well as a positive act of deception (R v Redford [1988] STC 845). In R v Charlton [1996] STC 1418 the professional advisers were charged and convicted and were duly imprisoned. The scheme depended on an independent Jersey resident company buying tyres and selling them at an uplifted price to the UK dealer. The success of the scheme depended on the Jersey company being resident in Jersey for tax purposes. However, the control of the Jersey companies had been retained by 272

Residence and Domicile 5.88 the potential beneficiaries, the directors of the UK companies. The companies that were supposed to be Jersey resident were therefore actually resident in the UK and had not complied with their responsibilities under the Corporation Tax Acts, as defined by ICTA  1988 s  831(1)(a). In the circumstances, this amounted to cheating the Public Revenue. 5.87 More recently, in R  v Dimsey [2001]  STC  1520 and R  v Allen [2001] STC 1537, the Jersey-based accountant and the UK resident taxpayer were convicted of cheating the Public Revenue. The facts were not dissimilar to those in R v Charlton and the question of whether or not the Jersey companies were resident in the UK was considered by the Court of Appeal (in R v Dimsey; R v Allen [1999] STC 846) where Laws LJ stated at 861: ‘… the factual issues in the case centred on the question of whether it was Dimsey who managed and controlled the companies with Chipping merely acting as a consultant who undertook work in England on behalf of the company. The Jury were presented with a simple choice, there was no subtle distinction between the functions of Dimsey and the functions of Chipping. So long as the prosecution could satisfy the Jury so that it was sure that Chipping was not a consultant but in fact not only undertook the day to day running of the business but made all the decisions, while Dimsey carried out the functions of the administration in Jersey, no sophisticated or difficult questions of central management and control arise.’ On this basis, the jury’s view that the Jersey companies were managed and controlled in the UK and were therefore liable to corporation tax secured the conviction on the grounds of conspiracy to cheat the Public Revenue. 5.88 In the House of Lords in R v Allen [2001] UKHL 45, [2001] STC 1537, the Hansard procedure under which HMRC used to agree not to prosecute if the taxpayer makes a full confession was considered at 1556. To the extent that there was an inducement contained in the Hansard statement, the inducement was to give true and accurate information to HMRC, but the accused in both cases did not respond to that inducement and, instead of giving true and accurate information, gave false information. Therefore, in the authors’ opinion, the appellant’s argument in this case that he was induced by hope of non-institution of criminal proceedings held out by HMRC to provide the schedule and that its provisions were therefore involuntary is invalid. However, in R  v Gill [2003]  EWCA  Crim 2256, [2003]  STC  1229 it was held by the Court of Appeal that a Hansard interview was governed by Police and Criminal Evidence Act 1984 s 69, and should have been given under caution and recorded. The court in this case held that this procedural breach had not had any adverse effect on the fairness of the proceedings. However, it caused the (then) Inland Revenue to suspend Hansard interviews for a time while new procedures were being worked out. The Hansard procedure was explained in its final guise in Tax Bulletin Issue 62, December 2002, pages 979–981 (PACE). PACE was 273

5.89  Residence and Domicile applied from late 2003 to September 2005 when a new Code of Practice 9 (COP9) was published, and what was basically the old Hansard system was rebranded as Civil Investigations which were dealt with by the Special Civil Investigations section of HMRC (SCI) established in 2005. From late 2015, SCI was rebranded as the Fraud Investigations Service Unit (FIS) and the team continues to deal with the most complex cases, with most being dealt with by specialist teams spread round the country. Complex technical investigations, where evasion is not suspected, are dealt with under Code of Practice 8 (COP8). Prosecution cases are handled by the Revenue and Customs Division of the Crown Prosecution Service. COP9 applies where HMRC suspect tax fraud and is a Contractual Disclosure Facility (CDF) which requires the taxpayer to admit that tax has been lost because of this or been deliberate conduct so that HMRC may seek recovery of tax, interest and penalties as far back as 20 years. A rejection may trigger a criminal investigation. 5.89 In the case of R (on the application of IRC) v Crown Court at Kingston [2001] STC 1615, Stanley Burnton J stated at 1622: ‘Before coming to the documents some general comments are called for. The first relates to the use of so called “nominee” directors, usually in offshore jurisdictions [the expression nominee director is to be avoided since it confuses directors who are nominated by shareholders and who properly carry out their responsibility as directors and those who are appointed by shareholders and only do as they are instructed by the person who appointed them]. It is a feature of modern commercial life that many companies have their place of residence in offshore jurisdictions purely in order to avoid tax which would be payable if the company were located in the UK. Corporate residence depends on the location of the central management and control of the company. Inevitably, persons who live onshore wish to own companies that reside offshore. For this purpose they may arrange for the appointment of directors of the company who themselves reside in the offshore jurisdiction in question. Notwithstanding the ultimate foreign ownership of the shares of the company, it will be resident for tax purposes in the offshore jurisdiction in question if the appointed directors genuinely determine its affairs in that jurisdiction. If however they simply obey the instructions of the ultimate owner of the company’s shares who remains in another jurisdiction the central management and control and therefore the residence of the company for the purposes of its tax liabilities will be the location of the ultimate owner of its shares. The difficulty here is to distinguish between the situation in which the directors act as mere ciphers simply doing as they are told by the ultimate owner of the company and the situation in which the directors have explained to them by the ultimate owner of the company’s shares that certain transactions are in the interests of the company and decide on the basis of the information given to them that the company should enter into them. In the latter situation the company can genuinely claim to be resident offshore; in the former situation its offshore 274

Residence and Domicile 5.92 residence is not genuine but a false sham. The line between them is a very nice one as the Revenue no doubt appreciate and as do those involved in the minimising of tax by locating companies in offshore jurisdictions including the professional directors of offshore companies. That line features large in the case against Mr John. It may be impossible for someone who is not present at the board meetings of a company and who is not told how the Board in fact takes its decisions to know on which side of the line the company operates. It is not alleged that Mr John attended board meetings of the target companies in Guernsey or that he was informed by their directors how they took their decisions. It is also necessary to comment on the use of pre-prepared minutes of Board meetings. Minutes of both Board and General meetings are often drafted in advance of the meetings to which they relate. There is nothing improper in the use of such drafts provided the meeting does deal with the business before it in the manner indicated in the draft and that in the case of board meetings the directors present do have the discussion and make the decisions indicated by the drafts. It is one thing for directors to take into account the wishes of the ultimate shareholder of the company or the advice of its advisers as indicated by a draft resolution; it is another for them to act without regard to the company’s interests or in their own judgement but solely because they are instructed to do so by their ultimate shareholder.’ 5.90 A  much more sophisticated structure was considered in R  v Hunt [1994]  STC  819 where again the charge of conspiracy to cheat the Public Revenue was upheld on the basis that the offshore companies were shams purporting to carry out numerous functions which, in fact, were carried out by other entities and that the documentation included false invoices and manufactured correspondence. While it appeared probable that the residence of the offshore companies was equally in doubt it was not a point that featured in the case.

Company domicile 5.91 The domicile of a company is not normally relevant for tax purposes, but would need to be considered for example where there is a corporate settlor of a trust and the trustees hold non-UK situs property. Generally a company is domiciled in its country of incorporation (Gasque v IRC (1940) 23 TC 210).

Partnerships 5.92 A  general partnership in England and Wales governed by PA  1890 is not a separate legal entity, although it is in Scotland. This also applies to a limited partnership under the Limited Partnerships Act 1907. A limited liability 275

5.93  Residence and Domicile partnership under the Limited Liability Partnerships Act 2000 is actually a corporate body but, like all partnerships in the UK, is fiscally transparent in most circumstances. This means that each partner is liable for taxation on his own share of profits, the self-assessment being at partner level not at the level of the partnership. It is quite common for trustees to be partners in a partnership, in which case the trustees would be taxed on their share of the partnership profits. Residence is therefore normally attached to the partners personally rather than to the partnership; the exception being a partnership controlled abroad. Under ITTOIA  2005 s  849(3), a non-resident partner is taxable in the UK on partnership profits made in the UK, so that if the partnership is trading worldwide, the non-UK profits are not subject to UK tax in the hands of a nonresident partner. Where a trade, profession or business is carried on in partnership wholly or partly outside the UK, and the control and management of the trade, profession or business is situated outside the UK, then any UK resident non-UK domiciled partners are taxed on their share of the partnership profits under ITTOIA 2005 Part 8 as if it were a possession outside the UK (ITTOIA 2005 s 857(1)–(3)). Where a partner changes his residence, he is treated as if he had ceased to be, and then immediately again became, a partner (ITTOIA 2005 s 852(6), (5)).

TRUSTS 5.93 The residence of a trust is determined for income tax purposes in accordance with ITA 2007 ss 474–476 and for capital gains tax by TCGA 1992 s 69. Prior to 6 April 2007 the residence of a trust would normally follow that of the residence of trustees.

Income and capital gains tax residence from 6 April 2007 5.94 Trustees of a settlement shall, except where the context otherwise requires, together be treated as if they were a single person distinct from the persons who are the trustees of the settlement from time to time (TCGA 1992 s 69(1), (3); ITA 2007 s 474(1)). ITA 2007 s 474(2) specifically provides that, if different parts of the settled property in relation to a settlement are vested in different bodies of trustees, they are treated as if they were all one body, and this includes, under section 474(3), cases under the Settled Land Act 1925 where the settled land is vested in the tenant for life, and investments representing capital money are vested in the trustees of the settlement. A  deemed single person representing the trustees is resident in the UK if all the trustees are UK resident (TCGA 1992 s 69(2), (2A); ITA 2007 s 475(1)–(4)). If at least one of the trustees is not resident in the UK, the residence of the trustees is 276

Residence and Domicile 5.99 determined by reference to the settlor. If the settlor was resident, ordinarily resident or domiciled in the UK at a time when the settlement was made, or if the settlement arose on the death of the settlor if he was so resident or domiciled immediately before his death the trust would be resident in the UK (TCGA 1992 s 69(2B), (2C); ITA 2007 ss 475, 476). The settlor is included within these provisions if there has been a transfer between settlements within ITA 2007 ss 470 and 471. 5.95 Where a professional trustee acts as trustee in the course of a business carried on in the UK through a branch, agency or permanent establishment, the trustee is deemed to be UK resident under TCGA 1992 s 69(2D) and ITA 2007 s 475(6). If the trustees are not treated as UK resident under these provisions, they are treated as not resident in the UK (TCGA 1992 s 69(2E); ITA 2007 s 475(3)). 5.96 HMRC’s Trustee Residence Guidance published in July 2009 (Appendix 5) (see TSEM10020), on whether or not a non-resident corporate trustee is carrying on a business in the UK through a permanent establishment, is based on whether or not the core activities of the trustee, rather than activities which are auxiliary or preparatory, are carried on in the UK. The core activities of a trustee would be regarded as including: (a)

the general administration of the trust;

(b) the overarching investment strategy; (c)

monitoring the performance of those investments;

(d)

decisions on how trust income will be dealt with and whether distributions should be made; and

(e)

accounting, making tax returns and record keeping.

5.97 A  non-UK trust company with an associated UK administrative company is not carrying on business in the UK provided that the UK company is neither a dependent agent nor carrying out its activities on other than arm’slength terms. 5.98 Prior to 6 April 2013 where the residence status of trustees changed during a tax year, HMRC treated the year as split into resident and not resident parts for income tax purposes. Following the introduction of the statutory residence test from 6 April 2013, an individual trustee who is resident in the UK is resident for every day in that year, including those days falling within the overseas part of the split year. 5.99 Split-year treatment does not apply for capital gains tax purposes. Therefore if the trustees are resident in the UK for any part of a tax year, gains arising at any time in that year will be chargeable to capital gains tax. 277

5.100  Residence and Domicile

Inheritance tax residence 5.100

For IHT purposes, the residence of the trustees is not a relevant factor.

Domicile of trustees 5.101 There does not appear to be any jurisprudence on the domicile of trustees as a body of persons and it does not appear to be relevant for any tax purposes. Where the beneficiary has an interest in possession as a life tenant or annuitant of a UK trust, the trustees’ income tax liability is based on the beneficiary’s domicile. The remittance basis, where it is available, applies to a non-UK domiciliary’s share of foreign income on the making of a claim unless unremitted foreign income and gains total less than £2,000 in a tax year. The remittance basis charge applies where the non-UK domiciliary has been resident in the UK for six out of the previous nine tax years and is over the age of 18. The exception from the remittance basis for income from the Republic of Ireland (ITTOIA 2005 s 831(5)) was removed by FA 2008 s 25, Sch 7, Pt 1, paras 46, 52 for 2008/09 and later years. Where the remittance basis applies, only income remitted to the UK is included in the trust and estate tax return under ITTOIA 2005 s 832 (Williams v Singer (1920) 3 TC 387; Archer-Shee v Baker (1927) 11  TC  749; TSEM3165). Similarly, where a UK trust has a non-resident beneficiary with an interest in possession, the trustees exclude from their foreign income the amount payable to the non-resident beneficiary (TSEM3160). Therefore, the share of the income from abroad payable to the non-resident beneficiary is limited to amounts remitted to the UK, provided that the beneficiary is a citizen of the Commonwealth or the Republic of Ireland (TSEM3170) (ITTOIA 2005 s 831). Trustees will also exclude, from the trust and estate tax return, income from exempt gilt-edged securities, to the extent that this becomes the income of a beneficiary with an interest in possession who is not ordinarily resident in the UK. This contrasts with the situation with regard to discretionary trusts, where the trustees must include the income on the trust return and pay tax at the trust rate unless, exceptionally, HMRC accepts that there is no liability after referral to the CAR (Residency) (TSEM3185). A non-UK will trust, with trustees resident in the UK, was liable to UK tax on the income arising, in Kelly v Rogers (Willme’s Trustee) (1935) 19 TC 692. 5.102 It would seem that a trust is domiciled in the country under the laws of which it is established. In Gomez and Others v Gomez-Monche Vives [2008] EWCA Civ 1065, concerning a trust administered from Liechtenstein with assets in the Cayman Islands, where the proper law of the trust was that of England, the English Court of Appeal held that the English courts had jurisdiction over the trust on the basis that the correct interpretation and application of Article  5(6) of Council Regulation (EC) 44/2001 and Civil Jurisdiction and Judgments Act 1982 s  45, which determines the domicile of a trust for the 278

Residence and Domicile 5.105 purposes of the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968 (OJ 1972 L299, as amended), was that a trust is domiciled in the UK if and only if it is, by virtue of sub-section 3, domiciled in a part of the UK. A trust is domiciled in a part of the UK if, and only if, the system of law of that part is the system of law with which the trust has its closest and most real connection. In Duke of Marlborough v A-G (No 1) [1945] 1 All ER 165, it was held that the proper law of a marriage settlement ‘can only be the law by reference to which the settlement was made and which was intended by the parties to govern their rights and liabilities’. 5.103 The 1985 Hague Convention on the law applicable to trusts and on their recognition was given the force of law in the UK by the Recognition of Trusts Act 1987. The Hague Convention gave primacy to a choice of law by the settlor. There is no need for an objective connection between the trust and the chosen law. In the absence of a choice of applicable law, the governing law would be that with which the trust is most closely connected on the basis of the place of administration of the trust designated by the settlor, the situs of the assets of the trust, the place of residence or business of the trustee, and the objects of the trust and the places where they are to be fulfilled. 5.104 The charitable exemption under ITA 2007 s 523 (ICTA 1988 s 505(1) (c)) only applied to charities established in the UK (IRC v Gull (1937) 21 TC 374; Camille & Henry Dreyfus Foundation Inc v IRC (1955) 36 TC 126). However relief was extended to charities in the EU by FA 2010 s 30 and Sch 6 following Persche v Finanzamt Lüdenscheid (case C-318/07) [2009] WLR (D) 27). In the case of an American will trust, it was assumed that the US law followed the UK law, and that a beneficiary with an interest in possession became entitled to the income of the trust fund as it arose and was not assessable on a remittance basis (Archer-Shee v Baker (1927) 11 TC 749). An attempt to adduce late evidence on the actual US legal position was rejected in Archer-Shee v Baker (No  2) (1928) 15 TC 1; but, in the following year, evidence on the relevant US law was given, and it was held that the life tenant’s income was from a single foreign possession and therefore taxable on the remittance basis, which then applied (Garland v Archer-Shee (1930) 15 TC 693). Archer-Shee v Baker was followed in Nelson v Adamson (1941) 24 TC 36 in respect of an Australian will trust, in Drummond v Collins (1915) 6 TC 525. The mother of a UK resident child was assessed as guardian on amounts remitted to her for the child. An American will trust was treated as a single source in Lord Inchyra v Jennings (1965) 42 TC 388.

Trusts governed by foreign law 5.105 HMRC published guidance on 17 June 2013 entitled ‘Income Tax and Capital Gains Tax for non-resident trusts’. On page 10 it explains the rules for trusts governed by foreign law. 279

5.106  Residence and Domicile 5.106 Trusts governed by foreign law are either Baker types or Garland types. These classifications are based on the cases of Archer-Shee v Baker 11 TC 749 and Garland v Archer-Shee 15 TC 693.

Baker type trust 5.107 Beneficiaries of a Baker type trust are entitled to their appropriate share of each item of income as and when it arises to the trust. This is subject only to a deduction for trustees’ expenses. Unless the remittance basis applies, the beneficiaries are chargeable on their share of the trust income, less a rateable proportion of the trust expenses. If the trust income has borne UK tax, it is taxed income of the beneficiaries. Credit relief may also be available for foreign tax suffered by the trustees on the income. Each beneficiary’s share (after a rateable proportion of trust expenses) is income that has been taxed at whatever rate of tax it has borne. Beneficiaries of a Baker type trust should make their self-assessment on the Trust etc supplementary pages. They follow the instructions in the SA107 (Notes) under the heading ‘Income from trusts and settlements’. (The list of countries that shows if trusts governed by the law of those countries are Baker or Garland shows that the only Garland territories are Quebec, Denmark, India, Liechtenstein, Namibia, Norway, South Africa, Sweden, Zimbabwe and certain states in the USA, viz New York, Minnesota, Montana, North and South Dakota and Wisconsin.)

Garland type trust 5.108 Beneficiaries of a Garland type trust are entitled only to their appropriate share of the net trust income remaining after the trustees have ascertained the balance available after meeting the expenses of administering the trust. Beneficiaries chargeable on the arising basis are liable by reference to the actual income receivable from the trust in the basis year. This applies whether or not it was paid out by the trustees or remitted to the UK. The nature of the income that arose to the trustees is irrelevant. Beneficiaries of a Garland type trust should enter the amount received on their self-assessment tax return, on the ‘Foreign’ supplementary pages. It is an untaxed source. Some of the income chargeable may be from trust income that has borne UK tax. A claim for relief in respect of the tax must be a free-standing claim. It must not affect a beneficiary’s self-assessment. Trust income may have suffered foreign tax. Beneficiaries can claim credit relief for that foreign tax. This is the same way and to the same extent as if the beneficiaries were entitled to their proportionate share of the underlying investments of the trust. A claim for credit must be a free-standing claim. It must not affect a beneficiary’s self-assessment.

280

Chapter 6

Main Taxation Rules Applicable to Trusts

6.1 This chapter deals with the taxation rules which apply to trusts generally where the settlor does not have an interest in the settlement. The specific tax rules applicable to settlor interested trusts are also dealt with in this chapter (see 6.185); relevant property trusts such as those with discretionary beneficiaries in Chapter 7; bare trusts and pre-22  March 2006 trusts where the beneficiaries have an interest in possession in Chapter 8; and trusts for children and young adults in Chapter 9. Other more specialised trusts are dealt with in Chapters 10 to 14.

DEFINITION OF SETTLEMENT 6.2 A  settlement includes any disposition, trust, covenant, agreement, arrangement or transfer of assets, and a settlor in relation to a settlement means any person by whom the settlement was made (ITTOIA  2005 s  620). An ‘arrangement’ includes a wide range of transactions or series of transactions (Crossland v Hawkins 39  TC  493), which may or may not be expressed in a deed. A  person is deemed to have made a settlement if he has provided, or undertaken to provide, funds directly or indirectly for the purposes of the settlement, or has made, with another person, a reciprocal arrangement for that other person to enter into the settlement. 6.3 Settlement is widely defined but does require an element of bounty (IRC v Plummer [1979] STC 793; IRC v Levy [1982] STC 442). An arrangement involving shares of different classes was held to be a settlement in IRC v Morton (1941) 24 TC 259 and Dalgeaty v IRC (1941) 24 TC 280. A covenant to pay certain dividends to a controlled company was held to be a settlement in Burston v IRC and Halperin v IRC (1942) 24 TC 285. Other occasions where different classes of shares in a company amounted to an arrangement, and therefore a settlement, include IRC v Prince-Smith (1943) 25 TC 84; Young v Pearce; Young v Scrutton [1996] STC 743; and Copeman v Coleman (1939) 22 TC 594. The arrangement of a loan to a trust for the benefit of children to enable shares to be purchased, was an arrangement amounting to a settlement in Jenkins v IRC; Mason v IRC (1944) 26 TC 265 and IRC v 281

6.4  Main Taxation Rules Applicable to Trusts Wachtel (1970) 46  TC  543. A  sale of shares at an undervalue to prevent a takeover had a commercial purpose, without an element of bounty, and was therefore not a settlement (Bulmer v IRC (1966) 44 TC 1). 6.4 The provision of services to a company owned by a trust makes the service provider a potential settlor, unless such service provider is fully remunerated at market rates (Crossland v Hawkins (1961) 39 TC 493; IRC v Mills [1974] STC 130). A gift of shares subject to a third-party option amounted to an arrangement, and therefore a settlement, in Vandervell v IRC  (1966) 43 TC 519, as did a trust created by a settlor who then borrowed the trust funds on mortgage in IRC v Pay (1955) 36 TC 109. 6.5 A case where two brothers set up a company and issued shares direct to their children amounted to a settlement on the grounds that the brothers provided all the entrepreneurial skills and the opportunity for the company to be profitable, and therefore created an arrangement which amounted to a settlement, in Butler v Wildin [1989] STC 22. This followed the earlier case of Hood-Barrs v IRC  (1946) 27  TC  385; Hood-Barrs v IRC (No  3) (1960) 39 TC 209. These cases were distinguished from Chamberlain v IRC (1943) 25  TC  317 where the arrangements for different classes of shares did not amount to a settlement. A settlement also arose in Copeman v Coleman (1939) 22 TC 594. 6.6 However, even if it is considered that challenging the existence of a partnership would not be successful, it does not mean that this is the end of the matter. In certain circumstances the settlements legislation may apply – see TSEM4215: ‘Example 10 – sleeping partner – settlements legislation does apply Mr Y, an architect, commences business as a sole trader. The business is successful and a few years later annual profits are in the region of £80,000. The business is transferred to a new partnership of Mr & Mrs Y. A deed is executed under which income profits are to be shared equally but the rights to share in capital profits belong solely to Nr Y. Mrs Y subscribes no new capital and carries out no work whatsoever for the partnership, that is to say, she is a sleeping partner. Profits for the year are £80,000 and £40,000 belongs to Mrs Y. This is a bounteous arrangement transferring income from one spouse to another. The settlements legislation will apply and Mrs Y’s share of the profits will continue to be assessed on Mr Y. Where the incoming partner is not a spouse or civil partner the legislation will not apply unless there are arrangements or conditions where the property can revert to the settlor (or spouse or civil partner).’ 6.7 HMRC’s view of the wide definition of a settlement for tax purposes was illustrated in Tax Bulletin, Issue 64, April 2003, pages 1011–1016 (now 282

Main Taxation Rules Applicable to Trusts 6.8 archived). The HMRC  view was considered in a test case on the settlement provisions, Jones v Garnett [2005] STC (SCD) 9 (frequently referred to as the ‘Arctic Systems’ case). The case was heard by two Special Commissioners, who arrived at fundamentally different decisions and HMRC won on the casting vote of the senior Commissioner. The case concerned the joint ownership of a limited company by a husband and wife, where the one party, Mr Jones, generated most of the company’s business profits through the provision of his computer consultancy services. Mrs Jones carried out various administrative duties on behalf of the company. The couple were paid minimal salaries, and the company paid out substantial dividends which were shared equally between them. The Special Commissioners’ decision was confirmed in the High Court, Jones v Garnett [2005]  SWTI  903; however, on appeal by the taxpayer, the Court of Appeal (Jones v Garnett [2005] EWCA Civ 1553) found there was no settlement within ITTOIA 2005 s 620, as Mrs Jones had acquired her 50% interest in the company for cash, and consequently there had not been the necessary element of bounty. On further appeal by HMRC, the House of Lords (Jones v Garnett [2007] UKHL 35) held that, although the arrangement constituted a ‘settlement’ within the meaning of ITTOIA  2005 s  620 the exception for outright gifts between spouses not consisting wholly of a right to income applied ITTOIA 2005 s 626. ‘Arrangement’ is therefore very widely defined and, for it to constitute a settlement, the element of bounty may be prospective, and not necessarily immediate. Another case, Langham v Veltema [2004] STC 544, seemed to widen the scope of the section, as a result of which there were discussions in the Operations Consultative Committee between HMRC and the taxpayer representatives which resulted in a (then) Revenue press release, guidance and background notes on 23 December 2004, to which the professional bodies responded on 6  January 2005 with a note entitled Settlement Provisions: Further Note on Disclosure. Following the decision of the House of Lords in Jones v Garnett, HMRC published guidance on 30 July 2007 setting out their approach to open cases with a similar fact pattern to that of Mr and Mrs Jones. The statement notes that each case would need to be considered on its own facts; however, in the absence of unusual factors, HMRC would not consider the settlements code to apply to arrangements between spouses (and, from 5 December 2005, civil partners) where the settled property consisted of ordinary shares in a company or a non-limited interest in a partnership. See TSEM4000 et seq. See also Buck v HMRC [2009] STC (SCD) 6. 6.8 In response to the House of Lords judgment in Jones v Garnett, HMRC announced on 30  July 2007 that legislation would be introduced to counter non-commercial arrangements between individuals which have the effect of diverting income from one person to another in order to obtain a tax advantage, effectively reversing the decision of the House of Lords. A  consultation document and draft legislation were published on 6 December 2007. However, following responses received from the professional bodies and other interested parties, it was announced on 12 March 2008 that the Government considered 283

6.9  Main Taxation Rules Applicable to Trusts that further consultation was required and the introduction of legislation to counter income shifting would be deferred until 2009/10. In the light of the economic downturn during the latter half of 2008, the Chancellor announced in the Pre-Budget Report on 24 November 2008 that anti-avoidance legislation would not be introduced in Finance Bill 2009. The Treasury has further announced that it has no immediate plans to amend the operation of the existing settlement provisions, although the matter will be kept under review. No further announcements regarding these proposals have been made by HMRC or the Government since 2008, and given the length of time which has now elapsed, it would be reasonable to conclude in the circumstances that the proposals have been quietly abandoned, although HMRC continue to challenge arrangements under the provisions of ITTOIA 2005 s 620 where they consider it appropriate, see TSEM 4325. 6.9 In the Irish case of O’Dwyer v Cafolla & Co (1948) 2I TC 374, a bona fide partnership was upheld. The allegation that a partnership is a settlement is an alternative to an allegation that the partnership does not in fact exist as such (Hawker v Compton (1922) 8 TC 306; Dickenson v Gross (1927) 11 TC 614; IRC v Williamson (1928) 14 TC 335), or that some of the partners were not actually partners (Alexander Bulloch & Co v IRC [1976] STC 514).

Stamp duty and stamp duty land tax 6.10 No stamp duty or stamp duty land tax should normally arise on the creation of a settlement because, by its very nature, it is a gift to the trustees for the benefit of the beneficiaries. The stamp duty charge on gifts inter vivos, under F(1909–10)A 1910 s 74 was abolished by FA 1985 s 82, and a similar exemption applies for stamp duty land tax under FA  2003 s  49 and Sch  3 para 1. FA 2003 s 48(1)(a) includes, as a chargeable interest in land for stamp duty land tax, an estate, interest, right or power over land in the UK. This could include an interest in a non-discretionary trust such that the purchase of a reversionary interest and an interest in possession in such a trust, where the asset is land, could be a land transaction, whatever the proper law of the trust (FA 2003 s 105 and Sch 16). Transfers from trustees to beneficiaries should normally qualify for stamp duty and stamp duty land tax exemption, under the same provisions, and transfers in connection with divorce, etc are normally exempt under FA 1985 s 83 and FA 2003 s 49 and Sch 3 para 3. Variations arising on a will or intestacy are normally exempt from stamp duty under FA 1985 s 84. A sale by trustees of trust assets may well attract stamp duty as a conveyance or transfer on sale, under FA 1999 s 112. The rates of stamp duty are given by FA 2000 s 114. On the sale of stocks and marketable securities the rate is 0.5%. 284

Main Taxation Rules Applicable to Trusts 6.11 On the sale of other property, the rate of stamp duty or, from 1 December 2003, stamp duty land tax depends on the consideration. From 4 December 2014, the ‘slab’ system of duty was withdrawn for residential property transactions and replaced with taxable bands. The slab system continues to apply to commercial property transactions. The rates show below are those apply from 4 December 2014 (for residential property) and 17 March 2016 (for commercial property). Residential

Band at

Commercial

Band at

£0–£125,000

0%

£0–£150,000

0%

£125,001–£250,000

2%

£150,001–£250,000

2%

£250,001–£925,000

5%

Over £250,000

5%

£925,001–£1,500,000

10%

Over £1,500,000

12%

An increased rate of 15% applies to the acquisition of residential property by certain ‘non-natural’ persons (see Chapter 17) where the value of the property exceeds £500,000 (from 22 March 2015). The above residential property rates are subject to a 3% surcharge where the purchaser already holds one or more residences. Discounted rates apply to first-time buyers acquiring a residential property on or after 22 November 2017 where the purchase price is below £500,000. Land and Buildings Transaction Tax (LBTT) replaces SDLT for transactions in residential and commercial land (and leases) in Scotland on or after 1 April 2015, following the Scotland Act 2012 and the Land and Buildings Transaction Tax (Scotland) Act 2013. The rates of LBTT for 2019/20 are as follows: Residential

Band at

Commercial

Band at

£0–£145,000

0%

£0–£150,000

0%

£145,001–£250,000

2%

£150,001–£250,000

1%

£250,001–£325,000

5%

Over £250,000

5%

£325,001–£750,000

10%

Over £750,000

12%

An ‘Additional Dwelling Supplement’ (ADS) applies to LBTT from 1 April 2016 on the purchase of an additional dwelling where the purchase price is £40,000 or more. The rate of ADS for transactions on or after 25 January 2019 is 4%. 6.11 In Wales, Land Transaction Tax (LTT) applies to property and land acquisitions from 1 April 2018, and not SDLT. The following rates apply for 2019/20: 285

6.12  Main Taxation Rules Applicable to Trusts Residential

Band at

Commercial

Band at

£0–£180,000

0%

£0–£150,000

0%

£180,001–£250,000

3.5%

£150,001–£250,000

1%

£250,001–£400,000

5%

£250,001–£1,000,000

5%

£400,001–£750,000

7.5%

Over £1,000,000

6%

£750,001–£1,500,000

10%

Over £1,500,000

12%

Note that separate LTT rates apply to leases. A 3% supplement to LTT applies to residential property purchases where the purchaser already holds one or more residential properties. 6.12 An additional charge on the acquisition of second or additional homes is a common feature across the SDLT, LBTT and LTT regimes. As a general rule, trustees are treated as the purchaser for SDLT (and LBTT and LTT) and the beneficiary’s interest is ignored. This is the case even where the trust is a bare trust. For the purposes of the additional charge, the beneficiary of a bare trust is treated as the owner of property (and not the bare trustee) and the additional charge will therefore apply if the beneficiary holds another residence. Where a beneficiary is entitled to occupy residential property under the terms of a settlement for life, or is entitled to rental income from the residence, he will be treated as the purchaser for the purposes of the additional charge, and not the trustees (FA 2003 Sch 4ZA para 10l Land and Buildings Transactions Tax (Scotland) Act 2013 Sch  2A para  3; Land Transaction Tax and AntiAvoidance of Devolved Taxes (Wales) Act 2017 Sch  5 para  27). A  liability to the additional charge will therefore arise if the beneficiary already owns a residence in his own right at the time the trustees acquire residential property. Similarly, the additional charge will apply if a beneficiary seeks to acquire a residential property in his own capacity whilst (say) having an entitlement to income arising from a residential property held by trustees. If the beneficiary is a minor, his interest is attributed to his parents irrespective of whether they are de facto trustees, unless property is held by trustees on his behalf in accordance with an appointment under the Mental Capacity Act 2005 or the Mental Capacity Act (Northern Ireland) 2016 (FA 2003 Sch 4ZA para 12). Residential property held on discretionary trust should not be subject to the additional charge. 6.13 There are no special rules for trusts or trustees in relation to stamp duty, apart from the exemption for the initial transfer of assets to trustees of a 286

Main Taxation Rules Applicable to Trusts 6.16 unit trust scheme under FA 2003 s 64A. For a more detailed commentary on stamp duty, including stamp duty reserve tax, see Stamp Taxes 2019/20 by Ken Wright and Andrew Evans.

Transactions in securities 6.14 The transactions in securities provisions in ITA  2007 ss  682–713 may also have to be considered and clearance obtained under ITA  2007 s 701. The provisions were revised for income tax purposes from 24 March 2010 by FA  2010 s  38 and Sch  12, following an HMRC consultation exercise aimed at simplifying the application of the transaction in securities rules. The term ‘transaction in securities’ is widely drawn and includes transactions of whatever description relating to securities, and in particular the purchase, sale or exchange of securities. For transactions taking place on or after 24  March 2010, the provisions apply to close companies where certain defined circumstances are present and there is no fundamental change of ownership. There is a fundamental change in ownership where, as a result of the transaction, the original shareholders (including associates) do not hold more than 25% of the ordinary share capital of the company, shares giving an entitlement to more than 25% of distributions made by the company or shares giving an entitlement to more than 25% of the company’s voting rights (ITA 2007 s 686(3), as amended by FA 2016 s 33). From 6 April 2016, it is put beyond doubt that a distribution received on the winding up of a company is within the scope of the transaction in securities rules (ITA 2007 s 684(2)). 6.15 Finance Act 2016 also introduced a targeted anti-avoidance rule (TAAR) in respect of liquidation distributions. A distribution in the course of a company liquidation will be subject to tax as income where the shareholder held an interest in the company of at least 5%, the company was close at the time of winding up or at any time in the two year period prior to the winding up, and within two years of the distribution, the shareholder carries on a trade or activity on his own account or as a partner in a partnership, and the trade or activity is the same as or similar to the activity carried on by the liquidated company. Where it is reasonable to assume that the main purpose or one of the main purposes of the winding up is the avoidance of income tax, the distribution will be categorised as an income dividend to the extent that the distribution exceeds the repayment of share capital (ITTOIA  2005 s 396B). 6.16 The clearance procedure outlined below broadly remains in place under the revised legislation, however, despite lobbying from the professional bodies HMRC have resisted requests to introduce an advance procedure for liquidation transactions potentially within scope of the new TAAR. 287

6.17  Main Taxation Rules Applicable to Trusts

Clearances under ITA 2007 s 701 6.17 In Working Together, Issue 6, August 2001, the (then) Revenue published the following comments in relation to clearance applications under what is now ITA 2007 s 701 (formerly ICTA 1988 s 707): ‘S 703 is concerned with the cancellation of tax advantages from certain transactions in securities. S  707 – a person who has carried out, or proposes to carry out, certain transactions in securities may apply to the Board for a clearance that the transactions are not caught by the provisions of ICTA 1988 s 703. We receive around 6,000 s  707 clearance applications each year. We try to deal with all such applications within the shortest possible time. But sometimes the transactions are so complex that we need to consider the matter in depth and on occasion we need to request further information before we are able to reach a decision. However, many agents need to make applications infrequently and in some cases we find that applications do not include information which, had it been given, would have enabled us to issue clearance quicker or possibly avoid issuing a conditional clearance. The following aide-memoire will help you avoid the most common causes of delay: Information The application should include: —

The latest accounts for companies involved in the transaction(s)

—

The names of all parties to the transaction(s).

Mergers and acquisitions If the transaction involves the acquisition by one company of another, the applications should show: — The nature and extent of any interest held by the vendors in the purchasing company (both before and after the transaction(s)). —

The form and amount of the sale consideration.

If the consideration includes the issue of shares The application should state: —

Whether they are redeemable or irredeemable.

Liquidations Where the transaction involves liquidation or informal striking off, the application should state: 288

Main Taxation Rules Applicable to Trusts 6.18 —

Whether the company’s trade has ceased, or

—

Whether the trade will be carried on in non-corporate form and if so by whom.

—

If the transactions include a s 110 liquidation the application should show what the members receive in addition to consideration shares.

Trusts Where shares are being sold by a trust the application should state: —

The identities of the trustees, settlor and beneficiaries.

—

The family relationship or connection between those persons and the continuing shareholders.

—

The date of birth of any beneficiaries who are minors.

—

How the trustees intend to apply the sale proceeds.

In the case of a purchase of own shares, if none of the continuing shareholders has any interest in a trust a statement to that effect will suffice. Layout of application In many applications we receive, the details of the transactions are combined with narrative explanation as to why they are being undertaken. It would help us if a schedule of the transactions were provided (say, as an appendix to the application) with any explanation eg  as to the commercial reasons being given separately in the covering letter. Where no Market sensitive information is contained within the application it should be sent to Clearance and Counteraction at the following address: HM Revenue & Customs CTIS Clearance S0483 Newcastle NW98 1ZZ [Formerly, Clearance & Counteraction Team, Anti-Avoidance Group First Floor 22 Kingsway London WC2B 6NR] We take the security of all applications very seriously. Where the information contained within the application is Stock Market sensitive the application should be sent to Team Leader at the address above.’ 6.18 The above information has been removed from HMRC’s website, and guidance at CTM36880 on submissions to the Clearance & Counteraction Team has been withheld under the Freedom of Information Act 2000. The reason for this is not clear, and it is suggested that the guidelines set out in 289

6.19  Main Taxation Rules Applicable to Trusts Working Together, Issue 6 continue to be relevant to applications for clearance under ITA 2007 s 701. Applications may also be emailed to [email protected]. HMRC no longer provide a fax number for clearance applications. 6.19 One of the most common problems in a clearance application is where the paper issued on a paper-for-paper transaction by the acquiring company includes redeemable preference shares or loan stock. In HMRC’s view, IRC v Cleary (1967) 44 TC 399 will cause the relief to be denied. Making the paper irredeemable will often assist in spite of the ability of a company to buy its own shares. A  CGT avoidance motive, such as the availability of Entrepreneurs’ relief, is not normally regarded as a reason for refusing clearance. Potential double taxation may arise where counteraction is taken under ITA  2007 s  701 where there is a disposal subject to CGT. There is no adjustment of the chargeable gain under TCGA  1992 s  37 in these circumstances but, in practice, HMRC will have regard to the CGT payable on any consideration that is subject to counteraction under ITA 2007 s 701. In IRC v Laird Group Plc [2003] STC 1349 the (then) Revenue failed to apply s 703 to dividends.

LIABILITY TO PAY TAX 6.20 Trustees are persons receiving or entitled to income, and are therefore subject to tax on that income. They are charged in the name of the trust. For income tax and CGT purposes, trustees are treated as being a single and continuing body of persons distinct from the persons who may from time to time be the trustees (ITA 2007 s 474(1); TCGA 1992 s 69(1)). However, as they are not (when acting as trustees) individuals, they cannot claim personal reliefs under ITA 2007 ss 33–55 (Stanley v CIR [1944] 1 All ER 230). Personal representatives are made responsible for tax under TMA 1970 s 74 and trustees of incapacitated persons by s 72 of that Act. A trustee who has properly delegated to an agent, who actually received the income, is not liable to do anything other than make a trust return in respect of that income under TMA 1970 s 76. These provisions are extended to CGT by TMA 1970 s 77. 6.21 UK resident trustees (see Chapter 5) are generally liable to tax on worldwide income and gains. In England, Wales and Northern Ireland, income is charged at the basic rate (20% for 2019/20) or dividend ordinary rate (7.5% for 2019/20), as appropriate, unless the settlement is subject to the trust rate (45% for 2019/20) and dividend trust rate of tax (38.1% for 2019/20) applicable to discretionary trusts (ITA 2007 ss 9, 11, 14). 6.22 An exception applies to certain foreign dividends arising under the terms of a settlement. Where a non-UK domiciled and non-resident beneficiary 290

Main Taxation Rules Applicable to Trusts 6.26 is entitled to the foreign dividend income and the income is paid to him, UK resident trustees are not assessable to tax in respect of that income. There must be an identifiable beneficiary entitled to the foreign dividend income, otherwise the liability for income tax remains with the trustees (Williams v Singer [1921] 7 TC 387; Kelly v Rogers [1935] 19 TC 692). 6.23 It should be noted that separate rates apply to individuals resident in Scotland from 6  April 2018 and Wales from 6  April 2019. Trustees are generally not affected by Scottish and Welsh income tax rates. There is an exception in relation to bare trusts, and beneficiaries of a bare trust who are resident in Scotland or Wales will be subject to the Scottish or Welsh rates of income tax as appropriate. Similarly, an individual beneficiary who is resident in Scotland or Wales will pay Scottish or Welsh income tax rates on income received from the trust from 2018/19 (2019/20 in the case of Welsh residents).

TRUST INCOME Trading income 6.24 Trustees may carry on a trade in the UK, throughout the world or entirely abroad. Trading profits are subject to income tax under ITTOIA 2005 Part 2. They could also be partners in a trading partnership in their capacity as trustees. They are entitled to the normal reliefs of any other taxpayer, such as loss relief under ITA  2007 s  64 and relief for overpayment of tax under TMA 1970 Sch 1AB para 1(4), and can claim capital allowances. 6.25 It is unusual for trustees to trade for the benefit of the trust because they could be personally liable for devastavit, or loss to the trust, if their commercial activities were unsuccessful. This may be covered by indemnities in the trust deed or guaranteed by adult beneficiaries. It is, however, quite common for trustees to be partners in family partnerships, particularly farming partnerships, although again the question of the trustees’ personal liability may pose a problem. In some cases it may be possible to arrange for the trustees to be companies with no other assets specifically formed for this purpose. The Limited Partnerships Act 1907 prevented trustee partners from taking part in the management of the partnership, but a partnership formed under the Limited Liability Partnerships Act 2000 could enable the trustees to participate in the business yet limit the risks to the assets used in the business. 6.26 The trading profits of a business carried on by the trustees are not classified as earned income but investment income when distributed to the beneficiaries (Fry v Shiels’ Trustees (1915) 6  TC  583; McDougall v Smith (1919) 7 TC 134). The profits are only earned income if the beneficiary actively conducts the business (TSEM3195). 291

6.27  Main Taxation Rules Applicable to Trusts 6.27 Where the trustees own land on which there are mines, quarries or similar concerns within ITTOIA 2005 s 12, the rent is subject to tax as trading income under ITTOIA 2005 ss 262 and 335–337, subject to relief for mineral royalties under ITTOIA 2005 ss 157, 319 and 340–342. Rent payable in respect of electric line wayleaves or property income is taxable as property income under ITTOIA 2005 ss 262 and 344–346). Management expenses incurred by the trustees wholly, exclusively and necessarily as expenses of management or supervision of mineral rights are allowable under ITTOIA 2005 s 339, subject to relief for mineral royalties. 6.28 ITTOIA 2005 ss 157, 319 and 340–342 treat one-half of the mineral royalties receivable by the trustees, less one-half of the management expenses, as income. The remaining half of the mineral royalties is taxed as a capital gain under TCGA 1992 s 201. No deductions are allowed against the capital element, not even the remaining half of the management expenses (TCGA 1992 s 122(3)). The requirement for deduction of tax at source from mineral royalties was removed with effect from 1 May 1995 by FA 1995 s 145.

Income from abroad 6.29 UK resident trustees will normally be subject to UK tax on income from abroad, although this will depend on the circumstances. Where the foreign income has suffered overseas tax and is liable to tax in the UK, credit for the foreign tax suffered will normally be available under the unilateral relief provisions in TIOPA 2010 ss 7–17. This will normally be restricted to withholding taxes, as relief for underlying tax is normally restricted to companies owning at least 10% of the voting power in the company paying the dividend (TIOPA 2010 ss 12–16). 6.30 It is interesting to consider whether, if a trust has a corporate trustee, it can claim unilateral relief under these provisions on the grounds that, as legal owner of the shares, it is legally entitled to the required voting control and that the dividend is paid to it, albeit in its capacity as trustee rather than as beneficial owner. Unilateral relief is only available where relief is not available under a double taxation treaty negotiated in accordance with TIOPA 2010 ss 2–6. The question as to whether a trust is able to benefit under a double taxation treaty will depend on the precise terms of the relevant treaty. Under some treaties a trust is specifically included in the definition of a resident of the contracting state, whereas other treaties do not mention trusts and the question then to be considered is whether trustees can claim treaty protection as an individual in the case of non-corporate trustees, or as a company in the case of a corporate trustee, or whether they are precluded from claiming any treaty relief as not being the beneficial owners of the income in question. 6.31 Where the beneficiary has an interest in possession and is therefore entitled to the income as it arises, subject only to the trustee’s expenses, it 292

Main Taxation Rules Applicable to Trusts 6.34 might be possible to argue that the beneficiary is entitled to claim relief under the double taxation treaty in respect of that income. Where a non-UK resident beneficiary has an interest in possession in a UK resident trust, TSEM 3655 states that it is the trustees who can claim and receive tax credit relief on behalf of the beneficiary based on his marginal rate. 6.32 The only reference in the Taxes Acts to double taxation relief in respect of trusts is found in TIOPA  2010 s  111 where the trustees of a discretionary trust have made a distribution to a beneficiary of net income under ITA  2007 s  494, which will be treated as having suffered tax at the trust rate. The trustees may certify, if that be the case, that the income (including taxed overseas income of an amount and from a source stated in the certificate) and the amount arose to the trustees not earlier than six years before the end of the year of assessment in which the distribution is made. The beneficiary may claim that the distribution, up to the certified amount, should be treated as his income from the overseas source held by the trustees in the tax year in which the payment is received, and claim double taxation relief accordingly. However, taxed overseas income is defined as income in respect of which the trustees are entitled to credit for overseas tax either under a treaty or as unilateral relief (TIOPA  2010 s  111). Overseas income accumulated and not paid out within six years of the start of the tax year in which it arose to the trustees ceases to be available for certification. Where income underlying the discretionary payment to the beneficiary has more than one overseas source, it is considered to arise rateably from the sources of income (INTM367820). 6.33 A  payment received by a UK resident beneficiary of a non-UK resident discretionary trust is not entitled to credit for the tax paid by the trustees under ITA 2007 s 494(3) as the beneficiary’s tax credit applies only if the trustees are UK resident (ITA  2007 s  493(1)(b)). The UK resident beneficiary would therefore not generally be able to claim double tax relief. By HMRC concession (ESC B18), a beneficiary receiving income from a nonUK resident discretionary trust may obtain relief under a double tax treaty or domestic unilateral relief provisions, for tax payable by the trustees on the income out of which the beneficiary’s payment is made as if he had received the income directly. 6.34 Concessionary treatment under ESC B18 may only be claimed where the trustees: •

have made trust returns giving details of all sources of trust income and payments made to beneficiaries for each and every year for which they are required;

•

have paid all tax due any interest, surcharges and penalties arising; and

•

keep available for inspection any relevant tax certificates. 293

6.35  Main Taxation Rules Applicable to Trusts 6.35 A claim must be made within five years and 10 months of the end of the year of assessment in which the beneficiary received the payment from the trustees. A claim for relief under ESC B18 is a standalone claim and is not made through the self-assessment return. HMRC do not consider that a claim under ESC B18 can be made by a beneficiary until the trustees have met their obligations to file tax returns (INTM367850). 6.36 The ‘look through’ treatment offered by ESC B18 applies only to deem the trustees’ foreign source income to be that of the beneficiary for the purposes of a claim to double tax relief. It does not have the effect of deeming the income to arise to the beneficiary more generally and therefore the beneficiary is not able to (for example) make a claim to the remittance basis in respect of the income. 6.37 ESC B18 also enables a non-UK resident beneficiary of a UK discretionary trust to claim relief or exemption in respect of a payment which would, had it been received directly by him, have been eligible for relief under a double tax treaty or not chargeable to UK tax because of their nonresident status. A discretionary beneficiary resident in a country with whom the UK has a double tax treaty may also be able to obtain treaty relief under Statement of Practice 3/86. This will be the case if the treaty contains an ‘Other Income’ article giving sole taxing rights to the recipient beneficiary’s country of residence in respect of other sources of income not dealt with under articles dealing with dividends, business profits etc. 6.38

Para 7 of SP 3/86 provides:

‘HMRC have accepted that if a payment made by trustees out of a UK discretionary trust falls to be treated as a net amount in accordance with TA  1988 s  687(2) [now s  494  ITA], the “looking through” principle is not appropriate where the beneficiary is resident in a country with which the UK has a double taxation agreement and the “other income” Article gives sole taxing rights in respect of such income to that country. (This will usually be the case where income from trusts is not specifically excluded from the Article.) This means that tax paid by the trustees in respect of the discretionary payment will be repayable to the beneficiary, provided that any conditions set out in the “other income” Article are met. For example, the recipient may be required to show that he is subject to tax on the income in his country of residence.’ 6.39 The number of UK treaties with an ‘Other Income’ article awarding sole taxing rights to the beneficiary’s country of residence is shrinking, however, the following treaties currently provide relief: Bosnia Herzegovina, Croatia, Egypt, Ivory Coast, Jamaica, Kenya, Montenegro, Morocco, Namibia, Portugal, Romania, Serbia, Sudan, Swaziland, Tunisia and Zambia. 294

Main Taxation Rules Applicable to Trusts 6.42

Deposit interest 6.40 Until 5 April 2016, a deposit taker making a payment of interest in respect of a relevant investment had to deduct income tax at the basic rate for the tax year in which the payment is made under ITA  2007 ss  851(2) and 855–857, and pay the tax deducted over to HMRC on a quarterly basis under ITA 2007 ss 946–962. Certain deposit holders, such as non-residents, may have qualified to have the interest paid gross under ITA 2007 s 852 up to 2015/16. The requirement to deduct basic rate income tax from deposits was removed by FA 2016 s 39, Sch 6 para 21 for interest paid or credited on or after 6 April 2016 and interest is paid gross. A deposit taker includes an authorised bank, the Post Office (until its dissolution), a local authority (ITA  2007 s  853), or a person so prescribed by statutory instrument (ITA  2007 s  854). A  relevant investment only arises where the deposit holder is an individual, a Scottish partnership of individuals, a personal representative or the trustees of a discretionary or accumulation and maintenance trust (ITA 2007 s 856). A trust is a discretionary or accumulation trust if some or all of the income accruing to the trustees, unless treated as income of the settlor, is taxable under ITTOIA 2005 s 624 and ITA 2007 s 873(1). ‘Investment’ includes a deposit with a deposit taker or building society, shares in a building society or a loan to a building society. Various investments which do not qualify as relevant investments are identified in ITA 2007 ss 858–870. 6.41 Prior to 5  April 2016, bank or building society interest could be paid to trustees gross if all the beneficiaries are not resident in the UK (not ordinarily resident prior to 6 April 2014) and the appropriate declaration to the deposit taker is given on form R105, so long as each beneficiary has an interest in possession and the income therefore belongs to him as it arises (ITA 2007 s 861 and SI 2008/2682). Trustees of a discretionary trust could also make such a declaration and receive the income gross, but only if the trustees themselves are non-UK resident as well as the beneficiaries.

Deeply discounted securities 6.42 Deeply discounted securities (previously referred to as ‘relevant discounted securities’) are taxable in accordance with ITTOIA 2005 ss 427–460. These are securities where the amount payable on redemption is an amount which is likely to produce a deep gain, ie where the amount payable on redemption or maturity exceeds the issue price by more than the lower of 0.5% of the redemption amount for each year between the date of issue and the date of redemption or 15% of the redemption amount. The question of whether a deep gain is likely is determined by looking at the position at redemption or on any occasion before maturity on which it could be redeemed at the option of the holder or in certain other cases. Gilt strips are included as deeply discounted securities. 295

6.43  Main Taxation Rules Applicable to Trusts 6.43 The profit on redemption is chargeable as savings and investment income. Deeply discounted securities are not subject to CGT, because they are qualifying corporate bonds (TCGA 1992 s 117(2AA)). The profit on redemption is chargeable on UK resident trustees at the trust rate (TSEM3225; ITTOIA 2005 s 457(4)). Non-UK resident trustees are not subject to UK tax on either UK or overseas deeply discounted securities (ITTOIA 2005 s 458(1)). Gilt strips are deemed to be disposed of on 5 April each year, whether they are or not, and any excess over the market value a year earlier, or the price paid for them if they are acquired during the year, is taxable at the trust rate (TSEM3230).

Exempt income 6.44 Certain income is exempt from UK tax and should not be included on the trust and estate tax return. This includes premium bonds, National Lottery and gaming prizes, interest and terminal bonuses under Save as You Earn schemes, accumulated interest on National Savings certificates including indexlinked certificates, interest on National Savings children’s bonus bonds, interest awarded by a UK court as part of an award of damages for personal injuries or death, and dividends on ordinary shares in venture capital trusts (TSEM3190).

Non-qualifying policies 6.45 Non-qualifying UK life assurance policies, life annuities and capital redemption policies may give rise to a chargeable event taxable as income under the provisions of ITTOIA 2005 ss 461–546. Although the tax is usually charged on the settlor (irrespective of whether the settlor is regarding as having retained an interest in the settlement), where the policies are held in trust and the settlor is not resident in the UK or is dead at the time of the chargeable event, the trustees may be subject to income tax on the gain (ITTOIA 2005 ss 465, 467). This also applies where the settlor was a company which was not UK resident or had been wound up at the time of a chargeable event. A gift of such a policy, outright or into trust, is not a chargeable event (ITTOIA 2005 s 462). 6.46 If the trustees are holding the policy as bare trustees, the income is that of the beneficiary. In other cases, where the deemed income is that of the trustees it is taxable on them at the trust rate. A gain is not deemed to be income of the trustees if the policy or life annuity was made before 17 March 1998 and not subsequently enhanced by paying further non-contractual premiums, or in any other way, and the trust was created before that date (TSEM3210; ITTOIA  2005 Sch  2 para  112). Similar provisions apply to non-resident policies under ITTOIA 2005 ss 528 and 529 (TSEM3220). 6.47 Where the gain on the chargeable event is taxed on the settlor under ITTOIA 2005 s 465, the settlor has a right of recovery from the trustees who 296

Main Taxation Rules Applicable to Trusts 6.51 actually realise the gain under ITTOIA 2005 s 538. The chargeable calculation on non-qualifying insurance policies may result in a deficiency for which relief may be claimed under ITTOIA 2005 ss 539–541. In certain cases where a loan is taken it may be treated as a partial surrender under ITTOIA 2005 ss 500–503. The insurance company has a duty under ICTA 1988 ss 552–552ZA to provide HMRC with details of the computation of the gain arising on the chargeable event. 6.48 The tax liability arising on personal portfolio bonds can be particularly swingeing as there is a yearly charge to tax under ITTOIA  2005 s  526 on the deemed income of the bond, which could well exceed the bond’s actual performance. Borrowings on life policies can, in certain cases, be treated as income under ITTOIA  2005 s  501. There are special rules for personal portfolio bonds under ITTOIA  2005 ss  515–526 (Personal Portfolio Bonds (Tax) Regulations 1999, SI 1999/1029).

Offshore funds 6.49 The reporting fund regime, which has applied from 1  December 2009, requires the offshore fund to report income to its investors who are then subject to income tax on the reported amounts. An ‘offshore fund’ is defined in TIOPA 2010 s 355(1), and regulations setting out how investors should be treated for tax purposes were published in September 2009 (Offshore Funds (Tax) Regulations 2009 (SI  2009/3001), as amended by the Offshore Funds (Tax) (Amendment) Regulations 2009 (SI 2009/3139)). 6.50 Under these rules, investors in a fund which meets certain reporting requirements will be subject to income tax on the reported income of the fund, irrespective of whether the fund makes a distribution of income. Investors in a fund which does not meet the reporting requirements are subject to income tax on the disposal of a relevant interest in the non-reporting fund. Where the fund is a reporting fund, gains are subject to CGT in the usual way. If the fund operates equalisation arrangements, part of the gain is chargeable to income tax, the balance as a capital gain. The split is usually shown on the redemption voucher that the trustees receive. If the fund is a non-reporting fund, income is charged at the trust rate under the ‘miscellaneous income’ provisions of ITTOIA  2005 Ch  8 Pt  5 (TSEM  3250). Although subject to income tax, an offshore income gain arising in a non-reporting fund to trustees is not ‘income’ for trust law purposes and is not income to which a beneficiary with an interest in possession will be entitled as against the trustees.

Scrip dividends, demergers etc 6.51 The tax consequences of scrip dividends, enhanced scrip dividends, demergers, reconstructions and companies buying their own shares are 297

6.52  Main Taxation Rules Applicable to Trusts dependent on the treatment under trust law and are dealt with at 4.81–4.94 (TSEM3270, 3205).

Estate income 6.52 Estate income from the estate of a deceased person in the course of administration, taxable under ITTOIA  2005 ss  649–682, may become payable to trustees, and under ITTOIA  2005 ss  663, 670 and 679 it is paid under the deduction of tax at the applicable rate, which means the basic rate or the dividend ordinary rate according to the income of the residue of the estate out of which it is paid. Where the income is received by the trustees of a discretionary settlement, it is charged at the trust rate or dividend trust rate. For the tax year 2015/16 and earlier years, the income was grossed up at the trust rate or the trust dividend rate under ITA 2007 s 479 with credit for the applicable rate of tax suffered.

Premiums etc 6.53 Premiums treated as rent under ITTOIA 2005 ss 277–281 are capital profits received by the trustees, taxable as income. Although the premium is taxable partly as rent where the lease does not exceed 50 years, and therefore brought within the rental income charge under ITTOIA  2005 Part 3, it is actually a capital profit under trust law. A lease premium within ITTOIA 2005 ss 277–281 is subject to income tax at the trust rate (ITA 2007 ss 481, 482), except where it is received by the trustees of an unauthorised unit trust scheme or a charitable trust (TSEM3255). A lease premium is not savings income, and the starting rate for savings (for 2008/09 and later years) does not apply. 6.54 Profits on the sale of certificates of deposit within ITTOIA  2005 ss 551, 552 are capital profits in trust law but subject to tax as income under ITTOIA 2005 s 554. Profits on the sale of certificates of deposit are subject to income tax at the trust rate (TSEM3260). It has not been possible to purchase new certificates of tax deposit, or top up existing certificates, since 23 November 2017. 6.55 Company distributions that are in fact capital but deemed to be income under CTA  2010 s  1000 are subject to tax at the dividend trust rate under ITA 2007 ss 481, 482. Distributions paid before 6 April 2016 carried a notional tax credit under CTA 2010 s 1109. The trust rate is disapplied by ITA 2007 s 481(3) (TSEM3205). 6.56 A loan by a close company to a trust, which is written off and treated as income under ITTOIA 2005 ss 415–421C, is taxable on the trustees at the dividend trust rate under ITTOIA 2005 s 404(4), (5) (TSEM3280). 298

Main Taxation Rules Applicable to Trusts 6.61 6.57 Profits and gains from certain land transactions are deemed to arise from a UK property trade under the anti-avoidance rules in ITA 2007 Pt 9A. These rules, introduced by FA  2016 s  79(1) replace the former transactions in land rules in ITA  2007 ss  752–772 from 6  April 2016. The pre-FA  2016 transactions in land rules applied to certain capital profits from transactions in land other than trading transactions where land was acquired with the sole or main object of realising a gain from disposing of it, or was held as trading stock or developed for the sole or main object of realising a gain from disposing of the land when developed (ITA 2007 s 756(3)). 6.58 The transaction in UK land provisions introduced by FA 2016 are wider in scope than the rules they replaced, and do not include a statutory clearance procedure. In addition to catching transactions in UK land (or property deriving 50% or more of its value from land) where the main purpose of the transaction is to realise a profit (ITA 2007 ss 517C, 517D), the legislation contains ‘antifragmentation’ rules which are designed to prevent profits on the development of UK land or activities contributing to the profit being fragmented between associated parties (ITA 2007 s 517H). There is also a targeted anti-avoidance rule (ITA 2007 s 317k) which applies to a person entering into arrangements where the main purpose or one of the main purposes is to avoid a ‘relevant tax advantage’, meaning a tax advantage in relation to tax chargeable as a result of applying the provisions of ITA  2007 Pt  9A. For further information see Property Taxes 2019/20 by Robert Maas. 6.59 A profit arising under these rules is taxable as miscellaneous income under ITTOIA 2005 Part 5. Income tax is charged at the trust rate for 2006/07 and later years. The starting rate for savings (for 2008/09 and later years) does not apply (TSEM3265). 6.60 In Page v Lowther [1983]  STC  799 the trustees of settled land leased the land for 99 years to a development company and were entitled to a premium on the development company granting underleases to tenants as the properties were developed and let. This was sufficient to bring the trustees within the charge to tax under (then) ICTA 1988 s 776 (TSEM3265). Under these provisions an individual providing the gain to other parties, such as trustees, could be taxable (Sugarwhite v Budd [1988] STC 533; Yuill v Wilson [1980] STC 460; Yuill v Fletcher [1984] STC 401; s 776(5)(a)).

Annuities 6.61 In Re Pettit, Le Fevre v Pettit [1922] 2 Ch  765 it was held that an annuity payable free of tax meant that the annuitant was to receive the stated annuity. It was held that the annuitant had to refund to the trustees part of the tax refund in relation to her personal allowances proportionate to the annuity. In Re Maclellan, Few v Byrne [1939] 3 All ER 81 and Re Eves, Midland Bank 299

6.62  Main Taxation Rules Applicable to Trusts Executor and Trustee Co Ltd v Eves (1939) 18 ATC 401 a similar decision was reached as it was in Re Jubb (1941) 20 ATC 297; Re Tatham, National Provincial Bank Ltd v MacKenzie [1945] 1 All ER 29 and a number of other cases. The refund which the annuitant makes to the trustees in these circumstances is taxable on them as additional trust income unless the annuitant is not resident in the UK and it does not relate to personal reliefs, for example, as it relates to a repayment of tax on foreign stock (TSEM3285). In some cases, the wording of the annuity is such that the annuitant could retain any tax refund (Re Jones, Jones v Jones [1933] Ch 842).

Accrued income scheme 6.62 The accrued income scheme in ITA  2007 ss  615–681 applies to trustees as it applies to other taxpayers. The scheme applies to gilt-edged securities, company loan stocks and similar investments and is designed to prevent bond-washing, ie buying securities ex-interest and selling them cum interest just before the interest is paid. The aim of the scheme is to tax the purchaser and seller on their share of the interest as it accrues from day to day. 6.63 There is a de minimis provision under which an individual escapes a charge where the nominal value of securities held by him does not exceed £5,000 (ITA 2007 s 639). This is extended to trustees of a disabled person’s trust under ITA 2007 s 641(1), as defined by s 641(4) by reference to TCGA 1992 Sch 1 para 1(1). These trusts secure that at least half of the property and income of the trust is applied during the lifetime of a mentally disabled person or a person in receipt of attendance relief or of a disability living allowance by virtue of entitlement to the care component at the highest or middle rate for his benefit. Trustees are not liable where they hold securities merely as bare trustees under ITA 2007 s 666 (TSEM3320), but the settlor remains chargeable. The accrued income charge on the trustees is not the income of a beneficiary but taxable on the trustees at the rate applicable to trusts (ITA 2007 s 667(1)). Where there is an accrued interest scheme allowance under ITA 2007 s 637(1), it is available to the trustees, unless the income has been mandated to a beneficiary in which case he should claim the allowance against the income (TSEM3325). Putting securities into trust in the first instance is a transfer from the settlor to the trustee under ITA 2007 s 620(1). 6.64 A  mere change of beneficiaries, eg  on the death of a life tenant, is not a transfer unless the assets pass absolutely to another beneficiary, in which case a transfer simply produces self-cancelling, deemed sums and reliefs to the trustees. Where, however, the trustees use their power of advancement to appoint property to a beneficiary, this can amount to a transfer within the scheme. It is possible for the trustees to end up with stranded or unusable accrued interest scheme allowances where, for example, securities are bought 300

Main Taxation Rules Applicable to Trusts 6.68 cum interest and shortly afterwards transferred to a beneficiary following the death of a life tenant. The allowance cannot be transferred to the beneficiary and may become unusable TSEM3335. 6.65 A  transfer to new trustees simply produces self-cancelling deemed sums and reliefs unless the new trustees are non-resident, in which case there is a deemed transfer of the securities by the resident trustees. The accrued income scheme can be applied to non-resident trustees through the antiavoidance provisions in ITA 2007 ss 720 and 731 by ITA 2007 s 747. Where non-resident trustees transfer to resident trustees, there is a transfer for accrued income scheme purposes (TSEM3340). The accrued income scheme may also apply to unauthorised unit trusts held by trustees which would be income or an allowance to set against income by the trustees (TSEM3345). Where the unit trust treats accrued interest as income by adopting a strict, daily, full accruals basis or ‘clean price accounting’, which strips out the income, the trustees are not charged at the rate applicable to trusts (TSEM3350). Tax payable under the accrued income scheme goes into the trust tax pool to frank payments to beneficiaries under ITA 2007 s 497 (TSEM3360). The accrued income scheme calculations for non-resident trustees assume they are UK resident under ITA 2007 s 680(1).

TRUSTEES’ LIABILITY FOR TAX 6.66 The income of a settlement is received by the trustees jointly, not jointly and severally (Dawson v IRC [1989] STC 473). Tax is chargeable on one or more of the relevant trustees under TMA 1970 s 30AA, relevant trustees being those to whom the income or gains arise and any subsequent trustees of the settlement TMA 1970 s 30AA(2). This section was deemed always to have had effect, under FA 1989 s 151(4), thus validating the HMRC practice of assessing a single trustee. 6.67 The trustees have a statutory obligation under TMA  1970 s  8A to make and deliver to HMRC a return containing such information as may reasonably be required in pursuance to a notice given to a relevant trustee, and to deliver with the return such accounts, statements and documents relating to information contained in the return as may reasonably be so required (s 8A(1)). 6.68 Payments made by trustees out of capital to beneficiaries may become income in the beneficiaries’ hands and the trustees would have to deduct tax under ITA  2007 s  901 as annual payments (Brodie’s Trustees v IRC  (1933) 17 TC 432; Lindus and Hortin v IRC (1933) 17 TC 442; Jackson’s Trustees v IRC (1942) 25 TC 13; Cunard’s Trustees v IRC; Mcpheeters v IRC (1945) 27 TC 122; John Morant Settlement Trustees v IRC (1948) 30 TC 147; Milne’s Executors v IRC  (1956) 37  TC  10; Williamson v Ough (1936) 20  TC  194; 301

6.69  Main Taxation Rules Applicable to Trusts Esdaile v IRC  (1936) 20  TC  700; Trustees of Pierse-Duncombe Trust v IRC (1940) 23 TC 199). 6.69 Interestingly, the above cases are all rather old and in Stevenson v Wishart (Levy’s Trustees) [1987]  STC  266 it was held that payments out of capital to defray a beneficiary’s medical and nursing home expenses were not annual payments, as they were for emergency expenditure to look after a very elderly beneficiary and not part of her normal income. Fixed annuities payable out of trust income would not normally be made these days, although trustees might be instructed to purchase an annuity for a beneficiary, which would be much more tax-effective, as part of it would be treated as capital under ITTOIA 2005 ss 717–726.

BENEFITS IN KIND 6.70 Where a beneficiary enjoys trust assets in kind, either land or chattels or a loan from the trust, there is no chargeable benefit if the trust is resident in the UK. There is no question of any deemed income arising to the beneficiary. There may be IHT implications by giving the beneficiary an interest in possession over part of the trust property (SP 10/79; and there could be CGT implications where the property concerned is occupied by a beneficiary as their main residence (Sansom (Ridge Settlement Trustees) v Paey [1976] STC 494; see 6.125 below). 6.71 The use of trust property by beneficiaries where the trustees are nonUK resident, however, could give rise to an income tax charge under ITA 2007 ss  720 and 731, or a charge to CGT under TCGA  1992 s  87 by virtue of TCGA 1992 s 97(2). This was applied to an interest-free loan in Billingham v Cooper [2000] STC 122 (see 10.40). The calculation of the value of certain benefits provided under these rules was put on a statutory footing from 6 April 2017 (TCGA 1992 ss 97A–97C; ITA 2007 ss 742B–742E).

TRUSTEES’ EXPENSES 6.72 Trustees who are partners in a trading partnership or who own property through the trust may incur expenses which are wholly and exclusively incurred for the purposes of the trade and are deducted in calculating trading profits, or are wholly and exclusively incurred in connection with a property business and therefore deductible in calculating the income of a UK or overseas property business. For 2017/18 and later years, relief for interest on loans is restricted to the basic rate of income tax where the property business consists of residential lettings (ITTOIA 2005 s 272A and 272B). The restriction is being phased in over four years, see table below. 302

Main Taxation Rules Applicable to Trusts 6.75 Tax year

Percentage interest costs allowed as a deduction

Non-deductible percentage

2017/18

75%

25%

2018/19

50%

50%

2019/20

25%

75%

2020/21

0%

100%

6.73 The detailed mechanics of the relief are outside the scope of this book (see Property Taxes 2019/20 by Robert Maas published by Bloomsbury). In outline, the trustees may only deduct the percentage of loan costs (interest plus incidental costs of obtaining loan finance) shown in the middle column above. A tax credit is then given at the basic rate equal to the remaining percentage of costs (or the taxable property income, if lower). For trustees of an income in possession trust, it will be the life tenant who is eligible for the basic rate tax credit, rather than the trustees. Form R185 has been modified accordingly for 2017/18 and later years. Trustees of discretionary trusts are entitled to the basic rate tax credit in computing their income tax liability. 6.74 Trust management expenses are paid out of net taxed income. Expenses properly charged against income reduce the additional tax charge at the trust rate on discretionary and accumulation and maintenance trusts, and are deducted when calculating the income of a beneficiary of other trusts, such as where the beneficiary has an interest in possession. Relief is therefore, to an extent, given indirectly to the beneficiaries because it reduces the income that would otherwise be taxable on them. The rules do occasionally have peculiar side effects, as in Aikin v Macdonald Trustees (1894) 3  TC  306, where the trustees were not allowed to deduct any trust expenses from foreign income assessable on the remittance basis. The beneficiaries of a bare trust have the right to take actual possession of the trust property and cannot deduct any expenses of the bare trustees (Lord Tollemache v IRC  (1926) 11  TC  277; TSEM8405). 6.75 In his 2003 Pre-Budget Report, the Chancellor asked the (then) Inland Revenue to look at ways of modernising the tax system for trusts and to consult with trust practitioners about those changes. Following some initial discussions in 2003 and 2004, the overwhelming view of the trust profession was that, while the area of Trust Management Expenses (TMEs) was unclear, this was best solved by agreeing some better guidance rather than legislating. Guidance was published by HMRC in January 2006 on the treatment of trust management expenses; however, differences in opinion between HMRC and professional bodies means that this guidance represents only HMRC’s view and there have been no significant changes to the way in which trust management expenses are dealt with for income tax purposes. The guidance can be found on the archive site at www.hmrc.gov.uk/trusts/tmes-paper.pdf. 303

6.76  Main Taxation Rules Applicable to Trusts 6.76 The HMRC  view is considered unduly restrictive, in particular on allowability of trustees’ own fees which HMRC regard as disallowable as being properly chargeable to capital, whereas the alternative view is that they are of a recurrent nature and chargeable against income, following Carver v Duncan; Bosanquet v Allan [1985] STC 356. The HMRC view is that for discretionary trusts, ITA 2007 s 484 (which refers to expenses of the trustees so that trustees’ remuneration is not allowable) is applicable. This seems to ignore Re Hulton Deceased [1936] Ch 536 which refers to trustees’ remuneration as an authorised trust expense. As the remuneration of non-professional trustees is an annual payment within ITA  2007 s  899 taxable under ITTOIA  2005 s  684, the payment of fees would be allowed as a deduction (Baxendale v Murphy (1924) 9 TC 76; Hearn v Morgan; Pritchard v Lathom-Browne (1945) 26 TC 478). Professional trustees are assessable on trustees’ remuneration as trading income (Jones v Wright (1927) 13 TC 121). 6.77 Where some beneficiaries have an interest in possession and some are discretionary, it is necessary to apportion the expenses rateably between the income of the discretionary and the non-discretionary elements (TSEM8610). Trust expenses are payable out of net trust income and are grossed up in computing the income available to beneficiaries. If the trustees receive any untaxed income, they are taxable on that income in full and cannot in any way frank it with trust expenses paid. If the admissible trust expenses in the year exceed that year’s statutory income, the trustees can carry the balance forward to the following year to set against that year’s income provided that they can do so under the appropriate trust law (ITA 2007 s 485; TSEM8240). 6.78 Where trust income is deemed to belong to the settlor under the antiavoidance provisions in, for example, ITTOIA 2005 Part 5 Chapter 5 ss 619– 648 or ITA 2007 s 714 et seq, it is the income before any expense is incurred by the trustees which is deemed to be that of the settlor (Lord Chetwode v IRC [1977] STC 64; TSEM 8510). Trust expenses chargeable to income, as opposed to capital, are all ordinary expenses of a recurrent nature such as rates and taxes and interest on charges and encumbrances. Capital should bear all costs, charges and expenses incurred for the benefit of the whole estate (Carver v Duncan; Bosanquet v Allan [1985] STC 356). The income of beneficiaries with an interest in possession is the income received by the trustees less the expenses properly charged to income (IRC v Lord Hamilton of Dalzell (1926) 10 TC 406; Murray v IRC (1926) 11 TC 133; MacFarlane v IRC (1929) 14 TC 532). 6.79 If a trust instrument allows trustees to meet normal capital expenses from income, they still reduce the income otherwise payable to the beneficiaries. HMRC cannot tax a beneficiary on more income than he is entitled to demand from the trustees (IRC v Dewar (1935) 19 TC 561). Where, however, the trustees pay expenses on behalf of a beneficiary, he is taxed on the gross equivalent of amounts paid by the trustees at his direction (IRC v Miller (1930) 15 TC 25; Shanks v IRC (1929) 14 TC 249; Donaldson’s Executors v 304

Main Taxation Rules Applicable to Trusts 6.82 IRC (1927) 13 TC 461; Sutton v IRC (1929) 14 TC 662; Sterling Trust Ltd v IRC (1925) 12 TC 868; TSEM3510). 6.80 HMRC, at TSEM3515, used to list some examples of trust management expenses but this has now been withdrawn: (a)

telephone, stationery and postage;

(b) the cost of collecting and distributing income; (c) accountancy fees – including the cost of preparing trust accounts and returns, arguably these are for the benefit of the trust as a whole; there is a long-standing practice that allows them; (d)

interest on unpaid IHT under IHTA 1984 s 233(3), which is not allowable in computing income for income tax purposes, but trustees can claim it as a trust management expense if they properly pay it from income – this will reduce the income of beneficiaries or the amount chargeable under ITTOIA 2005 s 568 or ITA 2007 ss 479–483 (TSEM8845);

(e)

interest paid on overdue income tax – the provisions are similar to those for interest on unpaid IHT;

(f)

interest paid under TMA 1970 s 88 – trustees must have an indemnity under the terms of the trust document.

The latest version (TSEM8220), however, merely refers to the expenses being necessarily incurred and properly charged to income. 6.81 (a)

TSEM similarly listed expenses that are not allowable are as follows: capital gains tax;

(b) the costs of creating the trust; (c)

the costs of appointing new trustees;

(d) legal fees – including the costs of legal advice or the cost of preparing supplementary deeds; (e) the costs of employing an investment adviser, including the costs of making or changing investments; (f) premiums on life or other insurance policies forming part of the trust fund; (g) expenses allowable in some other context, eg  expenses the trustees deducted to arrive at the taxable profits of property business. 6.82 Expenses paid by the trustees to a beneficiary as an allowance for the upkeep of trust property is likely to be the income of the beneficiary (Shanks v IRC (1928) 14 TC 249; Waley Cohen v IRC (1945) 26 TC 471) unless the money 305

6.83  Main Taxation Rules Applicable to Trusts is held in a constructive trust for the upkeep of the property (Marchioness Conyngham v Revenue Comrs (1928) 1 ITC 259). 6.83 The proliferation of different tax rates for different types of income has necessitated a statutory order of set-off of trust expenses which are treated as paid out of income in the following order under ITA 2007 s 486(1): (a)

dividends grossed up at the dividend ordinary rate (7.5% in 2019/20);

(b) savings income; (c)

other income bearing tax of the basic rate (20% in 2019/20).

6.84 Non-resident trustees have to apportion expenses rateably between income that pays UK tax and that which does not under ITA 2007 s 487. Only the proportion of expenses applicable to the UK income can be taken into account in calculating the tax payable by the trustees and beneficiaries. 6.85 Where a UK trust has non-UK resident beneficiaries to whom income is distributed, the management expenses incurred by the trustees in the year have to be proportionately disallowed where the beneficiary is not liable to income tax on distributions because of his non-UK residence, or deemed non-UK residence under a double taxation treaty (ITA  2007 ss  499–502). The disregarded expenses are the amount which bears the same proportion to all the expenses as the untaxed income payable to the non-resident bears to the distributed income payable to all the beneficiaries (ITA 2007 s 501). The proportion of income distributed is the actual income not grossed up for tax purposes. Excluded income taxable on a non-resident under ITA 2007 ss 811– 814, which has not borne tax by deduction at source, is treated as income not liable to tax in the UK by reason of the non-UK resident beneficiary’s nonresidence (ITA 2007 s 502). 6.86 So far as interest paid by the trustees is concerned, interest on unpaid tax, including IHT under IHTA 1984 s 233(3), is not allowable in computing income for income tax purposes as it is not an expense for the benefit of the income beneficiaries. TSEM  8845 formerly provided that the trustees could claim it as a trust management expense if the trust deed allows them to pay this properly from income but this does not appear in the current version of TSEM. TMA 1970 s 90 disallows tax relief on interest. The general interest deduction provisions in ITA 2007 ss 383–412 apply to trusts, and this includes a loan to pay IHT under ITA 2007 ss 403–405 although the interest is only deductible for the first year (ITA 2007 s 404). Trustees use the gross equivalent of the interest paid in calculating the tax at the rate applicable to trusts and the income of the beneficiary who is entitled to the trust income (TSEM8245). 6.87 Where income is mandated to a life tenant so that the trustees have no income, any trust expenses would, of necessity, have to be paid from capital and 306

Main Taxation Rules Applicable to Trusts 6.87 would not serve to reduce the life tenant’s taxable income. If the beneficiary meets the cost of trust management expenses that are properly charged to income, the beneficiary may set the expenses against income chargeable at higher rates. This is on the basis that income which is used to meet trust management expenses does not form part of his entitlement (TSEM8375).

Example The trustees of the Grushin trust were required to pay £500 per annum out of the trust income to maintain the grave of Rover, the settlor’s Labrador dog, now deceased, and half the remaining income to Peter, with the balance at their discretion to distribute among a number of beneficiaries or to accumulate. The trust income consisted of UK dividends of £1,000, net rents on commercial property received of £6,000 and bank interest of £500. The trustees incurred fees and expenses chargeable to income of £2,000.

£ Income received (2019/20) Less income allocated for specific purposes (Rover’s grave) allocated pro rata

Less allocated for specific purposes £2,000 × 500/7,500

Interest

Rent

£

£

£

1,000

500

6,000

(67)

Less income allocated to Peter (½) as life tenant Expenses

Dividends

(33)

933

467

(467)

(233)

466

234

2,000 (133) 1,867

Less allocated to life tenant £1,867 × ½=

933

Less allocated to income taxable at rate applicable to trusts

934

Grossed up at dividend rate £431 × 7.5%

(466)

Grossed up at basic rate £187 × 100/80

(234)

307

(400)

5,600 (2,800) 2,800

6.88  Main Taxation Rules Applicable to Trusts

£

Dividends

Interest

£

£

Grossed up at basic rate £316 × 100/80

Rent £ (395)

Amount taxable at trust rate NIL

NIL

Tax payable by trustees at 45% (note the standard rate band has been ignored)

2,405 1,082

Peter’s taxable income from the trust was:

Dividends £

Gross income

Interest

Rent

£

£

£

467

233

2,800

Tax paid by trustees 7.5%

(35)

20%

(46) (560)

Net

432

Less management expenses

933

Allocated to dividends

432

Allocated to interest

187

Allocated to rents

316

187

2,240

(432) (187) (316)

Net income liable to higher rates NIL Grossed 100/80

NIL

1,924 2,405

Tax payable by Peter at (say) 20% (40% – 20%)

481.00

CAPITAL GAINS TAX 6.88 For CGT purposes, settled property means any property held in trust other than by nominees or bare trustees (TCGA 1992 ss 68, 60). A transfer into settlement whether revocable or irrevocable is a disposal of the entire property by the settlor, whether or not he is a beneficiary under the settlement or a trustee (Berry v Warnett [1982] STC 396; TCGA 1992 s 70). The trustees of a settlement are treated as being a single and continuing body of persons distinct from the persons who may from time to time be the trustees. Trustees are treated as being resident in the UK if all of the trustees or a majority of them 308

Main Taxation Rules Applicable to Trusts 6.92 are resident in the UK and the settlor was resident or domiciled in the UK at the time property was added to the trust (TCGA 1992 s 69(2A), (2B)). A trustee is also treated as resident in the UK if he acts as trustee in the course of a business which he carries on in the UK through a branch, agency or permanent establishment (TCGA 1992 s 69(2D)). In the case of a trust established by will or intestacy, the residence status of the deceased person immediately prior to death establishes the residence status of the trustees (TCGA 1992 s 69(2C)). 6.89 For 2006/07 and earlier years, the trustees of a settlement were treated as resident and ordinarily resident in the UK unless the general administration of the trust was ordinarily carried on outside the UK and the trustees or a majority of them for the time being were not resident or ordinarily resident in the UK (TCGA 1992 s 69(1), prior to substitution by FA 2006 s 88 and Sch 12 para 2(1)). Under the pre-6 April 2007 rules, a UK resident professional trustee was regarded as non-UK resident if, when the settlement was created, the settlor was neither domiciled, resident nor ordinarily resident in the UK and the majority of the trustees were not UK resident and the general administration of the trust was ordinarily carried on outside the UK (TCGA 1992 s 69(2), prior to substitution by FA 2006 s 88 and Sch 12 para 2(1)). 6.90 In a strict settlement under SLA 1925, the life tenant, as trustee, and the capital trustees are treated as constituting and acting on behalf of a single body of trustees (TCGA 1992 s 69(3)). Where tax is assessed on the trustees in respect of a chargeable gain and is not paid within six months from the due date, HMRC may collect the tax from any transferee of the trust assets who has become absolutely entitled as against the trustees within two years of the time when the tax became payable (TCGA 1992 s 69(4)). 6.91 The rate of CGT for a settlement is 20% for gains arising on or after 6 April 2016, other than in relation to disposals of residential property where the CGT rate is 28%. The rate of CGT for trustees was 28% for gains realised between 6 April 2010 and 5 April 2016, having been 18% between 2008/09 and 2009/10. For rates applying to earlier years, please refer to previous editions of this work. 6.92 Disposals of high value UK residential property by ‘non-natural persons’ are subject to a CGT charge under the annual tax on enveloped dwellings (ATED) rules for tax years 2013/14 to 2018/19 inclusive (TCGA 1992 s 2B, prior to repeal by FA 2019 Sch 1 para 2). Trustees are not regarded as a non-natural person and are not therefore within the scope of the ATED provisions, however, the charge will need to be considered where UK residential property is held (for example) through an underlying company owned by the trustees. Under the ATED regime, an annual income tax charge is payable based on the value of the property in addition to a liability to CGT on a disposal (FA 2013 s 94). Residential property is ‘high value’ where it exceeds the valuation threshold on the ‘valuation date’ (FA 2013 ss 99, 102). The first 309

6.93  Main Taxation Rules Applicable to Trusts valuation date was 1 April 2012 and the valuation threshold was £2 million. This was subsequently reduced to £1 million from 1  April 2015 and then £500,000 from 1 April 2016. Various exemptions are available from the ATED charge, for example where property is acquired by a developer, or the property is let to a third party (FA 2013 ss 133 to 150). An ATED CGT charge arises on a disposal of the residential property (or part thereof) on or after 6 April 2013 unless an exemption from the annual charge has applied throughout the period between 6 April 2013 (or the date of acquisition, if later) and the date of disposal before 5 April 2019. Where an exemption has applied for only part of the period, the gain is time apportioned between exempt and non-exempt periods and ATED CGT levied only on the chargeable proportion (TCGA 1992 Sch 4ZZA to 4ZZC). 6.93 For disposals in 2019/20 and later years, the ATED CGT charge is withdrawn and replaced by the provisions relating to the disposal of UK land by non-residents. The income tax and SDLT elements of the ATED regime remain in place. For further details, see Chapter 17. 6.94 Trustees are entitled to an annual exemption equal to half that of an individual (TCGA 1992 s 1K, Sch 1C para 5(1), formerly TCGA 1992 Sch 1 para (2)(2)). In respect of pre-7 June 1978 trusts, the trustees merely have to state on the trust return that the gains do not exceed half the exempt amount for the year and that the consideration does not exceed the exempt amount. Other trusts have to return a full computation of chargeable gains (Sch 1 para 5, as amended by FA 2019 s 13 Sch 1, formerly Sch 1 para 2(3)). Where there are several trusts made by the same settlor after 6 June 1978, the annual exempt amount available of one-half of an individual’s annual exemption is divided by the number of trusts in the group, subject to the minimum allowance of one-tenth of the annual exemption for each trust (Sch 1C para 6(3), formerly Sch 1 para 2(4) and (5)). From 6 April 2006, the CGT definition of settlor in TCGA 1992 s 68A applies. Previously, the income tax definition of ‘settlor’ in ITTOIA 2005 s 620 (see 6.2) applied. 6.95 A  UK qualifying settlement (referred to as an excluded settlement for 2018/19 and earlier years) is defined as one where the trustees are UK resident or which is a charitable trust or approved superannuation fund (TCGA 1992 Sch 1C para 7(1) to (3), formerly Sch 1 para 2(7), (8)). An officer of the Board is given power to demand information in relation to a settlement in order to determine the entitlement to the proportionate annual allowance under FA 2008 Sch 36 as amended by FA 2009 Sch 47. The annual exempt amount for an individual under TCGA  1992 s  3(2) is £12,000 for 2019/20. From 6 April 2019, the annual exempt amount is to be increased in accordance with CPI (TCGA 1992 s 1L). Where the settlement is for disabled persons, the full annual exempt amount is allowed and apportioned among such settlements made by the same settlor if relevant (TCGA  1992 Sch  1C para  1, formerly TCGA 1992 Sch 1 para 1). 310

Main Taxation Rules Applicable to Trusts 6.100 6.96 Where the trustees have made a sub-fund election under TCGA 1992 Sch 4ZA para 1, the sub-fund is treated as a separate settlement, and the annual exempt amount allocated to the principal settlement is further apportioned between that settlement and the sub-fund(s) (Sch 1C para 8, formerly Sch 1 para 8). 6.97 Because trustees are taxable on disposals of trust assets, including on transfer to beneficiaries, the beneficiaries’ interest in the trust, which is itself an asset, is normally exempt for CGT purposes under TCGA 1992 s 76(1) unless it was acquired for money or money’s worth. The exemption is also lost where the trustees were at any time not resident or (for 2012/13 and earlier years only) ordinarily resident in the UK or treated as such for double taxation relief purposes under a double taxation treaty (s 76(1A) and (1B)). The purchaser of an interest in settled property who then becomes absolutely entitled as against the trustee is treated as disposing of the interest he purchased for the value of the property transferred to him (s 76(2) and (3)). 6.98 Although the definition of settlor is generally the same for CGT and income tax purposes, other than in relation to the settlor interested settlement regimes in ITTOIA 2005 s 624 and TCGA 1992 s 86, it may not always be the same person. For example, a beneficiary may have assigned the right of income to another party, thus creating a further trust of which he is the settlor which will not affect his position as beneficiary for capital gains purposes. Variation to a deceased testamentary disposition may cause the deceased to be the deemed settlor for CGT purposes under TCGA 1992 s 62(6) but this would not have any effect for income tax purposes and the original legatee would become the settlor. This also applies for the non-resident trust capital gains legislation in TCGA 1992 s 87 (Marshall v Kerr [1994] STC 638). 6.99 It is often necessary to determine whether there is more than one settlement which affects not only the annual allowance available to the trust but also the fact that losses cannot be transferred between settlements. The transfer of assets within a settlement would not be a disposal but a transfer to a different settlement would be, at a market valuation (CG33290). The starting point is that a single settlement deed implies a single settlement even though it may be divided into a number of funds or sub-trusts. The leading case on whether or not a separate trust has been created is Roome v Edwards [1981] STC 96. Where a trust was divided into two but the trustees remained the same and were subject to the administrative powers of the main settlement this was just an internal division, not a deemed disposal under TCGA 1992 s 71 (Bond v Pickford [1983] STC 517). 6.100

SP 7/84 provides as follows:

‘Exercise of a power of appointment or advancement over settled property The Board’s Statement of Practice SP  9/81, which was issued on 23  September 1981 following discussions with the Law Society, set 311

6.100  Main Taxation Rules Applicable to Trusts out the Revenue’s views on the capital gains tax implications of the exercise of a power of appointment or advancement when continuing trusts are declared, in the light of the decision of the House of Lords in Roome v Edwards [1981]  STC  96. Those views have been modified to some extent by the decision of the Court of Appeal in Bond v Pickford [1983] STC 517. In Roome v Edwards the House of Lords held that where a separate settlement is created there is a deemed disposal of the relevant assets by the old trustees for the purposes of TCGA  1992 s  71(1) (CGTA  1979 s  54(1)). But the judgements emphasised that, in deciding whether or not a new settlement has been created by the exercise of a power of appointment or advancement, each case must be considered on its own facts, and by applying established legal doctrine to the facts in a practical and commonsense manner. In Bond v Pickford the judgements in the Court of Appeal explained that the consideration of the facts must include examination of the powers which the trustees purported to exercise, and determination of the intention of the parties, viewed objectively. It is now clear that a deemed disposal under TCGA 1992 s 71(1) cannot arise unless the power exercised by the trustees, or the instrument conferring the power, expressly or by necessary implication, confers on the trustees authority to remove assets from the original settlement by subjecting them to the trusts of a different settlement. Such powers (which may be powers of advancement or apportionment) are referred to by the Court of Appeal as “powers in the wider form”. However, the Board considers that a deemed disposal will not arise when such a power is exercised and trusts are declared in circumstances such that— (a)

the apportionment is revocable, or

(b) the trusts declared of the advanced or appointed funds are not exhaustive so that there exists a possibility at the time when the advancement or apportionment is made that the funds covered by it will on the occasion of some event cease to be held upon such trusts and once again came to be held upon the original trusts of the settlement. Further, when such a power is exercised the Board considers it unlikely that a deemed disposal will arise when trusts are declared if duties in regard to the appointed assets still fall to the trustees of the original settlement in their capacity as trustees of that settlement, bearing in mind the provisions in TCGA 1992 s 69(1) (CGTA 1979 s 52(1)) that the trustees of a settlement form a single and continuing body (distinct from the persons who may from time to time be the trustees). Finally, the Board accept that a power of appointment or advancement can be exercised over only part of the settled property and that the above consequences would apply to that part.’ 312

Main Taxation Rules Applicable to Trusts 6.104 6.101 A  sub-trust of the existing trust was also held to arise in Swires v Renton [1991]  STC  490, separate trusts were created in Ewart v Taylor [1983] STC 721 but not in Eilbeck v Rawling [1980] STC 192 although the scheme failed on the grounds of interposed artificial transactions in that case. 6.102 HMRC analysis of one or more settlements is contained in CG33295– CG33323. HMRC’s view is that a conventional marriage settlement with funds coming from two families creates two distinct trusts in most cases (CG33306). Where the original settled funds are purely nominal and funds are added by somebody else, the original named settlor is effectively ignored (CG33320). Funds added to a substantial settlement by another party may create a new settlement unless the intention is clear that the additional funds are intended to be added to the existing trust property and mingled with it (CG33321 and CG33323). 6.103 The treatment under the Taxes Acts of the trustees as a single continuing body of persons presents a number of difficulties where a general settlement comprises one or more sub-trusts; for example, capital losses are regarded as belonging to the settlement as a whole rather than to a particular sub-trust so that, on the first beneficiary becoming absolutely entitled to capital, brought forward losses would be offset against the notional gain arising at that time, notwithstanding the losses may relate to another beneficiary’s subfund. The Treasury sought to address this anomaly in FA 2006 as part of its programme of modernisation of the trust legislation through the introduction of TCGA 1992 s 69A and Sch 4ZA, which enables a ‘principal’ settlement to make an election to treat the individual sub-funds as separate settlements for tax purposes (TCGA 1992 Sch 4ZA para 1). Although the sub-fund election is designed primarily to address imbalances in the treatment of capital losses within sub-funds, an election once made also has effect for income tax purposes (ITA 2007 s 477). 6.104 A sub-fund election may be made at any time and must specify the date from which it is to take effect, which cannot be earlier than 6 April 2006 or later than the date the election is made (TCGA  1992 Sch  4ZA para  2). There are three conditions which must be met before a sub-fund election can be made, and a fourth condition which must be met during the specified period which runs from the date the election takes effect until the day before the election is made. The first condition stipulates that the trustees may make a sub-fund election only if the principal settlement is not itself a sub-fund, and a sub-fund cannot itself be split into further sub-funds. Where there are effectively two separate settlements containing the entire settled property prior to the making of a sub-fund election, it is up to the trustees to determine which of those settlements is the ‘principal’ settlement and which is the sub-fund. The individual trustees of the principal settlement are treated as the trustees of that settlement only, and not the trustees of the sub-fund, unless as a question of fact they are trustees of both. Similarly, the trustees of the sub-fund are 313

6.105  Main Taxation Rules Applicable to Trusts regarded for tax purposes only as the trustees of the sub-fund and not the principal settlement, unless they are in fact the trustees of both settlements (TSEM3510). 6.105 Secondly, in order for a sub-fund election to be validly made, the subfund must not constitute the entire property of the principal settlement. Thirdly, assuming the sub-fund election were effective, the sub-fund must not have an interest in property in which the principal settlement has any interest. The effect of the second and third conditions is to ensure that assets within a sub-fund are therefore effectively ‘ring-fenced’ from the principal settlement and any other sub-funds. The final condition, which must be met during the specified period mentioned above, requires that, subject to certain exceptions, a beneficiary of the sub-fund cannot also be a beneficiary of the principal settlement, and vice versa (TCGA  1992 Sch  4ZA paras 2–8). For these purposes, a person is regarded as a beneficiary of a settlement if any property which is or may become comprised in the settlement (or any derived property) is applied for his benefit or is or may become payable to him, or if he enjoys a benefit directly or indirectly from settlement property (or any derived property). Where property or any derived property would only become payable to a person or applied for his benefit by reason of certain events, a person is not to be treated as a beneficiary. The events are: (a)

his entering into marriage or civil partnership with a beneficiary;

(b) the death of a beneficiary; (c)

an exercise of their power of appointment by the trustees under TA 1925 s 32 or equivalent under the terms of another jurisdiction; or

(d) a failure or determination of protective trusts within TA 1925 s 33. 6.106 On the making of a sub-fund election under TCGA 1992 Sch 4ZA para  1, the trustees of the principal settlement are deemed to have disposed of the property within the sub-fund and there is a corresponding deemed acquisition by the trustees of the sub-fund. A claim for holdover relief under TCGA 1992 s 165 may be made by the trustees of the principal settlement and sub-fund, where the relevant conditions are met. 6.107 The trustees are normally the party chargeable to CGT. Because the remittance basis only applies to individuals not domiciled in the UK and trustees are not regarded as individuals, the remittance basis cannot apply to capital gains made by trusts (TCGA 1992 s 65(2)). The trustees chargeable are those who were trustees at any time during the year of assessment in which the chargeable gain accrues and any subsequent trustees of the settlement. Where tax is chargeable on trustees who migrate within TCGA 1992 s 80(2), a former trustee is not liable if he can show that, at the time he ceased to be a trustee, there was no proposal that the trustees should become neither resident nor (prior to 2012/13) ordinarily resident in the UK (TCGA 1992 s 65(3), (4)). 314

Main Taxation Rules Applicable to Trusts 6.111

Trustee’s expenses deductible for capital gains tax 6.108 TCGA 1992 s 38 allows relief for the incidental costs of making a disposal for CGT purposes. This includes, in the case of a trust, the legal and actuarial services including stamp duty on transfers and auxiliary expenses incurred on varying or ending a settlement, including the termination of an interest in possession under TCGA 1992 s 72 (IRC v Chubb’s Trustee (1941) 47 TC 353). Relief extends to the expenses of obtaining probate of the deceased’s estate (IRC  v Richards’ Executors (1971) 46  TC  626) but not to insurance premiums paid as part of a trust variation (Allison v Murray [1975] STC 524). Other fees in respect of discharges and commission on the transfer of assets to beneficiaries would be deductible. Expenditure should be apportioned between chargeable and non-chargeable assets by reference to value. 6.109 Where costs are borne by a beneficiary to whom the assets are transferred, that would be an allowable cost to the transferee on any subsequent disposal unless the trustees have claimed a deduction for the costs on the transfer. TCGA 1992 s 52(1) prevents a double claim (CG33523). Expenses incurred by corporate trustees for the transfer of assets to beneficiaries are deductible in accordance with SP 2/04 para 5, which allows a basic cost of £25 per holding of stocks or shares with the addition of any exceptional expenditure for unquoted shares or other assets. For quoted stocks and shares the investment fee charged by the trustee is allowed with the addition of actual valuation costs in the case of unquoted shares. The maximum fee for other assets is £75 plus actual valuation costs. In the case of deemed disposals, the allowance is £8 per holding, except for unquoted shares and other assets where the actual valuation costs are allowed. Where a comprehensive annual management fee is charged, the allowance is 0.25% on the sale or purchase monies (CG33524–CG33528). Withdrawal fees charged by the trust departments of banks etc on termination of their trusteeship are not normally deductible, except for the actual work done on valuation or transfer of assets (CG33522). The normal scale fees of a professional trustee would usually be allowable (CG33528). Actual costs may be used rather than those set out in SP 2/04 (CG33524). 6.110 Although original valuation costs are deductible under TCGA 1992 s 38(2)(b), this does not extend to the costs of appealing against the valuation of unquoted shares (Caton’s Administrators v Couch [1997] STC 970). However, the cost of defending title to an asset such as partnership goodwill is deductible under s 38(1)(b) (Lee v Jewitt [2000] STC (SCD) 517).

Holdover relief 6.111 Where an individual transferor makes a disposal of a business asset other than at arm’s length, he and the transferee may jointly elect, or the transferor may on his own also elect where the transferees are the trustees of 315

6.112  Main Taxation Rules Applicable to Trusts a settlement, that the gain which would otherwise accrue to the transferor be held over and the transferee’s base value shall each be reduced by an amount equal to the held-over gain on the disposal (TCGA  1992 s  165(1) and (4)). A business asset is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by the transferor or his personal company or member of a trading group or consists of shares or securities of a trading company or the holding company of a trading group which is unlisted, or the transferor’s personal company (s  165(2)). It does not apply to a disposal of qualifying corporate bonds, or a disposal to which IHT applies where relief is given under TCGA 1992 s 260 (s 165(3)). Relief also applies to agricultural property under TCGA 1992 s 165(5) and Sch 7, and to settled property where the trade, profession or vocation is carried on by the trustees making the disposal, or by a beneficiary with an interest in possession, or consists of assets or securities in a trading company, or holding company of a trading group where the shares or securities are not listed on a recognised stock exchange, or not less than 25% of the voting rights are exercisable by the trustees (Sch 7 para  2). An interest in agricultural property under IHTA  1984 ss  115–124C also qualifies for business asset holdover relief (Sch 7 para 3). The rules for the calculation of the holdover gain on a gift of business assets within TCGA 1992 s 165 are given in Sch 7 paras 4–8. 6.112 A  personal company is any company the voting rights in which are exercisable as to not less than 5% by the individual transferor. A trading company is one whose business consists wholly or mainly of the carrying on of a trade or trades (TCGA 1992 s 165(8)). Trade includes the occupation of woodlands managed on a commercial basis (s 165(9)). The held-over gain on disposal is the amount by which the unrelieved gain on the disposal exceeds the actual consideration less allowable expenses (s 165(7)). If IHT is payable on the transfer, it is allowed as a deduction in computing the chargeable gain for CGT purposes up to the amount of the gain, in other words it cannot create a loss. If the IHT paid varies, for example, on the transferor’s death within seven years, the capital gain is recalculated (s 165(10), (11)). Holdover relief is not available where the transferee is not resident in the UK or is an individual treated under a double tax treaty as non-UK resident (s 166). Similarly, relief is not available on a gift to foreign-controlled companies (s 167), or to a settlor interested trust. 6.113 The holdover gain crystallises if the transferee was a limited liability partnership which has ceased to trade, or if the donee emigrates within six years, unless he becomes temporarily non-resident through working abroad and resumes UK residence within three years without having disposed of the asset (TCGA 1992 ss 168(4), (5), 169A). Where the trustee emigrates and has not paid the tax within 12 months, the transferor may be charged in the name of the transferee within six years of the end of the year of assessment in which the disposal was made. In such a case, the transferor has a right of recovery against the transferee (s 168(7)–(9)). 316

Main Taxation Rules Applicable to Trusts 6.116 6.114 Where there is a held-over gain on a transfer of business assets within TCGA 1992 s 165 or on a transfer chargeable to inheritance tax within TCGA 1992 s 260, the relief is denied where the transferee trustees are UK resident, but treated by any double taxation agreement as not resident in the UK (TCGA 1992 s 169). The held-over gain is also crystallised on the termination of a life interest, or the death of a life tenant, where holdover relief has been given for business assets under TCGA 1992 s 165, or on a chargeable transfer for IHT purposes under TCGA 1992 s 260 by s 74 of the Act. However, the gain so crystallised can itself be held over under s 260 where there would be a chargeable transfer for IHT purposes. There would not be such a chargeable transfer where, on the death of a life tenant, his or her spouse acquires an interest in possession or becomes absolutely entitled to the trust property (CG33552; TCGA  1992 s  58). Where there is holdover claim on a gift, it may not be necessary to have a formal valuation of the property transferred (SP 8/92). 6.115 Disposals of an interest in UK residential property by non-UK resident persons are chargeable to UK capital gains tax where the disposal takes place on or after 6 April 2015 (TCGA 1992 s 14B, 14D, prior to repeal by FA 2019 Sch 1 para 1). The scope of the non-resident capital gains tax charge is expanded to all direct and indirect interests in UK land (whether commercial or residential) for disposals on or after 6 April 2019 (TCGA 1992 s 1C, inserted by FA 2019 s 13 and Sch 1). The holdover relief rules apply with modifications in respect of such gains (TCGA 1992 s 167A). The normal rule under which the held over gain is deducted from the transferee’s base cost is disapplied, and it is instead deemed to wholly or partly accrue at the time of a subsequent disposal of an interest the property (s 167A(2), (3)). This is in addition to any further gain which may arise on the disposal. Any inheritance tax liability payable on a disposal to which holdover relief has applied is deducted from the actual chargeable gain arising on its disposal (s 167A(5)). See Chapter 10 for further details. 6.116 Gifts on which IHT is chargeable, made by an individual or the trustees of a settlement to an individual or the trustees of a settlement, may be held over where the appropriate claim is made. From 22 March 2006, IHT is chargeable on all transfers into trust made during an individual’s lifetime, except where the transfer is to a disabled person’s trust. The relief is also available where the transfer is exempt from IHT, eg as a transfer to a political party or to maintenance funds for historic buildings etc within TCGA  1992 s 260(2). It does not apply to potentially exempt transfers (s 260(2)(a)). The rollover relief is calculated in the same way as for TCGA  1992 s  165 on a gift of business assets (s 260(3)–(5)). Gifts to non-residents are excluded by TCGA 1992 s 261, and this includes residents deemed to be non-resident under a double taxation treaty. The anti-avoidance provisions on the emigration of a donee, gift into a dual resident trust or cessation of trade by a limited liability partnership in TCGA 1992 ss 168, 169 and 169A apply to gifts on which IHT is chargeable as they apply to gifts of business assets under TCGA 1992 s 165. 317

6.117  Main Taxation Rules Applicable to Trusts 6.117 Holdover relief is available under TCGA 1992 s 260(2)(d) where a beneficiary becomes absolutely entitled to trust property, provided that the income and capital vest simultaneously. TA  1925 s  31 gives entitlement to income at the age of 18 unless the trust instrument provides otherwise (BeggMacBrearty v Stilwell [1996] STC 413), so that the beneficiary has an interest in possession from age 18. CGT is payable on a subsequent transfer of assets to the beneficiary under TCGA 1992 s 71, as s 260(2)(d) of that Act does not apply where the IHT-free occasion for charge under IHTA 1984 s 71(4) has already taken place. Relief under TCGA 1992 s 260 is given in preference to the holdover relief on business assets under TCGA 1992 s 165 and must be claimed within four years (six years prior to 1 April 2010) by the transferor and trustee jointly, unless the transfer is to trustees, when only the transferor need make a claim. The death of a life tenant can crystallise capital gains tax on a held-over gain where assets were transferred to a trust under TCGA 1992 s 74 (see Chapter 8). 6.118 Following the introduction of the non-resident capital gains tax regime for disposals of interests in UK residential property on or after 6 April 2016, the scope of the holdover relief provisions under TCGA 1992 s 260 was expanded to include claims in relation to gains arising on such disposals. The capital gains tax charge was further expanded from 6 April 2019 to include disposals of direct and indirect interests in UK land, whether commercial or residential. TCGA 1992 s 261ZA provides for a holdover claim to be made where the gift by the non-UK resident gives rise to an IHT charge. As for holdover relief claims under TCGA 1992 s 167A, the normal rule under which the held-over gain is deducted from the transferee’s base cost is disapplied, and it is instead deemed to wholly or partly accrue at the time of a subsequent disposal of an interest the property (s  261ZA(2), (3)). This is in addition to any further gain which may arise on the disposal. Any inheritance tax liability payable on a disposal to which holdover relief has applied is deducted from the actual chargeable gain arising on its disposal (s 261ZA(5)). 6.119 Gifts on which IHT is chargeable include those covered by the nil rate band or 100% business property relief or agricultural property relief, as there is no requirement that IHT is actually payable. These provisions were used in a successful avoidance scheme in Melville v IRC [2001] STC 1271. In this case, the settlor transferred assets to a discretionary settlement, which is not a potentially exempt transfer. The terms of the trust gave to him, after 90 days, a power which amounted in effect to a general power of appointment to direct the trustees to exercise their discretionary powers including the transfer of all or part of the trust fund to the settlor absolutely. This meant that the reduction in the estate on which IHT was payable was minimal, in view of the value of the right given to the settlor under IHTA 1984 s 272. The asset could therefore be transferred into trust at negligible IHT cost and with holdover relief for CGT purposes under TCGA 1992 s 260. The scheme was stopped by FA 2002 s  119 which disregarded powers over trust property for IHT purposes. The 318

Main Taxation Rules Applicable to Trusts 6.122 settlor’s power of appointment only arose after 90 days because there would be no IHT charge if the property were to leave the settlement within the first quarter (IHTA 1984 s 65(4)) and therefore the transfer would not have been chargeable to IHT (TCGA 1992 s 260), and holdover relief would not have been available. 6.120 Melville has a number of implications in relation to non-domiciliaries obtaining an interest in settlements of excluded property which they created. These are considered in Chapter 10. Holdover relief under TCGA 1992 s 165 or s 260 is not available on the transfer of assets to a settlor interested settlement, or a trust which becomes settlor interested within six clear fiscal years from the end of the tax year in which the disposal was made (TCGA 1992 s 169C). See para 6.184 et seq. 6.121 For 2007/08 and earlier years, the deferred gain was, in certain cases, halved where it was held over under the gift of business asset rules in TCGA  1992 s  165 and other rollover provisions to compensate for the loss of rebasing. The relief applied where the deferred gain was deducted from allowable expenditure on a later disposal, other than a no gain/no loss disposal, of an asset acquired after 31  March 1982 and a deduction was attributable directly or indirectly, in whole or in part, to gains accruing on the disposal before 6  April 1988 of an asset acquired before March 1982 by the person making that disposal. The relief was really designed to give a rough and ready solution to cases where pre-March 1982 gains were rolled over or held over and lost out on rebasing at 31 March 1982 (TCGA 1992 Sch 4). The relief is repealed for 2008/09 and later years, following the withdrawal of taper relief and indexation allowance. See earlier editions of this work for further details. 6.122 Trustees who are carrying on a trade may claim rollover relief on the replacement of business assets under TCGA  1992 s  152 with proportionate relief for assets only partly replaced under s  153 (Temperley v Visibell Ltd [1974] STC 64; Campbell Connelly & Co Ltd v Barnett [1994] STC 50; Watton v Tippett [1996]  STC  101; Steibelt v Paling [1999]  STC  594; Tod v Mudd [1987] STC 141; SP/D11; and ESCs D16; D22; D24; D25; and D30; SP 8/81; SP/D6). Trustees could make a self-assessment declaration that rollover is intended under TCGA 1992 s 152 and rollover into depreciating assets under TCGA  1992 s  154. Rollover relief is only available for specific classes of assets, ie land and buildings, including fixed plant or machinery and occupied for the purpose of the trade (Anderton v Lamb [1981] STC 43; Temperley v Visibell Ltd [1974] STC 64; Williams v Evans [1982] STC 498). Other classes of assets are ships, aircraft and hovercraft, satellites, space stations and space craft, goodwill, milk quotas and other similar quotas, Lloyd’s syndicate assets, payment entitlements under the single payment scheme (SI 2005/409, implementing Council Regulation (EC) 1782/2003) and from 20  December 2013, basic payment scheme (Council Regulation (EC) 1307/2013). 319

6.123  Main Taxation Rules Applicable to Trusts 6.123 Goodwill and quotas were taken out of the corporation tax chargeable gains rollover provisions and brought into the income rollover provisions as replacement of intangibles from 1  April 2002 (CTA  2009 Part 8, following FA 2002 s 84 and Sch 29. This does not affect the relief for unincorporated businesses (TCGA  1992 s  155). Assets used for a trade of dealing in or developing land do not qualify for rollover relief (s 156). Where the trade is carried on by a limited liability partnership of which the trustees are members, a gain crystallises on the cessation of trade under s 156A. Relief is available in respect of commercial woodlands (s 158(1)(b)), but not to non-residents who replace a business asset within the UK tax regime with a business asset outside it (s 159).

Retirement relief 6.124 Retirement relief was available under TCGA 1992 ss 163, 164 and Sch 6 until 2002/03. This was extended to trustees of a settlement who disposed of shares or securities of a company or an asset used or previously used for the purposes of a business, which was part of the trust fund, and a beneficiary who had an interest in possession other than for a fixed term, in the whole or part of the settled property provided that a number of further conditions were met (s  164(3)). These conditions were that the company was the qualifying beneficiary’s personal company, ie he held at least 5% of the voting rights and it was a trading company or the holding company of a trading group and he was a full-time working officer or employee of the company or companies in the group or commercial association of companies and had reached the age of 50 or retired on ill-health grounds below that age (Palmer v Maloney [1999] STC 890; CG63621 and CG33560; TCGA 1992 s 164(4), (5)).

Private residence relief 6.125 Trustees are entitled to private residence relief where a trust property is occupied by a beneficiary of the trust (Sansom v Peay [1976]  STC  494; TCGA  1992 s  225). For disposals on or after 10  December 2003, the relief has to be claimed by the trustees (FA 2004 Sch 22 paras 5(5) and 7(2)). Relief is extended to personal representatives who dispose of a house which, before and after the deceased’s death, has been used as their only or main residence by individuals who, under the will or intestacy, are entitled to the whole or substantially the whole (75%) of the proceeds of the house either absolutely or for life (ESC D5 – Tax Bulletin, Issue 12, August 1994, p 148), now enacted as TCGA 1992 s 225A by FA 2004 Sch 22 paras 5 and 7(2) with effect for disposals on or after 10 December 2003. 6.126 The relief is the same as that available to an individual. The main residence can include a mobile home (Makins v Elson [1977]  STC  46), but 320

Main Taxation Rules Applicable to Trusts 6.128 see Moore v Thompson [1986] STC 170. The main residence includes grounds of up to 0.5 hectare, or such larger area as is required for the reasonable enjoyment of the dwelling-house (Wakeling v Pearce [1995] STC (SCD) 96; Goodwin v Curtis [1998] STC 475; Longson v Baker [2001] STC 6; Green v IRC [1982] STC 485; TCGA 1992 s 222(3)). A caretaker’s lodge was within the definition in Batey v Wakefield [1981] STC 521 and Williams v Merrylees [1987] STC 445, but not a gardener’s cottage in Lewis v Rook [1992] STC 171. A bungalow was not part of the same premises as the main building in Markey v Sanders [1987] STC 256, nor were separate flats in one building in Honour v Norris [1992] STC 304. An election within two years of the beginning of the period of ownership may be made to determine which of two or more residences is an individual’s main residence for any period, which has to be given jointly with the trustees (Griffin v Craig-Harvey [1994]  STC  54; TCGA 1992 s 222(5)(a), (b)). 6.127 Note that an election under TCGA  1992 s  222 must be between two or more residences, not properties. In other words, the individual must occupy the property as a residence at some time (Harte and Another v HMRC [2012] UKFTT 258 (TC), (2012) STI 2219). An election may be made outside of the period of two years of the acquisition of a second residence, provided it is made within two years after the property is first occupied as a residence. Where the residence was not used as the main residence throughout the period of ownership, relief is available in respect of the period of use as the main residence together with the last 18 months as a fraction of the total period of ownership since 31  March 1982 (s  223, as amended by FA  2014 s 58). From 6 April 2020, it is proposed that the exemption applying to the final period of ownership will be reduced to nine months. Draft legislation was published on 11 July 2019 for inclusion in Finance Bill 2020 following a consultation published on 1 April 2019 ‘Capital Gains Tax: Private Residence Relief: changes to the ancillary reliefs’. For disposals prior to 6 April 2014, the period in TCGA 1992 s 223 was three years. The exemption does not apply where the house was acquired or expenditure was incurred on it with a view to realising the gain on its disposal (Goodwin v Curtis [1996] STC 1146; Jones v Willcock [1996] STC (SCD) 389; TCGA 1992 s 224(3)). 6.128 TCGA 1992 s 226A provides that principal private residence relief is not available where holdover relief under TCGA 1992 s 260 has been claimed in respect of an earlier disposal of the property. This applies where such relief would have been available under TCGA 1992 s 223 on a gain accruing to an individual, or the trustees of a settlement, on a disposal identified in the section as the later disposal; where in computing the gain which would otherwise arise the allowable expenditure would be reduced as the result of a holdover claim under TCGA  1992 s  260 made in respect of one or more earlier disposals, whether or not to the same transferor. Principal private residence relief is not available where the holdover claim is made before the disposal or a claim is made for the relief by the trustees. However, if the holdover relief claim is made 321

6.129  Main Taxation Rules Applicable to Trusts after the disposal, it is assumed that principal private residence relief is not available and all necessary adjustments have to be made in connection with the tax liability ignoring any such relief. If the holdover claim under TCGA 1992 s 260 is revoked, it is deemed never to have been made and principal private residence relief is available instead. Where the earlier relevant disposal, which would otherwise be within TCGA 1992 s 225A, was made before 10 December 2003, principal private residence relief is allowed, as well as holdover relief, for the period up to 10 December 2003, but without any final period of deemed occupation qualifying for relief. Not only do these provisions remove relief from the holdover part of the gain, but also from any gain accruing on the residence subsequently, which seems both harsh and disproportionate to the mischief being aimed at. 6.129 From 6 April 2015, a residence is not regarded as occupied for the purposes of private residence relief for a ‘non-qualifying tax year’ or part thereof and will consequently not be regarded as exempt as a main residence, even where a nomination has been made under TCGA 1992 s 222(5). Where the disposal is made by a non-resident individual, a ‘non-qualifying tax year’ can relate to tax years before 2015/16. A tax year is a non-qualifying tax year if the owner of the property (and spouse or civil partner) is tax resident in a country other than that in which the house is situated, and they do not stay overnight for at least 90 days in a home located in the same territory. A property which is rented does not count as a home for this purpose. The period of 90 days (pro rated for partial tax years) need not be spent in the same home and periods of less than 90 days are aggregated (TCGA 1992 s 22B, inserted by FA 2015 Sch 9 para 3). 6.130 Exemptions for absences relating to, for example, job-related accommodation or where an individual works abroad for a period but subsequently returns to the UK can apply to a non-qualifying year (TCGA 1992 s 222B(11)). 6.131 Finance Bill 2020 will include provisions which restrict the availability of lettings relief under TCGA 1992 s 223(4) to cases where the owner shares occupation of the residence with tenants. The new rules will apply from 6 April 2020 (Draft Finance Bill 2020 published 11 July 2019).

Entrepreneurs’ relief 6.132 Entrepreneurs’ relief was introduced from 6 April 2008 after intensive lobbying by business leaders, professional bodies and other interested parties, following the withdrawal of the business asset taper relief regime. On its initial introduction, the relief operated by reducing net chargeable gains arising on a disposal of assets by 4/9ths, up to a lifetime maximum of £1 million. The application of CGT at the (then) capital gains tax rate of 18% to the reduced 322

Main Taxation Rules Applicable to Trusts 6.134 gains produced a 10% effective tax rate for those chargeable gains falling within the £1 million threshold. Gains in excess of £1 million were charged at the (then) standard CGT rate of 18%. The entrepreneurs’ relief provisions resurrect many features and terminology of the former retirement relief legislation which was phased out between 1998/99 and 2002/03; however, in contrast to retirement relief, there is no age limit for making a claim to entrepreneurs’ relief, and no requirement for the individual to actually retire. On the other hand, entrepreneurs’ relief is less generous in that, when first introduced, it merely reduced the tax rate on the first £1 million of gains from 18% to 10%, whereas retirement relief provided a complete exemption from CGT for gains within the relevant thresholds. The maximum gain qualifying for entrepreneurs’ relief was subsequently increased to £2 million from 6  April 2010, £5 million from 23  June 2010, at which time a straight 10% rate was also introduced (FA 2010 s 4, F(No 2)A 2010 s 2 and Sch 5 paras 1, 5 (F(No 2)A 2010 Sch 1, paras 2 and 12). The threshold of maximum qualifying gains was increased to its current level of £10 million from 6 April 2011 by FA 2011 s 9. 6.133 Entrepreneurs’ relief may be claimed in respect of three categories of qualifying business disposals, two of which are available only to individuals and the third of which is available only to trustees. The categories are: a material disposal of business assets (TCGA  1992 s  169I); a disposal associated with a relevant material disposal (s 169K); and a disposal of trust business assets (s 169J). A ‘material disposal of business assets’ is further divided into three sub-categories: a disposal of the whole or part of a business as a going concern; a disposal of assets used in or for the purposes of a sole trader’s business on cessation; and a disposal of shares or securities in the individual’s personal company. A disposal includes a capital distribution on liquidation (ss 122 and 169S). 6.134 The first sub-category, a disposal of the whole or part of a business (including an interest in a partnership) as a going concern, will be a material disposal of business assets if the business has been owned by the individual for the qualifying period prior to the disposal date. The qualifying period is one year for disposals prior to 5 April 2019 and two years for disposals after that date (TCGA 1992 s 169I as amended by FA 2019 s 39 and Sch 16). The emphasis on a disposal of ‘the whole or part of a business’ is reminiscent of the former retirement relief legislation, and has proven one of the more challenging aspects of entrepreneurs’ relief. Whilst deciding whether there has been a disposal of a business or an identifiable part thereof may be straightforward in many cases, there will frequently be areas of doubt, especially in connection with the disposal of land. This aspect was particularly problematic in relation to the former retirement relief rules, and HMRC’s guidance on the entrepreneurs’ relief (at CG64010) makes it clear that, although the earlier decisions on retirement relief do not constitute a binding precedent, they regard ‘Parliament’s use of the same terms in a subsequent Act [as] a clear 323

6.135  Main Taxation Rules Applicable to Trusts indication of the intended meaning and a Court is likely to find the previous cases persuasive’. A  sale of land used in a farming business which remains substantially unaltered following the sale was held not to be a part disposal of a business in McGregor v Adcock [1977] STC 206, (1977) 51 TC 692. In Purves v Harrison [2001] STC 267, trading premises were sold separately from the business and leased back to the proprietor whilst he found a purchaser for the trade and remaining assets. A period of nine months separated the sale of the premises and the disposal of the remaining business. In a decision of the High Court, Blackburne J held that the two sales could not be regarded as a single transaction, and the earlier sale of the premises could not be treated as part of the later sale of the business. 6.135 Prior to 3  December 2014, a common means of incorporation of a sole trade or partnership trade involved the sale by the proprietor(s) of their interest in the business in exchange for cash and shares. Provided the business had been owned for at least 12 months prior to the disposal, entrepreneurs’ relief could be claimed as there was a disposal of the whole or part of a business. Finance Act 2015 ss  42 and 43 amended the entrepreneurs’ relief rules from 3 December 2014 where a disposal of goodwill is made to a close company related to the transferor, entrepreneurs’ relief cannot be claimed. As a corresponding measure, the intangible asset provisions are amended from the same date to remove the ability of the transferee company to claim tax relief on the amortisation of the acquired goodwill. 6.136 The second sub-category relates to a disposal of assets used in or for the purposes of a sole trader’s business at the time of cessation. There will be a material disposal of business assets for the purposes of entrepreneurs’ relief if the disposal takes place within three years of the date of cessation, provided the individual has owned the business for the qualifying period of at least one year ending on the date the business ceased, or two years for disposals on or after 6 April 2019 unless the business ceased before 29 October 2018 (FA 2019 Sch 16 para 4(2)). A sale of assets with the sale or cessation of the associated business does not constitute a material disposal. Entrepreneurs’ relief will, however, not be lost where former trading premises are let in between the period from cessation until sale, provided the sale takes place within three years of cessation. 6.137 The third sub-category provides for a disposal of shares or securities in the individual’s personal company to be a material disposal of business assets if the individual has owned the shares for the qualifying period (a period of at least 12 months prior to the disposal for disposals before 5 April 2019, 24 months for disposals after that date). The definition of ‘personal company’ was modified for disposals on or after 29 October 2018. A company is an individual’s personal company if the individual holds at least 5% of the ordinary issued share capital of the company, is able to exercise at least 5% of the voting rights, and either would be entitled to at least 5% of the proceeds on 324

Main Taxation Rules Applicable to Trusts 6.141 a sale of the whole of the ordinary share capital of the company, or is entitled to at least 5% of the distributable profits and 5% of the assets available to equity holders on a winding up (TCGA 1992 s 169S(3), as modified by FA 2019 s 39 and Sch 16 para (2)(1), (4)). 6.138 Prior to that date, a company was an individual’s personal company if, during the 12 months ending with the date of disposal, the individual held at least 5% of the ordinary issued share capital of the company in his own right, and was able to exercise at least 5% of the voting rights (TCGA 1992 s 169S(5)). Where shares or securities are held in joint names, each shareholder is treated as being entitled to a proportion of the overall holding and corresponding voting power. It is necessary only for the individual to possess the power to exercise voting rights; it is not necessary for those rights to be exercised (Hepworth v Smith (1981) 54 TC 396). Voting rights which the individual is able to exercise in another capacity, such as in his capacity as the trustee of a settlement, are ignored in calculating the 5% total, as are rights which only come into force in certain circumstances, such as a preference shareholder’s right to vote when dividends fall into arrears. 6.139 To qualify as his personal company, the person making the disposal is required to be an employee or office holder of the company throughout the qualifying period ending with the date of disposal. This was increased from 12 months to 24 months for disposals on or after 6 April 2019. There is no requirement for the employment to be either full-time or paid. A  ‘group’ consists of a company and its 51% subsidiaries CTA  2010 ss  1154–1157 (ICTA  1988 s  838). ‘Trading company’ and ‘trading group’ are defined in TCGA  1992 s  165A, and require the company to be carrying on trading activities which do not include, to a substantial extent, non-trading activities (TCGA 1992 s 169A). 6.140 These terms mirror those which applied for the purpose of business asset taper relief, and much of the guidance in HMRC’s manuals (CG64055– 64100) appears to have been carried over directly from the commentary on the former taper relief provisions. This means that, in determining whether a company or group has substantial non-trading activities, HMRC will look at the same indicators, such as turnover, profits or asset base of the company. It was held in Farmer and Another (executors of Farmer deceased) v IRC (1999) SpC 216 that the status of a company as trading or non-trading is to be considered by reference to all the relevant factors. 6.141 An application under the Business Clearance Service (former Code of Practice 10) may be made by the company where there is genuine doubt or difficulty in determining whether a company meets the requirements for a trading company or holding company of a trading group. There is no appeals procedure, and so, where the company disagrees with HMRC’s ruling, the dispute must be resolved through the usual self-assessment enquiry process 325

6.142  Main Taxation Rules Applicable to Trusts (R v CIR ex parte Bishopp (on behalf of PWC) and Allan (on behalf of E&Y) (1999) 72 TC 322). 6.142 In addition to meeting the personal company requirements, the company must be either a trading company or holding company of a trading group during the period of two years ending with disposal (referred to as Condition A; for disposals before 5 April 2019 or where the trade ceased before 29 October 2019, the period was one year, FA 2019 Sch 16 para 4(3)), or meet the requirements of Condition B. Condition B will be met where a company ceases to be a trading company (without becoming a member of a trading group) or a holding company of a trading group (without itself becoming a trading company) within the three years preceding the disposal (TCGA 1992 s 169I(7)). 6.143 The 5% requirement in the test of personal company could lead to the loss of entrepreneurs’ relief through dilution of a shareholder’s interest on the issue of further share capital. This was perceived as a potential barrier to growth as it discouraged shareholders to seek external investment. To address the position, provisions were introduced in FA 2019 to enable a shareholder to claim entrepreneurs’ relief on gains accruing prior to dilution below the 5% threshold (TCGA 1992 ss 169SB–169SH, introduced by FA 2019 Sch 16 para 3). 6.144 The rules apply where a company no longer meets the personal company requirement in s  169S(3) as a result of an issue of shares on or after 6 April 2019. The subscription must be wholly in cash, and the shares subscribed for genuine commercial reasons and not as part of arrangements to secure a tax advantage (s 169SC(2), (5), (6)). Where the shareholder so elects, he will be treated as having sold and reacquired his shareholding at market value immediately after the diluting event, crystallising a gain upon which entrepreneurs’ relief may be claimed (s 169SC(3)). The irrevocable election must be made by the first anniversary of 31 January following the tax year of the share issue (s 169SG). A further irrevocable election may be made to defer the capital gain deemed to arise until an actual disposal occurs (s 169SD(1)). The election must be made within four years of the end of the tax year in which the share issue takes place. Both elections may be made in writing without the need to submit a tax return (s 169SG(4)). There are detailed rules which apply to apportion the deferred gain arising on the disposal and on a subsequent reorganisation (ss 169SE, 169SF and 169SH). 6.145 TCGA  1992 s  169I(8) provides that entrepreneurs’ relief may be claimed on the part disposal of a business where an individual carrying on a business as a sole trader takes one or more persons into partnership, and contributes assets used in or for the purposes of the former sole trade business to the partnership. Relief may also be claimed where a partner in a partnership (including a member of an LLP) makes a disposal of all or part of his interest in 326

Main Taxation Rules Applicable to Trusts 6.147 partnership assets. Each partner in a partnership at a particular time is treated as owning the business carried on by the partnership. A disposal (or part disposal) of an individual’s interest in a particular partnership asset (as opposed to his interest in the partnership’s entire assets) will not constitute a material disposal of business assets, unless the single asset represents a separately identifiable part of the business. 6.146 TCGA 1992 s 169J enables entrepreneurs’ relief to be claimed on a disposal ‘associated’ with a material disposal of assets consisting of shares or an interest in a partnership qualifying for relief. The associated disposal rules enabled, for example, a disposal of a property held personally be a partner in a partnership to qualify for entrepreneurs’ relief on the individual’s retirement from the partnership. However, in response to concern that the associated disposal provisions were enabling relief to be claimed on personally held assets where the reduction in the individual’s interest in the partnership or company is negligible. FA 2015 s 41 therefore amended these rules from 18 March 2015 to require that the individual’s interest in the partnership/company is reduced by at least 5%. In a further change, FA 2015 also denies entrepreneurs’ relief for an associated disposal where the disposal is of shares and takes the form of a capital distribution other than on a winding up on or after 18 March 2015. 6.147 Trustees do not have their own lifetime allowance, and entrepreneurs’ relief cannot be claimed on a disposal of settlement business assets, unless there is a qualifying beneficiary with an interest in possession in the settlement business assets which are the subject of the disposal, and the trustees and the beneficiary jointly elect for the disposal to count towards the beneficiary’s lifetime total (TCGA 1992 s 169M(2)(a)). The election must be made by the first anniversary of 31 January following the end of the tax year in which the disposal was made. A beneficiary is a qualifying beneficiary if he has an interest in possession in the settlement business assets being disposed of, other than an interest for a fixed term (s 169J(3)). The beneficiary’s interest in the assets being disposed of need not entitle him to all of the income arising from those assets, it is only necessary for the beneficiary to have an interest in part of that income. The term ‘interest in possession’ is not separately defined and therefore it seems there is no requirement for this to be a ‘qualifying interest in possession’ under IHTA 1984 s 59. The reference to an interest in possession for a ‘fixed term’ is designed to exclude interests which are for a fixed, unvarying period of time, such as one year, rather than for a period which is fixed but of variable length, such as an interest for life. A beneficiary with an interest in possession for a term of, say, two years would not be able to elect for entrepreneurs’ relief to apply to the trustees’ disposal, notwithstanding that the trustees may have wide powers to extend the term of the interest. In contrast, a beneficiary with a defeasible life interest appears to be a qualifying beneficiary for the purposes of entrepreneurs’ relief. This point was raised during the Committee Stage of FA  2008, when it was noted that ‘the fact that a defeasible interest may be terminated at some point does not render it an interest for a fixed term’. 327

6.148  Main Taxation Rules Applicable to Trusts It may therefore be possible to make use of defeasible life interests in CGT planning by, for example, granting a defeasible life interest to a beneficiary of a discretionary trust in order to access entrepreneurs’ relief. Under the provisions of FA 2006, all new inter vivos settlements formed on or after 22 March 2006 are within the relevant property regime, and a discretionary trust may therefore convert to an interest in possession trust for a period before reverting to discretionary status. However, HMRC can be expected to scrutinise defeasible life interest arrangements closely where tax avoidance is suspected. 6.148 Settlement business assets consist of shares or securities in a company or assets used (or previously used) for the purposes of a business forming part of the settled property of the trust (TCGA 1992 s 169J(2)). In the case of shares or securities, the same conditions must be met in relation to the company as if the disposal were being made by an individual. This means that, throughout the period of two years (one year for disposals before 5 April 2019) ending not earlier than three years prior to the date of disposal, the company must be a trading company or holding company of a trading group, and the beneficiary must be an employee or office holder of the company (or a company in the same group) and hold 5% or more of the ordinary share capital, voting rights and either would be entitled to at least 5% of the proceeds on a sale of the whole of the ordinary share capital of the company, or be entitled to at least 5% of the distributable profits and 5% of the assets available to equity holders on a winding up during the two year (one year, before 5 April 2019) period prior to disposal in his personal capacity (s 169J(4)). This latter requirement is likely to cause difficulties for a number of beneficiaries of settlor interested trusts, who may have transferred their entire shareholding to the trustees and will therefore be unable to exercise the requisite control over 5% of the company’s votes in a personal capacity. The length of time the shares or securities have been held by the trustees is not relevant in the context of a claim for entrepreneurs’ relief. 6.149 Where the settlement business assets being disposed of are assets (or an interest in assets) used in a business, they must have been used for the purpose of a business carried on by a qualifying beneficiary, whether alone or in partnership, throughout the period of two years (one year prior to 5 April 2019 unless the cessation took place before 29  October 2018) ending not earlier than three years prior to the date of disposal, and the business must have ceased within that three-year period. The length of time the trustees have owned the assets is not relevant. A business includes any trade, profession or vocation carried on on a commercial basis with a view to the realisation of profits. Most categories of business assets are eligible, including goodwill and assets used only partly for business purposes; however, relief is not available in respect of excluded assets, defined as shares and securities and any other assets held as investments (TCGA 1992 s 169L(4)). One interesting anomaly of the legislation is the treatment of assets such as land owned by the trustees and used in a business carried on by a qualifying beneficiary, and for which 328

Main Taxation Rules Applicable to Trusts 6.152 the trustees receive a rent. It appears that TCGA 1992 s 169N does not apply to assets held outside the business by trustees, in contrast to the position under the associated disposal rules for individuals, and the payment of rent does not restrict the availability of entrepreneurs’ relief. 6.150 The definition of settlement business assets does not include assets used in a trade carried on by the trustees. There are likely to be relatively few instances in which trustees are trading on their own account, owing to the risks involved and the possibility of claims for breach of trust where trustees use trust property for trading activities in the absence of express power to trade in the trust instrument. However, some trust instruments expressly permit the trustees to engage in trading activities, particularly where the settled property consists principally of farmland, and the inability to access entrepreneurs’ relief in these circumstances appears somewhat harsh and is, moreover, inconsistent with the approach adopted in the rollover relief provisions. The position may be remedied by the trustees entering into a partnership agreement with a qualifying beneficiary, thus bringing the disposal within the provisions of TCGA 1992 s 169O, but this may not be appropriate in all cases. 6.151 Where there is more than one beneficiary in addition to the qualifying beneficiary who, at the material time, had an interest in possession in the whole of the settled property or the part forming the subject of the disposal, the aggregated gains and losses are allocated to the qualifying beneficiary in accordance with his interest in the income of the settled property being disposed of. The only entitlement to income taken into account for this purpose is that arising from the qualifying beneficiary’s interest in possession in the trust business assets being disposed of. Any other entitlement to income he may have in those assets is ignored (TCGA  1992 s  169O(2)–(4)). The gain so apportioned is taken into account for the purposes of entrepreneurs’ relief, and the balance of gain will remain chargeable to CGT in the normal way. The material time referred to above, in the case of a disposal of shares or securities, is the end of the latest period of two years (one year for disposals before 5  April 2019) within the three-year period ending with the date of disposal throughout which the company met the trading requirement and the qualifying beneficiary met the employment and personal company requirements. In the case of a disposal of assets used for the purposes of a trade carried on by a qualifying beneficiary, the material time is the end of the latest period of two years (one year months for disposals before 5 April 2019) ending not earlier than three years before the date of disposal throughout which the business is carried on by the qualifying beneficiary (TCGA 1992 s 169O(6)). 6.152 It will be appreciated that, where a disposal of trust business assets and a qualifying business disposal by B (the qualifying beneficiary) take place on the same day, the gain realised by B is treated as taking place before the disposal by the trustees. The trustees are therefore only able to make a (joint) claim for entrepreneurs’ relief in respect of their disposal to the extent that 329

6.153  Main Taxation Rules Applicable to Trusts any balance remains of B’s £10 million allowance after his own qualifying disposal(s) have been taken into account. 6.153 The final category of disposals eligible for entrepreneurs’ relief is a disposal associated with a material disposal (TCGA  1992 s  169K). Relief under this heading applies where the material disposal consists of a disposal of shares or partnership assets by an individual; there is no relief for disposals by trustees or sole traders. Entrepreneurs’ relief may be claimed in respect of a gain arising on the disposal of an asset owned personally by the individual and used in the business which was the subject of the material disposal throughout the period of two years (one year before 5 April 2019) ending with the date of that disposal, or the date on which the business ceased, if earlier. The associated disposal must be made as part of the process of the individual’s withdrawal from participation in the business carried on by the partnership or company (TCGA  1992 s  169K(3)). In practical terms, this means that problems may arise where the two disposals are separated by a significant passage of time. HMRC’s guidance states (at CG63998): ‘As the “material disposal” and the “associated disposal” must be part and parcel of one single withdrawal from participation in the business, there should normally be no significant interval between the two disposals. However, where a partnership or company ceases to trade it is quite possible that there may be an interval between the “material disposal” and the disposal of the asset that is the subject of the “associated disposal”. In such cases you may accept that a disposal of an asset is associated with a “material disposal” if the asset is disposed of– •

within one year of the cessation of a business, or

•

within three years of the cessation of a business and the asset has not been leased or used for any other purpose at any time after the business ceased.

•

where the business has not ceased, within three years of the material disposal provided the asset has not been used for any purpose other than that of the business.

For example W, M and S are in partnership running a chain of retail chemists. W owns one of the shops used by the business. He decides to leave the partnership and move abroad. M and S continue in partnership. W intends at the time of leaving the partnership to sell the shop, which continues to be used by the partnership, to M. However M needs time to arrange his finances to allow the sale to proceed. W disposes of the shop to M 18 months after leaving the partnership. So the sale of the shop qualifies as an “associated disposal” under the third bullet point above as the business does not cease, the shop 330

Main Taxation Rules Applicable to Trusts 6.156 continued to be used in the business and the disposal of the shop takes place within 3 years of W leaving the partnership. Cases which do not fall within the above guidelines will have to be considered carefully on their particular facts to see whether they meet the requirement of Section 169K(3) TCGA 1992. For example if the asset has been used for any other purpose for a significant period following the material disposal, it is unlikely that the conditions for relief will be met.’

6.154 Like the former retirement relief provisions, the associated disposal conditions envisage an individual’s retirement following the disposal of a business; however, HMRC at CG63998 makes it clear that there is no requirement for the business to cease, or for the individual to retire or even reduce the amount of work they undertake in the business as part of their ‘withdrawal’ from the business (see Clarke v Mayo 66 TC 728). 6.155 Entrepreneurs’ relief is restricted for certain associated disposals, such as where the individual has received a below market rent for the use of the asset concerned, or the asset has not been used for the purposes of the business throughout its entire period of ownership (TCGA 1992 s 169P). The restriction applying on the payment of rent for assets held personally was perceived as particularly harsh, given its retrospective effect, and transitional provisions were introduced to ensure that the restriction would only apply where below market consideration is payable for the use of an asset on or after 6 April 2008 (TCGA 1992 Sch 3 para 6). 6.156 There are detailed provisions dealing with the operation of entrepreneurs’ relief on a reorganisation within the meaning of TCGA 1992 s  126 (including a share exchange under ss  135, 136) on or after 6  April 2008, and these provisions apply to trustees and personal representatives in the same way as they apply to individuals. Broadly, the provisions enable an individual to make an election disapplying the ‘no disposal’ fiction in TCGA 1992 s 127 and claim entrepreneurs’ relief in respect of a disposal of ‘old’ shares. This will be of use where the conditions for entrepreneurs’ relief are met at the time of the reorganisation but may not be met when the ‘new’ shares or securities are sold (eg because the issuing company is no longer the individual’s personal company). Where the new assets are qualifying corporate bonds (QCBs) under TCGA 1992 s 117(1), relief is available on the deferred gain crystallising on a redemption of the bonds on or after 6 April 2008, if the ‘old’ asset would have met the conditions for relief (had the relevant statute been in place) at the time of the reorganisation. The ‘frozen’ gain crystallising on a post-6 April 2008 redemption of QCBs is calculated without the benefit of taper relief, but indexation allowance is taken into account, as the latter is taken into account in computing the chargeable gain, rather than being a deduction from the gain. 331

6.157  Main Taxation Rules Applicable to Trusts

Taper relief (disposals between 6 April 1998 and 5 April 2008) 6.157 Taper relief applied for tax years 1998/99 to 2007/08 inclusive, and was available to trustees in accordance with TCGA  1992 s  2A and Sch A1 (before repeal by FA 2008 Sch 2 paras 23, 45). Taper relief was available at the rate applicable to non-business assets unless the trust qualified for business asset treatment. Disposals of business assets benefited from a reduction of 75% of the gain chargeable to tax where the asset had been held for a qualifying period of at least two years. Less generous tapering applied to non-business assets, where the maximum reduction in the chargeable gain was 40% after a maximum holding period of ten years. For the detailed provisions, please refer to earlier editions of this book.

Investors’ relief 6.158 Investors’ relief was introduced by FA  2016 s  87 and Sch  14 and has many features in common with entrepreneurs’ relief, however, investors’ relief is targeted at external investors rather than those working within a business. The relief applies to a disposal of any level of shareholding of ordinary shares in an unquoted trading company or the holding company of a trading group acquired fully paid up by subscription for cash on or after 17  March 2016 (ss  169VB, 169VC). ‘Trading company’ and ‘holding company of a trading group’ are defined as for gifts of business assets under TCGA  1992 s  165A (s  169VV(1)). Whether or not a company or group is carrying on trading activities is determined using the same factors applicable to entrepreneurs’ relief above. The appointment of a liquidator or administrator does not cause the company or group’s trading activities to cease for the purposes of investors’ relief, provided the appointment is for genuine commercial reasons and does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax (s 169VV(2), (3)). 6.159 Shares in a qualifying company must be held for a period of at least three years, beginning with the date the share was issued and ending with the date of disposal. If the share was issued before 6  April 2016, it must have been held by the investor during the period from issue to 5  April 2016 and three years thereafter, ie  relief applies to disposals on or after from 6  April 2019 (s  169VC(3)). As with entrepreneurs’ relief, gains on disposals of qualifying shares are charged at the rate of 10% up to a lifetime maximum of £10 million (s 169VK(1)). Although set at the same rate, the investors’ relief and entrepreneurs’ relief lifetime thresholds operate independently from one another, with entrepreneurs’ relief focused on employee shareholders and investors’ relief applying to external shareholders. 332

Main Taxation Rules Applicable to Trusts 6.162 6.160 For investors’ relief to apply, the shareholder, and persons connected with him, must not be an employee of the company or a connected company during the ‘relevant period’, being the period from the date of issue of the shares to the date of disposal (s 169VW). There are two exceptions to this rule, firstly, where the investor or person connected with him becomes an employee of the company or a connected company and at least 180 days have elapsed between the acquisition of the shares and the person becoming an employee, provided there was no intention at the time the shares were acquired for the person to take up employment with the company or a connected company (s 169VW(5), (6)). This exception applies only where the individual takes up an employment, it will not apply to a person who becomes a director. 6.161 The second exception applies to a director (as defined in CTA 2009 s 452) of the company or a connected company who is unpaid, provided he was not connected with the company or involved in carrying on any part of the trade, business or profession of the company or a connected company at any time before the commencement of the relevant period (s  169VW(3), (4)). ‘Unpaid’ in this context means in receipt only of payments which are not disqualifying payments received from the company or a related person (s 169VX). Broadly, a payment is a disqualifying payment unless it represents payment or reimbursement of travelling or other expenses incurred wholly, exclusively and necessarily in the performance of the director’s duties, interest representing no more than a reasonable commercial return on loans to the company or a related person, a dividend or other distribution representing no more than a normal return on investment, a payment for supply of goods not exceeding market value, payment of rent for property occupied by the company or a related person not exceeding a reasonable and commercial rent or necessary and reasonable remuneration in respect of qualifying services to the company or related person in the course of a trade or profession carried on wholly or partly in the UK which is taken into account in calculating the taxable profits of that trade or profession (s 169VX(2)). 6.162 Investors’ relief may be claimed on disposals by individuals or trustees, although (as for entrepreneurs’ relief) trustees do not have their own investors’ relief lifetime allowance and must rather depend upon an eligible beneficiary surrendering part of their own allowance. An individual is an eligible beneficiary if he has an interest in possession other than for a fixed term in settled property which includes the shareholding to which investors’ relief is to apply immediately before the disposal, and has held that interest in possession for the three-year period ending with the date of disposal (s  169VH). Where the eligible beneficiary elects to be treated as such, the trustees may claim investors’ relief in respect of a disposal of qualifying shares provided neither they nor the eligible beneficiary, and those connected with them, breach the rules relating to employment with the company or connected company. The eligible beneficiary can withdraw the election at any time until the claim is made (s 169VH(3)). 333

6.163  Main Taxation Rules Applicable to Trusts 6.163 Where there is more than one beneficiary with an interest in possession in settled property including the shareholding to which investors’ relief is to apply, the trustees’ claim to relief is restricted to the eligible beneficiary’s share (or total eligible beneficiaries’ share, where there is more than one). 6.164 A  claim to investors’ relief must be made on or before the first anniversary of 31  January following the tax year in which the disposal is made (s  169VM). Where investors’ relief is claimed by trustees, the claim is made jointly by the trustees and the eligible beneficiary (or beneficiaries, where there is more than one). The amount of qualifying gains charged at the investors’ relief rate of 10% will be the lower of the gain arising and the remaining £10 million lifetime allowance once previous claims to relief are taken into account (including claims made jointly with trustees, where appropriate) (s 169VL). 6.165 Although the investors’ relief rules require the eligible beneficiary to have an interest in possession in settled property which includes the shareholding to which investors’ relief is to be claimed, he may have no right to participate in trust capital and may therefore not benefit from the funds realised by the disposal. In that case, careful consideration would need to be given by the eligible beneficiary as to whether he wishes to surrender any part of his lifetime investors’ relief allowance, particularly if he has or plans to make investments in his own name which will qualify for the relief.

Reinvestment relief 6.166 Trustees are entitled to reinvestment relief under the Enterprise Incentive Scheme (EIS) (TCGA 1992 Sch 5B para 17). Relief applies to trust assets in the same way as for an individual, provided that the settled property is held in trust for beneficiaries, all of whom are individuals if they do not have interests in possession, or any of whom are individuals if they do have an interest in possession (Sch 5B para 17(1) and (2)). There is an apportionment to exclude the proportion of the gain held for non-individual beneficiaries (Sch  5B para  17(3)–(6)). Trustees are not eligible for Venture Capital Trust (VCT) relief. 6.167 The definition of an interest in possession excludes an interest for a fixed term, but the reference to an individual includes a charity (TCGA 1992 Sch 5B para 17(7) and (8)). The anti-avoidance provisions which claw back relief where an investor receives value, or where there is an investment linked loan, under Sch 5B paras 13–13C and 15, are extended to trustees, individual beneficiaries and their associates, and charitable beneficiaries and persons connected with them, by Sch 5A para 18. These provisions replace the rollover relief on reinvestment by trustees previously available under TCGA  1992 s 164B. 334

Main Taxation Rules Applicable to Trusts 6.168

Connected persons 6.168 Transfers between connected persons in TCGA  1992 s  18 are normally treated as made at market value under s 17. A person in his capacity as trustee of a settlement is connected with any individual who (in relation to the settlement) is a settlor, any person who is connected with such individual, and any body corporate which is connected with that settlement (TCGA 1992 s  286(3)). If the settlement is the principal settlement in relation to one or more sub-fund settlements, a trustee of the principal settlement is connected with the trustees of the sub-fund. Similarly, if the settlement is a sub-fund in relation to a principal settlement, the trustees of the sub-fund are connected to the trustees of any other sub-funds and the trustees of the principal settlement. A  person is connected with an individual if that person is the individual’s spouse or (after 5 December 2005) civil partner, a relative, or the spouse or civil partner of a relative of the individual, or of the individual’s spouse or civil partner (s  286(2)). A  company is connected with a settlement if it is a close company or would be if it were resident in the UK and the participators include the trustees of the settlement, or is controlled by such a company, and a person is connected with a partner, and with the civil partner or spouse or relative of a partner, except in relation to bona fide commercial dealings in partnership assets (s  286(3A) and (4)). Companies are connected if they are under common control (s  286(5)–(7)). A  relative means brother, sister, ancestor or lineal descendant but not uncle, aunt, nephew, niece or cousin (s  286(8)). Tax Bulletin, Issue 6, February 1993, p  56 clarifies the HMRC interpretation of settlements and connected persons. Losses are ring-fenced under TCGA 1992 s 18(3) where the disposal is to a connected person, and can only be set against gains in the same or subsequent fiscal years with the same connected person. HMRC’s interpretation of the connected party provisions as they relate to trustees is set out in the Capital Gains Manual CG14590. In particular, HMRC consider that the settlor and trustees are connected from the moment property is put into the settlement. HMRC appear to accept that the trustees cease to be connected to the persons connected to the settlor after his death as TCGA 1992 s 286(3) is expressed in the present tense. This was stated in RI  38; however, the current Capital Gains Manual has withdrawn CG14592, which explicitly made this clear. For the purposes of determining whether a trustee is connected with a settlor, the identity of the trustee is irrelevant. So, for example, if the trustee is the spouse or civil partner of the settlor, he or she is only connected in his or her capacity as trustee if the case is within TCGA  1992 s  286(3). HMRC consider that TCGA  1992 s  71(2) overrides the connected person rule in TCGA  1992 s  18(3), and hence, where a beneficiary becomes absolutely entitled against the trustees under TCGA  1992 s  71(1), all the unused losses which have arisen to the trustees in respect of property which is, or is represented by, the property to which the beneficiary becomes entitled, including any loss accruing on the deemed disposal to the beneficiary, are transferred to the beneficiary under s 71(2) (CG37207). 335

6.169  Main Taxation Rules Applicable to Trusts

Losses 6.169 Losses for CGT are normally calculated in the same way as profits under TCGA 1992 s 16. Losses have to be claimed (s 16(2A)). A loss is an allowable loss for CGT if a gain arising on the disposal would have been a chargeable gain (s  16(2)). Particular rules applied to losses arising on ‘high value’ residential property within the ATED regime introduced by FA  2013 under TCGA  1992 ss  2B, 2C (see Chapter 17) for tax years from 6  April 2013, and under the non-resident CGT rules introduced by FA  2015 Sch  7 para  11 from 6  April 2015 (TCGA  1992 ss  14B, 14D). Both the ATEDrelated CGT rules and non-resident CGT rules were replaced for 2019/20 and later years by TCGA  1992 ss  1C–1G to accommodate the extension of the CGT charge to gains arising on the disposal by non-UK residents of commercial as well as residential property. Broadly, UK property losses may only be offset against UK property chargeable gains arising in the same or subsequent tax year.

Death 6.170 Normally, on death, the personal representatives acquire the assets at market value and there is no charge to CGT, although there could well be an IHT charge TCGA 1992 s 62(1)). It is possible to change the distribution on death under the will or intestacy by an instrument in writing made by the persons who would benefit under the original dispositions. In this case, the variation or disclaimer does not constitute a disposal for CGT purposes and the variation is deemed to have been effected by the deceased or on a disclaimer the claimed benefit is deemed not to have been conferred (s  62(6)). It used to be necessary in such a variation to elect by notice given to HMRC within six months of the date of the instrument, or such longer time as HMRC may allow, for the variation to have an effect for CGT purposes. From 1 August 2002, TCGA 1992 s 62(7) was modified by FA 2002 s 52 to require the deed to specify that it is to apply for capital gains tax, if that is the intention, and no election is required. These provisions do not apply to a variation or disclaimer made for a consideration in money or money’s worth other than a consideration consisting of the making of a variation or disclaimer in respect of another of the dispositions (s 62(8)). It does not matter if the administration of the estate is complete or the property distributed in accordance with the original will or intestacy (s 62(9)). 6.171 A  variation would allow a settlement to be created or a statutory settlement avoided as if it had been made by the deceased, which has the effect of making the disposal by the person entitled under the will or intestacy a CGTfree disposal and the trustees would take the assets at the probate value. It does not, however, mean that the deceased becomes the settlor for CGT purposes and the settlor remains the legatee or person entitled on intestacy (Marshall v 336

Main Taxation Rules Applicable to Trusts 6.174 Kerr [1994] STC 638). There is no similar provision for income tax purposes, and any income received by or on behalf of the original legatees or persons entitled on intestacy is taxable as their income; it is not deemed to be that of the trustees or persons in whose favour the dispositions are varied.

Remittances 6.172 Trustees do not apply the remittance basis on gains arising on the disposal of assets situated outside the UK, irrespective of the residence or domicile of the beneficiary (CG33502; TCGA  1992 s  65(2)). The CGT is assessed and charged in the name of one or more of the relevant trustees or the relevant personal representatives (s 65(2)).

Deemed disposals 6.173 When a beneficiary becomes absolutely entitled as against the trustees under the terms of the settlement, the appropriate trust assets are deemed to have been disposed of at market value by the trustees and reacquired by them as nominees for the beneficiary within TCGA 1992 s 60(1) (Crowe v Appleby [1975]  STC  502; Pexton v Bell [1976]  STC  301; Stephenson v Barclays Bank Trust Co Ltd [1975] STC 151; Hoare v Gardner [1978] STC 89; Chinn v Collins [1981]  STC  1; Roome v Edwards [1981]  STC  96; Hart v Briscoe [1978] STC 89; TCGA 1992 s 71(1)). These cases demonstrate that whether or not a resettlement amounts to the trustees of the new settlement becoming absolutely entitled as against the trustees of the old settlement, giving rise to a deemed disposal and reacquisition, or is merely a sub-settlement of the original settlement, is a question of fact and degree. Where a power of appointment is exercised to create a new settlement, the settlor of the original settlement is also the settlor of the new settlement for CGT purposes (Pilkington v IRC (1962) 40 TC 416; CG34802). The HMRC view is contained in SP 7/84, which is set out at 6.100. 6.174 Where, on a person becoming absolutely entitled to settled property as against the trustee, an allowable loss would have accrued to the trustees on the deemed disposal at market value, the loss, to the extent that it cannot be deducted from pre-entitlement gains of the trustee, may be treated as an allowable loss accruing to the beneficiary instead of to the trustees, which is a ring-fenced loss deductible only from any gain on the subsequent disposal of the asset giving rise to the loss to the trustees, or, where the asset is an estate, interest or right in or over land, any asset deriving from that asset (TCGA 1992 s  71(2) and (2B)). Pre-entitlement gain for this purpose is the loss accruing to the trustees on the deemed disposal at market value on the beneficiary becoming absolutely entitled or any other disposal taking place before that occasion but in the same year of assessment (s 71(2A)). 337

6.175  Main Taxation Rules Applicable to Trusts 6.175 In computing whether the loss on the deemed disposal can be used by the trustee, it is deductible from trust gains in priority to any other allowable losses accruing to the trustee in that year. The ring-fenced losses of the beneficiary under these provisions can be carried forward indefinitely and are used in priority to any other losses (TCGA 1992 s 71(2C) and (2B)). An infant or mentally disabled person is treated as becoming absolutely entitled even though the assets remain held in a bare trust for them, in view of their legal incapacity (s 71(3)). 6.176 An asset derives from another asset if its value is wholly or partly derived from the other asset as a result of a merger or division of assets, a change in the nature of the assets or the creation or extinguishment of rights in or over an asset or any combination (TCGA 1992 s 71(2B)). 6.177 A  remainderman, becoming absolutely entitled on the death of a life tenant during the period of administration, takes the assets on the date of death as if he were a legatee (CCAB  Press Release, June 1967). Where TA 1925 s 31 is not disapplied by the trust deed, infants acquire an interest in possession at age 18 (Begg-MacBrearty v Stillwell [1996]  STC  413; Swires v Renton [1991] STC 490; Figg v Clarke [1997] STC 247; Bond v Pickford [1983]  STC  517; Ewart v Taylor (and related appeals) [1983]  STC  721). Where assets have to be valued on a beneficiary becoming absolutely entitled as against the trustees, the valuation would be on the basis of a single unit of property, the total allocated among the relevant assets (IRC  v Gray (Executor of Lady Fox) v IRC [1994] STC 360). The (then) Inland Revenue interpretation of the situation was given in the Tax Bulletin of August 1996 (RI 152): ‘Valuations for capital gains tax: applying Gray v IRC The Revenue have been asked whether the decision of the Court of Appeal in IRC v Gray (Surviving Executor of Lady Fox deceased) [1994] STC 360 has any implications for the valuation of assets for the purposes of capital gains tax. The Gray case concerned the valuation of assets for what is now inheritance tax but was at the material time capital transfer tax. IHTA 1984 s 4 deems a transfer of value to have been made for the purpose of capital transfer tax/inheritance tax immediately before death equal to the value of the deceased’s estate at that time. IHTA 1984 s 5 defines a person’s estate as “the aggregate of all the property to which he is beneficially entitled”. And IHTA 1984 s 160 provides that “… the value of any property at any time is … the price which the property might reasonably be expected to fetch if sold in the open market at that time …”. The main question in Gray was whether two items of property comprised in the deceased’s estate must be taken separately or whether they could be treated as one unity for valuation under IHTA 1984 s 160. 338

Main Taxation Rules Applicable to Trusts 6.177 The principle that emerged from Gray is that two or more different assets comprised in an estate can be treated as a single unit of property if disposal as one unit was the course that a prudent hypothetical vendor would have adopted in order to obtain the most favourable price without undue expenditure of time and effort. This principle will be applicable to capital gains tax valuations in which the statutory hypothesis on which the valuation is based deems two or more assets to be disposed of together. Examples will include— — an acquisition by personal representatives or legatees under TCGA 1992 s 62 of assets of which a deceased person was competent to dispose; —

an acquisition of settled property under TCGA 1992 s 71(1) on the occasion of a person becoming absolutely entitled to that settled property.

Where the principle established in Gray is followed, so as to value a number of assets collectively to produce a total valuation in excess of the value of the assets valued separately, an apportionment will be required in accordance with TCGA  1992 s  52(4). The apportionment is to be made on a just and reasonable basis and so must reflect the value of each of the assets. Commonly this will require an apportionment of the total value in proportion to the value of each asset. Where the statutory hypothesis requiring a valuation proceeds on the assumption of a disposal of a single asset by itself the principle established in Gray cannot apply, for example in Henderson v Karmel’s Executors [1984] STC 572 the court held that even though at 6 April 1965 Mrs Karmel owned both the freehold interest in a farm and controlled the tenant company, so having the power one way or another to terminate the company’s interest, that was insufficient to value the freehold interest on a vacant possession basis for capital gains tax rebasing to 6 April 1965. Other examples of valuation hypotheses for which assets will continue to be valued singly include— —

TCGA 1992 s 17 where there is a disposal of an asset for consideration deemed to be equal to its market value;

—

TCGA  1992 s  35 when a valuation of an asset is required for the purpose of rebasing to 31 March 1982.

The single asset valuation for TCGA 1992 s 17 is modified by TCGA 1992 s 19 where there is a series of linked transactions between connected persons. Each disposal in the series may be treated as being made for consideration equal to a proportion of the aggregate value of all the assets in the series.’ RI 152 has been withdrawn, but the principles set out in the guidance continue to apply and are now contained in CG16375. 339

6.178  Main Taxation Rules Applicable to Trusts

Disposal of interest in settled property 6.178 As the trustees are, in most circumstances, liable to CGT and the beneficiaries should not be, and in order to avoid a double charge on basically the same appreciation in value, a disposal of an interest under a settlement by the person for whose benefit the interest was created by the terms of the settlement does not normally result in a gain being charged on the vendor beneficiary (TCGA  1992 s  76(1)). This does not apply where the interest was acquired directly or indirectly for money or money’s worth other than consideration consisting of another interest under the settlement, or where the settlement has, at any time, been non-resident in the UK (or non-ordinary resident, for 2012/13 and earlier years), or treated as resident elsewhere under a double taxation treaty, or the property in the settlement includes property derived directly or indirectly from such a settlement (s 76(1), (1A) and (1B) as amended by FA 2013 Sch 46). When the purchaser or donee, who has acquired the interest in the settled property, including in particular a reversion or annuity or life interest, becomes absolutely entitled as against the trustees, he is deemed to dispose of his acquired interest for the market value of the settled property received. This does not affect the charge on the trustees (s 76(2)). 6.179 TCGA  1992 s  76A and Sch  4A apply where an interest in settled property, ie any interest created by or arising under a settlement, is disposed of for consideration other than another interest in the same settlement, ie actual consideration, and the relevant conditions are met. The trustees are deemed to have disposed of and immediately reacquired the underlying assets in the settlement, thus crystallising a CGT charge (Sch  4A paras 1–4). The preconditions are that the trustees must be resident in the UK and not treated as resident elsewhere under a double taxation treaty (Sch 4A para 5). The settlor must have been resident in the UK in the relevant year of assessment or any of the previous five years (Sch 4A para 6 as amended by FA 2013 Sch 46). For 2012/13 and earlier years, the test was that the settlor was resident or ordinarily resident in the UK. The trust must be a settlor interested settlement, or the property derived from such a settlement. For 2007/08 and earlier years, the trust gains would be chargeable on the settlor under TCGA 1992 s 77. It must be a settlor interested settlement at any time in the period beginning two years before the beginning of the year of assessment of the deemed disposal, but not before 6 April 1999 (Sch 4A para 7). The relevant underlying assets to be deemed disposed of is the whole or part of each of the assets comprised in the settled property or a defined part of the settled property. Where the interest disposed of is a specific fraction of the income or capital of the settled property or defined part, the deemed disposal is of a corresponding part of each asset in the trust or defined part (Sch 4A para 8). 6.180 The deemed disposal takes place at market value (TCGA  1992 Sch 4A para 9). If the disposal is already caught under TCGA 1992 s 76(1) as a 340

Main Taxation Rules Applicable to Trusts 6.181 disposal of an actual interest in settled property, the deemed disposal provisions do not normally apply. If the gain would be greater or the loss smaller under the deemed disposal provisions, however, they take precedence over the actual gain or loss on the disposal of the interest (Sch 4A para 10). If CGT is payable by the trustees, the trustees have a right of recovery against whoever disposed of the interest in the settlement, thereby causing the trustees a tax charge. The trustees may obtain from HMRC a certificate specifying the amount of the gains in question and the amount of tax paid (Sch 4A para 11). Settlor is defined as for a settlor interested settlement under TCGA 1992 s 79, by Sch 4A para  12. Where the beginning of the disposal, ie  the exchange of contracts under TCGA 1992 s 28 or, in the case of an option being exercised, when the option is granted, and the effective completion are in a different tax year, the deemed disposal takes place in the year of completion, and the conditions as to residence of trustees, residence of settlor or settlor interest are met if they apply for any of the relevant years (Sch 4A para 13). There is an exception for maintenance funds for historic buildings under ICTA 1988 s 691(2); such buildings are treated as non-settlor interested settlements (Sch 4A para 14). 6.181 These anti-avoidance provisions were introduced to prevent a taxpayer from putting assets into a trust in which he retains an interest and then selling the interest in the trust relying on the exemption on the sale of such an interest provided in TCGA  1992 s  76. Anti-avoidance legislation was introduced in respect of the sale of an interest in a settlor interested settlement after 20 March 2000 (FA 2000 s 91(3)). The settlor would have rolled over the gain into the trust as a gift of business assets under TCGA 1992 s 165 or s 260 as a gift of non-business assets to trustees where an IHT charge would arise. This would mean that for the first quarter the assets would be held on discretionary trusts, with the settlor being granted the life interest to make it a settlor interested trust after three months (Melville v IRC [2001] STC 1271; TCGA 1992 ss 77 (before repeal by FA  2008) and 65(4)). There is no motive test to prevent these provisions applying and therefore an innocent sale by a beneficiary of his life interest could be caught. The purpose of the anti-avoidance legislation in TCGA 1992 Sch 4A was explained in the HMRC Capital Gains Manual at CG35101 (now apparently withdrawn) as follows: ‘The main purpose of the legislation is to counteract a number of tax avoidance schemes which exploited the exemption under TCGA 1992 s 76 which applies to disposals of interests in settlements which have always been UK resident, whether by an original beneficiary, or by anyone else, if the interest had never been acquired for money or money’s worth. A simple scheme would have been something like this: •

A owns a valuable holding of unlisted shares in a trading company which he wishes to sell to B.

•

He creates a settlement under which he has the life interest and his son C has the remainder. 341

6.182  Main Taxation Rules Applicable to Trusts •

He transfers the shares to the settlement, claiming hold-over relief under TCGA 1992 s 165.

•

He sells his life interest to B and C sells his remainder to D, B’s son. The price would be based on the current market value of the shares, with some discount for potential future liability.

•

B and D are appointed trustees of the settlement.

•

B and D now have full control as beneficiaries and as trustees. They could get the shares out of the trust, using a TCGA 1992 s 165 claim to prevent liability. But this would involve some liability under TCGA 1992 s 76. Alternatively they can simply leave the assets in the settlement.

There is no motive test in the legislation. So, for example, a straightforward sale by a long-term beneficiary to raise money could result in the application of this Schedule.’

Transfers linked with trustee borrowing 6.182 TCGA  1992 s  76B and Sch  4B introduced legislation to counter the flip-flop scheme. The scheme worked by trustees borrowing against the security of the trust assets in year one and advancing the money borrowed to a new settlement which was created. In the next fiscal year the trustees realised the gains and used the proceeds to pay off the loan. Distributions to the beneficiaries could then be made from the new settlement free of CGT. In a UKbased scheme to avoid the settlor interest charge under the former provisions of TCGA 1992 s 77, the settlor and spouse were excluded from the original settlement after the advance, but in year one, and such a scheme was approved by the Special Commissioners in Tee v Inspector of Taxes [2002] STC (SCD) 370. The scheme was, however, largely aimed at the foreign trust provisions and taxing the settlor on distributions to beneficiaries under TCGA 1992 ss 86 and 87. These provisions are dealt with in Chapter 10.

Restriction on set-off of trust losses 6.183 In order to enable valuable business assets or unquoted shares to be sold, it was possible to find a trust with substantial genuine CGT losses. The beneficial interests of the existing beneficiaries would be purchased and the valuable assets transferred into the trust under a holdover relief claim under TCGA 1992 s 165. The trust losses would be realised, if they had not already been realised, and the valuable assets disposed of with the gain covered by the trust losses. The anti-avoidance provisions apply where a claim for gifts relief has been made under TCGA 1992 s 165 or s 260 in relation to gifts of business assets, or a gift on which IHT is chargeable, and the transferor in respect of the 342

Main Taxation Rules Applicable to Trusts 6.184 gift has acquired an interest in settled property or entered into an arrangement to acquire such an interest for consideration (TCGA 1992 s 79A(1)). The gain on the assets subject to the claim to gifts relief, realised by the trustees, is subject to CGT without relief for allowable losses which would otherwise be available (CG33553; TCGA 1992 s 79A(2)–(4)).

Situs of assets 6.184 TCGA 1992 s 275(1), as amended by F(No 2)A 2005 s 34 and Sch 4, provides the following rules applicable for CGT purposes for the location of assets: (a)

Rights or interests, in or over immovable property, other than by way of security are situated where the property is.

(b) Rights or interests, other than by way of security, in or over tangible movable property is where the property is. (c) A  debt secured or unsecured is situated in the UK if the creditor is resident in the UK. (d) Shares or debentures issued by any municipal or government authority or by anybody created by such an authority are situated in the country of that authority. (da) Shares in or debentures or interests of members in a company incorporated in the UK are situated in the UK. (e) Registered shares or debentures are situated where they are registered and if registered in more than one register where the principal register is situated, subject to (da) above. (f)

A ship or aircraft is situated in the UK if the owner is resident in the UK, and any interest or right in or over a ship or aircraft is situated in the UK if the person entitled to that right or interest is resident in the UK.

(g) The situation of goodwill as a trade, business or professional asset is the place where the trade, business or profession is carried on. (h) Patents, trademarks and registered designs are situated where they are registered and if registered in more than one register where each register is situated and the rights or licences to use a patent, trademark or registered design are situated in the UK if they, or any rights derived therefrom are exercisable in the UK. (i)

Copyright, design right and franchisees and rights or licences to use any copyright work or design are situated in the UK if they or any rights derived from them are exercisable in the UK.

(j)

A judgment debt is situated where the judgment is recorded. 343

6.185  Main Taxation Rules Applicable to Trusts (k) A debt which is owed by a bank and is not in sterling and is represented by a sum standing to the credit of an account in a bank of an individual who is not domiciled in the UK is situated in the UK only if the individual is resident in the UK and the branch of the bank at which the account is maintained is itself situated in the UK. TCGA 1992 ss 275A and 275B relate to certain intangible assets, and s 275C to interests of co-owners.

SETTLOR INTERESTED TRUSTS INCOME TAX LIABILITY OF SETTLOR Income tax 6.185 The income tax settlement provisions can be found in ITTOIA 2005 Part 5 Chapter 5 ss 619–648. The settlor remains taxable on income arising to the trustees where he has retained an interest in the settlement under ITTOIA 2005 ss 619–627, or where payments are made to an unmarried minor child of the settlor, the settlor is taxable under ITTOIA 2005 ss 629–632. The provisions relating to capital sums paid to the settlor in ITTOIA 2005 ss 641– 643, and via a company connected with the settlement under ITTOIA  2005 ss 633–640 have no territorial limitation and apply to foreign trusts as well as UK trusts. The income charged on the settlor is that arising to the trustees and not, for example, to an underlying company held by the trustees although if the company is resident outside the UK a charge on the company’s income may arise on the settlor under the transfer of assets abroad rules (see Chapter 10). 6.186 If the settlor retains any interest in the trust property, eg as a beneficiary or potential beneficiary under the trust, the income of the settlement remains his for income tax purposes under ITTOIA  2005 ss  622, 624. This applies where any income from the property put into trust may become payable to, or applicable for the benefit of, the settlor, or his spouse or civil partner ‘in any circumstances whatsoever’ (ITTOIA  2005 s  625). There are, however, exceptions. Spouse does not include an intended future spouse until the parties marry, nor a separated spouse under a court order or separation agreement where the separation is likely to be permanent, nor where the settlor has died and the former spouse becomes a beneficiary as widow or widower (ITTOIA 2005 s  625(4)). There are also exceptions for the settlor whose interest in the property only becomes payable to, or applicable for his benefit, in the event of the bankruptcy of a beneficiary, or the assignment or charging of property by a beneficiary (ITTOIA  2005 s  625(2)). Further exceptions apply, in the case of a marriage settlement, on the death of both parties to the marriage and all or any of the children of the marriage, or the death of a child of the settlor 344

Main Taxation Rules Applicable to Trusts 6.188 who had become beneficially entitled to the property at an age not exceeding 25 (ITTOIA  2005 s  625(2)). If, therefore, the income is distributed to, or accumulated for the benefit of, a child under 25 and it can only become payable to the settlor on the bankruptcy or assigning or charging of the child’s interest in the property, the settlor is not regarded as having an interest (ITTOIA 2005 s 625(3)). Settlement for these purposes does not include an outright gift to a spouse, unless the gift does not carry a right to the income from the property transferred, or it is merely a gift of income (ITTOIA 2005 s 626). 6.187 The restrictions do not apply to divorce settlements or separation agreements (ITTOIA 2005 s 627(1)). Nor do they apply to annual payments under covenant made by an individual for bona fide commercial reasons in connection with his trade, profession or vocation, eg pension payments to a former partner; qualifying donations to charities under the Gift Aid scheme in ITA 2007 Part 8 Ch 2 ss 413–430; or benefits under an approved pension arrangement (ITTOIA  2005 s  627). Provisions apply not only to property originally placed into the trust but also any derived property directly or indirectly representing proceeds of, or income from, the property settled (ITTOIA 2005 ss 625(5), 626(5)). As originally drafted, ITTOIA 2005 s 624 applied where the settlor in question was a company. It was therefore possible to arrange for income to be apportioned to the settlor under ITTOIA 2005 s 624 and suffer tax at corporate rates, rather than higher and additional income tax rates. To prevent this, ITTOIA 2005 s 627(4) was inserted by FA 2012 s 12 to provide an additional exclusion applies which where the settlor is a person other than an individual. 6.188 By definition, a revocable settlement is ineffective for tax purposes because the settlor, by revoking the settlement, can benefit and is therefore within ITTOIA  2005 ss  622–627. Revocable settlements are therefore unusual in the UK, except where the settlor is the main beneficiary. Revocable settlements are not uncommon in certain overseas jurisdictions, such as the USA, and are frequently used by non-UK domiciliaries to hold assets prior to becoming resident in the UK for a period. They have also been used in artificial tax avoidance schemes (Melville v IRC [2001] STC 1271). This case would seem to confirm that the power of revocation, like a general power of appointment, is a separate asset which would be a UK asset if the holder of the power were UK resident. This could defeat the object of creating the settlement offshore and such powers are now ignored for IHT purposes under FA 2002 s 119. A limited power of revocation, which excludes the appointment of the settlor as beneficiary, could nonetheless be caught if it would enable a future spouse to be included as beneficiary (IRC  v Tennant (1942) 24  TC  215; SP A30). However, in view of ITTOIA  2005 s  625(4) the trust would only be treated as one where the settlor retains an interest if the settlor marries and the spouse becomes a possible beneficiary of the trust. The possibility of the settlor becoming a beneficiary at some future time was considered in the case of an overseas trust in IRC v Botnar [1999] STC 711. In this case, although 345

6.189  Main Taxation Rules Applicable to Trusts the settlor was excluded from the initial trust, the trustees had power to resettle on terms that may not have excluded the settlor. Although the assessment was made under ICTA  1988 s  739 (now ITA  2007 s  720), it would appear that a similar line of reasoning could apply to a domestic trust as a retention of interest by the settlor under ITTOIA 2005 ss 622–627. The exclusion of the settlor and his spouse has to be absolute. 6.189 The income of a revocable settlement remained that of the taxpayer in IRC v Payne (1940) 23 TC 610, but not where the settlement was irrevocable as in IRC v Rainsford-Hannay (1941) 24 TC 273; Wolfson v IRC (1949) 31 TC 141; Chamberlain v IRC (1943) 25 TC 317; and Clark v IRC (1947) 28 TC 55. The unlikelihood of the settlor benefiting was no protection from a charge under ITTOIA 2005 ss 622–627 in Barrs Trustees v IRC (1943) 25 TC 72, which was a settlement on the settlor’s grandchildren such that the settlor could only have benefited had his grandchildren all predeceased him. In Glyn v IRC  (1948) 30 TC 321 a jointly held power of appointment was sufficient to give the settlor a retained interest in the settlement. The right to determine a lease in favour of the trustees was not a retention of interest in the settlement in Lord Vestey’s Executors and Vestey v IRC; Lord Vestey’s Executors and Vestey v Colquhoun (1949) 31 TC 1. 6.190 Another revocable settlement was IRC  v Countess of Kenmare (1957) 37 TC 383. The statutory power of advancement under TA 1925 s 32 in favour of the trustee’s wife was not a retention of interest as the terms of the settlement overrode the statutory power of advancement (IRC v Bernstein (1960) 39 TC 391). In IRC v Cookson [1977] STC 140 where the trust deed failed to dispose of all the income, it was held that the settlor held an interest (Hannay’s Executors v IRC  (1956) 37  TC  217). Other revocable settlement cases include IRC v Warden (1939) 22 TC 416; IRC v Lord Delamere (1939) 22  TC  525; Eastwood v IRC  (1943) 25  TC  100; Hood Barrs v IRC (No  3) (1960) 39 TC 209; Jamieson v IRC; and Wills v IRC (1963) 41 TC 43. 6.191 It is often difficult to cure a defect in an original settlement by a supplemental deed, as is shown in Taylor v IRC (1946) 27 TC 93 and IRC v Nicholson and Bartlett (1953) 34 TC 354. A trust that was effective following a deed of appointment is illustrated by Blausten v IRC (1971) 47 TC 542. Where assets are put into trust which are subject to IHT, both the settlor and the trustees are liable for any IHT payable under IHTA 1984 s 199. If the trustees had power to pay the IHT, or in fact paid IHT, on the transfer of assets into the settlement, this is not regarded as a retention of the settlor’s interest in the trust for the purposes of ITTOIA 2005 ss 622–627 (SP 1/82). 6.192 ITTOIA  2005 s  624 states that, where the settlor has retained an interest, the income is that of the settlor and not the income of any other person. The income is shown as income of the settlor in his personal tax return, 346

Main Taxation Rules Applicable to Trusts 6.195 normally as investment income in Boxes 7 to 12 of the Trusts etc pages, and to the extent that management expenses have been deducted by the trustees as other income, because the management expenses are not allowable where the income is deemed to be that of the settlor, under ITTOIA 2005 s 624 (see Helpsheet IR270). Although the income is ultimately taxed on the settlor and not on the trustees, the trustees have a liability to tax in the first instance at the basic rate in view of ITTOIA 2005 s 646(8). The dividend trust rate and the trust rate under ITA 2007 s 479 is disapplied in such cases by ITTOIA 2005 s 568(4) because the income is ultimately assessed on the settlor. The tax paid or suffered by the trustees becomes a credit available to the settlor to set against his tax liability on the income deemed to be his under these provisions. To the extent that the income is accumulated, the normal rules apply to charge a trustee at the trust rate, and when ultimately distributed give the appropriate pool credit to the beneficiary under ITA 2007. 6.193 Where trust income is deemed to belong to the settlor under the antiavoidance provisions in, for example, ITTOIA 2005 Part 5 Chapter 5 ss 619– 648 or ITA 2007 s 714 et seq, it is the income before any expense is incurred by the trustees which is deemed to be that of the settlor (Lord Chetwode v IRC [1977] STC 64; TSEM 8510). 6.194 The statutory authority for the nature of the charge on the settlor under these provisions is contained in ITTOIA 2005 ss 619 and 623, which effectively treat the income of the trust as if it were the income of the settlor within ITA 2007 s 6, ie in particular, dividend income, or equivalent foreign income, distributions from a company including both qualifying and non-qualifying distributions within ITTOIA 2005 s 399 and 400, stock dividends treated as income within ITTOIA  2005 ss  409–414, or deemed income arising on the release of a loan from a close company to a participator under ITTOIA 2005 ss 415–421 (ITTOIA 2005 ss 619 and 621). Any other income is taxable as miscellaneous income (ITTOIA 2005 ss 619 and 621). The settlor is entitled to the same deductions as if the income had been received by him directly under ITTOIA 2005 s 623 and is deemed to be the highest part of his income except for top-slicing relief under ITA 2007 s 1012 (ITTOIA 2009 s 619A(1)). Therefore, the starting rate for savings is given first to the settlor’s own income and then to the deemed income arising in the trust. Income deemed to be that of a settlor is treated as investment income (Ang v Parrish [1980] STC 341). 6.195 Where the income of the trust is chargeable on the taxpayer under ITTOIA 2005 ss 622–627 or 629–632 the settlor has a right of recovery against the trustees under ITTOIA 2005 s 646(1). He can require HMRC to furnish him with a certificate specifying the amount of tax he has paid in order to evidence the amount recoverable (ITTOIA  2005 s  646(2)). If, however, the settlor obtains a repayment of tax that he would otherwise not have been entitled to, this has to be accounted for to the trustees (ITTOIA 2005 s 646(4)–(7)). Any question of apportionment shall be decided by the First-tier Tax Tribunal, 347

6.196  Main Taxation Rules Applicable to Trusts whose decision shall be final. The fact that it is deemed to be the income of the settlor does not prevent the trustees being liable to tax as the original recipients of the income (ITTOIA 2005 s 646(8)).

Example Mr Boris Bisnovat, who is unmarried and UK resident, but not UK domiciled, settled a discretionary trust for his two children, Natasha aged five and Anna aged three. He was excluded from benefit and the income was accumulated. He is eligible for and has elected to pay the remittance basis charge under ITA 2007 s 809C. Boris married his children’s mother Lavinia, with whom he had been living for several years, on 22 September 2018. The trust’s net income from a let property in the UK in 2018/19 amounted to £12,540, of which £6,810 arose after 21 September 2018. On 5 April 2019, the trustees passed a resolution to exclude Lavinia, and any spouse for the time being, from benefit, under powers in the trust deed. 6.196 Boris was assessed to tax on the post-21  September rental income of £6,810 at his marginal rate of tax of 45%, £3,064.50, under ITTOIA 2005 ss 622–627, as his spouse was not excluded from benefit, and the trustees were assessed to tax on the total trust income of £12,540, taxed at the trust rate of 45%, £5,643. Boris claimed a credit for the tax paid by the trustees on his income of £6,810 at 45%, £3,064.50, and paid the difference of £2,578.50, which he reclaimed from the trustees under ITTOIA  2005 s  646(1)(a). Had Boris has been resident in Scotland, the Scottish income tax rates would have applied to the income treated as arising to him. 6.197 Income arising to the trustees which is treated as arising to the settlor under ITTOIA 2005 s 624 may in fact be paid to another beneficiary. Where this is the case, ITTOIA 2009 s 685A prevents a double charge to tax by providing that the recipient beneficiary is treated as having paid tax at the applicable rate. The mechanics of the relief are that the beneficiary includes the trust income received in computing his taxable income, but a tax credit equal to the tax payable by the settlor is available to offset his liability. The tax credit under ITTOIA 625A(3) may only be offset against the trust income received and cannot be used to shelter any other part of the beneficiary’s liability. 6.198 It is not possible to avoid the operation of ITTOIA  2005 Part 5 Chapter 5 by entering into reciprocal arrangements with a third party. If A agrees to settle £10,000 on trust for B and B settles a similar sum in trust 348

Main Taxation Rules Applicable to Trusts 6.200 for A, each would be deemed to be the settlor of the trust for themselves, which would consequently be ineffective for income tax purposes under ITTOIA  2005 ss  622–627 which assesses the income of a trust on a settlor who has retained an interest in the settlement, see below. Income arising under the settlement includes any income chargeable to income tax by deduction or otherwise, or which would be chargeable if it had been received in the UK by a person domiciled, resident and ordinarily resident in the UK (ITTOIA 2005 s 648(1)). However, where the settlor is not UK domiciled or not UK resident in the UK in the year of assessment, the settlor is not chargeable if he would not have been subject to UK tax had he actually been entitled to that income. Where he is resident in the UK but not UK domiciled (and for 2017/18 and later years, not deemed domiciled), for certain income he is only assessed on remittances to the UK (ITTOIA  2005 s  648(2)–(5)). An annual remittance basis charge may apply if the settlor is a longer term resident of the UK, see Chapter 5.

Settlements of income 6.199 Where the owner of securities transfers the right to receive any interest payable in respect of those securities, without selling or transferring the securities themselves, he remains taxable on the income under ITTOIA 2005 s 151, and the recipient of the income is not chargeable to tax on it. The inability to alienate such income for tax purposes is one of the reasons why a usufruct, where the right to income is transferred but the asset retained, is unusual in the UK although it is quite common on the Continent and in other civil law jurisdictions. The alienation of income by way of deed of covenant, although ineffective for tax purposes except to a charity under the Gift Aid regime, or for commercial purposes, such as a pension to a former partner, can still serve a purpose, eg to guarantee an elderly relative’s income to enable him to transfer assets to other family members in the knowledge that his income is assured. 6.200 An attempted sale of the right to dividends in order to avoid tax was defeated by invoking the Ramsay principle (W  T  Ramsay Ltd v IRC [1981] STC 174) in IRC v McGuckian [1997] STC 908. The charge was actually made under ICTA 1988 s 739, ITA 2007 s 720 not ICTA 1988 s 730 (now ITA  2007 s  809AZB), as a result of the taxpayer allegedly keeping material facts and documents from the Revenue. ICTA  1988 s  730 was initially introduced by FA 1938 to overturn the effect of Paget v IRC (1938) 21  TC  677. The usufruct principle was successfully applied to a sale of a five-year rental stream in return for a lump sum payment in John Lewis Properties Plc v IRC [2000] STC (SCD) 494, which was in turn stopped by ICTA 1988 s 43B which was in turn repealed and replaced by FA 2006 s 76 and Sch 6. This applies to a transfer of a right to receive rent other than by 349

6.201  Main Taxation Rules Applicable to Trusts means of the grant of a lease, unless it is a finance agreement with a term which exceeds 15 years (s 43C). The rent factoring anti-avoidance provisions formerly included in ss 43A–43G have been incorporated into the structured finance arrangement provisions in ICTA 1988 ss 774A–774G (FA 2006 s 76 and Sch 6).

Pre-owned assets 6.201 The pre-owned asset legislation is set out in FA 2004 s 84 and Sch 15 with effect for 2005/06 and subsequent years of assessment. These provisions are supplemented by the Charge to Income Tax by Reference to Enjoyment of Property Previously Owned Regulations 2005 (SI 2005/724) and the Income Tax (Benefits Received by Former Owner of Property) (Election for Inheritance Tax Treatment) Regulations 2007 (SI 2007/3000). 6.202 FA 2004 Sch 15 introduces an income tax charge designed to combat inheritance tax savings strategies to avoid the gift with reservation charge under FA  1986 ss  102–102C and Sch  20, but the legislation is much wider than would have been needed to prevent the avoidance referred to. It applies where a former owner of land or chattels, disposed of after 17 March 1986, benefits from the use or enjoyment of the asset. It also applies to beneficiaries of a settlor interested trust created on or after 17 March 1986. The provisions bite where an individual occupies land which he used to own or which was purchased from the proceeds of property which he used to own or using funds provided by him (FA 2004 Sch 15 para 3). The provisions also apply where an individual has possession or use of a chattel which he used to own or which was purchased from the proceeds of sale of a chattel which he used to own or using funds provided by him (FA 2004 Sch 15 para 6). 6.203 The income tax charge is based on an assumed market rental in the case of any interest in land and an assumed rate of interest in the case of chattels, which is the official rate of interest at the valuation date for beneficial loans under ITEPA 2003 s 181 and SI 2005/724 para 3. The income tax charge is reduced by any amount paid for the use of the property. There are various exclusions in FA 2004 Sch 15 para 10 for reserved rights where the remainder of the property is sold on arm’s-length terms, or is a transfer to a spouse or (from 5 December 2005) civil partner or former spouse or civil partner or for family maintenance or within the inheritance tax annual exemptions or small gifts provisions under IHTA 1984 s 19 or 20. There are also exemptions from charge under FA  2004 Sch  10 para  11 where the gift with reservation rules apply under FA 1986 ss 102–104 and Sch 20, or is a permitted reservation for gifts to charities etc under FA 1986 s 102(5)(d)–(i). Exemptions also apply to shared occupation under FA 1986 s 102B(4) or where a former owner moves back into a property gifted by a relative as a result of a change in circumstances under FA 1986 Sch 20 para 6. 350

Main Taxation Rules Applicable to Trusts 6.206 6.204 The charge does not apply to non-residents, and only in respect of UK property for non-UK domiciliaries who, from 2017/18 are not deemed UK domiciled. However, although it is an income tax charge, the inheritance tax deemed domicile rules under IHTA 1984 s 267 apply (FA 2004 Sch 15 para 12) even if they are disapplied by an Estates and Gifts double taxation treaty. There is a de minimis exemption where the notional annual values do not exceed £5,000, under FA 2004 Sch 15 para 13, and there is a power to make variations and prescribe appropriate rates of interest for different assets under FA 2004 Sch 15 paras 14 and 20. Assets are to be valued at the open market value with no reduction for flooding the market, under FA 2004 Sch 15 para 15. Variations on death are deemed to have applied from death and the original legatee is not deemed to be a chargeable owner (FA 2004 Sch 15 para 16). A guarantee does not count as a contribution to the borrower’s acquisition of property (FA 2004 Sch 15 para 17). 6.205 FA 2004 Sch 15 para 18 and SI 2005/724 para 6 are designed to avoid double charges, although may not be effective in all circumstances. Where there is a benefit in kind charged under ITEPA 2003 Part 3, this takes precedence over the pre-owned asset charge, but any balance of deemed income under the pre-owned assets legislation in excess of the benefit in kind charge would be chargeable under FA 2004 Sch 15 para 19. It is possible to elect for the asset to remain within the individual’s estate for inheritance tax purposes instead of becoming liable to the pre-owned assets income tax charge on land or chattels under FA 2004 Sch 15 para 21. A corresponding election may be made where an asset continues to be comprised in a settlor interested settlement within ITTOIA 2005 s 625 under FA 2004 Sch 15 para 22. These elections must be made on or before 31 January after the first tax year for which a pre-owned asset charge would arise, so that for assets within the provisions at 5 April 2005 the election must have been made by 31 January 2007. An election, if made, can be withdrawn but only within the same time scale (FA 2004 Sch 15 para 23). The form of election under FA 2004 Sch 15 para 23 is set out in SI 2007/3000. The first valuation date is 6 April 2005 or five years from 6 April following the first date of enjoyment of the pre-owned asset if later and thereafter at five yearly intervals under SI 2005/724 paras 2 and 4. 6.206 So far as trusts are concerned, the income tax charge arises in respect of intangible property, which is anything other than land or chattels, transferred after 17 March 1986 to a settlement within IHTA 1984 s 43 in which the settlor retained an interest within ITTOIA 2005 s 625 (ICTA 1988 s 660A). There is an exclusion for benefits arising purely through a spouse’s or (from 5 December 2005) a civil partner’s interest in the settlement (FA 2004 Sch 15 para 8). The amount chargeable as income of the settlor is the amount of the interest that would be payable for the taxable period if interest were payable at the rate prescribed by regulations enacted under the provisions of FA 2004 Sch 15 para 20 (SI 2005/724) on an amount equal to the value of the relevant property at 351

6.207  Main Taxation Rules Applicable to Trusts the valuation date. This chargeable amount is described as ‘N’ and is reduced by ‘T’ which is any amount already subject to income tax or capital gains tax under the chargeable event provisions of ITTOIA 2005 s 461, the settlor interested settlement provisions of ITTOIA 2005 s 624, the foreign trust settlor provisions under TCGA 1992 s 86, the income tax offshore trust provisions of ITA 2007 ss 720, 730 (FA 2004 Sch 15 para 9(1)), or (for 2007/08 and earlier years) the settlor interested settlement capital gains tax provisions under TCGA 1992 s 77. 6.207 The excluded transaction provisions in FA 2004 Sch 15 para 10 do not apply to settlements, but the exemptions within FA 2004 Sch 15 para 11 and SI 2005/724 para 3 do apply. There is provision within FA 2004 Sch 15 para  9(2) to provide by regulations an earlier valuation date subject to any prescribed adjustments such as indexation but these have not been enacted in SI 2005/724. The settlement provisions give rise to a number of problems under the pre-owned asset charge because the settlor is taxed on the deemed income from the property transferred to the settlement as if he were the actual life tenant, even though his actual interest may be minimal in actuarial terms. 6.208 The actual transfer of a land or chattel by way of gift to a settlement is an excluded transaction under the pre-owned asset provisions (FA 2004 Sch 15 para 10(1)(c)). This also applies to a transfer to a settlement for the benefit of a separated or former spouse in accordance with a court order under which the spouse or former spouse is beneficially entitled to an interest in possession. This exclusion applies to the disposal conditions for land or chattels under FA 2004 Sch 15 paras 3(2) and 6(2). There are also exclusions under the consideration conditions of FA 2004 Sch 15 paras 3(3) and 6(3) where the property becomes settled property in which the spouse or former spouse is beneficially entitled to an interest in possession, whether or not under a court order under Sch 15 para 2(b). 6.209 The exclusion does not apply where the interest in possession of the spouse or former spouse has come to an end other than on death (FA  2004 Sch  15 para  10(3)). Although not clear from the drafting, the HMRC  PreOwned Assets – Technical Guidance notes confirm that the exclusion is only lost on the happening of such an event, as it is excluded by FA 2004 Sch 15 para 10(1)(c). It is not clear what happens where the spouse or former spouse has joint interest with other beneficiaries, as in Woodhall v IRC [2000] STC (SCD) 558. Presumably some form of just and equitable apportionment would be applied. It is also not clear where a spouse’s interest in possession reduces from, say, 100% to 95%, or even 10%, and it may be that the exclusion continues so long as the spouse or former spouse has any interest in the property. The Court of Appeal in IRC v Eversden [2003] STC 822 held that a transfer by one spouse to an interest in possession trust for the other was not a gift with reservation, even where the life tenant’s interest came to an end in favour of children. Arrangements were designed to enable the settlor and spouse to retain occupation of the family home without being caught by the 352

Main Taxation Rules Applicable to Trusts 6.212 gift with reservation rules, which were duly amended with effect from 20 June 2003 by FA 2003 s 185, which inserted FA 1986 ss 102(5A)–(5C). 6.210 Under the Eversden schemes in relation to land put in place before the change in the gift with reservation rules, the pre-owned asset charge would appear not to apply on termination of the spouse’s interest in possession by the trustees, as the spouse never owned an interest in land and has not disposed of anything. If it is terminated on the spouse’s death then it would continue to be an excluded transaction within FA  2004 Sch  15 para  11. If there is a termination in other circumstances, however, a complete termination would probably trigger a pre-owned asset charge on the settlor but if the spouse continues to have a reduced interest in the settled property it could well remain an excluded transaction. 6.211 Intangible property is defined by FA  2004 Sch  15 para  1, as any property other than chattels or interests in land and therefore includes cash, shares, whether quoted or unquoted, life insurance policies, insurance bonds etc. Land or chattels held within the settlement in which the individual retained an interest would be caught under the land and chattel provisions directly, and not as a result of it being settled property. There is an exclusion for an outright gift of money to another person more than seven years before the donor occupied the land, or possessed or used a chattel acquired with the money, as it is within the excluded transaction provisions of FA  2004 Sch  15 para  10(2)(c). This would include an outright transfer to trustees. A settlement of land and chattels which are sold and the proceeds used to acquire intangible assets would fall within the settlement provisions of FA 2004 Sch 15 para 8. The settlor’s interest in the settlement is defined by reference to ITTOIA 2005 with the exclusion of any reference to the spouse (FA  2004 Sch  15 para  8(1)(b)). The interest of the settlor must arise under the terms of the settlement, and sub-trusts in which he has no interest would be ignored. In many cases where an individual has retained his interest in the settlement within the income tax provisions of ITTOIA 2005 s 625, the assets will remain within his estate for inheritance tax purposes, either because he has an interest in possession in the trust or the gift with reservation provisions apply under FA 1986 ss 102–104 and Sch 20 and are therefore taken out of the pre-owned asset income tax charge by FA 2004 Sch 15 para 11(1) and (2). The most likely application of the intangible asset settlement provisions therefore apply where the settlor has retained a reversionary interest in the settlement which would be exempt for inheritance tax purposes under the excluded property provisions of IHTA 1984 ss 47 and 48. 6.212 The provisions could also apply where there is a resulting trust in favour of the settlor, on failure of the trust for the intended beneficiaries, although it might be argued in this case that the settlor does not retain an interest under the terms of the settlement and is therefore outwith the provisions of FA 2004 Sch 15 para 8. It is understood that insurance based trust arrangements involving bonds or life policies, often referred to as discounted gift and gift and 353

6.213  Main Taxation Rules Applicable to Trusts loan arrangements, are not within the intangible property settlement provisions of FA 2004 Sch 15 para 8, although business trusts or partnership policies are considered to be caught by the HMRC guidance notes. 6.213 One of the popular inheritance tax mitigation devices was based on Ingram v IRC [1999] STC 37, which, in its original form, consisted of carving out a lease and disposing of the reversionary interest, which was stopped by FA 1986 ss 102A–102C inserted by FA 1999 s 104 with effect from 27 July 1999. A popular variation of the scheme would be where an individual owning a freehold interest in a property would grant a long lease of the property to his children or to a trust for their benefit, and the commencement date of the lease would be deferred for a number of years. This allowed the freeholder to remain in occupation of the property but the owners of the reversionary lease would be entitled to occupation at the end of the deferral period which would therefore reduce considerably the value of the freehold. It seems that because the owner of the land has made a disposal of the leasehold interest, but continues to occupy it, it would be caught under the pre-owned asset provisions. For further information on the pre-owned assets legislation reference should be made to I Maston ‘Pre-Owned Asset Tax’ Tolley’s Tax Digest Issue 23.

Settlements on children 6.214 Where a person creates a settlement in favour of his unmarried minor children, and distributions are made to the children which would otherwise be their income, these are treated as income of the settlor and not the income of any other person (ITTOIA  2005 s  629(1)). Where, however, the income is retained or accumulated by the trustees, only actual distributions made to minor children of the settlor will be deemed to be the settlor’s income. The charge on the settlor can therefore be avoided by accumulating the income until the children reach the age of 18, rather than distributing it (ITTOIA 2005 s 631). Most discretionary settlements for children allow the trustees to make distributions for the maintenance, education and benefit of the child, but this does not prevent any such distributions being treated as the settlor’s income to the extent that it is paid to an unmarried child under the age of 18. The income available to be taxed as that of the settlor is the entire income of the settlement since creation, less any income which has been treated as income of the settlor or distributed to any beneficiary who is not an unmarried minor child of the settlor, or treated as income of an unmarried minor child and subject to tax in 1995/96 to 1997/98, or applied in defraying trustees’ expenses, properly chargeable to income (ITTOIA 2005 s 631(5)). 6.215 The taxable income of the child in 1995/96 to 1997/98 is the excess of the child’s total income for tax purposes over the personal and other allowances that may be set against it. The amount of the income covered by the child’s allowances is taxed as income arising under the settlement (ITTOIA  2005 354

Main Taxation Rules Applicable to Trusts 6.218 s 631 (6), (7)). These particular provisions were introduced by FA 1999 s 64 to close a loophole under which a parent could create a bare trust for his minor unmarried child, but accumulate the income until the child attained the age of 18 or married under that age. Because it was a bare trust it was the child’s income absolutely and was not within ITTOIA 2005 ss 629–631 because it was accumulated not distributed. 6.216 Bare trusts are caught by ITTOIA  2005 s  629(1)(b). Parental  gifts producing income of no more than £100 in aggregate are excluded by ITTOIA 2005 s 629(3), (4). These amendments applied to income arising under a settlement made or entered into on or after 9 March 1999, or in respect of funds provided on or after that date (FA 1999 s 64(5), (6)). A further loophole allowed the untaxed part of the income under a bare trust, ie that amount covered by the child’s personal and other tax allowances, to be applied for the child’s benefit as it had already been treated as the child’s income. ITTOIA 2005 s 631(4)–(7) prevents this benefit continuing in relation to payments or applications for a child’s benefit made after 8 March 1999, irrespective of when the settlement itself was made (FA 1999 s 64(6)). For 2017/18 and later years, protected foreign source income is excluded from apportionment to a deemed UK domiciled settlor under these provisions in certain circumstances (ITTOIA 2005 s 631(5)). See Chapter 10 for a further explanation of the protections introduced from 2017/18 for foreign income arising to trustees. The anti-avoidance provisions apply not only to the bare trust but also to interest in possession trusts where the child is entitled to the income, where TA 1925 s 31 is excluded. 6.217 Where an offshore income gain accrues to a trust for the settlor’s children, it is treated as paid to the child under ITTOIA  2005 s  631(2) and therefore taxed on the parent under ITTOIA 2005 s 629(1)(a) or (ITTOIA 2005 s  632. ‘Payments’ include payments in money or money’s worth; ‘child’ includes a step-child or illegitimate child; and ‘minor’ means a person under the age of 19 years (ITTOIA 2005 s 629(7)). 6.218 These provisions only apply to settlements made by parents on their own children and not, for example, to settlements created by grandparents. However, reciprocal arrangements between the parents and grandparents, perhaps where funds were passed by the parents to the grandparents to enable them to create the settlement on the grandchildren, would cause the parents to be treated as settlors under ITTOIA 2005 s 620(2), (3). Similarly, where there is a waiver of dividends by some shareholders so that increased dividends can be paid to trustees, this could constitute an arrangement and if the waiving shareholders were parents of the child beneficiaries, they would become additional settlors under ITTOIA 2005 s 620(1). This would apply even though the dividend waiver is specifically not regarded as a chargeable transfer for IHT purposes under IHTA 1984 s 15. 355

6.219  Main Taxation Rules Applicable to Trusts Example Boris Bisnovat’s children’s trust had net rental income in 2018/19 of £13,270 and interest from a bank deposit account in Jersey of £615, ie £13,885, which was taxable on the trustees at the trust rate of 45%, £5,554. In the year the trustees paid Boris’s five-year-old daughter Natasha’s school fees of £2,250 and, from the Jersey bank account, £520 to a French travel agent in respect of a skiing holiday for her. The payment of school fees is taxable on Boris under ITTOIA 2005 ss 629–632, and he is liable for tax of £2,250 at his marginal rate of, say, 45%, £1,012.50, less a credit of £2,250 at 45%, £1,1012.50, for the tax paid by the trustees. He therefore had nothing further to pay or to recover from the trustees under ITTOIA 2005 s 646(1)(a). He was not, in view of his non-UK domicile status, taxed on Natasha’s skiing holiday as being a remittance basis user he would not have been taxed on any interest on a Jersey bank account of his own if it had been used by him to pay the French travel agent for the holiday, and was therefore not taxable on him, in view of ITTOIA 2005 s 648(2)–(5).

Multiple settlors 6.219 In view of the definition of ‘settlement’ and ‘settlor’ in ITTOIA 2005 s 620(1), it will be appreciated that anyone who transfers, directly or indirectly, assets into a settlement, or is party to an arrangement constituting a settlement, will be regarded as a settlor. Where there is more than one settlor, a settlement is effectively treated as a number of different settlements, with each settlor’s liability to tax being related back to his contribution to the settlement (ITTOIA  2005 ss  644, 645). Where there are reciprocal arrangements, the assets provided by the other party to the settlement are deemed to be those of the settlor, and the settlor’s reciprocal transfers are ignored in calculating the property in the settlement emanating from him (ITTOIA 2005 s 645(3), (4)). Example Anthony Beriev had discovered that if he settled funds on his own children he would remain taxable on the income distributed to them in respect of education, maintenance or benefit, until they reached the age of 18. He was explaining the position to his friend Timothy Bartini over lunch and they thought it would be a good idea if Anthony settled £25,000 on trust for Tim’s children and Tim settled a roughly similar amount on Anthony’s children. Tim thought that this was a great idea and suggested that he settled £24,800 and paid for lunch. They were disappointed to find that, had they proceeded to do so, Anthony would be deemed to have settled £24,800 on the trust for his own children and Tim to have settled £25,000 on trust for his own children, and taxed accordingly.

356

Main Taxation Rules Applicable to Trusts 6.223

Power to obtain information 6.220 ITTOIA 2005 s 647 allows HMRC, by notice, to require any party to a settlement to furnish them within such time as may be directed, being not less than 28 days, with such particulars as is thought necessary for the purposes of ITTOIA  2005 ss  619–648 inclusive. One of several trustees was held to be a ‘party to a settlement’ in Cutner v IRC [1974] STC 259. An attempt to argue that the amount of information required by HMRC was too wide and oppressive failed in Wilover Nominees Ltd v IRC [1974] STC 467.

Inheritance tax paid 6.221 Where a settlor transfers assets to a trust on condition that any IHT due in respect of the gift is payable by the trustees, this is no longer regarded as the settlor retaining an interest in the settlement within ITTOIA 2005 ss 622–627, because IHTA 1984 s 199 provides that both the settlor and the trustees are liable for any IHT payable. The Revenue practice in this connection changed in 1982, and the current practice was confirmed by SP 1/82.

Capital sums paid to settlor 6.222 It is not possible to avoid the provisions of ITTOIA 2005 ss 619–648 by the settlor taking out capital instead of income. ITTOIA 2005 s 633 provides that any capital sum paid directly or indirectly to a settlor shall be treated as his income up to the amount of the available income received, and not otherwise distributed, in the trust to the end of the tax year. If the capital sum exceeds the available income it is treated as the settlor’s income up to the amount of the available income in the trust in any of the ten following years. 6.223 The available income is the income received in the year in which the capital sum is paid, and in any previous year, less amounts distributed to beneficiaries – unless the amount has already been charged on the settlor in previous years or applied against an earlier capital sum or already treated as the settlor’s income, less provision for tax at the trust rate (ITTOIA 2005 s 635). There is also a deduction where the capital sum amounts to the release of a loan under ITTOIA 2005 ss 415–421 in respect of a loan by an associated close company within ICTA 1988 s 419, CTA 2010 ss 455–459. Capital sum includes any amount paid by way of a loan until it has been repaid (ITTOIA  2005 s 638(1)). Where a capital sum has previously been lent and repaid but some of the income of the trust has been taxed as the settlor’s income under this section, the amount of any further loan is reduced by the amount on which the settlor has already paid tax as a result of previous loans (ITTOIA  2005 s  638(2)). ‘Capital sum’ includes any amount paid to the settlor by way of a loan or the repayment of a loan, which the settlor had previously lent to the trust, and any other sum paid otherwise than as income, unless paid for full consideration 357

6.224  Main Taxation Rules Applicable to Trusts in money or money’s worth (ITTOIA  2005 s  634(1)). However, it does not include an amount paid to the settlor on the death of a beneficiary under the age of 25 (ITTOIA 2005 s 625(2), (3). Sums paid to the settlor include sums paid to his spouse or civil partner, or to the settlor or his spouse or civil partner jointly with another person (ITTOIA 2005 s 634(7)(b)). A capital sum includes a sum paid to a third party at the settlor’s direction, or otherwise applied for the benefit of the settlor (ITTOIA 2005 s 634(4)–(6)). 6.224 Although the capital sum is paid by the trustees in repayment of a loan from the settlor, the treatment of income as that of the settlor ceases if another loan, at least equal to the repayment of the loan, is paid by the settlor to the trustees (ITTOIA 2005 s 638(4), (5)). The amount taxable on the settlor is the amount of the capital sum grossed up at the trust rate (ITTOIA 2005 s 640). The charge on the gross equivalent of the capital sum is miscellaneous income and the settlor is given credit for tax at the trust rate, or the amount of tax due if less (ITTOIA  2005 ss  619, 221, 640). The settlor is entitled to the same allowances and reliefs as if the amount of tax imposed on him had actually been his income (ITTOIA 2005 s 623). 6.225 These provisions can be a trap for the unwary settlor. In De Vigier v IRC (1964) 42 TC 24, one of the trustees, who was married to the settlor, lent £7,000 to the trustees to acquire some shares. The loan was repaid in two amounts within 12 months, and the Revenue successfully assessed the settlor to surtax on the grossed-up equivalent of the capital sum under what is now ITTOIA 2005 ss 633–640 (see, however, 6.220). The mere guaranteeing of an overdraft by the settlor was not treated as a capital sum within ITTOIA 2005 ss  623–640 in IRC  v Wachtel (1970) 46  TC  543, although in that case the Revenue won on the alternative argument that the guarantee amounted to an arrangement under which the settlor had retained an interest in the settlement. A loan by the trustees to the settlor was caught by ITTOIA 2005 ss 623–640 in McCrone v IRC (1967) 44 TC 142.

Connected companies 6.226 Capital sums, as defined by ITTOIA 2005 ss 634, 638 and 643, paid to the settlor include those paid by a company connected with the settlement provided that an associated payment is being made directly or indirectly by the trustees (ITTOIA 2005 s 641(1), (2)). The capital sum is the lower of the amount paid to the settlor or the associated payment made to the company by the trustees (ITTOIA  2005 s  641(3)–(6)). If, however, it is greater than the associated payments made in the year of assessment, it will be treated as income of the settlor in a later year, up to the amount of associated payments made in subsequent years (ITTOIA 2005 s 641(3)–(6)). An associated payment means any capital sum paid by the trustees to the company or any other sum paid or asset transferred to the company by the trustees, which is not paid or 358

Main Taxation Rules Applicable to Trusts 6.228 transferred for full consideration in money or money’s worth but limited to funds paid or assets transferred in the five years from the date of payment of the capital sum to the settlor. Note that the associated payment can be made before or after the date of the capital payment (ITTOIA 2005 s 643(3)). A company is connected with a settlement for these purposes if it is a close company, or would be if it were resident in the UK, and the participators include the trustees of the settlement; or it is controlled by such a company under ITTOIA 2005 s 637(8) or is an associated company within the close company definition of ITTOIA 2005 s 643(4). 6.227 The normal definition provisions relating to settlements in ITTOIA  2005 ss  645–648 apply for the provisions relating to capital sums paid to settlors (ITTOIA  2005 ss  644–648). Sums withdrawn by the settlor on his current account with the company were treated as falling within these provisions in Piratin v IRC [1981] STC 441. Sums paid by a company to clear a settlor’s bank overdraft were also caught in IRC v Bates (1966) 44 TC 225. However, payments made to third parties debited to the settlor’s current account were not capital sums within these provisions (Pott’s Executors v IRC (1950) 32 TC 211). However, this ploy is no longer available in view of the extended definition of capital sum to include sums paid to a third party at the settlor’s direction (ITTOIA 2005 ss 634(1), (4)(b), 643(1)). Short-term loans are, however, now allowed under ITTOIA 2005 s 642 if the loan is repaid within 12 months and the total period for which loans are outstanding within a five-year period does not exceed 12 months. 6.228 Rules for ascertaining the undistributed income are set out in ITTOIA 2005 ss 636 and 637. Income arising under a settlement in any tax year is deemed not to have been distributed to the extent that it exceeds the aggregate of: (a) distributions to beneficiaries which would be taxable were they domiciled, resident and ordinarily resident in the UK; (b) trust expenses properly chargeable to income; and (c) the amount by which the exempt income of a charitable trust exceeds expenses properly chargeable against that income. Expenses include interest paid by the trustees except to the extent that distributions were made to the settlor or his spouse or civil partner, in which case there is an apportionment applying the fraction: A–B A where A is the whole of the income of the settlement less expenses properly charged to income, and B  is the distributions to beneficiaries other than the settlor or his spouse (ITTOIA  2005 s  637(2)–(5)). These provisions do not 359

6.229  Main Taxation Rules Applicable to Trusts apply to interest that is statutorily allowable under the Taxes Acts, or to interest payable to the settlor or his spouse living with him, nor do they affect the taxability of the interest on the recipient (ITTOIA 2005 s 637(6), (7)). 6.229 It should be noted that separate rates apply to individuals resident in Scotland from 6  April 2018 and Wales from 6  April 2019. Trustees are generally not affected by Scottish and Welsh income tax rates. There is an exception in relation to bare trusts, and beneficiaries of a bare trust who are resident in Scotland or Wales will be subject to the Scottish or Welsh rates of income tax as appropriate. Similarly, an individual beneficiary who is resident in Scotland or Wales will pay Scottish or Welsh income tax rates on income received from the trust from 2018/19 (2019/20 in the case of Welsh residents).

Capital gains tax 6.230 TCGA 1992 s 77 contained provisions apportioning chargeable gains arising to UK resident trustees to a settlor where the settlor retained an interest in the settlement. These provisions were repealed with effect for 2008/09 and later years. Reference should be made to earlier editions of this publication for further details. Under TCGA 1992 s 169B, holdover relief for gifts of business assets under TCGA  1992 s  165(4), or in respect of gifts on which inheritance tax is payable under TCGA 1992 s 260(3), is not available either where there is a transfer by the settlor or some other person to a settlor interested settlement or an arrangement exists under which a settlor may acquire such an interest. Holdover relief on the transfer is also not available where there would be a chargeable gain and the expenditure allowed as a deduction would be reduced by the holdover relief obtained on an earlier disposal when it was made, and the individual has an interest in the settlement or an arrangement exists for the acquisition of such an interest. Maintenance funds for historic buildings and certain trusts for the disabled are excluded from these provisions. 6.231 Holdover relief may be given because the settlement is not settlor interested, but then it becomes so, in which case the relief previously given may be clawed back under TCGA 1992 s 169C, if the settlor has acquired an interest in the settlement or an arrangement exists under which such an interest may be acquired. Relief may also be clawed back where the expenditure available to the transferor, if gifts relief were not available, would be reduced because of an earlier holdover and the transferor has, or may acquire, an interest in the settlement. If the relief has been claimed but not given it will be refused. The clawback does not apply if the transferor claiming the holdover relief dies before he acquires an interest in the settlement, or before any arrangement under which he may acquire such an interest comes into effect. The clawback taxes the transferor on a gain equal to the amount held over. The gains and 360

Main Taxation Rules Applicable to Trusts 6.234 losses of the trustees to whom the asset was transferred are then computed as if no gift relief had been available, increasing their base value, which would follow through on any subsequent disposal by the trustees on which holdover relief was validly claimed. Maintenance funds and certain trusts for the disabled are excluded from clawback provisions by TCGA 1992 s 169D. 6.232 Settlor interested settlements and arrangements are widely defined by TCGA 1992 ss 169E–169G to include indirect and reciprocal settlements, and a settlement where the spouse is a beneficiary. An arrangement includes any scheme, agreement or understanding whether or not legally enforceable. TCGA 1992 s 169G also enables HMRC to issue a notice requiring a trustee, beneficiary or settlor or his spouse or former spouse to supply information on giving at least 28 days’ notice. The additional capital gains tax may be paid by instalments where TCGA  1992 s  281 applies and recovered from the donee under TCGA 1992 s 282. TCGA 1992 Sch 7 para 2 includes gifts into settlement and gifts of agricultural property within these holdover relief restrictions.

INHERITANCE TAX 6.233 A  chargeable transfer is a transfer of value which is made by an individual which is not an exempt transfer or is exempt only to a limited extent (IHTA 1984 s 2(1) and (2)). A chargeable transfer also arises when tax is chargeable under the provisions relating to relevant property trusts under IHTA 1984 ss 58–85 (s 2(3)). FA 2006 made radical changes to the inheritance tax rules applying to trusts, and extended the relevant property regime formerly reserved for discretionary trusts to most inter vivos settlements (see 7.20 et seq). Settlements in existence at 22  March 2006, where there have been no additions to the settled property, are largely unaffected by the changes, with the exception of accumulation and maintenance trusts which were given a twoyear transitional period to enable the trustees to alter the terms of the trust deed to fall within one of the new categories of inheritance tax-favoured trusts under IHTA 1984 ss 71A–71D. Where no action was taken by 6 April 2008, such that the trust does not meet the conditions of IHTA 1984 ss 71A–71D, the trust will fall within the relevant property regime for 2008/09 and subsequent years. 6.234 IHT is charged on the value transferred by a chargeable transfer (IHTA  1984 s  1). A  transfer of value is a disposition which results in the fall in value of the estate immediately after the transfer, the difference being the value transferred (s  3(1)). Excluded property is not taken into account (s 3(2)). The omission to exercise a right can be a transfer of value (s  3(3)); see also RWJ  Parry (Mrs R  F  Staveley’s Personal Representatives) v HMRC [2014] UKFTT 419. A potentially exempt transfer is one made by an individual which would otherwise be a chargeable transfer but consists of a gift to another individual, or a gift into a disabled person’s trust, unless it is 361

6.235  Main Taxation Rules Applicable to Trusts specifically provided that it is not a potentially exempt transfer (s 3A(1)). Prior to 22 March 2006, a potentially exempt transfer included a gift to an interest in possession or accumulation and maintenance trust. After this date, transfers to both pre-existing and new interest in possession settlements are regarded as chargeable lifetime transfers. 6.235 A  potentially exempt transfer which is made seven years or more before the death of the transferor is an exempt transfer (IHTA 1984 s 3A(4)). It is presumed that a potentially exempt transfer will prove to be an exempt transfer until it actually becomes one on the seventh anniversary of the transfer, or the earlier death of the transferor in which case it becomes a chargeable transfer (s 3A(4) and (5)). 6.236 A person’s estate is that to which he is beneficially entitled before his death, other than excluded property (IHTA 1984 s 5(1)). A general power of appointment is treated as an asset of the estate (s 5(2)). A person who became beneficially entitled to an interest in possession in settled property before 22 March 2006 is treated as beneficially entitled to that property (IHTA 1984 s 49(1) and (1A)). After that date, a person with an interest in possession in settled property is not treated as beneficially entitled to that property, unless the interest is an immediate post-death interest, a transitional serial interest or a disabled person’s interest. Where a beneficial interest in possession arises as a result of a disposition for money or money’s worth, the beneficiary is not deemed to be entitled to the whole property, but merely the actuarial value of the life interest he acquired, in determining whether there was a reduction in value of his estate (s 49(2)). A reduced rate of inheritance tax applies where 10% or more of a deceased person’s net estate is left to charity. The reduced rate is 36% and applies for deaths occurring on or after 6 April 2012 (FA 2012 s 207, Sch 32).

Excluded property 6.237 Property situated outside the UK is excluded property if the person beneficially entitled to it is an individual domiciled outside the UK (IHTA  1984 s  6(1)). Securities that are free of tax for residents abroad are excluded property if they are in the beneficial ownership of a non-resident (s  6(2)). War savings certificates, National Savings certificates, premium savings bonds, deposits with the National Savings Bank or a trustee savings bank or a certified contractual savings scheme within ITTOIA 2005 ss 702– 707 are excluded property if held by a domiciliary of the Channel Islands or the Isle of Man. Emoluments paid to a non-British citizen who is a member of the armed forces of a foreign country stationed in the UK are excluded property, as is any tangible, movable property in the UK solely due to such presence (IHTA 1984 ss 6(4) and 155(1)). The definition of excluded property 362

Main Taxation Rules Applicable to Trusts 6.239 is modified for 2016/17 and later years in respect of assets deriving their value from UK residential property, see Chapter 10. 6.238 The exemption extends to property deemed to be situated outside the UK under a double taxation agreement under IHTA 1984 s 158. Prior to changes introduced by FA  2013 s  178, a non-domiciliary may leave out of account the balance on any qualifying foreign currency account, including that held by trustees of settled property in which he had an interest in possession on his death, if he was not domiciled in the UK immediately before his death, unless the settlor was domiciled in the UK when he made the settlement or the trustees are domiciled, resident or ordinarily resident in the UK immediately before his death (s 157). IHTA 1984 s 162AA provides that liabilities incurred to finance the acquisition of foreign currency are not taken into account in determining the value of the individual’s estate for inheritance tax purposes. The provision applies for transfers of value taking place after 17 July 2013. 6.239 Unlike for CGT under TCGA 1992 s 275, the IHT legislation contains no situs rules for determining whether the property is located in the UK or overseas and, consequently, the normal rules will apply: (i)

Registered securities are situated where they are registered, which is generally the place where the share register is kept and where the shares can be dealt with, see R v Williams [1942] AC 541; where dealings may take place in two or more countries the situs is the country in which the registered owner would ordinarily deal (Treasurer for Ontario v Aberdein [1947] AC 24; Standard Chartered Bank Ltd v IRC [1978] STC 272).

(ii) Bearer securities are situated in the country in which the title documents are kept (Winans v A-G [1910] AC 27. However, where Eurobonds are held through the Euroclear system, the CTO appears to have regard to the location of the broker. (iii) Renounceable letters of allotment of shares in UK companies were held to have a UK situs irrespective of the location of the documents, in the CGT case, Young v Phillips [1984] STC 520. (iv) A  simple contract debt is generally situated in the country where the debtor resides. Where there is more than one country, regard will be had to the contract terms to localise the debt (New York Life Insurance Co Ltd v Public Trustee [1924] 2 Ch 101; Kwok Chi Leung (Executor of Lamson Kwok) v Comr of Estate Duty [1988] STC 728). A specialty debt (ie a debt based on a document under seal), including a mortgage under seal, is located where the document is situated at the time of the disposition by the creditor (Royal Trust Co v A-G for Alberta [1930] AC 144). (v) Freehold and leasehold land is located where the property is situated.

363

6.240  Main Taxation Rules Applicable to Trusts (vi) Movable property is located where it is physically situated. However, see ESC F7 where foreign works of art temporarily in the UK are not charged to tax. Ships are generally situated where registered unless they are within UK territorial or national waters (Trustees Executors and Agency Co Ltd v IRC [1973] STC 96). 6.240 From 6  April 1998 all gilt-edged securities have been excluded property, and therefore free of IHT if they are in the beneficial ownership of a non-resident or non-domiciliary or held in trust and such a person has a qualifying interest in possession therein (IHTA  1984 s  49; FA  1998 s  161(2)(c)). An anti-avoidance rule was introduced by FA  2013 Sch  36 paras 1–3 in connection with liabilities related to excluded property. The new rule in IHTA  1984 s  162A applies to transfers of value taking place after 17  July 2013, where a liability is attributable to financing (directly or indirectly) the acquisition, maintenance or enhancement of excluded property. In such cases, the liability cannot be taken into account in valuing the estate for inheritance tax purposes. 6.241 It would appear that a non-domiciled, non-resident person deemed to be domiciled under IHTA 1984 s 267 could make transfers free of IHT by acquiring gilts and transferring them in specie to the proposed beneficiary. In appropriate circumstances trustees might wish to switch investments to hold such securities if the person having a qualified interest in possession qualifies for the exemption, ie is actually a non-domiciled, non-resident person. 6.242 A reversionary interest in settled property is a future interest under a settlement, whether vested or contingent, including an interest expectant on the termination of an interest in possession (IHTA 1984 s 47). A reversionary interest is excluded property unless it has been acquired at any time for a consideration in money or money’s worth, or is one to which either the settlor or his spouse or civil partner has been beneficially entitled, or is an interest expectant on the determination of a lease for life treated as a settlement under IHTA 1984 s 43(3) (s 48(1)). If the settlement was made before 16 April 1976, the exclusion of the reversionary interest belonging to the settlor’s spouse is ignored; and, for an interest in a post-16 April 1976 trust acquired before 10 March 1981, the reversionary interest is excluded property unless the settlor or his spouse is beneficially entitled at the relevant date (s  48(2)). Where a settlement is situated outside the UK, the property, but not a reversionary interest in the property, is excluded property if the settlor was domiciled outside the UK at the time the settlement was made; and the reversionary interest in the property is excluded property if the person beneficially entitled to it is an individual domiciled outside the UK (s 48(3)). Property is not excluded property if a UK domiciled individual acquires a beneficial entitlement to an interest in possession in the property for consideration in money or money’s worth 364

Main Taxation Rules Applicable to Trusts 6.243 on or after 5 December 2005 (s 48(3B) and (3C)). This is an anti-avoidance provision designed to counter inheritance tax mitigation strategies involving the sale of excluded property interests to individuals domiciled in the UK. Where FOTRA (free of tax for residents abroad) securities are held in trust, the securities are excluded property if the person with the interest in possession is non-resident or if it can be shown that all beneficiaries of a discretionary trust are non-resident (Montague Trust Co (Jersey) Ltd v IRC [1989] STC 477; Von Ernst and Cie SA v IRC [1980] STC 111; IHTA 1984 s 48(4)). 6.243 Where a close company is entitled to an interest in possession in settled property, the participators are treated, except for the acquisition of a reversionary interest under IHTA 1984 s 55, as being the persons entitled to the interest according to their interests in the company (IHTA  1984 s  101). An attempt to use the excluded property provisions for exempt gilts, using a non-resident close company, failed in IRC  v Brandenburg [1982]  STC  555. There are provisions covering the transfer of assets from one trust to another in IHTA 1984 s 48(5) and (6). Property is regarded for the purposes of s 48(3) as becoming comprised in the settlement when it, or other property which it represents, is introduced by the settlor (SP E9). Tax Bulletin, Issue 27, February 1997, RI 166, provides as follows: ‘Excluded property settlements by people domiciled overseas [IHTA 1984 ss 43, 44, 48] [The Revenue] have been asked how the IHT provisions on excluded property apply to the assets of a settlement made by a person domiciled overseas where— —

all, or only some, of the settled assets are situated outside the UK when a chargeable event occurs;

or —

a person domiciled in the UK has also provided property or funds for the purposes of that settlement.

References in this article are to sections of the Inheritance Tax Act 1984. Excluded property For persons domiciled abroad, IHT generally applies only to their UK assets; it treats their overseas assets as excluded property, that is not within the charge to IHT – s  6(1). For assets owned outright, it is the owner’s domicile at the time of a tax charge that is relevant in deciding whether or not the assets are excluded property. Slightly different rules apply to property held in settlement. An asset is excluded property if it is situated abroad when a chargeable event occurs and if the settlor (defined in s 44) was domiciled outside the UK at the time the settlement was made – s 48(3). 365

6.243  Main Taxation Rules Applicable to Trusts However, an “excluded” asset is not always completely irrelevant for the purposes of IHT. So— —

an “excluded” asset in a person’s estate may still affect the valuation of another asset in the estate, for example, an “excluded” holding of shares in an unquoted company may affect the value of a similar holding in the estate which is not “excluded”;

— the value of an “excluded” asset at the time the asset becomes comprised in a settlement may be relevant in determining the rate of any tax charge arising in respect of the settlement under the IHT rules concerning trusts without interests in possession – ss 68(5), 66(4) and 69(3). Domicile is a concept of general law but, in certain circumstances (s 267), a person with a general law domicile abroad can be treated as having a UK domicile for IHT purposes. Settlor adds assets to his/her existing settlements In the light of the definitions of “settlement” and “settled property” in s 43, [the Revenue’s] view is that a settlement in relation to any particular asset is made at the time when that asset is transferred to the settlement trustee, to hold on the declared trusts. Thus, assets added to a settlor’s own settlement made at an earlier time when the settlor was domiciled abroad will not be “excluded”, wherever they may be situated, if the settlor has a UK domicile at the time of making the addition. In determining the tax treatment of particular assets held in the same settlement it may, therefore, be necessary to consider the settlor’s domicile at times other than when the settlement was first made. And if assets added at different times have become mixed, any dealings with the settled fund after the addition(s) may also need to be considered. Several persons contribute to a single settlement There are rules (s 44(2)) which provide that assets contributed to a “single” settlement by more than one settlor are to be treated as comprised in separate settlements for IHT purposes if “the circumstances so require”. There is no definition of “required circumstances” or statutory guidance on how the assets in the single, actual settlement are to be attributed to the deemed separate settlements. However, the provision is similar in terms to FA  1975 Sch  5 para  1(8), which was considered by Chadwick J in Hatton v IRC [1992] STC 140. In the light of the decision in that case [the Revenue] take the view— — that the determination of the extent to which overseas assets in a settlement are excluded property by reason of the settlor’s domicile is a relevant “required circumstance”; and 366

Main Taxation Rules Applicable to Trusts 6.243 —

that where a clear, or reasonably sensible, attribution of settled property between the contributions made by several settlors is possible, there will be a separate settlement, with its own attributed assets, for each contribution for IHT purposes;

—

if such an attribution is not feasible, each separate settlement will comprise all the assets of the single, actual settlement.

Trust records It follows from the comments above that the trustees of a settlement should keep adequate records to enable any necessary attribution of the settled property to be made if either— —

the settlor has added further assets to the settlement after it was made; or

—

two or more persons have contributed funds for the purposes of the settlement.’

A  settlement for inheritance tax purposes means any disposition however effected whereby property is held in trust for persons in succession or for any person subject to a contingency or held by trustees on trust to accumulate the whole or part of the income or with power to make payments out of that income at the discretion of the trustees or some other person with or without power to accumulate surplus income or charged with the payment of an annuity other than for full consideration in money or money’s worth (IHTA 1984 s 43(2)). A lease for life is treated as a settlement unless the lease was granted for a full consideration in money or money’s worth (IHTA 1984 s 43(3)). The definitions in relation to Scotland and Northern Ireland are covered in IHTA 1984 s 43(4) and (5). Settled property is property comprised in a settlement (IHTA  1984 s 43(1)). The settlor includes any person by whom the settlement was made directly or indirectly, or who has provided funds directly or indirectly for the purpose of or in connection with the settlement, or who has made a reciprocal arrangement for some other person to make the settlement (IHTA 1984 s 44(1)). Except in relation to settlements of exempt gilts under IHTA  1984 s  48(4)–(6), where there is more than one settlor of a settlement, it is treated for inheritance tax purposes as if the settled property were comprised in separate settlements (IHTA 1984 s 44(2)). Trustee means any person in whom the settled property or its management is for the time being vested (IHTA 1984 s 45). The question of a lease for life was considered in IRC v Lloyds Private Banking Ltd [1998] STC 559. SP 10/79 gives the HMRC view of a power of the trustees to allow a beneficiary to occupy a dwelling house as follows: ‘Many wills and settlements contain a clause empowering the trustees to permit a beneficiary to occupy a dwelling-house which forms part of the 367

6.244  Main Taxation Rules Applicable to Trusts trust property as they think fit. The Board do not regard the existence of such a power as excluding any interest in possession of the property. When there is no interest in possession in the property in question, the Board do not regard the exercise of a power as creating one if the effect is merely to allow non-exclusive occupation or to create a contractual tenancy for full consideration. The Board also take the view that no interest in possession arises on the creation of a lease for a term or a periodic tenancy for less than full consideration, though this will normally give rise to a charge for tax under IHTA  1984 s  65(1)(b) (formerly FA  1982 s  108(1) (b)). On the other hand if the power is drawn in terms wide enough to cover the creation of an exclusive or joint residence, albeit revocable, for a definite or indefinite period, and is exercised with the intention of providing a particular beneficiary with a permanent home, the Revenue will normally regard the exercise of the power as creating an interest in possession. And if the trustees in exercise of their powers grant a lease for life for less than full consideration, this will be regarded as creating an interest in possession in view of IHTA 1984 ss 43(3), 50(6) (formerly FA 1975 Sch 5 paras 1(3), 3(6)). A  similar view will be taken where the power is exercised over property in which another beneficiary had an interest in possession up to the time.’ 6.244 A  right of occupation as a lease for life within IHTA  1984 s  43(3) was also considered in Woodhall (Woodhall’s personal representative) v IRC [2000] STC (SCD) 558, although in that case the interest was held to be a joint interest and he was therefore regarded as having an interest in possession in half of the house (IHTA 1984 s 50(5)). A trustee’s annuity that is no more than reasonable remuneration for his services is not regarded as giving him an interest in possession in the property (IHTA 1984 s 90). Where a person would have become entitled to an interest in possession in any part of the residue on the completion of the administration period, it is treated as if he had obtained such an interest in the ascertained residue and unadministered estate from the earliest date that income would become attributable to that interest if the residue had been ascertained immediately after the death (s 91). A disposal of an interest by a beneficiary which was not a disclaimer would therefore incur a charge to tax, even though he may never legally have had an interest in possession (Comr of Stamp Duties (Queensland v Livingstone) [1964] 3 All ER 692). Difficulties can arise in valuing the relevant property of an estate in administration in view of the definition of an unadministered estate in s 91(2). 6.245 Wills frequently contain a clause under which a person has to survive for a period in order to benefit. A survivorship period of up to six months is allowed under IHTA 1984 s 92. If the beneficiary survives and therefore inherits or dies before surviving the requisite period so that the dependent beneficiaries inherit the dispositions actually made on the circumstances applying at the end of the period are treated as if they had taken effect at the beginning of the 368

Main Taxation Rules Applicable to Trusts 6.247 period (ie at the date of death). A person who is entitled to an interest in settled property but disclaims that interest other than for a consideration in money or money’s worth is treated as if he had never become entitled to the interest under s 93. Decorations and awards for valour are excluded property under IHTA  1984 s 6(1B) if there has been no disposition for money or money’s worth (FA 2015 ss 74 and 75).

Close companies 6.246 Where a close company makes a transfer of value, IHT is charged on each individual to whom an amount is apportioned as if each individual had made a net of tax transfer of value equal to the amount so apportioned, less any amount by which the value of his estate has increased, excluding any rights or interests in the company. The amount transferred is apportioned among the participators according to their respective rights and interests in the company immediately before the transfer, with sub-apportionment through other corporate holdings, and by close company shareholders. However, distributions taxable as income are not apportioned. The value of property outside the UK which is the subject of the transfer is not apportioned to nonUK domiciled participators. Surrenders of group relief and surplus ACT are ignored, as are apportionments of 5% or less of the value transferred by the company’s transfer of value, which avoids apportionment to very small shareholders (IHTA 1984 s 94). There are relieving provisions where transfers take place between close companies and a participator is a shareholder in both (s 95). Preference shares are left out of account in determining the respective rights and interests of the participators (s 96). Apportionment is not made to minority shareholders in a subsidiary company of a group where intra-group transfers are made and they would have only a small effect on the value of the minority participator’s rights (s 97). Transfers of value can arise through the alteration of a close company’s unquoted share or loan capital or an alteration in any rights attaching to unquoted shares in, or unquoted debentures of, a close company (s 98). 6.247 Where the participators are trustees and any part of the value transferred by a close company’s transfer of value is apportioned to them, the apportionment goes through a person with a qualifying interest in possession, such as a life tenant, under IHTA 1984 s 99(2)(a). Where there is no qualifying interest in possession in the settled property, the value of the settled property is treated as reduced by the amount so apportioned which could give rise to an exit charge under IHTA 1984 s 65 (s 99(2)(b)). Qualifying interest in possession is as defined by IHTA  1984 s  59(1). If as a result of the transfer the value of the settled property increases, ignoring the value of any rights or interests in the company, the amounts apportioned under these provisions are reduced 369

6.248  Main Taxation Rules Applicable to Trusts accordingly (s 99(3)). There are corresponding provisions where an alteration in a close company’s share or loan capital, or of any rights attaching to shares in or debentures of a close company which is treated as a disposition made by the participators, is apportioned through to an individual entitled to an interest in possession who is treated as if his interest in possession had proportionately come to an end, which could give rise to a charge under IHTA 1984 s 52. Where the apportionment is to a close company having an interest in possession in settled property, the apportionment is carried through to the participators of the close company beneficiary, and, where these are trustees of a settlement, through to any beneficiary having an interest in possession in the trust which is treated as terminated, giving rise to a termination charge under s 52 unless the interest reverts to the settlor under s 53(3) (SP E5). 6.248 In connection with intra-group transfers, a dividend from a subsidiary to a parent is not a transfer of value nor are transfers of assets between whollyowned subsidiaries or between a wholly-owned subsidiary and its parent (SP E15). For these purposes, ‘close company’ and ‘participator’ are defined as for corporation tax purposes but expanded to a company which would be a close company if resident in the UK (IHTA  1984 s  102(1)). A  person’s interests in a company include rights and interests in the assets available for distribution among the participators in the event of a winding-up, or in any other circumstances (s 102(2)).

Business property relief 6.249 Relevant business property relief at 100% reduces the value transferred by the chargeable transfer to nil, under IHTA  1984 s  104(1)(a), where the property consists of a business or an interest in a business carried on for gain (ss 105(1)(a) and 103(3)). Similar relief applies where the assets consist of securities of a company which are unquoted and which, either by themselves or together with other such securities owned by the transferor and any unquoted shares held by the transferor, gave him control of the company immediately before the transfer (s  105(1)(b)). The relief also applies to any unquoted shares in a company (s 105(1)(bb)). 6.250 Relevant business property relief is available at 50% under IHTA 1984 s  104(1)(b) in respect of quoted shares or securities that gave the transferor control of the company immediately before the transfer (s 105(1)(cc)). Relief at 50% is also available on any land or building, machinery or plant which immediately before the transfer was used wholly or mainly for the purpose of a business carried on by a company of which the transferor had control, or by a partnership of which he was a partner (s 105(1)(d)). The transferor of a transfer of value includes the trustees of a settlement (s 103(1)(b)). Relief at 50% also applies to any land or building, machinery or plant which immediately before the transfer was used wholly or mainly for the purposes of a business carried 370

Main Taxation Rules Applicable to Trusts 6.252 on by the transferor which was owned by the trustees of a settlement in which he was beneficially entitled to an interest in possession (s 105(1)(e)). Business property relief is not available where the business consists of dealing in securities, stocks or shares, land or buildings or making or holding investments, except as a market-maker or holding company of qualifying companies (s 105(3) and (4)). Shares or securities cease to qualify where the company is in liquidation other than for a reconstruction or amalgamation (s 105(5)). Cases on relevant business property include Beckman v IRC [2000] STC (SCD) 59; Furness v IRC [1999] STC (SCD) 232; Farmer (Executors of Farmer) v IRC [1999] STC (SCD) 321; Grimwood Taylor v IRC [2000] STC (SCD) 39; Weston (Executor of Weston) v IRC [2000] STC 1064; Martin and Horsfall (Moore’s Executors) v IRC  [1995]  STC (SCD) 5; Burkinyoung (Burkinyoung’s Executor) v IRC  [1995]  STC (SCD) 29; Brown’s Executors v IRC  [1996]  STC (SCD) 277; Hall and Hall (Hall’s Executors) v IRC [1997] STC (SCD) 126; Powell and Halfhide (Pearce’s Personal representatives) v IRC  [1997]  STC (SCD) 181; Mallender (Drury-Lowe’s Executors) v IRC  [2000]  STC (SCD) 574; Hardcastle and Hardcastle (Vernede’s Executors) v IRC [2000] STC (SCD) 532; Barclays Bank Trust Co Ltd v IRC [1998] STC (SCD) 125; Brander (rep of James (decd.), Fourth Earl of Balfour v RCC (2009) SFTD 374; Trustees of the David Zetland Settlement v HMRC (TC02690). Settled property used by a life tenant for a farming business was specifically confirmed as qualifying for business property relief in Fetherstonhaugh v IRC [1984] STC 261. A company whose principal activity was the lending of money to associated companies was held not to be carrying on an investment business in Phillips (executors of Phillips dec’d) v Revenue and Customs Comrs (SpC 555) [2006] STC (SCD) 639. The value transferred must be attributable to the relevant business property, but there is no requirement that there is a transfer of a business. A transfer of business assets will therefore also be eligible for relief (RCC v Trustees of the Nelson Dance Family [2009] STC 802). 6.251 Securities on the alternative investment market are not treated as quoted for tax purposes (IR  Press Release, 20  February 1995). In order to qualify for business property relief an asset has to have been owned for the two years immediately preceding transfer but that may include replacement property under IHTA 1984 ss 106 and 107. However, in the case of a legacy the asset is treated as acquired when the donor died and if the donor was a spouse his or her period of ownership may be included (s 108). Where the asset was relevant business property on the death of the transferor, a subsequent transfer by the legatee is also of relevant business property; the fact that the legatee had held the property for less than two years does not disqualify him from business property relief (s 109). 6.252 The value of a business is the net value, ie  the value of the assets including goodwill used in the business, less any liabilities incurred for business purposes (Finch v IRC  [1983]  STC  157; IHTA  1984 s  110). In determining whether a person had control of a company, it was held that it was theoretical 371

6.253  Main Taxation Rules Applicable to Trusts control that was required, and the fact that the substantial shareholder was a minor and unable to exercise his voting rights was irrelevant (Walding’s Executors v IRC [1996] STC 13). 6.253 Where a group of companies consists only partly of qualifying companies, the non-qualifying companies are omitted for the purposes of calculating business property relief (IHTA  1984 s  111). Excepted assets are those which have neither been used wholly or mainly for the purpose of the business throughout the whole of the two years ending with the transfer, nor were required at the time of the transfer for future use in the business (s 112(2)). Excepted assets are excluded in calculating business property relief (s 112(1)). Land or buildings, machinery or plant used by a controlled company or partnership must either have been held for the two years immediately preceding the transfer of value or have replaced other assets where the combined period of ownership is at least two years in the five years immediately preceding the transfer of value (s  112(3)). Just apportionments are provided for under s 112(4). 6.254 Where a contract for sale has been entered into, the asset ceases to qualify for business property relief unless it is a sale of a business to a company wholly or mainly for shares or securities or as part of a reconstruction or amalgamation (IHTA 1984 s 113). Business property relief may be lost where buy and sell agreements have been entered into, eg  by partners agreeing to purchase an outgoing partner’s interest (SP 12/80). 6.255 Where a transferor dies within seven years of making a potentially exempt transfer of relevant business property, which becomes chargeable on his death, or a previously chargeable transfer of relevant business property, the tax on which has to be recomputed in accordance with IHTA  1984 s  7, business property relief will only be available where the transferee has retained ownership of the original property from the date of transfer to the date of death and that property would still qualify as relevant business property at the date of death, ignoring the two-year ownership requirement in IHTA 1984 s 106. If the transferee has died before the transferor, the conditions for business property relief must be met at the transferee’s death where the original property consisted of shares or securities; business property relief is preserved if the original transfers were made from a controlling shareholding. 6.256 IHTA 1984 s 113A allows the property to be disposed of and replaced by the donee before the transferor’s death, provided that all the net sale proceeds are reinvested in the acquisition of replacement business property within three years or such longer period as HMRC may allow, after the disposal. Both transactions must be at arm’s length and it is the replacement property that is owned by the transferee at the date of the transferor’s death which qualifies (s  113B). These provisions, which can cause the loss of business property relief, have to be considered by trustees to whom business property is given 372

Main Taxation Rules Applicable to Trusts 6.259 and they may think it appropriate to insure the donor’s life for the amount of any IHT for which they could become liable if the property were to cease to qualify as relevant business property and the transferor were to die within seven years. 6.257 Agricultural property relief takes precedence over business property relief and double relief is excluded by IHTA 1984 s 114. Agricultural assets such as stock and plant not qualifying for agricultural property relief would normally qualify for business property relief. 6.258 A  farming business acquired in replacement of a non-farming business, and owned for less than the minimum period required for agricultural relief, could qualify for relevant business property relief. In HMRC’s view, where agricultural property which is a farming business is replaced by non-agricultural business property, the period of ownership of the original property will be included in applying the minimum ownership condition to the replacement property (Tax Bulletin, Issue 14, December 1994, RI 95). 6.259 Agricultural property relief is also available to trustees (IHTA 1984 s  115(1)(b)). Agricultural property means agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish, if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture. It also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property (s 115(2)). Agricultural property is valued on the basis that it be subject to a perpetual covenant prohibiting its use otherwise than as agricultural property, which means that the development value of agricultural land does not qualify for the relief but could qualify for business property relief on the excess value. The breeding and rearing of horses on a stud farm and the grazing of horses in connection with those activities shall be taken to be agriculture, as will any buildings used in connection with such activities. Agricultural property relief was only available on such property in the UK, the Channel Islands or the Isle of Man until 21 April 2010 when it was extended to EEA land by FA 2009 s 122. Agricultural property relief was denied for a farmhouse where the land was held by a farming company (Starke v IRC [1995] STC 689). Relief was also denied in Harrold v IRC [1996] STC (SCD) 195. Grazing land used by horses was not connected with agriculture in Wheatley’s Executors v IRC [1998] STC (SCD) 60 in Farmer v IRC [1999] STC (SCD) 321 a mixed business was eligible for relief as consisting mainly of farming even though the net profit from letting exceeded that from farming. Agricultural property relief is 100% of the value transferred if the interest in the agricultural property is with vacant possession or a right to obtain vacant possession within 12 months or let on a tenancy beginning on or after 1 September 1995. The 100% relief also applies in certain cases where the land has been held since 10 March 1981 (s 116). Where the agricultural property is 373

6.260  Main Taxation Rules Applicable to Trusts let on a tenancy beginning before 1 September 1995 for 12 months or more, the percentage agricultural property relief is 50% (s 116(2)). 6.260 There is a minimum period of occupation of two years for owneroccupied property or seven years for let property (IHTA  1984 s  117). The provisions for replacement property are in s 118 and occupation by a company controlled by the transferor or a partnership in which he is a partner is covered by s 119. There are also provisions for successions and successive transfers which broadly correspond to the business property relief provisions (ss 120 and 121). The relief is extended to the agricultural value attributable to shares in a company which forms part of the company’s assets, where the shares gave the transferor control of the company immediately before the transfer and the property was occupied by the company for the purposes of agriculture throughout the period of two years ending with the date of the transfer, or was let for the purposes of agriculture throughout the seven years ending on that date, subject to qualifying replacements of similarly qualifying property (ss 122 and 123). 6.261 Where there is a contract for sale of agricultural property or the sale of the shares or securities in an agricultural company, other than for the purposes of reconstruction or amalgamation or the transfer of a business to a company, the relief is lost (IHTA 1984 s 124). Where there has been a potentially exempt transfer of agricultural property or a chargeable transfer and within seven years the transferor dies so that tax may have to be recomputed on death, agricultural relief will only be available if the property comprised in the gift is owned by the transferee throughout the period from the date of transfer to the date of death, and the property is agricultural property occupied either by the transferee or another person for the purposes of agriculture. Where the original agricultural property comprised shares in a farming company, the company must have owned the agricultural land throughout the relevant period, subject to reinvestment in other agricultural property which is allowed. Where the transferee predeceases the transferor or where the donee sells agricultural property and reinvests in business property, the conditions must be satisfied at the transferee’s death (Tax Bulletin, Issue 14, December 1994, p  182; IHTA  1984 s  124A). Provisions relating to replacement property are contained in s 124B. Land which is taken out of farming but dedicated under one of the habitat schemes listed in s 124C remains agricultural property for IHT purposes.

Woodlands 6.262 The woodlands relief in IHTA  1984 ss  125–130, which allows an election to leave out the value of trees or underwood in determining the value of non-agricultural land held at death, is not applicable to trustees except to the extent that land could be left to trustees under a will trust and the tax which crystallises on a subsequent sale could become chargeable on the trustees under the terms of the will. 374

Main Taxation Rules Applicable to Trusts 6.265

Deduction of liabilities relating to relievable property 6.263 Finance Act 2013 Sch 36 paras 1–3 introduced IHTA 1984 s 162B, changed the way in which certain liabilities incurred to acquire, maintain or enhance property qualifying for business property relief, agricultural property relief or woodlands are treated for the purposes of calculating a transfer of value. A  common structure was to borrow against relievable property, with the effect that the liability incurred further reduced the net amount chargeable to inheritance tax. With effect for transfers of value made on or after 17 July 2013, where a liability is incurred in acquiring etc property to which relief applies, the liability is deducted from the value of the relievable property before business, agricultural or woodland relief applies.

Written variations 6.264 Within the period of two years after a person’s death it is possible, by means of an instrument in writing, to vary any of the dispositions made by will or under the laws relating to intestacy or otherwise or where any benefit so conferred is disclaimed. IHT should be calculated as if the variations had been effected by the deceased or the disclaimed benefit had never been conferred (IHTA  1984 s  142(1)). The variation only had effect on giving written notice to HMRC within six months of the date of the instrument, or so long a time as HMRC may allow, by the persons making the instrument, and, where the variation results in the additional IHT being payable, the personal representatives. The personal representatives could decline to join in an election if they have insufficient assets to discharge the additional tax (s 142(2)). However, for deeds of variation made on or after 1 August 2002, the deed itself must state that it is to apply for inheritance tax if that is the case, or a result of FA  2002 s  120. The deed must be lodged with HMRC within six months of the death under IHTA 1984 s 218A. Variations made for money or money’s worth are not included unless the consideration is another variation or disclaimer (s 142(3)). Property eligible for inclusion in a variation includes excluded property but not an interest in possession in settled property which is governed by the trust deed (s 142(5)). It does not matter whether the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions (s 142(6)). Section 142 does not require a deed, merely an instrument in writing, although in practice this is usually in the form of a deed (Law Society’s Gazette, 18  December 1991). 6.265 Where the variation results in property being held in a trust which ends no more than two years after the death for IHT purposes, the property is deemed to have had effect from the date of death except in relation to any distribution or application of property occurring before the transfer into trust (IHTA 1984 s 142(4)). 375

6.266  Main Taxation Rules Applicable to Trusts 6.266 Rectification of deeds of variation was allowed in Lake v Lake [1989]  STC  865; Seymour v Seymour [1989]  BTC  8043; Schnieder v Mills [1993] STC 430; and Matthews v Martin [1991] BTC 8048. 6.267 HMRC in Tax Bulletin, Issue 15, February 1995, in IR  Int 1003, clarified the position with regard to the variation of inheritances following a death as follows: ‘The beneficiaries of a deceased person’s estate may wish to alter their entitlements under the estate, by changing the terms under which the original inheritance arose, whether by the deceased’s will, the laws of intestacy or otherwise. For example, a daughter inheriting under her father’s will may want to pass the inheritance on to her own child. Not surprisingly everyone who would lose out as a result of the change – called a variation – must agree to it. There are special rules concerning the consequences of variations in inheritance tax IHTA 1984 s 142. The main ones are set out below. If a variation is made— —

in a written instrument; and

—

within two years of the relevant death; and

—

if all those affected give written notice (usually called an election) to the Board of Inland Revenue within six months of the date of the instrument (or such longer time as the Board may allow); and

—

where the variation means that additional inheritance tax is payable, the personal representatives of the deceased also sign the election but see 6.279,

then the estate will be taxed as if the variation had been made by the deceased at the time of his/her death. In other words inheritance tax will be calculated on the basis of the varied entitlements, not the original ones. We have recently been asked for guidance in two areas relating to inheritance tax and instruments of variation. Marshall v Kerr In June 1994 the House of Lords, in the case of Marshall v Kerr [1994]  STC  638 found that those provisions of TCGA  1992 s  62 which apply where there is a variation and election, did not mean that the variation of the terms of a deceased person’s will was to be treated for all purposes of capital gains tax as made by the deceased. We have been asked whether variations which meet the conditions in IHTA  1984 s  142 will still be treated for inheritance tax purposes as made by the deceased and not by the beneficiary or beneficiaries. 376

Main Taxation Rules Applicable to Trusts 6.267 Our view is that, as the relevant inheritance tax legislation differs from the capital gains tax provisions which were considered in Marshall v Kerr, that decision has no application to inheritance tax. Variations which meet all the statutory conditions will continue to be treated for inheritance tax purposes as having been made by the deceased. Variation of inheritances following the death of an original beneficiary within the statutory two-year period As explained above, for IHTA 1984 s 142 to apply, all beneficiaries affected by the variation must join in a written election to the Board of Inland Revenue. We have been asked how this requirement should be interpreted when one of the beneficiaries dies before a variation is made. Our view is that the legal personal representatives of a beneficiary (the second deceased) may enter into a variation and sign an election. If the variation will reduce the entitlements of the beneficiaries of the second deceased then they, as well as the legal personal representatives of the second deceased, must agree to the variation. The Revenue will require evidence of the consent of the beneficiaries of the second deceased to the variation. If they are not themselves parties to the variation other written evidence of their consent will be sought. This view applies for capital gains tax purposes also.’ Subsequent interpretation IR  Int 1006, in Tax Bulletin 19, October 1995, covered the case of post-death variation of inheritance by survivorship as follows: ‘Beneficiaries of the estate of a deceased person – whether under the will, rules relating to intestacy, or otherwise – may wish to change their inheritances. There are special inheritance tax rules for changes or variations made within two years after the deceased’s death. If a variation made within the two-year period satisfies certain other conditions, inheritance tax is charged on the death as though the deceased person had made the variation and the beneficiaries do not have to pay tax on any gift of their inheritance. The main conditions are that the variation is made in writing and that, within six months after the variation, the persons making the variation give written notice to the Revenue electing for the inheritance tax rules to apply (no longer applicable, see 6.274). Similar rules apply for certain purposes of capital gains tax. Recently [The Revenue] have seen suggestions that these rules do not apply to a variation of the deceased’s interest in jointly held assets, which passed on the death to the surviving joint owner(s). For example, the family home was owned by a mother and her son as beneficial joint tenants and on the mother’s death, her interest passed by 377

6.268  Main Taxation Rules Applicable to Trusts survivorship to the son who then became the sole owner of the property. It has been suggested that, in this example, the son cannot, for inheritance tax/ capital gains tax purposes, vary his inheritance of his mother’s interest by redirecting it to his children. [The Revenue] do not share this view. Both inheritance tax and capital gains tax rules apply not only to dispositions/ inheritances arising under will or the law of intestacy but also those effected “otherwise”. In [The Revenue’s] view, the words “or otherwise” bring within the rules the automatic inheritance of a deceased owner’s interest in jointly held assets by the surviving joint owner(s).’ 6.268 On 22  May 1985, the Law Society’s Gazette published the (then) Revenue view on the interpretation of IHTA 1984 s 142 as follows: ‘The Revenue have taken further advice on the interpretation of IHTA 1984 s 142 and have indicated that the following conditions must be satisfied by an instrument if it is to be brought within that provision— 1.

the instrument in writing must be made by the persons or any of the persons who benefit or would benefit under the dispositions of the property comprised in the deceased’s estate immediately before his death;

2.

the instrument must be made within two years after the death;

3. the instrument must clearly indicate the dispositions that are the subject of it, and vary their destination as laid down by the deceased’s will, or under the law relating to intestate estates, or otherwise; 4.

a notice of election must be given within six months of the date of the instrument, unless the Board see fit to accept a late election; and

5.

the notice of election must refer to the appropriate statutory provisions (but see 6.274).

It is likely that the application of these principles will mean that most cases in which there were thought to be technical objections to instruments of variation will now be accepted. It will not be contended that the instrument of variation, to be eligible, has in terms to purport to vary the will or intestacy provisions themselves: it is sufficient if the instrument of variation identifies the disposition to be varied and varies its destination. It is emphasised, however, that the Revenue will continue to require that the provisions of IHTA 1984 s 142 as interpreted above, are satisfied. There have been some cases in which a number of instruments of variation have been executed in relation to the same will or intestacy. The Revenue emphasise that these cases must be considered on their precise facts, but in broad terms, their views will be as follows— 378

Main Taxation Rules Applicable to Trusts 6.269 (a)

an election which is validly made is irrevocable;

(b)

an instrument will not fall within IHTA 1984 s 142 if it further redirects any item or any part of an item that has already been redirected under an earlier instrument; and

(c)

to avoid any uncertainty, variations covering a number of items should ideally be made in one instrument (see 6.274).’

A  deed of variation in favour of a charity executed in respect of a death occurring on or after 6 April 2012 must be notified to the charity. IHTM35124 indicates that an exchange of letters will be sufficient. The use of deeds of variation and their role tax planning is the subject of a consultation following an announcement at the March 2015 Budget. Views are being sought as to whether legislation is required to remove the tax benefits which can arise through the use of deeds of variation. The consultation document published on 15 July 2015 does not give any insight into potential changes, but aims to ‘explore the circumstances in which deeds of variation are used for tax purposes’. The outcome of the review was announced in the Autumn Statement on 9  December 2015 and concluded that no changes were required at the present time, although the position would be kept under review.

Double taxation relief 6.269 Double taxation relief (DTR) for IHT purposes is given by IHTA 1984 s  158 which gives the statutory authority for entering into double taxation agreements in respect of estate and gifts taxes. The UK has double taxation agreements with the following countries: •

France: DTR (Estate Duty) (France) Order 1963, SI 1963/1319;

•

India: DTR (Estate Duty) (India) Order 1956, SI 1956/998;

•

Ireland: DTR (Taxes on estates of deceased persons and inheritances and on gifts) (Republic of Ireland) Order 1978, SI 1978/1107;

•

Italy: DTR (Estate Duty) (Italy) Order 1968, SI 1968/304;

•

Netherlands: DTR (Taxes on estates of deceased persons and inheritances and on gifts) (Netherlands) Order 1980, SI 1980/706;

•

Pakistan: DTR (Estate Duty) (Pakistan) Order 1957, SI 1957/1522;

•

South Africa: DTR (Taxes on Estates of Deceased Persons and on Gifts) (Republic of South Africa) Order 1979, SI 1979/576;

•

Sweden: DTR (Taxes on estates of deceased persons and inheritances and on gifts) (Sweden) Order 1981, SI 1981/840; 379

6.270  Main Taxation Rules Applicable to Trusts •

Switzerland: DTR (Taxes on estates of deceased persons and inheritances) (Switzerland) Order 1994, SI 1994/3214; and

•

USA: DTR (Taxes on estates of deceased persons and on gifts) (United States of America) Order 1979, SI 1979/1454.

6.270 Under most of these double taxation treaties, there are various rules as to the situs of assets, to try and reconcile differences in national law as to where an asset is deemed to be situated and, as in all treaties, these rules take precedence over the national law (Ostime v Australian Mutual Provident Society (1959) 38  TC  492), unless specifically overridden (Padmore v IRC (No 2) [2001] STC 280). 6.271 The treaty may also attempt to deal with different concepts of domicile or where estate and gifts taxes are based on nationality or residence. As such, they may provide for a treaty domicile based on nationality or residence. A treaty domicile, for the specific purposes covered by the treaty, would overrule the normal UK rules and could, for example, deem a settlor or beneficiary to be domiciled outside the UK where he would otherwise be treated as UK domiciled. The effect of this could be to prevent anti-avoidance provisions such as IHTA 1984 s 267 (deemed UK domicile) from applying. They could also make property excluded where it would not otherwise be so under IHTA 1984 s 6 or, in the case of settled property, IHTA 1984 s 48(3). 6.272 Most of the treaties will also provide for a credit against tax payable in the other jurisdiction under the treaty situs rules. It is important to consider the terms of the particular treaty where relevant. Many of the treaties are rather old and do not reflect either the changes to UK law on the introduction of corporation tax and CGT or changes in foreign laws, such as capital acquisitions tax in Ireland. The older agreements concluded when estate duty was in force were extended to cover capital transfer tax and subsequently inheritance tax payable on death. They do not generally apply to inheritance tax on lifetime transfers. 6.273 Unilateral relief for double taxation for IHT purposes is given under IHTA 1984 s 159. Overseas taxes which are similar to IHT or chargeable by reference to gifts or on death are relieved as a credit against UK IHT. If the property is situated in the overseas territory and not in the UK the credit is equal to the full overseas tax charge. Where, however, the property is situated neither in the UK nor the overseas territory or in both the UK and the overseas territory and is subject to IHT or a similar tax in both countries, the credit is calculated in accordance with a formula whereby the smaller of the inheritance tax or the overseas tax is multiplied by: A A ie ×C A+B A+B where A is the IHT and B the overseas tax and C is whichever is the smaller.

380

Main Taxation Rules Applicable to Trusts 6.276 In such cases, the property may be liable to tax in a third country and, applying the formula, the overseas tax B  is the aggregate of the taxes in each of the overseas countries for the calculation; but, in determining the smaller of the IHT or the overseas tax, it is the aggregate of all except the largest of the UK IHT and each of the overseas taxes. The unilateral relief is the same as the treaty relief for the USA, South Africa, India and Pakistan. In other cases, the higher of treaty relief or unilateral relief may be taken (s 159).

Liability for inheritance tax 6.274 By virtue of IHTA 1984 s 199(1), the persons liable for tax under a transfer inter vivos include: (a)

the transferor;

(b) the person whose estate is increased by the transfer; (c) any person in whom the property is vested whether beneficially or otherwise, which would include the trustees of the settlement; and (d) where the property becomes comprised in a settlement, any beneficiary for whose benefit any of the property or income from it is applied, or who is beneficially entitled to an interest in possession in the property. So far as trustees are concerned, SP  1/82 confirms that, where trustees pay IHT due on assets put into settlement, this is not regarded as an interest in the settlement held by the settlor sufficient to make the income taxable on him under ITTOIA 2005 s 624. 6.275 Where tax becomes payable as a result of a transfer on death, the persons liable for IHT on the free estate are the personal representatives under IHTA  1984 s  200(1)(a), unless the liability arises on the death of a person with value remaining in an alternatively secured pension fund, where it is the pension fund trustees who are liable for the tax (IHTA 1984 s 200(1A)). Where the property was comprised in a settlement, it is the trustees of the settlement who are liable under s  200(1)(b). Trustees can also be liable if a property is vested in them, as may a beneficiary entitled to an interest in possession, under s  200(1)(c). A  beneficiary of a settlement for whose benefit any of the property or income is applied may also be liable for IHT under s  200(1)(d). A  person with an interest in part only of the property is deemed to be entitled to an interest in the whole of the property for this purpose, except that a purchaser for value is not liable for tax attributable to the value of that property unless it is subject to an HMRC charge under IHTA 1984 s 237. 6.276 By virtue of IHTA  1984 s  201(1), where IHT is due in respect of settled property, the persons liable for the tax are: 381

6.277  Main Taxation Rules Applicable to Trusts (a)

the trustees of the settlement;

(b)

any person entitled whether beneficially or not to an interest in possession in the settled property;

(c)

any person for whose benefit any of the settled property or income from it is applied at or after the time of the transfer; or

(d) in the case of a lifetime gift to non-resident trustees, the settlor. Trustees are non-resident for this purpose unless the general administration of the settlement is ordinarily carried on in the UK and the trustees – or a majority of them, and where there is more than one class of trustees a majority of each class – are for the time being resident in the UK (s 201(5)). Trustees could also be liable for a chargeable transfer apportioned to the participators in a close company under IHTA 1984 s 99(2) (s 202). 6.277 A settlor’s spouse or civil partner can be made liable for IHT where property is transferred to her under IHTA 1984 s 203. A personal representative of a deceased person is only liable for IHT attributable to the value of the property which he has received as personal representative or might have so received but for his own neglect or default, which includes land in the UK comprised in the settlement which is available in his hands for the payment of tax or might have been so available but for his own neglect or default (s 204(1)). 6.278 A  trustee is only liable to IHT to the extent of the property he has actually received or disposed of or has become liable to account for to the beneficiaries and any other property for the time being available in his hands as a trustee for the payment of the tax or which might have been so available but for his own neglect or default (IHTA 1984 s 204(2)). Where a trustee is liable for tax as a person in whom property is vested, or a beneficiary is liable as a person entitled to a beneficial interest in possession, he is only liable to the extent of that property (s 204(3)). A beneficiary for whose benefit property or income from any settled property is applied is only liable to the extent of that property or income, less tax (s 204(5)). A person other than the transferor or personal representative liable under s 199, or the trustee of a settlement under s 201, is only liable if the tax remains unpaid after it ought to have been paid (s 204(6)–(8)). 6.279 Where, on a reservation of benefit, the estate of the deceased person is treated as including property given away, the personal representative is liable for tax only if it remains unpaid 12 months after the end of the month in which the death occurs, and is limited to the assets in his hands (IHTA 1984 s 204(1) and (9)). Where more than one person is liable for the tax, the liability is joint and several (s 205). Executors liable for payment of tax are also liable for the delivery of accounts under IHTA 1984 s 216 (Re Clore (No 3), IRC v Stype Trustees (Jersey) Ltd [1985] STC 394). A personal representative’s liability is 382

Main Taxation Rules Applicable to Trusts 6.283 absolute and HMRC can raise a notice of determination on him under s 221 of the 1984 Act (Howarth’s Executors v IRC [1997] STC (SCD) 162). This also applies to a non-resident executor (IRC  v Stannard [1984]  STC  245; Berry v Gaukroger [1903] 2 Ch 116) and to an executor de son tort intermeddling in a deceased’s estate (IRC  v Stype Investments (Jersey) Ltd; Re Clore [1982] STC 625). 6.280 A  person who, in the course of a trade or profession, other than a barrister, has been concerned with the making of a settlement, and knows or has reason to believe that the settlor was domiciled in the UK and the trustees of the settlement are not or will not be resident in the UK, must, within three months of making the settlement, make a return to HMRC stating the names and addresses of the settlor and of the trustees of the settlement, except where the settlement is made by will, or if a return has been made by some other person or an account has been delivered in relation to it under IHTA  1984 s 216. For the purposes of this section, trustees of a settlement shall be regarded as not resident in the UK unless the general administration of the settlement is ordinarily carried on in the UK and the trustees or a majority of them (and where there is more than one class of trustees a majority of each class) are for the time being resident in the UK (s 218). 6.281 HMRC’s wide powers to require information, call for documents, inspect property and exchange information with other countries under IHTA 1984 ss 219–228E apply to property held by trustees as they apply to property held by other persons.

Associated operations 6.282 Associated operations are any two or more operations of any kind which affect the same property directly or indirectly, or income arising from that property, or which represent accumulations of such income or any two operations of which one is affected by reference to the other. Operations may be effected by the same person or different persons, need not be simultaneous and include an omission (IHTA  1984 s  268(1)). A  lease granted for full consideration in money or money’s worth is not associated with any operation effected more than three years after the grant (s  268(2)). Where a transfer of value is made by associated operations carried out at different times, it is treated as made at the time of the last of them. If an earlier transaction was itself a transfer of value, the value transferred by the earlier operations reduces the value transferred by the totality of the associated operations, except where the earlier operation was exempt as a transfer between spouses (s 268). 6.283 Life assurance policies and annuities are regarded as not being affected by the associated operations rule if the policy was issued on full medical evidence and would have been issued on the same terms if the annuity 383

6.284  Main Taxation Rules Applicable to Trusts had not been bought (SP E4). Hansard of 10 March 1975, Vol 888, Col 56, quoted the Chief Secretary of the Treasury on associated operations as follows: ‘I  want to explain the reason for the clause [now IHTA  1984 s  268]. As I said in Committee, it is reasonable for a husband to share capital with his wife when she has no means of her own. If she chooses to make gifts out of the money she has received from her husband, there will be no question of using the associated operation provisions to treat them as gifts made by the husband and taxable as such. In a blatant case, where a transfer by a husband to a wife was made on condition that the wife should at once use the money to make gifts to others, a charge on a gift by the husband might arise under the clause. The Hon Gentleman fairly recognised that. I  want to give an example of certain circumstances that could mean the clause having to be invoked. There are complex situations involving transactions between husband and wife and others where, for example, a controlling shareholder with a 60% holding in a company wished to transfer his holding to his son. If he gave half to his son the effect would be to pass a controlling shareholding from father to son. The Revenue would then use the associated operations provisions to ensure that the value of a controlling holding was taxed. There are ordinary, perfectly innocent transfers between husband and wife. For example, where a husband has the money and the wife has no money – or the other way round, which happens from time to time – and the one with the money gives something to the other to enable the spouse to make a gift to a son or a daughter on marriage, that transaction would not be caught by the clause. It would be a reasonable thing to do. I have made that clear in Committee upstairs, and I make it clear again now.’ 6.284 The (then) Revenue confirmed (in correspondence with the Institute of Chartered Accountants in England and Wales on 21  September 1985, published as TR 588) that the existence of specific anti-avoidance provisions in IHTA 1984 s 268 did not preclude the application of the decision in Furniss v Dawson [1984]  STC  153 on artificial transactions imposed purely for tax avoidance purposes. 6.285 A transfer of shares into trust, followed immediately by a purchase by the company of some of its own shares, and a sale by the trustee of others, was not an associated operation within IHTA  1984 s  268 nor an interposed transaction under the rule in W T Ramsay v IRC [1981] STC 174; in Reynaud v IRC [1999] STC (SCD) 185. When trustees of a discretionary settlement leased valuable trust pictures to a beneficiary’s father on commercial terms, which had the effect of devaluing the trusts interest in the assets, the appointment the following day of a protected life interest of the paintings subject to the lease to the beneficiary was an associated operation in McPherson v IRC [1988] STC 362. 384

Main Taxation Rules Applicable to Trusts 6.287 The necessary connection between operations for them to be associated operations within IHTA  1984 s  268 was discussed in RWJ  Parry (Mrs R F Staveley’s Personal Representatives) v HMRC [2014] UKFTT 419. It was held that two operations do not need to be connected in order for them to constitute a transfer of value in IHTA 1984 s 10, however, both operations must be intended to confer a gratuitous benefit.

Gifts with reservation 6.286 Where an individual disposes of property by way of gift, which includes a gift into trust, and either the possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period, or if at any time in the relevant period the property is not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor, and of any benefit to him by contract or otherwise, the property remains in the donor’s estate for IHT purposes. The relevant period is the period ending on the date of the donor’s death and beginning seven years before that date or the date of the gift if later (FA 1986 s 102(1)–(3)). If the property ceases to be subject to such a reservation, the donor is treated as disposing of the property as a potentially exempt transfer at that date (s 102(4)). The provisions do not apply to exempt transfers, such as those between spouses or civil partners or in consideration of marriage or a civil partnership, as listed in s 102(5). Nor do they apply to an insurance policy made before 18  March 1986 and not subsequently varied (s 102(6) and (7)). FA 1986 s 102(8) introduces further provisions in FA  1986 Sch  20, including in relation to substitutions of and accretions to property in paras 2–4 of that Schedule. 6.287 Where there is a gift into settlement, the property comprised in the settlement at the material date is treated as the gift subject to reservation. If the settlement comes to an end before the settlor’s death the property in it at that time is treated as the gift subject to the reservation. If the donee beneficiary subsequently resettles the property subject to the original settlor’s reservation the original settlor is treated as if he had made the settlement. Where property is directly or indirectly derived from a loan made by the settlor to the trustees, the property they acquired is treated as the property originally comprised in the gift into settlement. Accumulations of income, however, are not treated as property derived from the gift (FA 1986 Sch 20 para 5(5)). Interests in land or chattels are disregarded if the donor pays full consideration in money or money’s worth, eg a rack rent (Sch 20 para 6(1)(a)). Occupation by the donor of an interest in land is disregarded if there has been a change in circumstances since he gave it away, and it was a gift to a relative who is now providing reasonable provision for the care and maintenance of the donor who has become unable to maintain himself through old age, infirmity or otherwise (Sch 20 para 6(1)(b)). The meaning of full consideration was explained in Tax Bulletin, Issue 9, November 1993. 385

6.288  Main Taxation Rules Applicable to Trusts 6.288 Where an individual is beneficially entitled to an interest in possession in settled property, and the property continues to be treated as the individual’s under the gift with reservation rules, on or after 22  March 2006 a lifetime termination of the individual’s interest in possession is treated as a gift for the purposes of these rules (IHTA 1984 s 102ZA). An inheritance tax charge will therefore remain if the individual continues to have the use of property following the termination of his interest in possession, as if the property had been owned outright. 6.289 In the case of settled gifts, the substitutions and accretions provisions in FA 1986 Sch 20 paras 2–4 do not apply, but the property comprised in the settlement is treated as the property comprised in the gift, and if the settlement comes to an end before the donor’s death, or if the property ceases to be subject to a reservation, any property taken absolutely and beneficially by the donor and any consideration given by him for the property so taken shall be treated as comprised in the gift in addition to any other property so comprised. If the gift is not placed into settlement by the donor but is subsequently settled by the donee, subject to the donor’s reservation of benefit, the donor is regarded as the settlor for the purpose of the gift with reservation rules. It is not relevant whether the donee’s settlement is inter vivos or made on death either under the will or under the intestacy rules. Where property is comprised in the settlement at the material date, ie the date of the donor’s death, or the property ceased to be subject to a reservation which is derived directly or indirectly from a loan made by the donor to the trustees, it should be treated as property comprised in the gift (Sch 20 para 5). 6.290 Insurance schemes which consist of a policy of insurance on the life of the donor or his spouse or civil partner or on their joint lives, under which the benefits which accrue to the donee are measured by reference to the benefits accruing to the donor or his spouse or civil partner under the policy or another policy, are treated as gifts with reservation (FA  1986 Sch 20 para 7). 6.291 Where the gift with reservation is relevant business property, agricultural property or shares representing agricultural property, business property or agricultural property relief will be given on the death of the donor or on the property ceasing to be subject to a reservation, if earlier, as if the property comprised in the gift was a transfer of value by the donor so far as it relates to shares or securities and of the donee so far as it relates to other property. Where the relief is calculated by reference to the donee, ownership by the donor prior to the disposal with reservation is treated as ownership by the donee, as is occupation by the donor before or after the disposal which should be treated as occupation by the donee in order to determine whether the minimum period of ownership or occupation requirements in IHTA  1984 ss  106–117 have been met (FA  1986 Sch  20 para 8(1)–(2)). 386

Main Taxation Rules Applicable to Trusts 6.294 6.292 In determining whether shares qualify for relief as a controlling shareholding or as an unquoted holding with more than 25% of the votes, the donor is deemed to continue to own the shares at the date of the cessation of the reservation or on his death. This means that shares retained by the donor or his spouse as related property can be added to those comprised in the gift with reservation, in order to determine whether the shareholding requirement is met. The shares subject to the reservation must still be owned by the donee at the material date. If the donee dies before the transfer his personal representative, or the beneficiaries under his estate, stand in the shoes of the donee (FA  1986 Sch  20 para  8(3)–(5)). The lease carve-out scheme, under which the donor created a lease on property occupied by him at a low or nominal rent which he retained and then gave away the reversion, was successfully applied in Ingram v IRC  [1999]  STC  37. The inevitable antiavoidance provisions were introduced in FA 1986 ss 102A–102C by FA 1999 s  104 in respect to gifts of land made on or after 9  March 1999. FA  1986 s 102A(2) provides that, where the donor or his spouse or civil partner enjoys a significant right or interest in relation to land which is disposed of as property subject to reservation, it will be treated as remaining in his estate under the gifts with reservation provisions in FA 1986 s 102(3) and (4). A right etc is significant if it entitles or enables the donor to occupy all or part of the land or to enjoy some right in relation to it otherwise than for full consideration in money or money’s worth. It is not significant if it does not prevent the enjoyment of the land by the donee to the entire exclusion, or virtually the entire exclusion, of the donor, or it does not entitle the donor to occupy all or part of the land immediately after the disposal but would do so were it not for the interest disposed of. Nor is a right or interest significant if it was granted or acquired before the period of seven years ending with the date of the gift (s 102A(3)–(5)). 6.293 A disposal of more than one interest in land by way of gift is treated separately in relation to each interest (FA  1986 s  102A(6)). Where the gift consists of an undivided share of an interest in land, by making the donee a joint tenant, the share disposed of is treated as a gift with reservation within s 102(3) and (4). These provisions do not apply where the donor does not occupy the land or occupies it to the exclusion of the donee for full consideration in money or money’s worth. Nor does it apply when the donor and the donee jointly occupy the land, or the donor does not receive any benefit other than a negligible one which is provided by or at the expense of the donee for some reason connected with the gift. This sort of arrangement applies where the land is jointly occupied by the donor and the donee, and each pays their own fair share of the outgoings which is therefore an arrangement not regarded as a gift with reservation (s 102B). 6.294 FA 1986 s 102C disapplies the provisions of FA 1986 s 102 to gifts with reservation in connection with the interests in land provisions of FA 1986 ss 102A and 102B. Where FA 1986 s 102B applies, ss 102 and 102A of that 387

6.295  Main Taxation Rules Applicable to Trusts Act are disapplied. If FA 1986 s 102A applies, s 102 is disapplied (FA 1986 s 102C(6) and (7)). 6.295 Debts or encumbrances created on or after 18  March 1986 are not deductible from the value of the estate on death to the extent that they arise from a loan-back from a person to whom the deceased had transferred property directly or indirectly. The repayment of a loan in these circumstances is treated as a potentially exempt transfer. Similarly, a loan secured on an insurance policy is not deductible from the estate unless the policy proceeds are included in the estate (FA 1986 s 103). 6.296 A  gift with reservation, eg  into a discretionary trust, could also be a chargeable transfer. Regulations have been introduced by statutory instrument to avoid a double charge to IHT, with the higher liability under the original transfer or the reservation of benefit rules applying, under the Inheritance Tax (Double Charges Relief) Regulations 1987 (SI  1987/1130). Unusually, these regulations in the Schedule provide a number of examples of how the calculations proceed in order to avoid a double charge. The gift with reservation rules can, in practice, be a major inhibition to transferring assets into trust. A discretionary beneficiary would have an interest in a trust in respect of which he was the settlor (IRC v Eversden (Executors of Greenstock) [2002] EWHC 1360 (Ch), [2002] STC 1109). IRC v Eversden (Executors of Greenstock) [2003] EWCA Civ 668, [2003] STC 822 ended up in the Court of Appeal on a further point as to whether a transfer to a trust for the settlor’s spouse for life with remainder to discretionary beneficiaries, including the settlor, was, although a gift with reservation as had been held in the High Court under FA 1986 s 102(5)(a), nonetheless an exempt transfer to a spouse under IHTA 1984 s 18. The Court of Appeal held that the inter-spouse exemption took precedence over the gift with reservation rules, which therefore did not apply. For a short time, this became a popular inheritance tax mitigation device until it was ended by FA 2003 s 185 in respect of disposals made on or after 20 June 2003. This introduced IHTA 1984 s 102(5A)–(5C), which now provides that a gift with reservation charge will apply where a gift is made into trust and the donor’s spouse or civil partner enjoys an interest in possession, which comes to an end in whole or part, whether on the donee’s death or otherwise, before the donee dies, and the subsequent use of the gift is such that it would count as a gift with reservation if it had been made at the time when the interest in possession terminates, ie it does not pass to the donee spouse or civil partner absolutely or under another interest in possession. The beneficiary’s interest in the discretionary trust is a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity (Gartside v IRC [1968] AC 553). 6.297 There has been a number of (then) Revenue press releases and exchanges of correspondence in connection with gifts of reservation, including the Law Society Gazette on 10 December 1986, which examined a number of 388

Main Taxation Rules Applicable to Trusts 6.298 examples. Confirmation that a director’s remuneration at a market value would not be regarded as a gift with reservation was confirmed in Revenue letters of 19 February 1987 and 5 March 1987 and, in relation to gifts of land and gifts involving family businesses or farms, on 18 May 1987. 6.298 The following exchange of correspondence between Vic Washtell of Touche Ross on 29  August 1986 and the Controller of the Capital Taxes Office on 29  October 1986 was published in The Law Society Gazette on 10 December 1986: ‘[Q] Could you please let us know whether the Inland Revenue intends to issue a statement of practice regarding the Revenue’s view on various types of gift which they would treat as gifts with reservation under the new inheritance tax legislation. If not, could you please let us know whether or not the Revenue would regard gifts in the following situations as gifts with reservation. [A] As you will doubtless appreciate, any question about the existence and/ or extent of any future liability to tax can be determined only in accordance with the particular facts on the basis of the law as it is understood to be. However, in order to be as helpful to you as I can at this stage, I would offer the following comments on the situations outlined in your letter. 1.

[Q] A  transfers assets into a discretionary settlement. The class of beneficiaries includes A’s wife at the trustees’ discretion on a regular basis. [A] The mere fact that the donor’s spouse is a member of the class of potential beneficiaries would not suffice to bring the gift within the provision of FA  1986 s  102 (gifts with reservation). I  should, however, draw your attention to Sch 20 paras 6(1)(c) and 7 (associated operations and certain life assurance arrangements).

2.

[Q] B transfers assets into a discretionary settlement under which he is not included in the class of beneficiaries, adding further beneficiaries (including B) to the class of beneficiaries in future. [A] As you probably know the inclusion of the settlor among the class of beneficiaries subject to powers contained in his trust is considered to be sufficient to constitute his gift as a gift with reservation. Where there is a possibility of the settlor becoming included in the class of beneficiaries by exercise of a power in the settlement, it is considered likely that this would again constitute a gift with reservation.

3.

[Q] C buys a house and puts it into the name of himself and his wife as tenants in common. On the death of the wife her share of the house passes to the son absolutely. C remains in occupation of the property. On the death of C is the whole or only C’s half of the property treated as part of his estate for inheritance tax purposes? 389

6.298  Main Taxation Rules Applicable to Trusts [A] Having regard to FA 1986 s 102(5)(a) (exempt transfers between spouses) it is not considered that the original gift to C’s wife would constitute a gift with reservation. However, the death of C  might give rise to a claim for tax on other grounds but this would fall for consideration in the light of the precise facts as they were shown to be at that time. 4.

[Q] D owns freehold property and grants a lease to himself and his wife for twenty years at a peppercorn. D then gifts the reversionary interest in the property to his son. [A] If the true construction of the transactions here is that the gift to the son is of the reversionary interest only in the property then the gift would not constitute a gift with reservation.

5.

[Q] E  gifts all of his shares in his family company into an accumulation and maintenance settlement for his children under which E is a trustee. [A] The mere fact that E  is a trustee of an accumulation and maintenance settlement for his children would not of itself involve a reservation to him.

6.

[Q] F owns a home and some adjacent land. F gifts the land but retains the house. [A] If the situation is such that the subject matter of the gift is the land only, I do not see that this constitutes a gift with reservation.

7.

[Q] G, a non-domiciliary, gifts excluded property into a discretionary settlement under which he is in the class of beneficiaries. G  dies domiciled in the UK. Are the ‘excluded property’ assets in the settlement treated as part of G’s estate? [A] Here it seems to me that the settled property would be ‘property subject to a reservation’ in relation to the settlor. Accordingly it would fall within FA 1986 s 102(3) to be treated as property to which he was beneficially entitled immediately before his death. The effect would be to lock the property into the settlor’s estate within the meaning of CTTA/IHTA  1984 s  5(1), which is subject to the exception for “excluded property”. It would follow that in the case of settled property, relief for foreign assets could continue to be available under ibid, s 48(3) provided that the settlor was domiciled outside the UK at the time the settlement was made.

8.

[Q] Kindly confirm that Statement of Practice E10 will apply for inheritance tax purposes (vendor retaining a lease for life). [A] As you will know SP E10 applies in the context of the FA 1975 Sch  5 now para  1(3), CTTA/IHTA  1984 (lease for life treated as a settlement). In the context of gifts with reservation, I might perhaps 390

Main Taxation Rules Applicable to Trusts 6.300 draw your attention to FA  1986 Sch  20 para  6(1)(a) (occupation, enjoyment or possession by the donor to be disregarded if for full consideration).’ The Controller’s letter concludes: ‘I  would emphasise that each case must be looked at in the light of its own particular facts. Too much should not be read, therefore, into general comments on the bare situations outlined in your letter which may not, in the event, be found to apply to the facts of an individual case. In a separate development, the Revenue has confirmed to the Association of British Insurers that the following do NOT constitute gifts with reservation: (a)

a whole life policy effected by the life assured in trusts for X should X survive the life assured, but otherwise for the life assured.

(b) An endowment effected by the life assured in trust for X if living at the death of the life assured before the maturity date but otherwise for the life assured.’ Also, the Revenue has confirmed that if a gift with reservation is made into a pre-Budget day trust, this will not “taint” the whole trust fund so as to make the funds settled before Budget day liable to inheritance tax.’ 6.299 This exchange of correspondence is interesting, in particular in paragraph 1 where it is confirmed that the inclusion of a spouse (or civil partner, from 5 December 2005) in the class of potential beneficiaries of a discretionary trust would not of itself be a gift with reservation under FA 1986 s 102 if this were not part of an associated operation. This conclusion could have adverse income tax or CGT consequences as being a settlor interested settlement under ITTOIA 2005 s 624 and (prior to repeal) TCGA 1992 s 77. 6.300 In paragraph  7 of the reply to Mr Washtell, at 6.298, it is confirmed that the gifts with reservation rules do not apply to an excluded property settlement of a non-UK domiciled settlor, which remains exempt under IHTA  1984 s  48(3). It is common for non-domiciliaries to create excluded property settlements of assets of which they and their spouses are beneficiaries prior to acquiring a UK domicile or being deemed domiciled in the UK under IHTA  1984 s  267. It is understood that this interpretation is currently under review and that HMRC’s interpretation may change both for discretionary and life interest settlements, under which the gift with reservation rules would continue to apply to deem excluded property to remain in the settlor’s estate. At the time of writing it is not clear whether this will involve legislation or a change in HMRC practice and what provisions will be made for taxpayers who have relied on this statement. SP E10 is now obsolete (IR 131 (1996)). 391

6.301  Main Taxation Rules Applicable to Trusts 6.301 There have been a number of estate duty cases on gifts with reservation which are likely to apply for IHT purposes. These include Comrs of Stamp Duties of New South Wales v Permanent Trustee Co of New South Wales Ltd [1956] 2 All ER 512; Chick v Comrs of Stamp Duties of New South Wales [1958] 2 All ER 623; Munroe v Coms of Stamp Duties of New South Wales [1933] All ER Rep 185; Nichols v IRC [1975] STC 278; Earl Grey v A-G [1900] ACT 124; and A-G v Worrall [1895] 1 QB 99. 6.302 That the settlor had reserved a benefit by being a beneficiary under a discretionary trust was confirmed by A-G v Heywood (1887) 19 QBD 326 and A-G v Farrell [1931] 1 KB 81. A gift to a settlement with a resulting trust in favour of the donor, if the child beneficiary failed to obtain a vested interest, was not a reservation of benefit in Comrs of Stamp Duties of New South Wales v Perpetual Trust Co Ltd [1943] 1 All ER 525. A settlor remunerated as trustee had retained a benefit (Oaks v Comrs of Stamp Duties of New South Wales [1953] 2 All ER 1563). 6.303 Tax Bulletin, Issue 9, November 1993 (IR  Int 1001) made the following comments in relation to gifts with reservation: ‘Under FA 1986 s 102, any property given away on or after 18 March 1986 subject to a reservation is, on the death of the donor, treated as forming part of the donor’s estate immediately before his death. Gifts with reservations (GWRs) are defined as gifts where either— —

the donee does not assume bona fide possession and enjoyment of the property at the date of the gift or seven years before the donor’s death, if later; or

—

at any time in the period ending with the donor’s death and beginning seven years before that date or, if later, from the date of gift, the property is not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor.

This note provides some guidance on the Revenue’s interpretation of the de minimis rule which is expressed as “virtually to the entire exclusion” and comments on the exclusion from the GWR provisions where the donor pays full consideration for any use of the property. The note also clarifies the position of the annual exemption under IHTA 1984 s 19 where a reservation of benefit ceases. Interpretation of de minimis rule The word “virtually” in the de minimis rule in IHTA 1984 s 102(1)(b) is not defined and the statute does not give any express guidance about its meaning. However, the Shorter Oxford English Dictionary defines it as, amongst other things, “to all intents” and “as good as”. Our interpretation of “virtually to the entire exclusion” is that it covers cases in which the benefit to the donor is insignificant in relation to the gifted property. 392

Main Taxation Rules Applicable to Trusts 6.303 It is not possible to reduce this test to a single crisp proposition. Each case turns on its own unique circumstances and the questions are likely to be ones of fact and degree. We do not operate s 102(1)(b) in such a way that donors are unreasonably prevented from having limited access to property they have given away and a measure of flexibility is adopted in applying the test. Some examples of situations in which we consider that IHTA 1984 s 102(1)(b) permits limited benefit to the donor without bringing the GWR provisions into play are given below to illustrate how we apply the de minimis test— —

a house which becomes the donee’s residence but where the donor subsequently—

—

stays, in the absence of the donee, for not more than two weeks each, year, or

—

stays with the donee for less than one month each year;

—

social visits, excluding overnight stays made by a donor as guest of the donee, to a house which he had given away. The extent of the social visits should be no greater than the visits which the donor might be expected to make to the donee’s house in the absence of any gift by the donor;

—

a temporary stay for some short-term purpose in a house the donor had previously given away, for example—

—

while the donor convalesces after medical treatment;

— while the donor looks after a donee convalescing after medical treatment; —

while the donor’s own home is being redecorated;

—

visits to a house for domestic reasons, for example baby-sitting by the donor for the donee’s children;

—

a house together with a library of books which the donor visits less than five times in any year to consult or borrow a book;

—

a motor car which the donee uses to give occasional (ie less than three times a month) lifts to the donor;

—

land which the donor uses to walk his dogs or for horse riding provided this does not restrict the donee’s use of land.

It follows of course, that if the benefit to the donor is, or becomes, more significant, the GWR provisos are likely to apply. Examples of this include gifts of— —

a house in which the donor then stays most weekends, or for a month or more each year;

—

a second home or holiday home which the donor and the donee both then use on an occasional basis; 393

6.303  Main Taxation Rules Applicable to Trusts —

a house with a library in which the donor continues to keep his own books, or which the donor uses on a regular basis, for example because it is necessary for his work;

—

a motor car which the donee uses every day to take the donor to work.

Exclusion of benefit where full consideration paid for use of property The GWR provisions do not apply where an interest in land is given away and the donor pays full consideration for future use of the property (FA 1986 Sch 20 para 6(1)(a)). While we take the view that such full consideration is required throughout the relevant period – and therefore consider that the rent paid should be reviewed at appropriate intervals to reflect market changes – we do consider that there is no single value at which consideration can be fixed as “full”. Rather, we accept that what constitutes full consideration in any case lies within a range of values reflecting normal valuation tolerances, and that any amount within that range can be accepted as satisfying the para 6(1)(a) test. Termination of reserved benefits and the annual exemption Where a reservation ceases, the donor is treated by FA  1986 s  102(4) as having made a potentially exempt transfer (PET) at that time. In that event the PET will only be taxable if the donor dies within the next seven years, but the value of the PET cannot be reduced by an available annual exemption under IHTA 1984 s 19. The statement in para 3.4 of the IHT1 booklet, which indicates that the annual exemption may apply if the reservation ceases to exist in the donor’s lifetime and a PET is treated as made at that time, is incorrect. This will be corrected in IHT1 when it is next updated. A typical outright gift to an individual of an amount exceeding the available annual exemption is partly exempt, with the balance above the available annual exemption being a PET. But a PET itself cannot qualify for the annual exemption. The reason is that a PET is a transfer which, but for the provisions of IHTA  1984 s  3A, would be an immediately chargeable transfer. By definition a chargeable transfer is a transfer of value which is not an exempt transfer – IHTA 1984 s 2(1). So a PET cannot be an exempt transfer at the time it is made. The PET will, of course, escape a charge to IHT if the donor survives the statutory period after making it. The annual exemption is not necessarily lost by the taxpayer. For example, suppose he makes a gift of his home in August 1991 but continues to reside there. In May 1992 he finally leaves the gifted house and the reservation ceases. In October 1992 he makes a gift into a discretionary trust (an immediately chargeable transfer). He is treated as making a PET of his residence in May 1992 – the annual £3,000 exemption does not reduce its value. But the £3,000 exemption is available for setting off against the immediately chargeable transfer in October, and so is any unused exemption carried forward from the previous year.’ 394

Main Taxation Rules Applicable to Trusts 6.309

Appeals 6.304 Appeals for IHT purposes are to the First-tier Tax Tribunal (IHTA 1984 s 222(2)) by way of an appeal within 30 days, under s 222(1) of the 1984 Act, against the Notice of Determination under IHTA 1984 s 221. An appeal may be made direct to the High Court where the appeal is substantially confined to questions of law and HMRC gives leave for the appeal to be taken direct (s 222(3)). The appeals and questions as to the value of land may be taken to the tribunal (s 222(4), (4A) and (4B)). 6.305 Appeals may be brought with the consent of HMRC or the tribunal (IHTA 1984 s 223). The procedure before the tribunal is governed by s 224 and the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (SI 2009/56), which inserted IHTA 1984 ss 223A-I and provided for an internal HMRC review procedure. 6.306 The powers of HMRC to require information and call for documents, and appeals against such requirements, the inspection of property and the exchange of information with other countries were dealt with by IHTA 1984 ss 219–220A until repealed by FA 2009 Sch 48 with effect from 1 April 2010 which extended the FA 2008 Sch 36 powers to inheritance tax.

Valuations 6.307 The basic market value rule in IHTA  1984 s  160 is that property should be valued at the price which it might reasonably be expected to fetch if sold in the open market at the appropriate time but that price shall not be assumed to be reduced on the grounds that the whole property is to be placed on the market at the same time. 6.308 In valuation it is necessary to take into account, where appropriate, potential special purchasers (IRC  v Clay; IRC  v Buchanan (1914) [1914– 15]  All ER  Rep 882). Optimum lotting, ie  breaking the estate into its most saleable units, was approved in Earl of Ellesmere [1918] 2 KB 735; Duke of Buccleuch v IRC  [1967] 1  All ER  129. This includes notionally selling, for example, a freehold reversion and an interest in a farming partnership together but not to the extent of assuming that land which is in fact tenanted has vacant possession IRC v Gray (Executor of Lady Fox) [1994] STC 360). 6.309 Jointly held property would usually be valued on the basis of half vacant possession value less a discount of 15% (Wight v IRC Lands Tribunal (1982) 264 EG 935). Hope value is included (Gajapatiraju v Revenue Divisional Officer Vizagapatam [1939] 2 All ER 317). Smaller minority interests of land would attract a larger discount (Charkham v IRC Lands Tribunal 14 November 1996, Tolley’s Tax Cases 2001 72.58). 395

6.310  Main Taxation Rules Applicable to Trusts 6.310 The theory behind the valuation is to consider the amount which a hypothetical purchaser would pay to stand in the shoes of the transferor and includes all advantages and disadvantages of ownership of those rights (Alexander v IRC  [1991]  STC  112; IRC  v Crossman [1936] 1  All ER  762). This would include, for example, rights in a building society that was about to demutualise (Ward Cook and Buckingham (Cook’s Executors) v IRC [1999] STC (SCD) 1). 6.311 There are special valuation rules for related property in IHTA 1984 s  161 where for valuation purposes a person’s estate is deemed to include property comprised in the estate of his spouse, or which has, within the preceding five years, been transferred to a charity, political party, housing association or national institution (s  161(2)). The amount comprised in the estate is the appropriate proportion of the aggregate value. This is important in the context of IHTA 1984 s 3(1) which provides that the value transferred by a transfer of value is the amount by which the value of the transferor’s estate has fallen as a result of the transfer, which may be more or less than the value of the property transferred in isolation. This is particularly important in the case of assets such as shares where a transfer of say, a 10% interest may reduce the shareholding in the estate from 55% valued as a controlling interest to 45% valued as a minority interest. 6.312 Related property originally included property transferred into a discretionary trust but this is no longer so. Liabilities are taken into account for valuation purposes, as are restrictions on freedom to dispose acquired for consideration and actual but not hypothetical expenses of transfer (IHTA 1984 ss 162–164). Where the transfer is also a disposal for CGT purposes, the amount of the tax can be deducted from the value of the chargeable transfer under s 165; debtors are valued as if they were good unless it can be shown otherwise, and there are special rules for the valuation of life policies (ss 166 and 167). Unquoted shares and securities are valued as for CGT on the assumption that there is available to a prospective purchaser all the information which a prudent prospective purchaser might reasonably require if he were proposing to purchase them from a willing vendor by a private treaty and at arm’s length (s 168). 6.313 In the case of trusts, the termination of an interest in possession which is treated as a transfer of the interest under IHTA  1984 ss  51–53 makes it necessary to value any shares held by the trust on the termination of such an interest. The Capital Taxes Office (CTO) used to take the view that any shares held by the settlement would be aggregated with shares held in the free estate of the beneficiary and with any related property in determining the value for IHT purposes. For example, A holds 40% of the shares in a private company, his wife 20% and A also has an interest in possession in a settlement holding 15% of the share capital. If someone other than A or his wife becomes absolutely entitled to the shares on the termination of the interest the valuation would, on this interpretation, be on the basis of 15/75ths of a controlling interest. 396

Main Taxation Rules Applicable to Trusts 6.318 However, ss  51–55 specifically state that the termination of an interest in possessions is not a transfer of value, therefore the quantum of the deemed transfer would be the settlement’s own 15% shareholding without aggregation with the shares held by A and his wife, a view which HMRC now accepts. 6.314 HMRC has confirmed to the Institute of Chartered Accountants in England and Wales, as reported in the May 1990 edition of Accountancy magazine, that it takes the view that when the interest in possession comes to an end during the lifetime of a person entitled to it, the settled property in which the interest subsisted will be valued in isolation without reference to any other property, ie in these circumstances it is not treated as a disposal of part of the settlor’s estate. 6.315 Where a person entitled to an interest in possession in settled property is entitled to part only of the income of the property and, under IHTA 1984 s 50(1)–(3), his interest is taken to subsist in a proportion of part of that property, his estate for IHT purposes is limited to that part of the property in which his interest subsists (IHTA 1984 ss 5(1) and 49(1)). If the trust therefore held, say, 60% of the shares and A had an interest in possession in 25% of the trust fund, on termination of that interest in possession it would be necessary to value a 15% interest, being 25% of the trust holding of 60%, and not a 60% interest of which 25% would be allocated to A’s interest. This would have a material effect on the valuation, as a 15% interest is a small minority shareholding, whereas a 60% shareholding is a controlling interest. 6.316 In the case of a settlement with no interest in possession within IHTA 1984 ss 58–76, any IHT charge on a distribution of shares to a beneficiary would be on the basis of the reduction in value of the trust fund as a result of the transfer under s 65(2)(a), ie the same valuation basis as if the shares had been held by an individual chargeable on the reduction in value of his estate under IHTA 1984 s 3(1). For a more detailed treatment on the valuation of unquoted shares and securities, see Eastaway, Elliot, Blundell and Cook Practical Share Valuation (Bloomsbury Professional, 2019). 6.317 Other valuation rules apply to farm cottages which are to be valued without taking account of the fact that the cottages are suitable for residential use by non-farm workers (IHTA  1984 s  69). A  lease for life treated as a settlement under IHTA 1984 s 43(3) is valued on the proportionate part of the value of the property which the value of the gift element bore to the market value of the lease on grant (IHTA 1984 s 170).

RETROSPECTIVE ANTI-AVOIDANCE LEGISLATION 6.318 One of the surprise announcements at the time of the pre-Budget Report on 2  December 2004 was the Paymaster General’s statement on 397

6.319  Main Taxation Rules Applicable to Trusts Finance Bill measures at www.inlandrevenue.gov.uk/pbr2004/pmg-statement. pdf which contained the statement: ‘I am therefore giving notice of our intention to deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today.’ On the face of it, this seemed to be directed purely at employment-related tax avoidance schemes and therefore not normally directly relevant to the taxation of trusts. It is, however, possible to view the PMG’s statement as the thin end of the wedge with the suggestion that the introduction of retrospective antiavoidance legislation in other fields may become a feature of the UK’s tax regime, see, for example, FA 2008 s 58. 6.319 There have been examples of deliberate retrospection in antiavoidance measures in the past, such as FA 1936 s 18, FA 1944 s 33(3) and FA 1978 s 31, but by and large anti-avoidance provisions have operated from the date of introduction or from the date of an earlier parliamentary statement, and deliberate retrospection has been avoided, although it not infrequently affects the future tax charge which results from actions that have already taken place. For example, the pre-owned asset legislation in FA 2004 Sch 15 applies to transactions which took place on or after 17 March 1986, when the gift with reservation rules were introduced, but only applies to charge tax from 2005/06. More recently, retrospective taxation has been the focus of attention following the introduction of the loan charge by F(No 2)A 2017 to counteract disguised remuneration arrangements where loans which were made on or after 6 April 1999 remain outstanding at 5 April 2019. HMRC’s view is that the loan charge is retroactive in its effect and not retrospective, however, the legislation remains controversial and HMRC’s distinction above is a very fine one. The compatibility of retrospective legislation with the European Convention on Human Rights was challenged in R (Huitson) v HMRC [2010] EWHC 97 (Admin), [2010] STC 715. It was held that legislation countering an income tax avoidance scheme did not contravene the Convention.

British constitution 6.320 The suggestion has been made that retrospective legislation in the field of taxation is in some way unconstitutional. In his dissenting judgment in Ingle v Farrand [1927] AC 417, Lord Atkinson quoted with approval Maxwell on Statutes, which, at p 382 stated ‘it is a fundamental rule of English law that 398

Main Taxation Rules Applicable to Trusts 6.323 no statement shall be construed so as to have a retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary and distinct implication’. Lord Atkinson proceeded ‘If a clause in a statute says in so many plain words that the statute shall have retrospective operation then it must not be construed so as to defeat those express words’. In Kirkness v John Hudson & Co Ltd [1955] AC 696, Viscount Simmonds at 713 stated: ‘When an Act of Parliament becomes law and its meaning is plain and unambiguous, a citizen is entitled to order his affairs accordingly and to act upon the footing that the law is what it unambiguously is. He must be assumed to know that the law may be altered, but if so he may be assumed to know also that it is contrary to the general principles of legislation in this country to alter the law retrospectively. He should know, too, that if Parliament alters the existing law retrospectively it does so by an amendment which is an express enactment.’ 6.321 It seems therefore without doubt that the sovereignty of Parliament encompasses the ability to change the law retrospectively, if, and only if, it does so in clear and unambiguous terms.

Human rights 6.322 Challenges have been made to retrospective legislation in the European Court of Human Rights; and in A, B, C and D v United Kingdom, application number 8531/79 (1981) 23 DR 203, it was the retrospective effect of FA 1978 s 31 which, it was argued, was in contravention of Article 1 of the first protocol which states ‘no one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties’; see HRA 1998 Sch 1. The Court considered that retrospective legislation was not incompatible with the convention in view of the wide margin of appreciation given in taxation matters to State governments. 6.323 In Woolwich Equitable Building Society v IRC [1992] STC 657, the House of Lords held that the Income Tax (Building Societies) Regulations 1986 (SI 1986/482) could not be treated as having effect for periods prior to April 1986, and the tax demanded and paid was recoverable by the Society. Statutory instruments cannot be retrospective without the appropriate vires, ie specific provisions in the primary legislation (Congreve v Home Office [1926] QB 629). FA  1991 s  53 gave the 1986 regulations unequivocal retrospective effect, except for a building society which commenced proceedings to challenge 399

6.324  Main Taxation Rules Applicable to Trusts the validity of the regulations before 18  July 1986, ie  the Woolwich. Other building societies which had been awaiting the outcome of the case, as was then common practice, appealed to the European Court, (1997) 25 EHRR 127, where it was held that the retrospection was appropriate to avoid the building societies benefiting from the windfall in a changeover to a new tax payment regime. Cases involving other countries (such as MA and Others v Finland (application number 27793/95, in respect of which judgment was given on 10  June 2003) failed to strike down retrospective legislation introduced to prevent forestalling manoeuvres by bringing forward the starting date of new legislation. The Court specifically stated that Article  1 of the first protocol does not prohibit retrospective tax legislation, as such. The cases do, however, support the view that retrospective tax legislation must represent a fair balance between the interests of the particular taxpayers affected and the population at large.

European Union 6.324 European Union legislation introduces concepts such as legitimate expectation and proportionality which would strictly limit retrospection where other European nationals are adversely affected or European law is in point, such as VAT (see, for example, the Advocate General’s comments in Stichting Goed Wonen 2 Case C-376/02, 16 December 2004). The importance of legal certainty has featured in a number of cases in the Court of Justice of the European Commission, including Defrenne v SA Belge de Navigation Aerienne Sabena [1981] 1 All ER 122; Barber v Guardian Royal Exchange Assurance Group [1990] 2 All ER 660, and Societe Comateb v Directeur General Douanes et Droits Indirects [1997] STC 1006. Retrospection with a transitional provision would appear to be allowed. The absence of such a provision was held to be incompatible with the principles of effectiveness and legitimate expectations in Marks & Spencer v Customs & Excise Commrs [2002] STC 1036. 6.325 The Government and its advisers are fully aware that any antiavoidance legislation having retrospective effect has to be proportionate to the mischief aimed at, ie sufficient to catch the scheme identified, and others relying on the same provisions, but not sufficiently wide to be disproportionate in the light of taxpayers’ legitimate expectations to be taxed in accordance with the law in being when the transaction is carried out. The result could, perhaps, be expressed by suggesting that the only legitimate expectation a taxpayer may have if he participates in an artificial avoidance scheme is that the Government will seek to prevent the anticipated tax saving from arising, and will resort to retrospective legislation if this is the only way of achieving this objective. This approach was highlighted in the March 2011 Budget document ‘Tackling Tax Avoidance’ where it was stated that ‘changes to tax legislation where the charge takes effect from a date earlier than the date of the announcement will be wholly exceptional …’ The document goes on to give examples of where 400

Main Taxation Rules Applicable to Trusts 6.327 retrospective legislation may be justified, such as where the anticipated loss to the Exchequer is significant. 6.326 The imposition of retrospective legislation has been highlighted most recently in the case of the loan charge rules introduced by F(No  2)A  2017 Sch  11. These rules were designed to counter remuneration arrangements whereby employees were paid through intermediaries, typically employee benefit trusts. It was common practice prior to the introduction of the disguised remuneration legislation in ITEPA 2003 Part 7A (see chapter 22) for such trusts to make interest free loans of substantial amounts to employees. HMRC were unsuccessful in their argument that loans made under arrangements pre-dating the disguised remuneration rules (RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45, and responded with the introduction of an income tax charge on the value of employment-related loans made on or after 6 April 1999 which remained outstanding at 5 April 2019. Whilst HMRC describe the loan charge as retroactive rather than retrospective, the point has proved controversial and represents a clear shift in attitude on the part of HMRC to the use of retrospective legislation.

DISCLOSURE OF TAX AVOIDANCE SCHEMES 6.327 FA  2004 ss  306–319 introduced new disclosure obligations on promoters of certain tax avoidance schemes, with a requirement to provide details of such schemes to HMRC. The broad effect of the rules is that taxpayers are required to provide details of schemes that they have devised in-house or acquired from an overseas promoter who has not made a corresponding disclosure, or where the promoter is claiming legal professional privilege. The disclosure rules as originally drafted were substantially amended by FA 2006 and have been the subject of more minor modifications in subsequent Finance Acts. A separate disclosure regime applies for national insurance contributions and indirect taxes and SDLT. The schemes concerning direct taxes, meaning income tax, capital gains tax, corporation tax, are described in the Tax Avoidance Schemes (Prescribed Description of Arrangements) Regulations 2004, SI 2004/1863. The 2004 rules were limited to arrangements connected with employment and arrangements in relation to financial products. These operated by reference to a series of filters which sought to remove most ‘ordinary’ tax planning and left more artificial arrangements within the scope of the disclosure provisions. The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006, SI  2006/1543, adopted a different approach and introduced the concept of ‘hallmarks’ of an avoidance scheme, and extended the scope of the DOTAS provisions to tax products outside the financial and employment sectors; and the definition of ‘tax’ in FA  2004 s  318 now includes income tax, capital gains tax, corporation tax, petroleum revenue tax, the apprenticeship levy, inheritance tax, stamp duty land tax, stamp duty reserve tax and the annual tax on enveloped dwellings. 401

6.328  Main Taxation Rules Applicable to Trusts Grandfather provisions apply; see for example the Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017 (SI 2017/1172, repealing the 2011 Regulations). There are six key ‘hallmarks’ which may trigger the duty to notify arrangements to HMRC: confidentiality, a premium fee, off-market terms, standardised tax products, loss schemes, and leasing arrangements. 6.328 The provisions are not particularly aimed at trust arrangements but some of the arrangements may involve trusts. In particular, under the 2011 Regulations, inheritance tax arrangements fell within the definition of notifiable arrangements if the main benefit was the obtaining of an inheritance tax advantage on property becoming relevant property. The scope of the provisions as they relate to trusts was widened under the 2017 Regulations, and the arrangements now encompass the avoidance or reduction of a relevant property entry charge, an exit or ten-year charge, charges on employee trusts, the charge on participators relating to transfers of value by close companies, and the gift with reservation (IHTA 1984 ss 64, 65, 72, 94, 102, 102ZA, 102A or 102B). An arrangement is also within the scope of the 2017 Regulations where its main purpose is to secure a reduction in the value of a person’s estate without giving rise to a potentially exempt or chargeable transfer. In each case, the arrangements must involve one or more abnormal or contrived steps about which the tax advantage would not be obtained (SI 2017/1172 para 4). The new hallmarks above apply from 1 April 2018. To be caught, a scheme must enable a person to obtain a tax advantage and the main benefit or one of the main benefits that might be expected to arise from the arrangements is the obtaining of that advantage. Notifiable arrangements and notifiable proposals are defined by FA 2004 s 306, as amended. A promoter is someone who provides taxation services to others in the course of a trade, profession or business or is a bank or securities house and is to any extent responsible for the design of a notifiable proposal (FA  2004 s  307). The provision of administrative services is not sufficient (HMRC v Curzon Capital [2019]  UKFTT  63 (TC)). Persons who might otherwise be promoters may be taken out under the Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations 2004 (SI  2004/1865) as amended by the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543). 6.329 The duties of a promoter are set out in FA 2004 s 308 and the Tax Avoidance Schemes (Information) Regulations 2004 (SI  2004/1864), as amended by SI  2006/1544, SI  2008/1947 and SI  2009/611. The regulations provide that initial notification to HMRC with information regarding the scheme is required within five working days beginning with the day on which the promoter makes the notifiable proposal available for implementation, or becomes aware of any transaction forming part of any notifiable arrangements implementing the notifiable proposal. A  client using a scheme promoted by 402

Main Taxation Rules Applicable to Trusts 6.332 a non-UK promoter or person claiming legal professional privilege similarly must notify, within five working days from entering into the first transaction forming part of the notifiable arrangements. In-house schemes, however, need not generally be disclosed until the tax return is due to be submitted to HMRC. 6.330 A non-UK promoter can give information to HMRC, and if he fails to do so it is the client’s responsibility to notify HMRC (FA 2004 s 309). It is also the taxpayer’s responsibility to notify HMRC of in-house schemes under FA  2004 s  310. Under FA  2014 ss  310A, 310B, HMRC have the power to require a promoter to provide further specified information and documentation relating to the notifiable arrangements. On application to the First-tier Tribunal, an order may be granted to HMRC for an order requiring the promoter to provide information or documents if the promoter fails to furnish HMRC with the information requested. ‘Introducers’, typically IFAs, are not under the same obligations to provide information regarding notifiable arrangements to HMRC; however, HMRC have the power to obtain information from introducers requiring them to identify persons who provided information about a notifiable scheme (FA 2004 s 313C, Tax Avoidance Schemes (Information) Regulations 2012 (SI 2012/1838)). FA  2014 contained provisions aimed at ‘high-risk’ promoters, ie  those who are considered by HMRC to represent a high risk, generally based on previous failure to comply with their duties under the DOTAS regime. The high-risk promoter regime provides for a conduct notice to be issued where the promoter’s behaviour triggers certain conditions. If the promoter fails to comply with the conduct notice, HMRC may apply to the First-tier Tribunal for the promoter to be given ‘monitored promoter’ status. The names of monitored promoters may be published by HMRC, and the monitored promoter must notify his status to clients. Further information is provided in HMRC’s guidance ‘Promoters of tax avoidance schemes’. The high risk promoter regime applies from 17 July 2014. Once schemes have been notified to HMRC, they will normally be given a randomly generated reference number, which is notified to the promoter, who in turn notifies the client and the client merely has to specify the number of the scheme used on his tax return (FA 2004 ss 311–313 inclusive). 6.331 These provisions do not overrule legal professional privilege (FA  2004 s  314), but the effect of the Tax Avoidance Schemes (Promoters Prescribed Circumstances and Information) (Amendment) Regulations 2004 (SI 2004/2613) is intended to make the taxpayer responsible for notification where the promoter is claiming legal professional privilege. 6.332 Penalties for failure to comply are specified in FA 2004 s 315, with a penalty of up to £5,000 per day for failure to comply with a disclosure order within 10 working days, £5,000 and £600 a day for failure to notify, and £100 403

6.333  Main Taxation Rules Applicable to Trusts to £1,000 for failure to include a reference number in a return. Higher penalties up to £1m in total may be imposed by the Tribunal for failures after 26 March 2015. Information is to be provided to HMRC in a form and manner specified by them, under FA 2004 s 316, and the vires for the regulations are provided by FA 2004 s 317. An ‘advantage in relation to taxation’ is defined to include relief from all repayment of tax, the deferral of tax or advancement of any repayment or the avoiding of withholding taxes, by FA 2004 s 318, which also defines other terms. The commencement provisions can include schemes going back to 18 March 2004, under FA 2004 s 319. No penalty can be imposed if the person has a reasonable excuse for failing to comply with the DOTAS regulations. HMRC do not consider that having a legal opinion that the arrangement is not notifiable constitutes a reasonable excuse. From 17 July 2014, reliance on legal advice given or obtained by a ‘monitored promoter’ cannot be a reasonable excuse for a person other than the promoter. Further, reliance on legal advice by a monitored promoter cannot be a reasonable excuse if the advice was not based on full disclosure of the facts, or the conclusions in the advice were unreasonable (FA 2014 amending TMA 1970 s 98C (2EA), (2EB)).

Follower notices and accelerated payment notices 6.333 Finance Act 2014 contained provisions enabling HMRC to expedite collection of tax arising from avoidance arrangements during the sometimes lengthy appeals procedure. In Budget 2014, the Chancellor announced the purpose of the proposals was to prevent taxpayers benefiting from the use of cash which, in HMRC’s view, should have been paid whilst the dispute was resolved (FA  2014 ss  199–226). However, the presupposition that HMRC’s view of the point of law in dispute goes further than previous efforts in clamping down on tax avoidance and, unsurprisingly, has proved controversial. 6.334 There are two aspects to the FA 2014 provisions: the ‘follower notice’ concept and the issue of an ‘accelerated payment notice’. A  follower notice may be issued by HMRC where they consider that an existing final judicial decision covers the principles of the tax advantage arrangements in dispute. ‘Tax advantage’ is defined in FA 2014 s 201(2). The arrangement will be a ‘tax arrangement’ within the provisions where it is reasonable to conclude in all the circumstances that obtaining a tax advantage was the main purpose or one of the main purposes of entering into the arrangement. A follower notice can be filed whilst an appeal is ongoing or an enquiry into a return open, subject to certain conditions. The return (or appeal against a determination) must result from an ‘asserted advantage’ resulting from particular tax arrangements; HMRC must be of the opinion that there is a judicial ruling relevant to the arrangements and finally no previous follower notice can have been given to the same person by reference to the same tax advantage, tax arrangements, judicial ruling and tax period (FA 2014 s 204(1)). The follower notice must 404

Main Taxation Rules Applicable to Trusts 6.336 comply with certain formalities (FA  2014 s  206) and comply with the time limits set out in FA 2014 s 204(6). Broadly, a follower notice must be served within 12 months of the date the judicial ruling or the day on which the return, account or document was filed or appeal made. The follower notice provisions apply from 17 July 2014, and under transitional arrangements, where HMRC wish to rely on a judicial ruling prior to that date, the period of 12 months runs from 17 July 2014. The taxpayer has no right of appeal against the follower notice, but may make representations within 90 days of the notice (FA 2014 s 207). HMRC may confirm the notice, with or without amendment, or withdraw the notice following the taxpayer’s representations. 6.335 The follower notice requires the taxpayer essentially to concede the purported tax advantage included in the return. Failure to do so renders the taxpayer liable to penalty of 50% of the tax advantage, although this may be reduced by up to 40% if the taxpayer cooperates with HMRC. Note that the penalty cannot be reduced below 10% of the tax advantage denied under the follower notice. The taxpayer may appeal to the tribunal against the imposition of a penalty (FA 2014 s 214). The limitation of the follower notice provisions is that there must be a final judicial ruling before HMRC may serve a notice to a taxpayer. It could therefore be many years before HMRC are able to collect tax considered due. The accelerated payment notice provisions enable HMRC to serve a notice demanding payment whilst an appeal is in progress. An accelerated payment notice may be issued where a tax enquiry is in progress or there is an outstanding appeal by the taxpayer against a determination, and the return or claim is based on an asserted tax advantage arising from particular arrangements, and either a follower notice has been issued in relation to the return or appeal (in which case the accelerated payment notice may be issued at the same time as the follower notice), or the arrangements are DOTAS notifiable arrangements. An accelerated payment notice may also be issued where a GAAR counteraction notice has been given in relation to the arrangements (FA 2014 ss 220, 221). 6.336 The taxpayer may make representations within 90 days of the issue of the accelerated notice to make representations to HMRC. Representations may dispute that the necessary conditions for the notice are met or the amount of tax required to be paid under the notice (FA 2014 s 222). Where the grounds for the notice are challenged, HMRC may confirm the notice, with or without amendment, or withdraw the notice. Where the amount of tax specified in the notice are challenged, HMRC must determine whether a different amount should have been specified, and then either confirm the original amount or specify a new amount. A  payment under an accelerated payment notice is treated as a payment on account of tax due. In the case of inheritance tax payable by instalments, the taxpayer may only be required to 405

6.337  Main Taxation Rules Applicable to Trusts pay so much of the tax as would have been due under the instalment basis (FA 2014 s 223(6)). 6.337 The payment date under an accelerated payment notice is 90 days from the date of the notice, if no representations have been made. Where the taxpayer has made representations in response to the notice, the payment date is the later of the initial 90-day period in which representations could be made, or 30 days of the date of HMRC’s decision in relation to the representations made. 6.338 The penalty for failure to comply with an accelerated payment notice varies accounting to the length of time the failure subsists. A penalty of 5% of the outstanding amount due under the notice applies where payment is not made at the end of the payment period. A further 5% penalty of the outstanding amount is imposed where the notice has not been fully complied with five months after the end of the payment period. Where an amount remains unpaid at the end of 11 months from the end of the payment period, a further penalty of 5% of the outstanding amount is applied. In the case of inheritance tax payable by instalments, the penalty dates are calculated from the instalment date, if later than the payment date (FA 2014 s 226). HMRC may withdraw an accelerated payment for any reason, but is required to do so where it withdraws the follower notice to which the accelerated payment notice is attached, or if any other condition relating to the issue of the accelerated payment notice ceases to be met (FA 2014 s 227).

Sanctions for serial tax avoidance 6.339 Finance Act 2016 introduced a new regime for ‘serial tax avoiders’ with additional sanctions being levied on repeated users of tax avoidance schemes. Within 90 days of an arrangement being defeated, HMRC will issue a warning notice to the taxpayer (and associates, such as group companies or members of a partnership). A warning notice generally lasts for five years, and requires the taxpayer to provide information about any tax avoidance schemes in which they have participated within 30 days of the reporting period. In order to be disclosable, the scheme must fall within DOTAS arrangements (including the regime applying to VAT and other indirect taxes). If the taxpayer enters into a new scheme which is defeated by HMRC, sanctions may be imposed including a penalty of up to 40% of the additional tax due following the defeat of the scheme. HMRC may also publish details of serial tax avoiders in certain circumstances, including the taxpayer’s name, address, the nature of business carried on by the taxpayer (if any) and the amount of tax avoided. Where the taxpayer has participated in three schemes which have been defeated by HMRC, the taxpayer’s ability to claim certain reliefs, for example loss relief, may be restricted for a period of three years commencing with the issue of a loss restriction notice (FA 2016 Sch 18). 406

Main Taxation Rules Applicable to Trusts 6.342

General Anti-Abuse Rule (GAAR) 6.340 Following extensive consultation, the UK’s General Anti-Abuse Rule (GAAR) came into effect from the date of Royal Assent to Finance Act 2013, 17  July 2013. The stated purpose of the GAAR is ‘to strengthen HMRC’s anti-avoidance strategy and to help HMRC tackle abusive avoidance’. It is perhaps too early to measure its success in meeting this aim; however, the introduction of the wide-ranging GAAR appears to have had no discernible effect on the approach to counteracting avoidance arrangements through the issue of detailed anti-avoidance legislation. 6.341 The GAAR provisions are contained in FA 2013 ss 206–215 and aim to counteract tax advantages arising from tax arrangements that are abusive. It applies to income tax, corporation tax (including amounts chargeable as if they were, or treated as if they were, corporation tax), capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax, the annual tax on enveloped dwellings (ATED) and (by extending legislation), national insurance contributions. 6.342 Arrangements are ‘tax arrangements’ (FA  2013 s  208) if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements (FA 2013 s 207). Tax arrangements are ‘abusive’ if (having regard to any other arrangements of which they form part) entering into them or carrying them out cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions (the so-called ‘double reasonableness test’), having regard to all the circumstances including: (a) whether the substantive results of the arrangements are consistent with any principles (express or implied) on which those provisions are based, and the policy objectives of those provisions; (b) whether the means of achieving those results involves one or more contrived or abnormal steps; and (c) whether the arrangements are intended to exploit any shortcomings in those provisions. Indicators that tax arrangements are abusive are: (a) that the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes; (b) deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes; or (c)

a claim for the repayment or crediting of tax (including foreign tax) that has not been paid and is unlikely to be paid. 407

6.343  Main Taxation Rules Applicable to Trusts The above list is not exhaustive; however, an arrangement will only fall within the GAAR if it is reasonable to assume that such the result obtained was not the anticipated result when the relevant tax provisions were enacted. Arrangements are not abusive if they accord with established practice and that HMRC had, at the time the arrangements were entered into, indicated its acceptance of that practice (FA 2013 s 207(5)). 6.343 The most important safeguard within the GAAR provisions relates to the independent Advisory Panel. Abusive arrangements are counteracted by the making of a just and reasonable adjustment in respect of the tax in question or any other tax to which the GAAR applies. The adjustments that may be made include those that impose or increase a liability to tax where, in the absence of the GAAR, there would be no liability or a smaller liability. Adjustments that are required may be made by HMRC or the taxpayer by way of an assessment, the modification of an assessment, amendment or disallowance of a claim, or otherwise, subject to any time limit imposed by or under any legislation other than the GAAR (FA 2013 s 209). 6.344 In proceedings on the GAAR before a court or tribunal, the burden of proof rests with HMRC to show that there are tax arrangements that are abusive, and that the adjustments made under FA 2013 s 209 are reasonable. HMRC must also comply with certain procedural aspects, set out in FA 2013 Sch 43. The taxpayer must be issued with a written notice advising that HMRC considers the arrangements abusive, specifying the tax advantage obtained and the counteraction HMRC considers should be taken. The taxpayer then has 45 days in which to make written representation in respect to the counteraction notice. This period may be extended at HMRC’s discretion. If representations are made, they must be considered by HMRC, and if HMRC’s view is that counteraction of the tax advantage should be taken, the matter must be referred to the GAAR  Advisory panel along with the notice given to the taxpayer, the taxpayer’s representations on the notice, and the conclusion of HMRC following consideration of those representations. If no representations are made, referral to the GAAR  Advisory panel is made by HMRC (FA  2013 Sch 43 paras 3 to 8). The taxpayer then has 21 days beginning with the day on which a notice is given under para 8 to send the GAAR Advisory Panel written representations (with a copy to the designated HMRC officer) about the notice given to the taxpayer under para 3 or about any comments provided by the officer to the Panel. The Panel may extend the 21-day period on written request by the taxpayer. If no representations were made by the taxpayer under para 4 the officer may provide the Panel with comments on any representations that are made by the taxpayer under this paragraph (and must send a copy to the taxpayer). The Chair to the GAAR Advisory Panel must appoint a sub-panel, consisting of three members, one of whom may be the Chair, to consider the matter referred to them. Where a matter is referred to the GAAR Advisory Panel, the sub-panel must produce 408

Main Taxation Rules Applicable to Trusts 6.347 either one opinion notice stating the joint opinion of all the members of the sub-panel or, alternatively, two or three ‘opinion notices’ which taken together state the opinions of all the members. It must give a copy of this notice (or these notices) to the designated HMRC officer and the taxpayer. The opinion notice may conclude (and give reasons for the conclusion) that: (a)

the entering into and carrying out of the tax arrangements is a reasonable course of action in relation to the relevant tax provisions having regard to all the circumstances, including the matters mentioned in FA 2013 s 207 as relevant in considering whether tax arrangements are abusive;

(b) the entering into and carrying out of the tax arrangements is not a reasonable course of action having regard to all the circumstances, including those matters; or (c) it is not possible, on the information available, to reach a view on that matter. The opinion must be that of the majority of the sub-panel. This raises an interesting question over the application of the ‘double reasonableness’ test, as the opinion of a dissenting panel member is seemingly thereby construed as unreasonable. 6.345 Following the opinion of the GAAR  Advisory Panel, HMRC must give the taxpayer a written notice setting out whether the tax advantage arising from the arrangements is to be counteracted under the GAAR. If it is, the notice must also set out the adjustments required to give effect to the counteraction and, if relevant, any steps that the taxpayer is required to take to give effect to it. 6.346 HMRC have published extensive guidance on the operation of the GAAR, and in the absence (so far) of any reported cases, heavy reliance must be placed upon HMRC’s views as expressed in the guidance. The most recent guidance was updated on 28  March 2018 can be found at www.gov. uk/government/publications/tax-avoidance-general-anti-abuse-rules. The GAAR  Advisory Panel have also issued a series of opinions and HMRC have a number of factsheets. These can be found at www.gov.uk/government/ publications/tax-avoidance-general-anti-abuse-rules-gaar#gaar-advisorypanel-opinions.

Corporate criminal offence of failure to prevent facilitation tax evasion 6.347 For 2017/18 and later years, a new offence of failing to prevent the facilitation of tax evasion applies. An offence is committed by a partnership or company where an employee, agent or other person providing services for 409

6.347  Main Taxation Rules Applicable to Trusts or on behalf of the company or partnership fails to prevent facilitation of tax evasion, whether of UK or foreign taxes. The rules are extremely widely drawn, however, a defence against a penalty will be possible where the company or partnership has reasonable prevention procedures in place, or it would be unreasonable to expect such procedures to be in place. Where the business does not have a valid defence, it is potentially liable to unlimited financial penalties. A self-reporting regime is in place – see guidance at www.gov.uk/guidance/ tell-hmrc-your-organisation-failed-to-prevent-the-facilitation-of-tax-evasion.

410

Chapter 7

Relevant Property Trusts

DEFINITION 7.1 A relevant property trust is defined by IHTA 1984 s 58 and includes a discretionary trust, which is a trust under which the trustees are given a discretion to pay or apply income for beneficiaries, but no beneficiary is able to claim a right to any part of that income unless the trustees think fit to pay it to him or apply it for his benefit. Gartside v IRC [1968] 1 All ER 121 held that beneficiaries of a discretionary trust were not entitled either individually or collectively to receive any part of the trust income unless the trustees so decided, and that they did not have an interest in possession. This was confirmed even when there was only a single beneficiary of a discretionary trust (Moore and Osborne v IRC [1984] STC 236; see also Turner v Turner [1984] Ch 100; Tankel v Tankel [1999] 1 FLR 676). It is perfectly possible to have a mixed trust, where some of the beneficiaries have a discretionary interest and some have an interest in possession or a contingent interest. 7.2 The trustees may decide to distribute some or all of the income of the discretionary trust to one or more of the beneficiaries and may decide to accumulate income not so distributed. This should normally be decided before the end of the fiscal year, so that timely distributions may be made, but it is possible to defer the decision for a reasonable time, which could in exceptional cases be several years (Re Gulbenkian’s Settlement Trusts (No 2), Stephens v Maun [1970] Ch  408). Accumulated income may, at the trustees’ discretion or as provided under the trust instrument, remain as accumulations of income and be distributed as income at a later date (Re Berkeley [1968] 3 All ER 364) or could involve the addition of income to capital, thus increasing the estate in favour of those entitled to capital and against the interests of those entitled to income. Distributions of capital could still be income in the beneficiaries’ hands (Brodie’s Trustees v IRC (1933) 17 TC 432); see 7.16. 7.3 Although trustees may, in providing for the maintenance of a beneficiary, make advancements of capital (Re Howarth (1873) 8 Ch App 415; Walker v Wetherell (1801) 6 Ves 473), they would normally only do so under the statutory rights in TA 1925 s 32 or under specific powers in the trust instrument. The power of advancement enables the trustees to pay or apply 411

7.4  Relevant Property Trusts the trust capital for the advancement or benefit of beneficiaries entitled to a share in the capital of the trust property, whether absolutely or contingently (Re Garrett, Croft v Ruck [1934] Ch 477). Unless the trust instrument otherwise so provides, it must not exceed one half of the presumptive or vested share of the beneficiary (TA 1925 s 32). The power of advancement cannot be used to prejudice any person entitled to a prior life or other interest, whether vested or contingent, and if the advancee becomes absolutely entitled to a share of the trust property, the amount paid or applied under the advancement must be brought into account as part of that share (TA 1925 s 32(1) proviso). 7.4 Powers of advancement may be used to make distributions of capital to a beneficiary. A  power of appointment may be given to the trustees, or a protector, or may be retained by the settlor or otherwise, as specified in the trust deed, to determine who will actually benefit from distributions of income or capital. It is thus a dispositive as opposed to an administrative power. A general power, which would be unusual in a trust, would enable the holder of the power to appoint the assets to anyone, including himself, and is therefore a valuable asset (Melville v IRC [2001] STC 1271), and is defined by IHTA 1984 s 47A for IHT purposes. Normally the holder of the power will be excluded from benefit as will other members of an excepted class, usually the settlor or his spouse and the trustees (Re Hay’s Settlement Trusts [1981] 3 All ER 786; Re Beattie’s Will Trusts [1990] 3 All ER 844). Such a power is a special power of appointment (Re Penrose [1933] Ch 793). It is not uncommon in a discretionary trust to give the trustees, often with the consent of the settlor or protector, a power to appoint additional beneficiaries other than those named or defined by the trust instrument.

INCOME TAX 7.5 Discretionary trusts are taxable at the trust rate under ITA 2007 s 9 instead of the basic rate under ITA 2007 s 6, or the trust dividend rate under ITA  2007 s  8. The trust rate does not apply to the ‘standard rate band’ of the first £1,000 slice of trustees’ income (£500 for 2005/06, the first year it applied), and income within this threshold is instead charged at the basic rate (20%for 2008/09 and later years) or the dividend ordinary rate of 7.5% (from 6 April 2016). The reduced rates on the first £1,000 of income are applied first against income chargeable at the basic rate and then against income chargeable at the dividend ordinary rate. Basic rate income includes offshore income gains and, from 2008/09, gains on contracts for life assurance previously treated as savings income. For 2007/08 and earlier years, a lower or savings rate was also in force (ITA 2007, s 7). For 2005/06 to 2007/08, set-off was first against income taxable at the basic rate, then savings rate income, and any balance against income chargeable at the dividend ordinary rate, see earlier editions of this book for details. 412

Relevant Property Trusts 7.7 7.6 Where a settlor has made more than one settlement, the £1,000 standard rate band is apportioned between them. The amount allocated to each settlement is £1,000 divided by the number of settlements, or £200, whichever is the greater (ITA 2007 s 492(1)–(3)). The restriction applies to settlements created at any time, and includes non-UK settlements. A  settlement which exists for only part of the tax year also falls to be included for the purpose of the restriction (ITA 2007 s 492(5)). 7.7 The trust rate is 45% from 2013/14, having previously been 50% between 2010/11 to 2012/13, and 40% between 2004/05 and 2009/10. The dividend trust rate is:

6 April 2016 to date 6 April 2013 to 5 April 2016 6 April 2010 to 5 April 2013 6 April 2004 to 5 April 2010

Dividend Trust Rate 38.1% 37.5% 42.5% 32.5%

From 6 April 2016, the system of taxation of dividends was revised and the notional tax credit of 1/9 of the net dividend removed. Dividends (and other distributions) are taxed at special rates as follows: 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers and trusts. Individuals are entitled to a ‘dividend allowance’ of £2,000 (£5,000 for 2016/17 and 2017/18) but this is not available to trustees or personal representatives. The above rates apply to income which is accumulated or payable at the discretion of the trustees or any other person, whether or not the trustees have power to accumulate, and is not treated as the income of any person other than the trustees, eg  as income of the beneficiary entitled to an interest in possession (see Chapter 8), or is deemed to be the income of the settlor under ITTOIA 2005 ss 622–627. The trust rate does not apply to income arising to a charitable trust (ITA 2007 s 479(1)(b)), to trusts established under a Share Incentive Plan meeting the requirements of ITEPA  2003 Sch  2 (ITA  2007 s 479(5)), or to a superannuation fund to which ICTA 1988 s 615(3) applies (ITA 2007 s 480(4)). Trust expenses are paid out of trust income subject to tax at the basic rate or ordinary dividend rate. Income so utilised is not subject to the trust rate or the dividend trust rate (ITA 2007 s 484). Trustees’ management expenses, which would normally be properly chargeable to income, except that the trustees are non-UK resident and therefore have income not subject to UK tax, are reduced to the proportion of those expenses which equates with the proportion that the UK taxable income bears to the total trust income (ITA 2007 s 487(2)). For this purpose, excluded income within ITA 2007 ss 811–812 is 413

7.8  Relevant Property Trusts included, other than that on which income tax has been deducted at source (ITA 2007 s 487(5), (6)). 7.8 Distribution income, to which the dividend trust rate applies, includes distributions from UK companies and income from abroad, other than distributions to non-residents or non-qualifying distributions chargeable under ITTOIA 2005 ss 399, 400, stock dividends under ITTOIA 2005 ss 409–414, deemed income arising on the release of a loan from a close company under ITTOIA 2005 s 416, and other distributions within ITA 2007 ss 481(3), 482. These include qualifying distributions made to trustees other than trustees of a unit trust scheme, including deemed distributions on the acquisition by a company of its own shares (ITA  2007 s  482). Trustees do not include personal representatives, but payments by personal representatives to trustees are deemed to have borne tax at the trust rate or the dividend trust rate, as appropriate (ITA 2007 s 483(1)). The exemption for pension fund investments in ITA  2007 s  480(4) does not extend to income derived from investments, deposits or other property held as a member of a property investment limited liability partnership (ITA 2007 s 480(4)(b)).

PAYMENTS TO BENEFICIARIES 7.9 Where the trustees pay tax on the income less expenses (at the trust rate, or the dividend trust rate, as appropriate) on the income for each fiscal year, they may also have a liability on distributions under ITA 2007 ss 493– 498. These provisions apply where a payment is made to a beneficiary under a discretion exercisable by the trustees or any other person, which is the income of the beneficiary and not treated as the income of the settlor or a payment to a minor child of the settlor under ITTOIA 2005 ss 629–631 (ITA 2007 s 493). The payment is treated as a net amount corresponding to a gross amount from which tax has been deducted at the trust rate, ie currently 45%, and therefore the gross equivalent is treated as the income of the person to whom the payment is made or the settlor of a settlor interested trust. The beneficiary therefore receives income carrying with it a tax credit of 45% irrespective of the actual source of the distribution, and the beneficiary may claim a repayment of the associated tax credit depending on his particular circumstances, for example if he is liable to tax only at the basic rate (ITA 2007 s 494). The beneficiary may request a statement from the trustees showing the amount of income tax deducted from the distribution, normally given on form R185 (Trust Income) (ITA  2007 s  495). The trustees have to account to HMRC for any shortfall between the tax that has been paid by them already under ITA  2007 s  479 (the trust tax pool) and the grossed-up equivalent of net distributions paid to beneficiaries (ITA 2007 s 496). This requirement arises from the fact that, in HMRC’s view, the source of the beneficiary’s income is the trust itself and not, as in the case of a beneficiary with an interest in possession, the underlying investments; and, as the beneficiary is given a credit for the trust tax paid of 414

Relevant Property Trusts 7.9 45%, it is necessary to ensure that HMRC has collected the same amount of tax from the trustees. Where the trust income includes dividends which have been subject to tax only at the dividend tax rate of 38.1%, there will be no further tax to pay. The method of calculating the tax pool has changed over the years, which can perhaps best be illustrated by an example, which contrasts the position prior to 6 April 1999 with the position thereafter.

Example The pre-6 April 1999 rules for a dividend received via a discretionary trust are as follows: £ Dividend received by trustees

80.00

Tax credit

20.00 100.00

Tax thereon at 34% (of which £20 met by tax credit)

(34.00) 66.00

Distributed to beneficiary

66.00

Grossed up under ICTA 1988 s 687(2) at 34%

34.00

Gross income of beneficiary

100.00

Tax thereon at 40% (of which £34 met by trustees’ deemed deduction)

40.00

Net income of beneficiary

60.00

The 1999/2000 to 2003/04 rules for a dividend received via a discretionary trust are as follows: £ Dividend received by trustees

£ 80.00

Tax credit (one-ninth)

8.89 88.89

Tax thereon at 25% Schedule F trust rate: Met by tax credit

8.89

Paid by trustees

13.33

Net income of trust

(22.22) 66.67

Liability of 34% under ICTA 1988 s 687 on gross payment of £80.00 (£80 figure determined by formula – maximum possible distribution)

415

27.20

7.9  Relevant Property Trusts £ Met by trustees’ payment above

£

(13.33)

Remaining liability of trustees ICTA 1988 s 687(2)(b)

(13.87)

Available for distribution to beneficiary

52.80

Grossed-up under ICTA 1988 s 687(2)(a) at 34%

27.20

Gross income of beneficiary

80.00

Tax thereon at 40% (of which £27.20 met by trustees)

(32.00)

Net income of beneficiary

48.00

The rules for a dividend received via a discretionary trust between 2004/05 and 2009/10 are as follows: £ Dividend received by trustees

£ 80.00

Tax credit (one-ninth)

8.89 88.89

Tax thereon at 32.5% trust dividend rate: Met by tax credit

8.89

Paid by trustees

20.00

Net income of trust

(28.89) 60.00

Liability of 40% under ITA 2007 s 496 (ICTA 1988 s 687) on gross payment of £80.00

32.00

(£80 figure determined by formula – maximum possible distribution) Met by trustees’ payment above

(20.00)

Remaining liability of trustees ITA 2007 s 496 (ICTA 1988 s 687(2)(b))

12.00

Available for distribution to beneficiary

48.00

Grossed up under ITA 2007 s 494 (ICTA 1988 s 687(2)(a)) at 40%

32.00

Gross income of beneficiary

80.00

Tax thereon at 40% (all of which is met by trustees)

32.00

Net income of beneficiary

48.00

NB: Exemption from trust rates for first £1,000 of income has been ignored (ITA 2007 s 491)

416

Relevant Property Trusts 7.9 The position for 2010/11 to 2015/16 is as follows (rates are those applying for 2015/16): £ Dividend received by trustees

£ 80.00

Tax credit (one-ninth)

8.89 88.89

Tax thereon at 37.5% dividend trust rate: Met by tax credit

8.89

Paid by trustees

24.44

Net income of trust

(33.33) 55.56

Liability of 45% under ITA 2007 s 496 on gross payment of £80.00 Met by trustees’ payment above

36.00 (24.44)

Remaining liability of trustees ITA 2007 s 496

11.56

Available for distribution to beneficiary

44.00

Grossed up under ITA 2007 s 494 at 45%

80.00

Gross income of beneficiary

80.00

Tax thereon at 45% (all of which is met by trustees)

36.00

Net income of beneficiary

44.00

NB: Exemption from trust rates for first £1,000 of income has been ignored (ITA 2007 s 491)

The trouble is that because the tax credit under the post-5 April 1999 rules is a non-payable credit it is not treated as paid by the trustees and therefore not taken into the tax pool under ITA 2007 s 497. From 6 April 2016, the position is as follows: £ Dividend received by trustees

£ 80.00

Tax thereon at 38.1% dividend trust rate: Paid by trustees

(30.48)

Net income of trust

49.52

Liability of 45% under ITA 2007 s 496 on gross payment of £80.00

417

36.00

7.10  Relevant Property Trusts £ Met by trustees’ payment above

£

(30.48)

Remaining liability of trustees ITA 2007 s 496

5.52

Available for distribution to beneficiary

44.00

Grossed up under ITA 2007 s 494 at 45%

80.00

Gross income of beneficiary

80.00

Tax thereon at 45% (all of which is met by trustees)

36.00

Net income of beneficiary

44.00

NB: Exemption from trust rates for first £1,000 of income has been ignored (ITA 2007 s 491)

7.10 From 2007/08, the tax charge on the trustees in respect of discretionary payments is equal to the excess of the tax deemed to have been deducted from the payment over the tax pool (ITA 2007 s 496). For 2006/07 and earlier years, the trustees were assessed on the amount of tax deemed to have been deducted from the discretionary payment, after set-off of the tax pool. Step 1 of the tax pool calculation under ITA  2007 s  497(1) therefore requires the pool to be adjusted in respect of income tax treated as paid under ITA 2007 s 494(1) as a result of discretionary payments made in the previous year. In addition to amounts brought forward from earlier years, the tax pool consists of the cumulative tax payable under ITA 2007 s 479 at the trust rate or the dividend trust rate, together with: (i)

tax charged at the basic rate or dividend rate on the first £1,000 slice of income (ITA 2007 s 491);

(ii) tax at a rate equal to the difference between the trust rate and the basic rate (lower rate for 2007/08 and earlier years) on chargeable event gains on certain life insurance policies within ITTOIA 2005 s 467 or 530; (iii) with effect from 2007/08 tax at a rate equal to the difference between the trust rate and the basic rate (lower rate for 2007/08 and earlier years) on capital receipts treated as income chargeable at the trust rate under ITA  2007 s  481, including profits under the accrued income scheme, profits from deep discounted securities and offshore income gains; and (iv) tax relief on payments to vulnerable beneficiaries (FA 2006 s 26). (ITA 2007 s 498). ICTA 1988 s 687(3) included a number of additional categories of tax which fell to be included in the tax pool, including a credit left over from 1972/73 418

Relevant Property Trusts 7.14 in some cases which may be deducted (ICTA 1988 s 687(3)(d)), and a credit for development gains tax paid as allowed (ICTA  1988 s  687(3)(g)). These provisions were not rewritten into ITA 2007 s 498; however, it is assumed that relief continues to be available in those rare cases where it continues to be relevant under the transitional and savings provisions of ITA 2007 Sch 2. 7.11 The tax pool provisions do not apply to personal representatives (ITA 2007 s 463(1)). Where a distribution is made from a discretionary trust to a company which is not a charity, a heritage body or a scientific research association, the tax credit cannot be set off against corporation tax payable under CTA  2009 ss  2–8 or income tax payable on annual payments under ITA 2007 s 952. However, the distribution is left out of account in calculating the profits of the company for the purposes of corporation tax and no repayment may be claimed by the company. If the company is not resident in the UK, these provisions only apply so far as the companies are chargeable to corporation tax. 7.12 Where trustees receive interest from employees or directors under a scheme enabling them to acquire shares under CA 2006 s 682(2)(b), such interest is exempt from tax (ITTOIA 2005 s 752). 7.13 Where trustees make a distribution out of overseas income which has borne tax overseas, which is treated as a net amount grossed up under ITA 2007 s 494 the trustees may certify that the income out of which the payment was made was, or included, taxed overseas income of an amount and from a source stated in the certificate, which arose not earlier than six years from the end of the year of assessment in which the payment was made TIOPA 2010 s 111. In such cases the beneficiary may claim repayment of the amount so certified as if he had received the income from the source specified in the year in which the distribution was made to him.

TRUST AS SOURCE 7.14 The HMRC contention that a discretionary trust is itself the source of the income to the beneficiary is not based on any statute. It was stated in Memec v IRC [1996] STC 1336, obiter, by Robert Walker J: ‘under an English trust with an interest in possession the life tenant has an equitable interest in the trust property and the trust income as it comes into the trustees’ hands even though the trustees have a lien on capital and accruing income for their expenses. Such a trust is transparent for income tax purposes. A discretionary trust on the other hand is not transparent. No beneficiary is entitled unless and until the trustees exercise their discretion in his or her favour and the trustees’ exercise of discretion is regarded as having (in Lord Asquith’s words in Stainer’s Executors v Purchase (1952) 419

7.15  Relevant Property Trusts 32  TC  367) “independent vitality” and creating a new source of income, although the effect of this may be tempered by specific enactment (see [TIOPA 2010 s 111], ICTA 1988 s 809) or extra-statutory concession (see extra-statutory concession B18, payments out of discretionary trusts). Similarly the rights of an annuitant under a trust are regarded as a source of income distinct from the underlying trust investments. Garland v ArcherShee (1931) 15 TC 693 shows that a foreign trust is not transparent if the life tenant has no equitable interest and no right to the payment to him or her (as opposed to the application for his or her benefit) of even the balance of net income.’ In the subsequent Court of Appeal hearing of [1998] STC 754 at 764, Peter Gibson LJ stated: ‘… the Judge made a comment [Robert Walker J at [1996] STC 1336] on the distinction between a life tenant under an English trust and a beneficiary under an English discretionary trust, there being transparency in the case of the former but, the Judge said, not in the case of the latter. I merely note that this distinction is supported by the Crown but disputed by Mr Venables (by reference to Drummond v Collins (1915) 6 TC 525) but it is not necessary for the purposes of this appeal to resolve the dispute.’ 7.15 In Drummond v Collins (1915) 6 TC 525, Lord Parker of Waddington stated: ‘the monies transmitted in this case from America were certainly profits and gains arising from property. The property from which they arose was equally clearly a foreign possession within the meaning of Schedule D Case V as interpreted by the decisions of this House’. Lord Wrenbury stated: ‘… the first matter is to investigate upon the provisions of the will what the remittances in question are. In the events which have happened the Trustees are, by the will, directed to hold the trust estate and to apply the net income for the use and benefit of the children. So far I find a direct and unfettered gift of the income in favour of the children. There follows a direction that out of the net income of the proportionate share held in trust for any child the Trustees make such provision from time to time as they in their uncontrolled discretion think necessary or advisable for the maintenance and education of the child until he is entitled under provisions after contained to receive the income directly from the Trustees … the gifts are each one of them in favour of the children but the dates for payment to the children are fixed with reference to the exercise by the Trustees of their discretion or the ages from time to time of the children. At the time with which your Lordships have to do there could be no payment except by exercise of the discretion vested in the Trustees; but so soon as their discretion is exercised in favour of the child the resulting 420

Relevant Property Trusts 7.16 payment seems to me upon the language of the will to be a payment of income to which the child is entitled by virtue of the gift made by the testator. I cannot see any grounds upon which such income is not subject to income tax.’ 7.16 HMRC appeared to rely, for its authority of the trust itself being the source of the income, on Cunard’s Trustees v IRC; McPheeters v IRC (1945) 27 TC 122 (TSEM 3755). However, this case actually related to a will trust under which the trustees had a discretion to supplement income by payments of capital. It is not immediately apparent why a case which taxed the payments of capital at the discretion of the trustees as income in the hands of the recipient, on the authority of cases such as Brodie’s Trustees v IRC (1933) 17 TC 432 and Lindus and Hortin v IRC (1933) 17 TC 442, should be said to be authority for the proposition that the source of the beneficiary’s income in a discretionary trust is the trust itself rather than the underlying investments. It is indeed difficult to envisage quite how a relationship such as a trust can be a source of the income. As far as the individual is concerned, it is that relationship under which they are entitled to the income, which is rather a different matter. It seems to follow that, if the HMRC view is correct, the income of the beneficiaries, in the case of a UK resident trust, is assessable as interest, and, if the trustees are resident outside the UK, the trust presumably becomes a foreign possession, the income for which is taxed as relevant foreign income within ITTOIA 2005 ss 829–845. If the trustees are non-resident, ITA 2007 s 494 would not apply and therefore there would be no credit for any UK tax paid under ITA 2007 s 497. This means that the beneficiaries would again be taxed on the income net of UK tax already paid by the trustees, with the tax already paid being treated as an expense rather than as a credit. The worst aspects of this situation are dealt with under ESC B18, which provides as follows: ‘UK resident trusts A  beneficiary may receive from trustees a payment to which ICTA  1988 s  687(2) [ITA  2007 s  496(1)–(5)] applies. Where that payment is made out of the income of the trustees in respect of which, had it been received directly, the beneficiary would— —

have been entitled to exemption in respect of FOTRA securities issued in accordance with FA 1996 s 154 [ITTOIA 2005 ss 713–716]; or

— have been entitled to relief under the terms of a double taxation agreement; or —

not have been chargeable to UK tax because of their not resident and/ or not ordinarily resident status

the beneficiary may claim that exemption or relief or, where the beneficiary would not have been chargeable, repayment of the tax treated as deducted from the payment (or an appropriate proportion of it). For this purpose, the payment will be treated as having been made rateably out of all sources of income arising to the trustees on a last in first out basis. 421

7.16  Relevant Property Trusts Relief or exemption, as appropriate, will be granted to the extent that the payment is out of income which arose to the trustees not earlier than six years before the end of the year of assessment in which the payment was made, provided the trustees— —

have made trust returns giving details of all sources of trust income and payments made to beneficiaries for each and every year for which they are required; and

— have paid all tax due, and any interest, surcharges and penalties arising; and —

keep available for inspection any relevant tax certificates.

Relief or exemption, as appropriate, will be granted to the beneficiary on a claim made within five years and ten months of the end of the year of assessment in which the beneficiary received the payment from the trustees. Non-resident trusts A similar concession will operate where a beneficiary receives a payment from discretionary trustees which is not within ICTA  1988 s  687(2) [ITA 2007 s 494] (i.e. where non-resident trustees exercise their discretion outside the UK). Where a non-resident beneficiary receives such a payment out of income of the trustees in respect of which, had it been received directly, it would have been chargeable to UK tax, then the beneficiary— —

may claim relief under ICTA 1988 s 278 [ITA 2007 s 56] (personal reliefs for certain non-residents)); and

—

may be treated as receiving that payment from a UK resident trust but claim credit only for UK tax actually paid by the trustees on income out of which the payment is made.

The beneficiary may also claim exemption from tax in respect of FOTRA securities issued in accordance with FA 1996 s 154 [ITTOIA 2005 ss 713– 716] to the extent that the payment is regarded as including interest from such securities. A UK beneficiary of a non-resident trust may claim appropriate credit for tax actually paid by the trustees on the income out of which the payment is made as if the payments out of UK income were from a UK resident trust and within ICTA 1988 s 687(1) [ITA 2007 s 493]. This treatment will only be available where the trustees— —

have made trust returns giving details of all sources of trust income and payments made to beneficiaries for each and every year for which they are required; and 422

Relevant Property Trusts 7.19 —

have paid all tax due and any interest, surcharges and penalties arising; and

—

keep available for inspection any relevant tax certificates.

Relief or exemption, as appropriate, will be granted to the beneficiary on a claim made within five years and ten months (now four years, FA 2008 Sch  39) of the end of the year of assessment in which the beneficiary received the payment from the trustees. No credit will be given for UK tax treated as paid on income received by the trustees which would not be available for set off under ICTA 1988 s 687(2) [ITA 2007 s 496] if that section applied, and that tax is not repayable (for example on dividends). However, such tax is not taken into account in calculating the gross income treated as taxable on the beneficiary under this concession.’ 7.17 A non-UK resident trust is not limited to UK tax deducted at source under ITA  2007 s  811 where there is at least one UK resident beneficiary or potential beneficiary ITA  2007 ss  811, 812; IRC  v Regent Trust Co Ltd [1980] STC 140). However, HMRC may not be able to enforce the trustee’s liability in view of the general non-enforceability of foreign tax claims, in the absence of treaty provisions to the contrary, following Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491, unless under an international tax enforcement arrangement under the Mutual Assistance in the Recovery of Claims Relating to Taxes and Duties and Other Measures Directive 2010/24/EU and the Council of Europe/OECD  Convention or Mutual Administrative Assistance in Tax Matters or bilateral treaties. Not unreasonably, HMRC will only give credit for tax paid or suffered by non-UK resident trustees where the trustees are UK tax compliant. 7.18 If the HMRC view is wrong, the effect is merely that the underlying income of the trust, so far as it is distributed to beneficiaries in the exercise of the trustees’ discretion, would be treated as the income of the beneficiaries in the same way as it is in an interest in possession trust, following Archer-Shee v Baker (1927) 11 TC 749. The modernisation of the trust provisions in FA 2006 did not address this fundamental concept, and it is to be hoped that a further review of the taxation of trusts will put the matter on a proper statutory footing in the future.

CAPITAL GAINS TAX Gifts on which inheritance tax is chargeable 7.19 As a gift into a relevant property trust is not a potentially exempt transfer under IHTA 1984 s 3A, it is a chargeable transfer within TCGA 1992 423

7.20  Relevant Property Trusts s  260(2), and holdover relief may be available as described at 6.116 et seq. The provisions relating to a person becoming absolutely entitled to settled property under TCGA 1992 s 71 apply to a discretionary trust (and new interest in possession trusts created on or after 22  March 2006). These provisions and others relating to trusts generally, which include discretionary trusts, are covered in Chapter 6. There are no CGT provisions which relate specifically to discretionary trusts.

INHERITANCE TAX 7.20 The IHT provisions relating to trusts are set out in IHTA 1984, Part III, Ch III ss 58–85. These provisions formerly applied only to discretionary trusts, meaning settled property in which no qualifying interest in possession subsisted; however, following fundamental changes introduced by FA 2006 and the extension of IHT to UK situs real estate by FA 2017 (residential property), the scope of the ‘relevant property’ regime is now substantially broadened (IHTA 1984 s 58(1)). From 22 March 2006, the relevant property regime applies to most new trusts created during the settlor’s lifetime, with the exception of disabled person’s trusts within IHTA  1984 s  89 and certain charitable trusts. The relevant property regime also applies to trusts created by will or on intestacy, with the following exceptions: (a)

a trust for a bereaved minor, the terms of which meet the requirements of IHTA 1984 s 71A;

(b) a trust for an 18–25 year old bereaved person, the terms of which meet the requirements of IHTA 1984 s 71D; (c) an immediate post-death interest in possession trust (‘IPDI’) within IHTA 1984 s 49A; and (d) a transitional serial interest trust (‘TSI’) within IHTA 1984 s 49C. The following trusts also continue to be outside the relevant property regime: (a)

property held for charitable purposes only;

(b) pre-22  March 2006 interest in possession trusts, pre-1978 protective trusts, pre-1981 trusts for disabled persons and trusts for the benefit of employees, under IHTA 1984 ss 71, 73, 74 and 86; (c) property held on maintenance funds for historic buildings within IHTA 1984 Sch 4; (d) pension schemes within IHTA 1984 s 151; (e)

property comprised in a trade or professional compensation fund; and 424

Relevant Property Trusts 7.22 (f) excluded property, ie  property comprised in a settlement which is situated outside the UK where the settlor was domiciled outside the UK at the time the settlement was made (IHTA  1984 ss  48(3), 58), other than to the extent property comprised in the settlement derives its value from UK residential property (from 6 April 2017) (IHTA 1984 Sch A1). A settlement created whilst the settlor was non-UK domiciled also loses excluded property status on or after 6 April 2017 where the settlor is a formerly domiciled UK resident. A  formerly domiciled resident is an individual born in the UK with a UK domicile of origin who is resident in the UK in the tax year concerned and was also UK resident for one or both of the preceding two tax years (IHTA 1984 s 272 as amended by F(No 2)A 2017 s 30(8)). An interest in possession settlement created either on death or during the settlor’s lifetime before 22 March 2006 is outside the relevant property regime, provided no property is added to the settlement on or after that date. Property added on or after 22 March 2006 is treated as relevant property and will be subject to ten-year and exit charges. 7.21 A  qualifying interest in possession is defined, unhelpfully, by IHTA 1984 s 59(1) as an interest in possession to which an individual (or a company which acquired it in the course of its business for full consideration in money or money’s worth from an individual who was beneficially entitled to it) is entitled, and which, if the interest was beneficially acquired on or after 22  March 2006, is an immediate post-death interest (IPDI), a disabled person’s interest (DPI) or a transitional serial interest (TSI) (IHTA 1984 s 59(1) (a), (b) as amended by FA  2006 s  156 and Sch  20 para  20(2)). The normal definition of an interest in possession is taken from Pearson and Others v IRC [1980] STC 318 as ‘a present right to the present enjoyment’ of something. Therefore a power of accumulation given to the trustees, whether exercised or not, would be sufficient to make the trust a discretionary and not an interest in possession trust; although, given the extension of the relevant property regime to most new interest in possession trusts created on or after 22 March 2006, this distinction may no longer be as important for inheritance tax purposes. Other cases in which an interest in possession has been considered include Moore and Osbourne v IRC; Re Trafford’s Settlement Trusts [1984] STC 236; Miller v IRC [1987] STC 108; Gartside v IRC [1968] AC 553; A-G v Power [1906] 2 IR 272; Swales v IRC [1984] STC 413; Re Delamaere’s Settlement Trusts; Kenney v Cunningham-Reid [1984] 1  All ER  584; IRC  v Lloyds’s Private Banking Ltd [1998]  STC  559; and Woodhall (Woodhall’s Personal Representative) v IRC [2000] STC (SCD) 558. An attempt to use the definition of interest in possession in the ‘General Franco’ avoidance scheme failed in IRC v Trustees of Sir John Aird’s Settlement [1983] STC 700. 7.22 An ‘immediate post-death interest’ is an interest arising under the will or intestacy of an individual which entitles the holder to an interest in 425

7.23  Relevant Property Trusts possession in the settled property. Such an interest is outside the relevant property regime; however, if the interest is terminated during the IPDI holder’s lifetime, there will be a chargeable transfer for inheritance tax purposes unless the termination is in favour of the life tenant, the trust property passes to absolute ownership, or the property continues to be held on trust for a bereaved minor, a disabled person or on charitable trusts (IHTA 1984 s 49A). 7.23 A ‘transitional serial interest’ arises where an interest in possession arises on or after 22  March 2006, and before 6  October 2008, following a previous interest in possession in place at that time (IHTA  1984 s  49C). A transitional serial interest also arises on the death of a spouse or civil partner on or after 6  April 2008 (IHTA  1984 s  49D), or under a contract for life insurance entered into before 22 March 2006 (IHTA 1984 s 49E). 7.24 A reversionary interest in settled property is excluded property unless it has been acquired for a consideration in money or money’s worth or is one to which either the settlor or his spouse is, or has been, beneficially entitled or is an interest expectant on the determination of a lease treated as a settlement under IHTA  1984 s  43(3) (IHTA  1984 s  84(1), (2)). A  reversionary interest in property situated outside the UK comprised in a settlement, with a nondomiciled settlor, is only excluded property under IHTA 1984 s 48(3)(b) if held by an individual domiciled outside the UK (IHTA  1984 s  6(1)). Gilt-edged securities within IHTA 1984 s 6(2) are only excluded property if held in trust if a non-UK resident has an interest in possession or all known persons who might become beneficiaries are non-UK resident (IHTA 1984 s 48(4)). The relevant property regime applies to non-resident trusts settled by UK domiciled settlors in the same way that it applies to UK trusts. ‘Excluded property’ (IHTA 1984 s 6 and s 48(3)) held by a non-UK trust settled by a nonUK domiciled settlor is not relevant property and is thus not subject to ten-year and exit charges. However, F(No 2)A 2017 s 33 and Sch 10 provide for direct and indirect interests in UK residential property to be brought within the scope of the relevant property regime from 6 April 2017 (IHTA 1984 Sch A1). This is achieved by modifying the definition of ‘excluded property’ to remove value attributable to UK residential property, whether that is directly held, or through a non-UK company or partnership. The removal of excluded property status means that the common device of holding valuable UK property interests through an offshore trust and company structure is no longer an effective means of protecting such assets from UK IHT and the relevant property regime will apply to such assets after 6 April 2017.

Ten-year charge 7.25 A  trust commences when property first becomes comprised in it (IHTA  1984 s  60). This date is necessary in order to compute the ten-year 426

Relevant Property Trusts 7.28 anniversary, which is the tenth anniversary of the date on which the settlement commenced and subsequent anniversaries at ten-yearly intervals (IHTA 1984 s 61(1)). Where, however, the trust was initially created after 26 March 1974 and before 22 March 2006 with an interest in possession to the settlor or his spouse or civil partner, and therefore, under the pre-22  March 2006 rules, remained in the estate of the settlor or spouse under IHTA 1984 s 49(1) and subsequently became held on discretionary trusts, it was deemed to result in the commencement of a separate settlement made when the settlor beneficially entitled ceased to have that interest (IHTA 1984 s 80, before amendment by FA 2006 s 156 and Sch 20 para 23), and the settlement was deemed to commence at that time for the purpose of the ten-year charge (IHTA 1984 s 61(2)). No date falling before 1 April 1983 was a ten-year anniversary (s 61(3)). 7.26 Where property becomes or became comprised in a settlement on or after 22 March 2006, and the settlor or his spouse or civil partner (which includes a widow, widower or surviving civil partner) has a beneficial entitlement to a ‘postponing interest’ immediately after the property becomes or became comprised in the settlement, for the purposes of the ten-year charge, under previous legislation the property is treated as not having become comprised in the settlement at that time, but at the time the last person with a postponing interest, or the settlor or his spouse/civil partner, ceases to have a beneficial entitlement to an interest in possession in any part of the property comprised in the settlement, but it is treated as becoming comprised in a separate settlement created at that time and by that person. A ‘postponing interest’ is a disabled person’s interest (DPI) or an immediate post-death interest (IPDI) (IHTA 1984 s 80(4)). F(No 2) A 2015 s 13 amends the operation of IHTA 1984 s 80 from 18 November so that where an individual succeeds to a life interest in a settlement to which their spouse or civil partner was entitled during their lifetime, settled property will be treated as becoming relevant property at that time, unless the successor’s interest is a postponing interest. The change will apply from the date of Royal Assent. 7.27 Settlements are related where made by the same settlor if they commenced on the same day, unless held for charitable purposes only (IHTA 1984 s 62). For these provisions a ‘payment’ includes a transfer of assets other than money; and, for calculating how long an asset has been in a trust, a ‘quarter’ means a period of three months (IHTA 1984 s 63). Relevant property, as defined by IHTA 1984 s 58(1), comprised in a settlement immediately before a ten-year anniversary is subject to a charge to IHT under IHTA 1984 s 64 on the value of the relevant property, calculated in accordance with IHTA 1984 ss 66 and 67. Trusts settled on nearly consecutive days were held to be separate trusts and not associated operations within IHTA 1984 s 268 (Rysaffe Trustee Co (CI) Ltd v IRC [2003] EWCA Civ 356, [2003] STC 536). 7.28 The rate of the ten-yearly charge is 30% of the effective lifetime rate which would be charged on the value transferred by a chargeable transfer, as specified in IHTA 1984 s 66(1). Where property has been added to the trust in the 427

7.28  Relevant Property Trusts ten-year period, its value is reduced by a fortieth for each quarter which expired before it became relevant property comprised in the settlement (s 66(2)). The notional chargeable transfer is made immediately before the ten-year anniversary by a notional transferor deemed to have made a transfer in the preceding seven years to the trust, which is chargeable at the lifetime rate, ie half of the death rate of IHT under IHTA 1984 s 7(2). The maximum rate of IHT with a 40% death rate is therefore 30% of the lifetime rate of 20%, ie 6% (s 66(3)). Following consultation on the reform of the IHT regime for trusts, F(No  2) A  2015 introduced a number of amendments to the way in which ten-year charges are calculated, in particular in relation to ‘pilot trusts’, confirming HMRC’s commitment to ‘make the tax system fairer by removing the advantage under the current rules that enables individuals to create multiple trusts and avoid IHT through the use of multiple nil rate bands’ (HMRC policy paper: IHT: simplifying charges on trusts and new rules to target avoidance through the use of multiple trusts published 8 July 2015). For ten year charges arising on or after 18 November 2015, IHT at 6% tax is charged on the value at the ten-year anniversary of relevant property under s 66(4)(a), together with the initial value of relevant property comprised in any related settlement, the value of any ‘same day additions’ (as defined by new IHTA 1984 s 62A) to another settlement plus the initial value of property in other trusts that have increased in value on the same day. Where the addition is less than £5,000, it is ignored. Property comprised in protected settlements and related settlements is excluded. The changes made to the provisions governing same-day additions apply to tax charges arising on or after 17 November 2015 in respect of relevant property trusts created on or after the publication of the draft legislation on 10 December 2014. Under anti-forestalling provisions, the new rules apply to relevant property trusts settled before 10 December 2014 where there are additions of more than £5,000 made on or after that date to one or more relevant property trusts on the same day. Transfers on the death of the settlor before 6 April 2016 are ignored, provided that the provisions of the settlor’s will are ‘in substance’ the same as they were prior to 10 December 2014. IHTA 1984 s 62C, which provides that the calculation of trust charges would be simplified by removing the requirement to include the value of property comprised in the same settlement which has never been relevant property in calculations under IHTA 1984 ss 66, 68 and 69. This change applies to all charges arising after 17 November 2015, irrespective of when the trust was created. For chargeable events before 18 November 2015, the value upon which IHT was charged took into account the value of any excluded property in the settlement, which although not chargeable to the ten-year anniversary charge was nonetheless included in fixing the applicable rate (section 66(4)(b) prior 428

Relevant Property Trusts 7.30 to repeal by FA  2015 s  11 and Sch  1 para  1). This provision meant that it was desirable to avoid mixing excluded property and UK property in the same settlement. 7.29 In fixing the rate of the ten-year charge, there have to be included any chargeable transfers made by the settlor in the period of seven years ending with the day on which the settlement commenced (IHTA 1984, s 66(5)(a)) and the amount on which any exit charge under s 65 was calculated in the ten years prior to the anniversary s 66(5)(b)). In the case of a pre-27 March 1974 settlement, any excluded property, or property in related settlements and settlor’s transfers, is ignored in calculating the rate of the ten-year charge (s 66(6)).

Example On 1 December 2008, Mr Smithwick, who had made chargeable transfers of £180,000 in the previous seven years, created a discretionary trust. On that date, he settled £300,000. At 30 November 2018, the discretionary trust held investments with a market value of £1,000,000. 30 November 2018 Ten-yearly charge

Chargeable transfers made by settlor in 7 years prior to settlement Value of relevant property at 30 November 2018

Gross

Tax

£

£

180,000 1,000,000

– 171,000*

1,180,000 (*1,180,000 – 325,000 = 855,000@20% = 171,000) Actual rate is 30% of effective rate

171,000 × 100 × 30% = 5.213% 1,000,000 Tax payable by trustees: On relevant property £1,000,000 × 5.13%=

£51,300

Added property 7.30 Where after 8  March 1982 the settlor adds further property to the settlement as a result of which the value of the property comprised in the 429

7.31  Relevant Property Trusts settlement is increased, and this takes place before the next ten-yearly charge, the amount of the charge is abated (IHTA 1984 s 67(1)). However, where the transfer was not primarily intended to increase the value and did not result in the value immediately after the transfer increasing by more than 5%, it is ignored (s 67(2)). In the first instance it is necessary to include in the aggregate values for the computation of the rate of ten-yearly charge the greater of the aggregate value of transfers made by the settlor in the seven years ending with the day on which the settlement commenced, disregarding transfers made before 27 March 1974, and transfers made on the day of commencement of the settlement (s 66(5) (a)). If greater, the transfers made in the seven years prior to the addition to the settlement, excluding the transfers on that day, are included (s 67(3)(a)). 7.31 Where the settlement originally commenced before 27 March 1974, transfers made on or before that date are ignored, as are the values attributable to property already taken into account, eg as related property under IHTA 1984 s 66(4), and the amounts included in the settlement on the previous ten-year anniversary. Where the settlor has made more than one addition to the property, that which results in the greatest aggregate amount is to be included in fixing the rate used (IHTA 1984 s 67(4) and (5)). There is a deduction for any property taken out of the settlement in respect of which there was an exit charge under s 65 which is equal to the lesser of the amount on which the exit charge was computed and the value at which the relevant property was included prior to leaving the settlement (s 67(6)). If any part of the settlement consisted of relevant property, there is a proportionate adjustment (s 67(7)).

Example Facts are as for the example at 7.29 (the initial settled fund was £300,000): on 1 December 2016, Mr Smithwick added further funds of £100,000 to the trust which had appreciated to £150,000 at 30 November 2018. No transfers were made in the seven years immediately preceding 1 December 2016. 30 November 2018 Ten-yearly charge

Chargeable transfers made by settlor in prior 7 years* Value of relevant property at 30 November 2018

Gross

Tax

£

£

180,000

–

1,000,000

171,000

1,180,000

**

*  The original chargeable transfers are included as their value exceeds the value of the transfers made in the seven years prior to the addition to the settlement (£Nil). 430

Relevant Property Trusts 7.33 **  (1,180,000–325,000=855,000 @ 20%=171,000). Actual rate is 30% of effective rate

171,000 × 100 × 30% = 5.13% 1,000,000 Tax payable by trustees: On relevant property held for 10 years £1,000,000 – £150,000 = £850,000 × 5.13% =

£43,605

On relevant property added on 1 December 2016 £150,000 × 8/40 @ 5.13%

1,539 £45,144

7.32 Property added to a pre-22  March 2006 interest in possession settlement after that date falls within the relevant property regime, even though the original settled property continues to be outside the scope of IHTA 1984 ss 58–85.

Exit charge 7.33 Where property in a settlement ceases to be relevant property, usually on a distribution to a beneficiary or where, as a result of a disposition by the trustees, the value of the relevant property reduces, there is a potential charge to IHT (IHTA 1984 s 65(1)). IHT is charged on the reduction of value in the relevant property in the settlement as a result of the transfer (s 65(2)(a)). Where the IHT is payable out of the remaining relevant property in the settlement, the amount on which IHT is charged has to be grossed up by the tax payable (s 65(2) (b)). There is no exit charge if the disposition takes place within the first three months after the commencement of the settlement or a ten-year anniversary (s 65(4)). There is no exit charge in respect of costs or expenses attributable to relevant property or where a transfer is subject to income tax, or would be if the recipient were resident in the UK (s 65(5)). The reduction in value of the relevant property in the settlement under s 65(1)(b) does not apply to transfers at arm’s length not intended to confer gratuitous benefit, which in the case of an individual would fall within IHTA 1984 s 10, or the grant of a tenancy of agricultural property in the UK, the Channel Islands or the Isle of Man if for full consideration of money or money’s worth, under IHTA 1984 ss 16 and 65(6). There is no charge where property comprised in the settlement ceases to be situated in the UK and therefore becomes excluded property under IHTA 1984 s 48(3)(a) (s 66(7)). Where the settlor was not domiciled in the UK when the settlement was made, there is no charge on property ceasing to be relevant property because it is reinvested in exempt gilts treated as excluded property 431

7.34  Relevant Property Trusts under IHTA 1984 s 48(4)(b) (s 65(8)). The deliberate omission to exercise a right by the trustees would be treated as a disposition made at the latest time when they could have exercised that right (s 65(9)). The rate of tax on an exit charge is calculated in accordance with IHTA 1984 s 68 or s 69 (s 65(3)). 7.34 The augmentation of a beneficiary’s income by payments out of capital would be regarded as liable to an exit charge under IHTA 1984 s 65(1) (a), if it were not taxable as income in the hands of the recipient as not being made on a regular basis within Brodie’s Trustees v IRC  (1933) 17  TC  432 (IHTA 1984 s 65(5)(b)) unless paid to a life tenant out of a pre-22 March 2006 interest in possession trust and excluded under Statement of Practice SP E6. The grant of a lease to a beneficiary for a term or a periodic tenancy for less than full consideration does not create an interest in possession, but would normally give rise to a charge to tax under IHTA 1984 s 65(1)(b) (SP 10/79). Prior to 6 April 2014, undistributed and accumulated income was not subject to the ten-year charge because it was not treated as a taxable trust asset, but it became a taxable asset when formally accumulated; see 7.2 (SP 8/86) and also Gilchrist v HMRC [2014] UKUT 169. FA 2014 s 117 amends IHTA 1984 s 64 so that income arising in a relevant property trust which remains undistributed for more than five years is regarded as part of the trust capital for the purposes of calculating the ten-year charge. No adjustment is made to reflect the period for which the income did not form relevant property. The reduction in value of the relevant property in the settlement is illustrated in MacPherson v IRC [1988] STC 362, where paintings were leased on commercial terms for 14 years and then transferred to a beneficiary subject to the lease.

Rate of exit charge before first ten-year anniversary 7.35 The rate of tax charged on property ceasing to be relevant property before the first ten-year anniversary, for the purposes of IHTA  1984 s  65, is the appropriate fraction of the effective rate of IHT, at half the death rate under IHTA  1984 s  7(2) (IHTA  1984 s  68(1)). The appropriate fraction is 30% multiplied by the number of quarters between the commencement of the settlement and the day before the occasion of the charge, divided by 40, which is the number of quarters in the ten-year period (s 68(2)). If the property were not relevant property or not in the settlement for the entire period since commencement, any quarter which had expired before the property became relevant property is ignored, but the quarter in which the property became relevant property is counted. The quarter in which the charge arises is not counted, as it would not be a complete quarter (s 68(3)). 7.36 The amount of the notional transfer on which the tax is charged is the value of the property comprised in the settlement immediately after its creation, together with the value on creation of the property in any related settlement made by the same settlor on the same day (IHTA 1984 s 62), and of 432

Relevant Property Trusts 7.37 any property added to the settlement before the disposition giving rise to the exit charge (s 68(5)). This is added to the value of the settlor’s transfers made in the seven years ending on the date on which the settlement commenced, disregarding transfers made on that day (s 68(4)). Example Facts are as for the example at 7.29, except on 1 December 2010 the trustees appointed £200,000 to a beneficiary. 1 December 2010 Exit charge on distribution to beneficiary Amount chargeable = £200,000 Calculation of rate Gross

Tax

£

£

Chargeable transfers made by settlor in prior 7 years

180,000

Initial value of settlement

300,000

31,000*

480,000

*  480,000 – 325,000** = £155,000 × 20% = 31,000 **  Nil rate threshold 2010/2011. Actual rate is 30% of effective rate 31,000 × 100 × 30% = 3.1% 300,000 Number of complete quarters between 1  December 2005 and 1  December 2010 = 20 Tax payable by the beneficiary £200,000 × 3.1% × 20/40 = £3,100

Rate between ten-year anniversaries 7.37 After the first, or any subsequent ten-year anniversary, where there is a disposition of relevant property giving rise to an exit charge under IHTA 1984 s 65, the rate of tax is calculated at the appropriate fraction of the rate applicable to the immediately preceding ten-year anniversary (IHTA 1984 s 69(1)). The appropriate fraction is the number of complete successive quarters in the 433

7.38  Relevant Property Trusts period, beginning with the most recent ten-year anniversary and ending with the day before the disposition giving rise to the charge, divided by 40, being the number of quarters in the ten-year period. Where property has been added since the previous ten-year anniversary, quarters prior to the quarter in which the additional property is added are ignored (s 69(4)). This also applies to property that was previously held but was not then relevant property and has become such during the period (s 69(2)). In the case of property becoming comprised in the settlement, it is valued immediately after it became comprised in the settlement or, where appropriate, when it became relevant property (s 69(3)). 7.38 Where there is a reduction in the rate of IHT, and an exit charge under IHTA 1984 s 65 is determined by reference to the rate that was charged on the previous ten-yearly anniversary under s 64, the reduction in rate is deemed to have applied at that time in order to compute the exit charge (IHTA 1984 Sch 2 para 3). 7.39 Where an interest in possession in settled property is terminated without reverting to the settlor or his spouse, it is deemed to become a separate settlement at the date of termination (IHTA 1984 s 80). The ten-year charge, however, is calculated by reference to the date the settlement actually commenced as an interest in possession settlement (IHTA 1984 s 61(2)). Example Facts are as for the example at 7.29, except on 1  December 2016, ie  three years after the exit charge imposed on 30 November 2013, trustees appointed £200,000 to a beneficiary. 1 December 2016 Exit charge on distribution to beneficiary Rate applying on prior 10-year charge Revised to reflect 2016/17 nil rate threshold £325,000 £1,180,000 – £325,000 = £855,000 @ 20% = £171,000 171,000 × 100 × 30% = 5.13% 1,000,000 Number of complete quarters between 1  December 2013 and 1  December 2016 = 12 Rate of exit charge 5.13% × 12/40 = 1.54% Tax payable by trustees £200,000 × 1.54% = £3,080.

434

Relevant Property Trusts 7.41

Property moving between settlements 7.40 Property which moves from one settlement to another is treated as remaining in the first settlement, unless in the meantime any person has become beneficially entitled to the property, and not merely an interest in possession in the property (IHTA  1984 s  81(1)). Property ceasing to be held after 26 March 1974 and before 10 December 1981 is only regarded as remaining in the first settlement where there was a direct transfer between settlements (s 81(2)). Property is not deemed to remain in the first settlement where it was a reversionary interest settled on the second settlement before 10 December 1981 and was subject to a qualifying interest in possession subsisting under the first settlement (s 81(3)). 7.41 In the case of a settlement where there is an initial interest in possession held by the settlor or his spouse, or property is moving between settlements, the excluded property provisions of IHTA 1984 s 48(3)(a) (under which nonUK property comprised in a settlement is not regarded as excluded property for these purposes unless the settlor was not domiciled in the UK when the settlement was made) are modified to require the settlor also to be non-UK domiciled when the interest in possession terminated under IHTA 1984 s 80 or the second settlement commenced, under IHTA 1984 s 81 (s 82(3)). Similarly, for gilts to be exempt, the settlor has to be non-domiciled both at the date when the settlement was made and when the interest in possession ceased, or the transferee settlement was made, under IHTA 1984 s 80 or s 81 (s 82(2)). From 6 April 2017, the settlor must also not be a formerly domiciled UK resident at the time in question. The operation of IHTA 1984 s 81 was examined in the case of Barclays Wealth Trustees (Jersey) Limited and Dreelan v HMRC [2017] EWCA Civ 1512, where a non-UK domiciled taxpayer settled funds on a Jersey resident discretionary trust (the 2001 Trust) through a series of transfers. The taxpayer was included within the class of discretionary beneficiaries. The assets comprised within the 2001 Trust consisted wholly of non-UK situs property and the settlor was domiciled outside the UK at the time various assets were transferred to the trustees, so that the property comprised within the 2001 Trust was excluded property for inheritance tax purposes. In the tax year before he became deemed to be UK domiciled under IHTA  1984 s  267, the settlor transferred shares in a UK company to the trustees. The trustees of the 2001 Trust transferred the UK shares to a wholly-owned Jersey subsidiary, such that they became excluded property. Several years later, at a time when the settlor was deemed to be domiciled in the UK for IHT, the wholly-owned Jersey subsidiary was dissolved and the shares in the UK company transferred to the trustees of the 2001 Trust. In 2008, the settlor, along with his three brothers, settled a new trust in Jersey (the 2008 Trust) with each having an equal life interest in the trust’s income. The trustees of the 2001 Trust exercised their power of appointment to transfer the UK company shares to the trustees of the 2008 Trust. A  few 435

7.41  Relevant Property Trusts months later, the UK company shares were sold and subsequently the trustees of the 2008 trust appointed the settlor’s share of cash proceeds from the sale back to the 2001 Trust. The settlor was deemed to be UK domiciled both at the time the 2008 Trust was settled and at the time funds were appointed back to the 2001 Trust. HMRC argued that the cash proceeds were relevant property within IHTA 1984 ss 64 and 66, however, the Court of Appeal ruled that funds were excluded property as the 2001 Trust was a single settlement constituted by a number of separate dispositions. The time the settlement was made in accordance with general trust law principles was when the deed of trust was executed in 2001, and at that time the settlor was non-UK domiciled. The judge considered that it was irrelevant that the UK company shares had been appointed from one settlement to another and the cash proceeds realised on their sale appointed back. The provisions of IHTA  1981 s  81 applied to treat the UK shares as remaining comprised within the 2001 Trusts until the proceeds representing the shares were actually appointed back to the 2001 Trust, and as the property was treated as never having left that settlement, it would be inconsistent to regard the appointment from the 2008 Trust as effecting a separate settlement. Finance Bill 2020 amends the provisions of IHTA 1984 s 48(3) from 6 April 2020 so that the domicile of the settlor is tested at the time property is added to a settlement rather than the time at which the settlement was first created (draft s 48A). Consequently, additions of assets by UK domiciled or deemed domiciled individuals to trusts settled at a time when they were non-UK domiciled will not be regarded as excluded property. The change is retrospective, therefore property added to a settlement while the settlor was deemed domiciled will be relevant property after 6 April 2020, regardless of when the property was added. The operation of IHTA 1984 s 81 will also be modified (draft s 82B) for inter-trust transfers taking place on or after 6  April 2020, and property transferred between settlements will only be excluded property if the settlor of the transferee settlement is not domiciled or deemed domiciled in the UK at the time of the transfer.

436

Chapter 8

Bare Trusts and Interest in Possession Trusts

BARE TRUSTS (OR SIMPLE TRUSTS) 8.1 Where a person acts as nominee for another person or as trustee for a person who is absolutely entitled as against the trustee to the property held, or would be were he not an infant or under some disability which prevented him holding the legal title to the assets, the acts of the nominee or trustee are treated as the acts of the beneficiary. This also applies where the nominee or trustee is holding assets for two or more persons who would be jointly entitled as against the trustee. Because the beneficiary is deemed to own the assets, there is no capital gains charge on a disposal by him of the legal title to the nominee or trustee, or vice versa (TCGA 1992 s 60(1)). The person absolutely entitled as against the trustee is someone who has the exclusive right (subject only to satisfying any outstanding charge, lien or other right of the trustees to resort to the asset for payment of duty, taxes, costs or other outgoings) to direct how that asset should be dealt with. 8.2 Funds held in court by the Accountant-General are regarded as held by him as nominee for the persons entitled to, or interested in, the funds or their trustees (TCGA 1992 s 61). In Saunders v Vautier (1841) 4 Beav 115 it was held that, where a beneficiary of an accumulation and maintenance trust was the sole beneficiary, and had reached the age of majority so that he had an absolute indefeasible interest in the property held in trust, he could require payment of the trust assets to him as he was capable of giving a valid discharge, ie he was absolutely entitled as against the trustees. 8.3 A  number of cases have considered whether beneficiaries are absolutely entitled as against the trustee, including Tomlinson v Glyn’s Executor and Trustee Co Ltd (1969) 45  TC  600; Cochrane v IRC  [1974]  STC  335; Crowe v Appleby [1975]  STC  502; Scott v Scott (1930)  SC  903; Kidson v Macdonald [1974]  STC  54; Harthan v Mason [1980]  STC  94; Jenkins v Brown, Warrington v Sterland [1989]  STC  577; Frampton (Trustees of the Worthing Rugby Football Club) v IRC  [1985]  STC  186; Figg v Clarke [1997]  STC  247; IRC  v Matthews Executors [1984]  STC  386; Prest v 437

8.4  Bare Trusts and Interest in Possession Trusts Bettinson [1980] STC 607; Anders Utklens, Rederi v O/Y Lovisa Stevedoring Co A/B  [1985]  STC  301; Stephenson v Barclays Bank Trust Co Ltd [1975]  STC  151; Hoare Trustees v Gardner [1978]  STC  89; and Booth v Ellard [1980] STC 555. 8.4 The base value for a CGT bare trust is the value on the death of the previous owner of the property, if it was inherited. In the case of trust assets, the base value is the value on the date when the beneficiary became absolutely entitled to the asset under TCGA 1992 s 71(3), or the actual cost to the trustees if acquired on behalf of the beneficiary. The base value is the actual cost to the beneficiary where the asset was subsequently transferred to bare trustees (CG34363). CGT assessments must be made on the beneficiaries not on the trustees, and elections must be made by the beneficiaries (CG34366). Partnership property is often held on bare trusts because the maximum number of owners of the legal estate in land is four. 8.5 Where land is held jointly on bare trusts by tenants in common, they may exchange their joint interest in the whole property for an absolute interest in part of the property under TCGA 1992 s 248A, enacting former ESC D26 from 6 April 2010, without crystallising a CGT charge (CG34411, CG73002). 8.6 Where a person has a general power of appointment as a beneficiary of a trust enabling him to appoint assets comprised within the trust to himself, this does not mean that it is a bare trust until the property has actually been appointed under the general power of appointment to that beneficiary. Once a beneficiary has all the interests under the settlement, it is a bare trust, for example where he has a life interest and a general power of appointment and also the interest in remainder (CG34450–34454). A  transfer by way of security is not a disposal for CGT purposes (TCGA  1992 s  26; CG34460; Aspden v Hildesley [1982]  STC  206; Passant v Jackson [1985]  STC  133). A  gift in a will to someone on attaining a particular age is contingent and therefore not held on bare trusts, unless there is a direction to pay the income or such part of it as the trustees think fit to the beneficiary, in which case he would be absolutely entitled, unless he is an infant, and it would be a bare trust (CG34471). 8.7 The administrative arrangements for bare trusts are explained in the (then) Inland Revenue Press Release of 20 January 1997, which provides as follows: ‘1.

Prior to 6 April 1996, the trustees of some bare trusts accounted for income tax at the appropriate rate on the income which they paid over to the beneficiaries. These amounts became taxed income in the hands of the beneficiaries, who were required to give full details of that income in their tax returns, but were liable to pay further tax only if they were higher rate taxpayers. Conversely, they were entitled to 438

Bare Trusts and Interest in Possession Trusts 8.7 a repayment of the tax paid by the trustees if they had no personal liability. 2.

Under self-assessment, the Revenue will no longer expect trustees to account for tax in such circumstances because there is no entitlement in law for trustees to deduct tax from income arising to bare trusts. Any income which is received gross by the trustees must be paid gross to the beneficiaries. The only exception to this rule is that UK resident trustees may be required under the non-resident landlords scheme, to deduct and account for tax on the rental income of beneficiaries whose usual place of abode is outside the UK.

3.

Trustees of bare trusts will not be required to complete self-assessment tax returns, or to make any payments on account. Beneficiaries will still be required to give details of all their income and gains from bare trusts in their own tax returns, and in addition will be required to account to the Revenue for the full amount of any tax due.

4.

Although the Revenue are endeavouring to identify those bare trusts where trustees have previously made annual returns and accounted for the tax, in order to notify them of this change, there will be some cases which will not be recognised in time to prevent the 1996–97 payment on account notices and self-assessment tax returns from being issued to the trustees.

5.

Any trustees receiving a payment on account notice should return it to the issuing trust office with a brief explanation so that the records can be amended. Any trustees receiving a self-assessment tax return after 6  April 1997 should complete the final three questions on the return form in accordance with the notes given in step 1 on this form.

6.

There are a number of collective investment schemes which are constituted as bare trusts, but only two kinds are treated as such for tax purposes. These are enterprise zone property unit trusts (EZPUTs), and pension fund pooling vehicles (PFPVs). The trustees of such schemes will not receive self-assessment tax returns. That is because the income and gains which arise under EZPUTs and PFPVs belong to the unit holders of the schemes, and if any expenditure is incurred by the trustees which gives rise to capital allowances, those allowances are made to the unit holders and not the trustees.

7.

The trustees of EZPUTs and PFPVs will, however, remain responsible for agreeing the amounts of the schemes’ income, profits, gains, capital expenditure, capital allowances, and balancing adjustments with their own tax inspectors in accordance with the rules laid down in the relevant income tax regulations, and for providing the unit holders of the schemes with certificates giving details of the parts of those amounts that are, in each case, attributable to them. 439

8.7  Bare Trusts and Interest in Possession Trusts Notes 1.

A  “bare trust” also known as a “simple trust” exists where the beneficial owner of the property held in trust is fully entitled to both the capital and income from that property. The property will be held in the name of the trustee, but the trustee will have no discretion over what income to pay the beneficiary. The trustee is in effect a nominee in whose name the property is held. The beneficial owner is the person who benefits from, and is entitled to, the property and any income it produces.

2.

EZPUTs, which first became available in 1984, are unauthorised unit trust schemes which provide tax incentives for individuals to invest collectively in properties in enterprise zones.

3.

Regulations providing tax rules for PFPVs were announced in an Inland Revenue Press Release on 19 June 1996 and came into force on 11 July (see Simon’s Weekly Tax Intelligence 1996 p 1029). These vehicles are pooled investment funds specialising in managing the assets of UK exempt approved pension schemes and their overseas equivalents.

4.

Further information about the non-resident landlords scheme can be found in leaflet IR 140 “Non-resident landlords, their agents and tenants”.’

The text is the same as that in Tax Bulletin, Issue 27, February 1997, p 395. This was modified by Tax Bulletin, Issue 32, December 1997, p 487: ‘In the Tax Bulletin, Issue 27, (February 1997, page 395) we explained the Revenue’s approach to the taxation of bare trusts, ie  trusts where the beneficial owner of the trust property is absolutely entitled to both the capital and income from that property. We said that the trustees of bare trusts would not be required to complete self assessment tax returns, or to make payments on account. That remains the Department’s position, and we think that the approach set out in the article will simplify the tax affairs of most bare trustees and beneficiaries under self assessment. Following discussions with representative bodies, we now accept that the trustees of bare trusts are entitled to make a self assessment return of income, but not of capital gains, and to account for tax on it at the appropriate rate. In those cases where the trustees of bare trusts wish to make a return, the appropriate rate of tax will be at basic rate (or lower rate, if the income is savings income). It is emphasised that capital gains and capital losses must not be included on any self assessment return made by a bare trustee. These remain the sole responsibility of the beneficiaries. If the trustees and all the beneficiaries of a bare trust wish to follow this course of action they should notify the trust district dealing with the trust’s 440

Bare Trusts and Interest in Possession Trusts 8.10 tax affairs as soon as possible. We will expect them to follow this course consistently year on year. Where the trustees of bare trusts do not notify the trust district that they wish to make a return of income and to pay tax, those trustees and their beneficiaries will be dealt with in accordance with the article in Issue 27 of Tax Bulletin. We expect the great majority of bare trustees to fall into this category, as it is only in relatively unusual circumstances that it will be more convenient for the trustees to self assess. Whether or not the trustees decide to self assess and account for tax, the beneficiaries of these trusts remain within self assessment and are obliged to notify the Inland Revenue of their income and gains.’ 8.8 The parent, guardian or tutor of an infant may be charged to tax in default of payment by the infant under TMA 1970 s 73. Similarly the trustee, guardian etc of an incapacitated person having the direction, control or management of property of such a person is liable to tax on that income under TMA 1970 s 72 and may recover the tax paid from the money coming into his hands on behalf of that person under s 72(3).

INTEREST IN POSSESSION 8.9 A beneficiary has an interest in possession in a settlement if he has a present right to the present enjoyment of the whole or part of the trust property (Pearson v IRC [1980] STC 318). Such a beneficiary is the person receiving or entitled to the income within ICTA  1988 s  59 and subject to tax thereon (Williams v Singer and Others (1921) 7 TC 387; Archer-Shee v Baker (1927) 11 TC 749), often referred to as a Baker trust. Although the income is that of the beneficiary with the interest in possession and he is entitled to it as it arises so that, for example, a dividend from ICI remains in the hands of the beneficiary a dividend from ICI, nonetheless if it passes through the trustees they are liable to tax on the income in the first instance (ITTOIA 2005 s 646(8)). Where the income is actually mandated direct to the beneficiaries so that it does not pass through the trustees’ hands, it is not necessary for the trustees to include that income on their trust return (TSEM3040). 8.10 This general rule, which arises in case law in England and Wales, is extended by statute to Scottish trusts under ITA 2007 s 464(1). In the case of foreign trusts, however, the beneficiary’s interest might be in the foreign trust as the source of the income and not in the underlying investment, even though he has an interest in possession in the sense of being absolutely entitled to the income arising from the trust or some part of it (Garland v Archer-Shee (1930) 15 TC 693), often referred to as a Garland Trust. Where the investments are outside the UK and the UK resident beneficiary is domiciled outside the UK, no deduction for the trust expenses is allowable from income taxable on a 441

8.11  Bare Trusts and Interest in Possession Trusts remittance basis (Aiken v Macdonald Trustees (1894) 3 TC 306). In spite of the fact that the beneficiary with an interest in possession has an entitlement to the income as it arises, this is subject to the trustees’ right to withhold part of that income for the payment of trust expenses which are therefore paid out of net income (Murray v IRC (1926) 11 TC 133; MacFarlane v IRC (1929) 14 TC 532). 8.11 Where, however, the beneficiary with the interest in possession is a minor or child of the settlor, the income is taxed on the settlor under ITTOIA  2005 s  629(1)(c)) and not on the beneficiary. Similarly, where the spouse of the settlor is entitled to an interest in possession, the income is nonetheless taxable on the settlor under ITTOIA 2005 ss 622–625. 8.12 An annuity is an annual payment within ITTOIA 2005 ss 426, 450, 602, 618, 686) and therefore the person paying the annuity should deduct tax at the basic rate and hold it in charge under these sections or pay it over to HMRC if it is not a business expense under ITTOIA 2005 ss 426, 602, 618 or 686. The use of trust assets by a beneficiary of a UK resident trust does not give rise to a tax charge on the benefit in kind as there is no mechanism for assessing any notional income in these circumstances. This contrasts with the position in relation to overseas trusts dealt with at 10.40 et seq.

CAPITAL GAINS TAX Termination of life interest 8.13 On the termination of the life interest on the death of a person entitled to an interest in possession in settled property, the value of the property is rebased for CGT purposes by being deemed to be disposed of and immediately reacquired by the trustee for a consideration equal to the market value of the asset but with no chargeable gain accruing on the disposal (TCGA 1992 s 72(1)). This corresponds with the general rebasing to market value on death for assets held by the deceased directly, under TCGA 1992 s 62. 8.14 The rebasing applies on the death of a life tenant even where the interest does not terminate (TCGA  1992 s  72(2)). An annuitant is deemed to be a life tenant for these purposes where the annuity is payable out of, or charged on, settled property s 72(3)). Where property has been appropriated by the trustees to create a fund out of which the annuity is payable, without any right of recourse to the remainder of the settled property or the income therefrom, the rebasing applies to the property so appropriated as if the fund were a separate settlement (s 72(4) and (5)). SP D10 provides as follows: ‘1.

Where an interest in part of settled property terminates and the part can properly be identified with one or more specific assets, or where, 442

Bare Trusts and Interest in Possession Trusts 8.17 within a reasonable time, normally three months, of the termination the trustees appropriate specific assets to give effect to the termination, the Board will accept that the deemed disposals and reacquisitions under TCGA 1992 ss 71, 72 apply to those specific assets, and not to any part of the other assets comprised in the settled property. The treatment must be consistent with that adopted for inheritance tax. 2.

In particular, inspectors will be prepared to agree with the trustees, lists of assets properly identifiable with the termination of an interest in possession, and any such agreement will be regarded as binding on the Revenue and the trustees.

3.

This practice applies on any act or event which terminates an interest in possession whether voluntarily or involuntarily.’

8.15 Where a person becomes absolutely entitled to settled property on the death of the life tenant, there is no chargeable gain on the disposal under TCGA 1992 s 71 (TCGA 1992 s 73(1)(a)). If the property reverts to the settlor, the consideration is deemed to be such as to give rise to a no-gain, no-loss disposal, ie normally the settlor’s base cost, with no readjustment to market value s 73(1)(b)). Where the life tenant’s interest extended only to part of the settled fund, only that proportion is exempt from CGT under these provisions s 73(2)). Cases on the apportionment of trust funds on the death of a life tenant include Pexton v Bell [1976] STC 301 and Crowe v Appleby [1976] STC 301. Similar rules apply on the death of an annuitant (s 73(3)). 8.16 Where a chargeable gain has been held over on the transfer of an asset into settlement as a business asset under TCGA 1992 s 165, or one chargeable to IHT under TCGA 1992 s 260, the CGT exemption on the death of the life tenant or annuitant does not apply, but the chargeable gain on the trustees is restricted to the held-over gain, or a corresponding part of it, which arose on the transfer of the asset into trust (TCGA 1992 s 74(1) and (2)). Proportionate adjustment is made if the life tenant or annuitant had an interest in any part of the trust (s 74(3)).

INHERITANCE TAX 8.17 A  qualifying interest in possession for IHT purposes is defined in IHTA  1984 s  49(1) as an interest in possession to which an individual is beneficially entitled, which comes back to the present right to the present enjoyment of the trust property under Pearson v IRC  [1980]  STC  318. The inheritance tax position of interest in possession trusts was fundamentally altered by FA 2006 with effect for trusts created on or after 22 March 2006. Under the rules applying to pre-22  March 2006 interest in possession trusts (IHTA 1984 s 49(1)), a person beneficially entitled to an interest in possession in settled property, including the Scottish equivalent, was deemed to own that 443

8.18  Bare Trusts and Interest in Possession Trusts property unless it was acquired for money or money’s worth (IHTA  1984 s  46). A  deficiency in the life tenant’s free estate, however, could not be set against the settled fund for inheritance tax purposes (St Barbe Green v IRC [2005] STC 288). 8.18 A person beneficially entitled to an interest in possession in settled property arising on or after 22  March 2006, other than a disabled person’s interest, an immediate post-death interest or a transitional serial interest, under IHTA  1984 ss  89B, 49A–49E, is not deemed to own the settled property in which the interest in possession subsists, and the value of that property is not included in the life tenant’s estate on death, mirroring the position of discretionary beneficiaries. The number of interests in possession to which IHTA 1984 s 49(1) applies is therefore much restricted from 22 March 2006. References to pre-22 March 2006 interests in possession and post-22 March 2006 immediate post-death interests, transitional serial interests and disabled person’s interests are referred to in the following paragraphs as ‘beneficiarytaxed’ interests in possession. The following commentary, therefore, has no application to post-22  March 2006 non-beneficiary-taxed interests in possession. 8.19 For beneficiary-taxed interests in possession, ie those in existence at 22 March 2006 or a disabled person’s interest (DPI), an immediate post-death interest (IPDI) or a transitional serial interest (TSI), an interest in possession in part only of the settled property gives rise to an appropriate apportionment under IHTA 1984 s 50(1). The apportionment is made on the basis of the share of the capital being assumed to be equal to the share of the income paid to the beneficiary with the interest in possession (IHTA 1984 s 50(2)). However, the Treasury has been given power to prescribe a higher and a lower rate which the property is assumed to yield, in order to arrive at the proportion of the capital deemed to belong to the life tenant, although this cannot exceed the whole of the trust property (s 50(3)). In respect of transfers of value after 17 February 2000, these yields are given by the Inheritance Tax (Settled Property Income Yield) Order 2000, SI 2000/174, on the authority of IHTA 1984 s 50(4). The higher rate is the rate of the irredeemable yield shown in the FT  Actuaries Government Securities UK Indices for the date on which the value in question is to be determined, or the latest date preceding that date for which those indices were produced (SI  2000/174 reg  3). The lower rate is the rate that is equal to the rate of the All Share Index actual dividend yield shown in the indices, which are known as the FT Actuaries Share Indices and are produced either for the date on which the value in question is to be determined or for the latest date preceding that date on which those indices are produced (SI 2000/174 reg 4). So long as the actual yield of the trust falls within these parameters, the apportionment is on the basis of the actual income to which the life tenant is entitled as a proportion of the total income. If the actual yield is below the minimum yield, the notional yield is substituted and, if it is above the maximum yield, the maximum yield is substituted. 444

Bare Trusts and Interest in Possession Trusts 8.22 8.20 Where a life tenant is not entitled to income from the trust but is entitled to the use and enjoyment of trust property, his interest is proportionate to the annual value of his interest in the aggregate values of the trust property and those of the other beneficiaries (IHTA 1984 s 50(5)). Where a lease for life is treated as a settlement, the lessee’s interest in the property is in the whole of the property less the value of the lessor’s interest as determined under IHTA 1984 s 170, as if the lease had been granted for full consideration in money or money’s worth (IHTA  1984 ss  43(3) and 50(6); SP  10/79). The converse of treating a person entitled to a beneficiary taxed interest in possession in the property under IHTA 1984 s 49(1), is that the reversionary interest, as defined by IHTA 1984 s 47, is excluded property under IHTA 1984 s 48(1) and (2).

Disposal of interest in possession 8.21 The disposal by a beneficiary of a beneficiary-taxed interest in possession is not a transfer of value but is treated as a termination of his interest and charged accordingly, under IHTA  1984 s  51. This does not apply to a disposition for the maintenance of family in favour of his spouse or child or, in the case of a child under the age of 18 or undergoing full-time education or training, for the maintenance, education or training of that child. The relief is also extended to reasonable provision for the care or maintenance of a dependent relative (IHTA 1984 ss 11 and 51(2)). Apportionment is provided for in IHTA 1984 s 51(3). Where the interest in possession is one arising before 22  March 2006, its disposal is not charged to inheritance tax under IHTA 1984 s 51 if s 71A or 71D applied to the property in which the interest in possession subsists immediately before the disposal.

A charge on termination of interest in possession 8.22 Where a beneficiary-taxed interest in possession comes to an end or is deemed to come to an end under IHTA 1984 s 52, then subject to s 53 of the Act, there will be a transfer of value and the value transferred is equal to the value of the property in which the interest in possession subsisted (IRC v Brandenburg [1982] STC 555; IHTA 1984 s 52(1)). Where it has been sold, the interest in possession is valued ignoring the value of the reversionary interest but reduced by a consideration in money or money’s worth received on sale (s 52(2)). Where the trustees enter into a transaction with the person beneficially entitled to an interest in possession, or a person connected with him, or another beneficiary, which results in the termination charge being reduced, the amount accruing to the benefit of the other beneficiaries will also be deemed to be part of the interest terminated unless the transaction would not 445

8.23  Bare Trusts and Interest in Possession Trusts be a transfer of value if the property were beneficially owned by the trustees (s 52(3)). Apportionment is provided for under s 52(4). 8.23 Exceptions from the IHT charge on termination of a beneficiary-taxed interest in possession apply where the settled property is excluded property as defined by IHTA  1984 ss  272 and 48(3), ie  property situated outside the UK where the settlor was domiciled outside the UK at the time the settlement was made. Under s  48(3)(a), this does not apply to a reversionary interest in such property unless it is held by an individual domiciled outside the UK (IHTA 1984 s 48(3)(b) and (6)(a)). 8.24 Where a person’s beneficiary-taxed interest in possession comes to an end on the same occasion on which he becomes beneficially entitled to the entire property, or to another interest in possession in the property, there is no IHT charge (IHTA 1984 s 53(2)), except where the new interest in possession is less valuable than the old, in which case there is a charge on the difference under IHTA 1984 s 52(4)(b). There is no charge on a termination of an interest in possession where the settlor is still alive and the property then reverts to him (Hatton v IRC [1992] STC 140; Countess Fitzwilliam v IRC [1993] STC 502; IHTA 1984 s 53(3)).

Transfers to a spouse 8.25 The exemption for transfers to the transferor’s spouse or civil partner (after 5  December 2005) in IHTA  1984 s  18(1) is extended to cases where the property is held in trust for the spouse by IHTA  1984 s  18(4). Where the transferor spouse is UK domiciled and the transferee spouse is non-UK domiciled, the spouse exemption is subject to a limit equal to the nil rate band (currently £325,000) (IHTA  1984 s  18(2)). Prior to 6  April 2013, this limit was £55,000. Before 22 March 2006, settled property subject to an interest in possession could be transferred by the life tenant to a UK-domiciled spouse with the benefit of the spouse exemption (IHTA 1984 s 53(4)(a)). Spouse does not extend to unmarried partners living together (Holland v IRC [2003] STC (SCD) 43). This also applied to the settlor’s widow or widower where the settlor had died within the previous two years (IHTA 1984 s 53(4)(b)). After 22 March 2006, only a limited category of interests in possession are treated as if the settled property were comprised in the individual’s estate. In the context of beneficiary-taxed interests in possession, the spouse exemption will apply only where there is a lifetime or death transfer by the person beneficially entitled to the settled property followed by an immediate absolute interest of the transferor’s spouse or civil partner, or in the case of an interest in possession to which a surviving spouse or civil partner becomes entitled on the death of a spouse, where the late spouse’s interest in possession was in place at 22 March 2006 under a settlement created before that date. The reverter to settlor or spouse exemption does not apply where the settlor acquired a reversionary 446

Bare Trusts and Interest in Possession Trusts 8.27 interest in the property for consideration in money or money’s worth, or it was transferred into a settlement on or after 10 March 1981 (IHTA 1984 s 53(5)). Indirect consideration is included by s 53(6), although these restrictions may not apply where the interest was acquired prior to 12 April 1978 (IHTA 1984 s 53(7) and (8)). 8.26 One of the main changes introduced by IHT, compared with estate duty, was to charge IHT on the second death where a couple are married, whereas estate duty charged tax on the first death. There was, however, an exemption where assets were left in trust for the surviving spouse for life, so that estate duty was not chargeable on the second death on those assets. There are still a number of surviving spouses alive whose spouse died before 13 November 1974 when what is now IHT was introduced. IHTA 1984 Sch 6 para  2 preserves the surviving spouse exemption which applied for estate duty under FA 1894 s 5(2) to exempt the property in such a settlement from giving rise to a termination charge under IHTA  1984 s  52 on the death of the surviving spouse. Although not chargeable to IHT, the property in the surviving spouse’s trust is still deemed to be that of the surviving spouse with an interest in possession under IHTA 1984 s 49(1) and could therefore affect the value of other assets held by the surviving spouse personally, eg  where 30% of the shares in a family company were owned by the surviving spouse personally and 30% through a surviving spouse trust exempt under IHTA 1984 Sch 6 para 2, the shares in the free estate would still be valued on the basis of half of a 60% shareholding, ie on the basis of a proportion of a controlling interest valuation.

Exemptions from charge on death 8.27 Where the holder of a beneficiary-taxed interest in possession dies and the property reverts to the settlor, who is still alive, the value of the property which would otherwise be deemed to be part of the life tenant’s estate is left out of account (IHTA 1984 s 54(1)). This also applies where on the life tenant’s death the settled property passes to the settlor’s spouse or widow or widower, if the settlor has died within the previous two years, so long as the spouse is domiciled in the UK, except where the settlor or spouse acquired a reversionary interest in the property for consideration in money or money’s worth, or a reversionary interest was transferred into settlement on or after 10 March 1981 (IHTA 1984 s 54(3)). Where two or more persons have died in circumstances where it is not known which died first, they should be assumed to have died at the same instant (IHTA 1984 s 54(4)). The potentially exempt transfer provisions in IHTA 1984 s 3A were extended by F(No 2)A 1987 s 96 to include transfers into a settlement where there is an interest in possession or on the termination of an interest in possession. As a transfer directly into a discretionary trust is not a potentially exempt transfer, anti-avoidance provisions are needed to prevent an indirect transfer by means of a transfer 447

8.28  Bare Trusts and Interest in Possession Trusts into a trust with a beneficiary-taxed interest in possession where that interest has shortly afterwards terminated, and the settled property becomes subject to discretionary trusts. These provisions are contained in IHTA 1984 ss 54A and 54B. Before 22 March 2006, the provisions applied unless the discretionary trusts involved were accumulation and maintenance trusts within IHTA 1984 s  71 (see Chapter 9) which would have been potentially exempt transfers under IHTA 1984 s 3A(1)(c) if made direct. 8.28 In appropriate circumstances, a charge to IHT arises on the termination of a beneficiary-taxed interest in possession during the life of or on the death of the person beneficially entitled to it, the interest in possession being referred to as the relevant interest (IHTA 1984 s 54A(1)). For interests in possession created on or after 22 March 2006, the provisions of IHTA 1984 s 54A will apply only to disabled person’s interests or transitional serial interests (IHTA 1984 s 54A(2A)). The circumstances arise where the whole or part of the relevant interest arises as a part of a potentially exempt transfer by the settlor on or after 17 March 1987, and within the previous seven years, and the settlor is alive when the interest in possession terminates, and on the termination the settled property is sold or transferred other than to interest in possession or accumulation and maintenance trusts, and does not become subject to interest in possession, or accumulation and maintenance trusts within six months of the termination of the interest in possession (IHTA 1984 s 54A(2)). Where part only of the property qualifies, apportionment is provided for under s 54A(3). The property remaining on discretionary trusts is known as the special rate property. The IHT on the value transferred is the greater of the charge that would arise on the termination of the interest in possession, ie by reference to the life tenant’s cumulative transfers (s 54A(4)) or by reference to the tax that would have been charged on a chargeable transfer of the relevant property plus the cumulative transfers by the settlor made within seven years prior to the date of the potentially exempt transfer to the interest in possession trust, ie the tax that would have been payable had there been a direct transfer by the settlor into discretionary trusts (s 54A(5) and (6)). 8.29 It seems that a pre-22 March 2006 initial potentially exempt transfer into an accumulation and maintenance trust followed by a beneficiary obtaining an interest in possession, which is then terminated in favour of discretionary trusts, was not caught under these provisions, nor was a transfer to a trust in which the settlor’s spouse had an interest in possession terminated in favour of discretionary trusts, subject to the associated operation provisions in IHTA 1984 s 268. The deemed transfer by the settlor where these provisions apply is charged at the lifetime rate of half of the death rate in IHTA 1984 ss 7(1) and 54A(6)(c). Where tax is payable under IHTA 1984 s 54A by reference to cumulative transfers of the settlor or life tenant, the only adjustment required on death is where this would result in a higher charge in relation to the settlor where s 54A(5) and (6) applies or by reference to the life tenant where s 54A(4) applies (IHTA 1984 s 54B(1) and (2)). Where the charge is made by reference 448

Bare Trusts and Interest in Possession Trusts 8.32 to the settlor’s previous transfers, this includes transfers during the previous seven years within s 54A (IHTA 1984 s 54B(3)–(7)).

Acquisition of reversionary interest 8.30 Where a person already entitled as a beneficiary, whether to an interest in possession or not, in any settled property, acquires a reversionary interest in the same settlement he is treated as making a transfer of value, which may be a potentially exempt transfer, equal to the amount of the consideration given for that reversionary interest. This is an anti-avoidance provision to prevent a person reducing the value of his estate when he already holds an interest in the settlement, eg a life tenant, deemed to own the assets of the settlement, could reduce his estate by buying the reversionary interest, cash passing out of the estate and his interest in the settled property would not increase because as a life tenant he is already entitled to the entire interest in the property. The normal exemption for a reversionary interest as excluded property, under IHTA 1984 s 48(1), incorporated in the definition of his estate within IHTA 1984 s 5(1), is disapplied, as is the exemption for arm’s-length transactions in IHTA 1984 s 10(1) (IHTA 1984 s 55).

Exclusion of exemptions 8.31 Exemptions normally available to an individual in respect of transfers between spouses or civil partners under IHTA  1984 s  18 (IHTA  1984 ss  23 (gifts to charities and registered clubs), 24 (gifts to political parties), 24A (gifts to housing associations), 25 (gifts for national purposes such as museums), 26A (potentially exempt transfers of property subsequently held for national purposes), and 27 (maintenance funds for historical buildings)) do not apply where they are given in exchange for a reversionary interest in a settlement, where the reversionary interest would not form part of the estate of the donor under IHTA 1984 s 55. This is an anti-avoidance provision to prevent these exemptions being used for the artificial reduction in the transferor’s estate for IHT purposes (IHTA 1984 s 56(1)). A disposition by which a person acquires a settlement power for consideration in money or money’s worth is subject to anti-avoidance provisions which disapply the exemptions in IHTA 1984 s 18 and ss 23–27 and that for arm’s length transactions in IHTA 1984. The acquirer is treated as making a transfer of value calculated without bringing into account the value of the power and everything else acquired by the disposition (IHTA 1984 s 55A). 8.32 The inter-spouse or civil partner exemption under IHTA  1984 s  18 does not apply where the reversionary interest is acquired for money or money’s worth (IHTA 1984 s 56(2)). Exemptions in IHTA 1984 ss 23–27 do 449

8.33  Bare Trusts and Interest in Possession Trusts not apply. The interest in possession does not cease on making the transfer of value where the interest under the settlement has been acquired for money or money’s worth before being transferred to an exempt body (IHTA 1984 s 56(3) and (4)). Partial termination of previously purchased interests in possession do not qualify for a charitable deduction under IHTA 1984 s 23, in view of IHTA 1984 s 56(3) (Powell-Cotton v IRC [1992] STC 625). 8.33 A number of exemptions are specifically applied on the termination of an interest in possession in settled property, if this is within the annual exemption under IHTA 1984 s 19 or as a gift in consideration of marriage or civil partnership under IHTA 1984 s 22 (IHTA 1984 s 57). Where the transfer is a termination of an interest in possession which results in the property ceasing to be settled property, it is treated as an outright gift for the purposes of IHTA 1984 s 22 and is regarded as settled by gift if it remains within the trust (s 57(2)). In order for the exemptions to apply, the transferor must inform the trustees of the availability of the exemption (s 57(3) and (4)). The notice to the trustees must be given to the trustees within six months following the date of the transfer of value. The transfer to a maintenance fund for historic buildings within IHTA  1984 s  27 and Sch  4 is treated as if it had become comprised in the settlement by virtue of the transfer where it remained settled property (s 57(5)). 8.34 The fiction under IHTA 1984 s 49(1), whereby the person beneficially entitled to an interest in possession in settled property is treated as if he were the absolute owner of that property rather than the mere beneficiary, has a number of knock-on effects, although as noted above, the number of cases where a person with an interest in possession in settled property will be treated as if he were the absolute owner of that property is much reduced following the changes introduced from 22 March 2006. 8.35 The trust property in a beneficiary taxed interest in possession trust becomes part of the beneficiary’s estate for IHT purposes within IHTA 1984 s 5(1), which means that a gift into settlement where a person has an interest in possession is treated as a gift to that individual, and is a potentially exempt transfer under IHTA 1984 s 3A(1). Similarly, a transfer out of such an interest in possession settlement can be a potentially exempt transfer under IHTA 1984 s 3A(6). The whole of the beneficiary’s share of the trust in which he has an interest in possession is part of his estate if he dies (within IHTA 1984 s 4) and, as such, any chargeable transfer in relation to the settled property is chargeable either at the death or lifetime rates under IHTA 1984 s 7, including the taper relief on an inter vivos transfer within seven years of death under s 7(4) and the indexation of rate bands and transitional provisions on reduction of tax in ss 8 and 9. 8.36 A disposition for the maintenance of a transferor’s relatives (or those of his spouse or civil partner) or his mother or father (or mother or father in 450

Bare Trusts and Interest in Possession Trusts 8.37 law), for the maintenance of his spouse child, or for the maintenance, education or training of the child under the age of 18 or undergoing full-time education or training, is not a transfer of value for IHT purposes, nor is one in favour of a dependent relative (IHTA  1984 s  11). Such dispositions include transfers to trusts in respect of which the spouse, children or dependent relative are beneficiaries. 8.37 For valuation purposes, unquoted shares held in a settlement where there is an interest in possession are aggregated with the beneficiary’s free estate for valuation purposes under IHTA 1984 ss 160 and 168, as a result of IHTA 1984 ss 49(1) and 5(1). However, a transfer of shares by the trustees, other than on the death of the life tenant, would not be aggregated with the beneficiary’s own shareholding for valuation purposes (see 6.304 et seq). In determining the value of the beneficiary’s estate or that of his spouse, property held in the trust in which he had an interest in possession would be aggregated as related property under IHTA 1984 s 161.

451

Chapter 9

Trusts for Children and Young Adults

9.1 The inheritance tax benefits associated with the creation of an accumulation and maintenance trust were effectively abolished under the changes introduced by FA 2006 with effect from 22 March 2006, subject to some transitional provisions (described at 9.15–9.19 which enabled certain existing trusts to amend their terms to fall within one of the new tax-favoured categories of trusts, ie  an ‘age 18 to 25’ trust or trust for bereaved minors (IHTA 1984 ss 71A–71D). The commentary below applies to the new regime applying to 18 to 25-year trusts and trusts for bereaved minors. Reference should be made to 9.20–9.28 for commentary on accumulation and maintenance trusts established prior to 22  March 2006 for periods falling before 6  April 2008. Reference should be made to 9.29–9.41 in respect of the new regime applying to age 18 to 25 trusts and trusts for bereaved minors.

INCOME TAX AND CAPITAL GAINS TAX Trusts for bereaved minors and age 18 to 25 trusts 9.2 A  new category of trusts was introduced by FA  2006, following pressure on the Treasury to recognise that, in many cases, it would be inappropriate for significant assets to be appointed absolutely to a beneficiary on reaching the age of 18. The compromise solution put forward as part of the Finance Bill 2006 proposals was for the introduction of two new forms of trust to bridge the gap between the accumulation and maintenance trust regime and the rules applying to standard discretionary trusts: these are the so-called ‘age 18 to 25 trusts’ and ‘trusts for bereaved minors’.

Trusts for bereaved minors 9.3 A  trust for bereaved minors may be created under will by a parent or step-parent wishing to make provision for children under the age of 18, under the Criminal Injuries Compensation Scheme or under the Victims of Overseas Terrorism Compensation Scheme (IHTA 1984 s 71A). A bereaved minor’s trust may also be established on application of the laws of intestacy 453

9.4  Trusts for Children and Young Adults to another person’s estate, provided that at least one of the child’s parents has died. A valid deed of variation satisfying the conditions of IHTA 1984 s 142 can also be used to create a bereaved minor’s trust. 9.4 A bereaved minor means a person under the age of 18 who has not yet attained the age of 18 and at least one of whose parents has died (IHTA 1984 s 71C). 9.5 The trust must provide for the child to become entitled to the settled property and all income accumulated arising from it on reaching the age of 18, if not earlier. For so long as the bereaved minor is living and under the age of 18, the income and capital of the trust cannot generally be applied for the benefit of any other person; however, FA 2013 Sch 44 introduced an annual limit below which the trustees may apply income (and capital) for a person other than the bereaved minor. The limit is the lower of £3,000 or 3% of the maximum value of the settled property during the period. Income may be paid out for his benefit whilst the beneficiary is below the age of 18, either through giving the child an interest in possession or through the exercise of the trustees’ discretion. 9.6 Where the above conditions are met, the trust is not subject to tenyearly charges under the relevant property regime and there is no charge to inheritance tax upon the child becoming absolutely entitled to the settled property on reaching the age of 18, or upon the death of the beneficiary if it occurs before that date. Capital gains tax holdover relief will be available in respect of chargeable assets passing to the beneficiary. 9.7 It is possible to construct a bereaved minor’s trust so as to avoid the appointment of capital to the beneficiary on reaching age 18, by providing for the trustees to have the power of advancement of funds on new trusts. It would normally be beneficial to ensure that the new trusts meet the requirements of age 18 to 25 trusts, in order to preserve the freedom from inheritance tax charges under the relevant property regime.

Age 18 to 25 trusts 9.8 The terms of many accumulation and maintenance trusts falling within the pre-amendment IHTA 1984 s 71 were altered on or before 6 April 2008, so as to fall within the special inheritance tax provisions applying to age 18 to 25 trusts, as described below. An accumulation and maintenance trust not meeting these conditions on 5 April 2008 will have entered the relevant property regime and be subject to ten-yearly and exit charges, as described in Chapter 7. 9.9 Other than where a pre-22 March 2006 accumulation and maintenance trust is amended to fall within the requirements of IHTA 1984 s 71D, an age 18 454

Trusts for Children and Young Adults 9.12 to 25 trust can only be created under the terms of a will of a deceased parent, a person with parental authority, under the Victims of Overseas Terrorism Compensation Scheme or under the Criminal Injuries Compensation Scheme. As with a bereaved minor’s trust, a valid deed of variation satisfying the conditions of IHTA 1984 s 142 can also be used to create an age 18 to 25 trust. 9.10 To meet the conditions of IHTA 1984 s 71D, the terms of the trust must provide for the beneficiary to become absolutely entitled to funds (including amounts accumulated) on or before reaching the age of 25. Whilst the beneficiary is below the age of 25, any appointments of capital made in favour of the beneficiary must be applied for his benefit, or be within the annual limit introduced by FA 2013 Sch 44 of £3,000 or 3% of the maximum value of the settled property during the period, if lower. If the beneficiary is not entitled to all of the income arising to the trustees before reaching age 25, there must be no possibility of the income being applied for the benefit of any other person (IHTA 1984 s 71D), subject to the annual limit mentioned above. It is therefore possible to construct a beneficiary’s entitlement so as to give an entitlement to income at aged 18, but to reserve the settled property within the trust until such time as the beneficiary reaches age 25, at which point the property must pass absolutely to the beneficiary. 9.11 Section 71D refers to a single beneficiary, which had given rise to concerns that the conditions of s 71D could not be met where there is more than one beneficiary. HMRC’s Manual states at IHTM42816: ‘While Section 71D is drafted by reference to a single beneficiary (“B”), we take the view that it is possible to have more than one existing beneficiary, so long as it is not possible for any other person to become entitled under the trusts in future. For example, the trusts of an existing A&M settlement provide that: •

The three grandchildren – B1, B2 and B3 – of the settler will take the trust assets absolutely at 25;

•

They will be entitled to all of the income arising before they reach 25; and

•

If any of the settled property is applied in that time, it must be applied for B1, B2 and B3.

If B1, B2 and B3 are all living when Section 71 ceases to apply, we take the view that s.71D will begin to apply provided that it is not possible for any other person to become entitled in future. This is because it can still be said that “B” – although plural – will become absolutely entitled to the settled property by 25 etc.’ 9.12 There will be no charge to inheritance tax on settled property passing to the beneficiary on or before he reaches the age of 18, or on death if it occurs 455

9.13  Trusts for Children and Young Adults before that date. There will also be no inheritance tax charge on property applied for the maintenance or benefit of the beneficiary before reaching age 18. The appointment of settled property to the beneficiary between the ages of 18 to 25 will be an occasion of charge to inheritance tax in accordance with IHTA 1984 s 71E, as will the death of the beneficiary between those ages. Similarly, should the settled property held on trust no longer meet the various requirements of IHTA 1984 s 71D at any time, a charge to inheritance tax will arise. 9.13 The charge to tax under s 71E is subject to specific amendments set out in s 71F. First, in calculating the number of quarters which have elapsed, only the period from the beneficiary’s attaining the age of 18 are counted, or such later date as the trust came within the age 18 to 25 regime. The maximum period for which the trust will have been subject to the relevant property regime on its conclusion is therefore limited to seven years, and hence the maximum charge is seven years at 0.25% per quarter. Secondly, the rate of inheritance tax to be applied is determined by reference to the value of the settled property at the time the trust was established. 9.14 As the appointment of assets to the beneficiary is an occasion of charge to inheritance tax, holdover relief under TCGA 1992 s 260 will be available.

The FA 2006 regime – transitional provisions for accumulation and maintenance trusts 9.15 Accumulation and maintenance trusts in existence at 22 March 2006 were subject to an approximately two-year transition period, before entering the relevant property regime with effect from 6 April 2008. During the transitional period, the IHTA 1984 s 71 regime continued to apply, under FA 2006 Sch 20 para 3(3), and thus gave the trustees time to consider the future of the trust. One option was to wind up the trust and distribute assets to the beneficiaries, and the inheritance tax and capital gains tax implications of this are as described in the paragraphs above. 9.16 Another alternative was to take no action, and accept that the trust would lose its favoured status for inheritance tax purposes from 6 April 2008, and that the appointment of an interest in possession on or after 21 March 2006 would mean that the property concerned will be subject to ten-yearly charges and exit charges from that time. 9.17 A  third alternative was for the trustees to make any necessary amendments to the terms of the trust so that the beneficiaries became entitled to capital on or before reaching the age of 18. In this case, the provisions of IHTA 1984 s 71 continue to apply, such that no inheritance tax charges arise on the beneficiary becoming absolutely entitled to the trust property. 456

Trusts for Children and Young Adults 9.21 9.18 A further option was to amend the terms of the existing accumulation and maintenance trust so that the trust fell within the definition of an age 18 to 25 trust, one of the new categories of tax-advantaged trusts established by FA 2006 with effect from 22 March 2006. These trusts are discussed in more detail below. 9.19 Where the trustees took no action to amend the terms of the trust before 6 April 2008, there is limited scope for planning to mitigate the effects of being within the relevant property regime unless the settled property is able to benefit from business property relief or agricultural property relief. Giving the beneficiaries an absolute interest in the settled property sooner rather than later may still be one option as, although there will be an inheritance tax exit charge, the number of quarters which have elapsed since entering the relevant property regime will be lower. Any chargeable gain arising may be held over under the provisions of TCGA  1992 s  260. Where assets are appointed to minors, the trustees will retain the settled property as bare trustees until the beneficiary attains the age of 18.

ACCUMULATION AND MAINTENANCE TRUSTS 9.20 For trust law purposes, an accumulation and maintenance trust is merely a discretionary trust which gives the trustees powers to distribute income, and, where the trust deed so provides or under TA 1925 s 32, to make advances of capital for the maintenance, education or benefit of one or more beneficiaries, and to accumulate any income not so distributed. There are no particular income tax or CGT rules applying to accumulation and maintenance trusts, which are therefore dealt with as ordinary discretionary trusts for such purposes, as described in Chapter 7. 9.21 Where distributions are made out of an accumulation and maintenance settlement to minor beneficiaries the income will be theirs for tax purposes, unless it is a parent’s settlement caught by ITTOIA  2005 ss  629–632. It will therefore have suffered tax at the rate applicable to trusts and the net distribution can be grossed up at that rate, and an income tax repayment claim made on the minor beneficiaries’ behalf. Although a maintenance and accumulation trust can be created by will it can also be established by a deed of variation under IHTA  1984 s  142(1). However, if the children benefiting under an accumulation and maintenance trust set up by variation are the children of the initial beneficiary, any distributions of income would be taxed as that beneficiary’s income as the true settlor for income tax purposes, under ITTOIA  2005 ss  629–632, as the variation only deems the settlement to be created by the deceased for IHT and CGT purposes (Marshall v Kerr [1994]  STC  638; IHTA  1984 s  142(1); TCGA 1992 s 62(6)). 457

9.22  Trusts for Children and Young Adults

INHERITANCE TAX – PRE-22 MARCH 2006 Definition 9.22 For IHT purposes, the term ‘accumulation and maintenance trust’ was normally confined to one which met the specific requirements of IHTA 1984 s 71, prior to amendment by FA 2006. The main IHT advantage of a discretionary trust qualifying as an accumulation and maintenance trust under s 71 was that it was not relevant property under IHTA 1984 s 58(1)(b) and therefore there was no IHT charge on a ten-year anniversary and no exit charge on distributions of capital (IHTA 1984 ss 64 and 65). The first requirement of an accumulation and maintenance trust was that one or more of the beneficiaries would, under the terms of the trust, on or before obtaining a specified age not exceeding 25, become beneficially entitled to the trust property, or an interest in possession in it (Lord Inglewood v IRC [1983] STC 133; IHTA 1984 s 71(1)). In this case, the powers of revocation and reappointment in the trust deed meant that it could not be said that any child would obtain an interest in possession, and therefore it was not an accumulation and maintenance trust within s 71. A conditional appointment that depended on the power of accumulation being valid under the Trusts (Scotland) Act 1961, which both the Revenue and the taxpayer agreed that it was, was effective in Maitland’s Trustees v Lord Advocate 1982 SLT 483. The remote likelihood of a challenge did not mean that the beneficiaries would not obtain an interest in possession, and the trust qualified as an accumulation and maintenance trust within s 71. 9.23 A beneficiary with a prospective, protected life interest could qualify under IHTA 1984 s 71(1)(a), as this was treated as an interest in possession under IHTA 1984 s 88(2)(b), even though the interest in possession may be protected by being held on protective trusts similar to those specified in TA 1925 s 33(1). A trust deed did not actually need to mention age 25 if it was obvious that, in fact, the beneficiaries would acquire an interest in possession at that age, eg at the end of the maximum accumulation period of 21 years (see ESC F8, now classified as obsolete). ‘Beneficiary’ included an unborn person provided that there was also a living beneficiary (s 71(7)). The definition of a beneficiary to include an unborn child enabled the beneficiaries to be described by class, such as the children of a particular person. Children include illegitimate, adopted and step-children (s  71(8)). So long as a beneficiary obtained an interest in possession by age 25, at the latest, there was no requirement to obtain a vested interest in capital at any particular age. 9.24 The second requisite of an accumulation and maintenance trust for IHT purposes was that there could be no current interest in possession in the trust property, or in the income from it, which had to be accumulated insofar as it was not applied for the maintenance, education or benefit of a beneficiary (IHTA 1984 s 71(1)(b)). This requirement followed closely TA 1925 s 31 where

458

Trusts for Children and Young Adults 9.25 the trustees normally had a power to apply the income for the maintenance, education or benefit of a beneficiary and to accumulate the balance of income, although these provisions may be modified by the trust instrument. The requirement was that the income must either be applied for the maintenance, education or benefit of a beneficiary or accumulated; this, therefore, included a trust where the trustees must accumulate the income or must use it for the maintenance, education or benefit of the beneficiaries (see IRC  v Berrill [1981]  STC  784, although this case actually concerned ICTA  1988 s  686, as the trust was a discretionary trust). In Re Clore’s Settlement Trusts [1966] 2 All ER 272, a gift to charity by the trustees through an accumulation and maintenance settlement was held to be for the benefit of a beneficiary from a wealthy family. 9.25 It should be noted that the provisions applied to settled property, not the settlement as such, and it was perfectly possible to have a single trust with an interest in possession in part, which would be identified under IHTA 1984 s 50, and have discretionary beneficiaries as well as accumulation and maintenance trusts. For example, there was no requirement that the accumulations of income were held on trusts which qualify under IHTA  1984 s  71(1). These two conditions were sometimes known as the ‘capital condition’ under s 71(1) (a) and the ‘income condition’ under s 71(1)(b). However, this terminology, although convenient, was perhaps misleading in that the capital condition did not require the beneficiary to have a vested interest in capital at any stage so long as he had an interest in possession. An Inland Revenue Press Release of 19 January 1976 stated: ‘… where there is a trust for accumulation and maintenance of a class of persons who become entitled to the property (or to an interest in possession in it) at a specified age not exceeding 25 it would not be disqualified under IHTA 1984 s 71(1)(a) by the existence of a power to vary or determine the respective shares of members of the class (even to the extent of excluding some members altogether) provided the power is exercisable only in favour of a person under 25 who is a member of the class.’ This is also confirmed in similar terms by SP E1, which provides as follows: ‘1. It is not necessary for the interests of individual beneficiaries to be defined. They can, for instance, be subject to powers of appointment. In any particular case the exemption will depend on the precise terms of the trust and power concerned, and on the facts to which they apply. In general, however, the official view is that the conditions do not restrict the application of IHTA 1984 s 71 to settlements where the interests of individual beneficiaries are defined and indefeasible. 2.

The requirement of IHTA 1984 s 71(1)(a) is that one or more persons will, on or before attaining a specified age not exceeding 25, become beneficially entitled to, or to an interest in possession in, the settled 459

9.25  Trusts for Children and Young Adults property or part of it. It is considered that settled property would meet this condition if at the relevant time it must vest for an interest in possession in some member of an existing class of potential beneficiaries on or before that member attains 25. The existence of a special power of appointment would not of itself exclude s 71, if neither the exercise nor the release of the power could break the condition. To achieve this effect might, however, require careful drafting. 3.

The inclusion of issue as possible objects of a special power of appointment would exclude a settlement from the benefit of s 71 if the power would allow the trustees to prevent any interest in possession in the settled property from commencing before the beneficiary concerned attained the age specified. It would depend on the precise words of the settlement and the facts to which they had to be applied whether a particular settlement satisfied the conditions of s  71(1). In many cases the rules against perpetuity and accumulations would operate to prevent an effective appointment outside those conditions. However the application of s 71 is not a matter for a once-for-all decision. It is a question that needs to be kept in mind at all times when there is settled property in which no interest in possession subsists.

4.

Also, a trust which otherwise satisfied the requirement of s  71(1) (a) would not be disqualified by the existence of a power to vary or determine the respective shares of members of the class (even to the extent of excluding some members altogether) provided the power is exercisable only in favour of a person under 25 who is a member of the class.

Annex to SP E1 Practical illustrations of IHTA 1984 s 71. The examples set out below are based on a settlement for the children of X contingently on attaining 25, the trustees being required to accumulate the income so far as it is not applied for the maintenance of X’s children.

Example A The settlement was made on X’s marriage and he has as yet no children. IHTA 1984 s 71 of Schedule 5 will not apply until a child is born and that event will give rise to a charge for tax under IHTA 1984 s 65. Example B The trustees have power to apply income for the benefit of X’s unmarried sister. IHTA  1984 s  71 does not apply because the condition of subs (1)(b) is not met. 460

Trusts for Children and Young Adults 9.26 Example C X  has power to appoint the capital not only among his children but also among his remoter issue. IHTA 1984 s 71 does not apply (unless the power can be exercised only in favour of persons who would thereby acquire interests in possession on or before attaining age 25). A release of the disqualifying power would give rise to a charge for tax under IHTA 1984 s 65. Its exercise would give rise to a charge under IHTA 1984 s 65. Example D The trustees have an overriding power of appointment in favour of other persons. IHTA 1984 s 71 does not apply (unless the power can be exercised only in favour of persons who would thereby acquire interests in possession on or before attaining age 25). A release of that disqualifying power would give rise to a charge for tax under IHTA 1984 s 65. Its exercise would give rise to a charge under IHTA 1984 s 65. Example E The settled property has been revocably appointed to one of the children contingently on his attaining 25 and the appointment is now irrevocable. If the power to revoke prevents IHTA 1984 s 71 from applying, (as it would for example, if the property thereby became made subject to a power of appointment as at C or D) tax will be chargeable under IHTA 1984 s 65 when the appointment is made irrevocable. Example F The trust to accumulate income is expressed to be during the life of the settlor. As the settlor may live beyond the 25th birthday of any of his children the trust does not satisfy the condition in subsection (1)(a) and IHTA 1984 s 71 does not apply.’

9.26 There were a number of further requirements in order to qualify as an accumulation and maintenance trust. These were either that not more than 25 years had elapsed since the commencement of the settlement or since it became an accumulation and maintenance trust, or that all the persons who were or had been beneficiaries were, or had been, either grandchildren of a common grandparent, or children, widows or widowers of such grandchildren who were beneficiaries but died before obtaining an interest in possession or an absolute interest in part of the trust property (IHTA 1984 s 71(2)(a) and (b); Tax Bulletin, Issue 74, December 2004, p 1170). 461

9.27  Trusts for Children and Young Adults

Ceasing to qualify 9.27 Where settled property ceased to qualify under the accumulation and maintenance trust rules, there was an IHT charge, as there was where the trustees made a disposition reducing the value of the settled property under the accumulation and maintenance trusts (IHTA 1984 s 71(3)). The charge to tax in such cases followed that of property leaving temporary charitable trusts, so that the charge was on the value of the property ceasing to qualify, depending on how long the asset had been in the trust, measured in quarters of a year. The rates under IHTA 1984 s 70(6) were: (a)

0.25% for each of the first 40 complete successive calendar quarters;

(b) 0.20% for each of the next 40; (c)

0.15% for each of the next 40;

(d) 0.10% for each of the next 40; and (e)

0.05% for each of the next 40.

This formula meant that a charge to IHT on termination of the 25-year period gave rise to a tax charge at 21% with no nil rate band, ie 40 quarters at 0.25% + 40 quarters at 0.20% + 20 quarters at 0.15%. If the settlor did not survive the seven-year gift inter vivos period, the trustees had to deliver an account under IHTA  1984 s  216(1)(bb) and were responsible for paying the tax out of the trust assets. 9.28 There was no charge on ceasing to qualify where a beneficiary became absolutely entitled to part of the settled property, or to an interest in possession in it, on or before obtaining the specified age not exceeding 25, or on his death before obtaining that age (IHTA  1984 s  71(4)). Section 71(5) provided that there was no exit charge where the property ceasing to qualify was taxed as the beneficiary’s income, or would be if he were UK resident.

MAINTENANCE, EDUCATION OR BENEFIT 9.29 TA 1925 s 31, as amended by the Inheritance and Trustees’ Powers Act 2014, empowers trustees to apply income for maintenance and to accumulate surplus income during a beneficiary’s minority. Section 31 provides: ‘Where any property is held by trustees in trust for any person for any interest whatsoever, whether vested or contingent, then, subject to any prior interests or charges affecting that property— (i)

during the infancy of any such person, if his interest so long continues, the trustees may, at their sole discretion, pay to his parent or guardian, if any, or otherwise apply for or towards his maintenance, education, 462

Trusts for Children and Young Adults 9.29 or benefit, the whole or such part, if any, of the income of that property as may, in all the circumstances, be reasonable, whether or not there is— (a)

any other fund applicable to the same purpose; or

(b) any person bound by law to provide for his maintenance or education; and (ii) if such person on attaining the age of eighteen years has not a vested interest in such income, the trustees shall thenceforth pay the income of that property and of any accretion thereto under subsection (2) of this section to him, until he either attains a vested interest therein or dies, or until failure of his interest.’ ‘Provided that, in deciding whether the whole or any part of the income of the property is during a minority to be paid or applied for the purposes aforesaid, the trustees shall have regard to the age of the infant and his requirements and generally to the circumstances of the case, and in particular to what other income, if any, is applicable for the same purposes; and where trustees have notice that the income of more than one fund is applicable for those purposes, then, so far as practicable, unless the entire income of the funds is paid or applied as aforesaid or the court otherwise directs, a proportionate part only of the income of each fund shall be so paid or applied.’ Prior to the amendments made by Inheritance and Trustees’ Powers Act 2014, the assessment of the amount of income to be applied for maintenance was limited to the amount considered reasonable in all the circumstances. The trustees also formerly had to have regard to the age of the infant and his requirements and generally to the circumstances of the case and, in particular, to whatever income, if any, was applicable for the same purposes, with the intention, apparently, of spreading the costs of maintaining the infant among the available resources. Under the redrafted TA  1925 s  31, the trustees are required only to consider all relevant factors before exercising their discretion. These changes apply to trusts (or an interest in a trust) created on or after 1 October 2014, the date the Inheritance and Trustees’ Powers Act 2014 came into force. During the infancy, the trustees accumulate any undistributed income until the beneficiary obtains the age of 18 years or marries under that age. Where the infant has a vested interest on attaining the age of 18 or marrying, the trustees hold the accumulations in trust for him absolutely. Otherwise the accumulated income is added to the trust fund but not so as to prevent the income being used for the maintenance, education or benefit of the child in the later year as if it were income arising in that year (TA 1925 s 31(2)). In the case of a contingent interest, which carries the intermediate income into an annuity as if the annuity were trust income, s 31(3) and (4) applies. 463

9.30  Trusts for Children and Young Adults 9.30 SP 8/86 confirms that HMRC takes the view that undistributed and unaccumulated income of a discretionary trust should not be taxable as a trust asset and for the purposes of determining the rate of charge on accumulated income the income should be treated as becoming a taxable asset of the trust on the date when the accumulation is made.

Powers of appointment 9.31 An Inland Revenue letter of 8 October 1975 confirms that a special power of appointment would only exclude a settlement from qualifying as an accumulation and maintenance settlement if the power would allow the trustees to prevent any interest in possession in the settled property from commencing before the beneficiary concerned attained the age specified. It also confirms that qualification as an accumulation and maintenance settlement is an ongoing test, not a matter for a once and for all decision. It also confirms that beneficiaries do not need to be identified nor their interests to be quantified in the trust deed, much less equal. The (then) Revenue also confirmed, in a Press Release of 24 September 1975, that where a beneficiary is entitled to income in accordance with TA 1925 s 31(1)(2) on attaining his majority, this would satisfy the provisions of IHTA 1984 s 71(1)(a).

Interest in possession 9.32 The reference to an interest in possession enjoyed by a beneficiary is to a present right to the present enjoyment of trust income, following Pearson v IRC [1980] STC 318.

POTENTIALLY EXEMPT TRANSFERS 9.33 A transfer to an accumulation and maintenance trust had the distinct advantage of being a potentially exempt transfer (PET) under IHTA  1984 s  3A(1)(c) and FA  1986 s  101 and Sch  19, which meant that no IHT was payable on the transfer of assets into an accumulation and maintenance settlement unless the settlor died within a seven-year gift inter vivos period (IHTA 1984 s 7). It was common for the trustees to insure the settlor’s life for the amount of IHT payable, taking account of the taper relief in s 7(4), during the gift inter vivos period of seven years. The trustees would ensure that the premiums were charged to capital – as a payment of premiums out of income would not be for the maintenance, education or benefit of the beneficiaries and would not be an accumulation and therefore the trust would be inadvertently taken outside the definition of an accumulation and maintenance trust in IHTA 1984 s 71(1). 464

Trusts for Children and Young Adults 9.37 9.34 Where assets were being put into a discretionary trust within the nil rate band exemption, it was worth considering whether the trust should be converted into an accumulation and maintenance trust before the first or next relevant ten-year anniversary. It was sometimes useful to nominate an accumulation and maintenance trust as the recipient of death-in-service life insurance under an occupational pension scheme in order to avoid wasting the spouse exemption. The trustees were able to use the proceeds to purchase, at market value, illiquid assets from the deceased’s surviving spouse. Non-pension insurance policies could also be held by the accumulation and maintenance trustees. 9.35 To qualify as a potentially exempt transfer on the creation of an accumulation and maintenance trust, it was necessary for there to be an absolute gift to the trustees, not, for example, the payment of a life insurance premium or payment direct to the school for school fees on behalf of the beneficiaries. As noted above, the inheritance tax advantages relating to accumulation and maintenance trusts were withdrawn effectively by FA 2006, and from 6 April 2008 such trusts now fall within the relevant property regime applying to discretionary trusts described in Chapter 7).

ENTITLEMENT TO CAPITAL 9.36 It was common in an accumulation and maintenance settlement to provide for the beneficiary to obtain an interest in possession only in income at an age below 25 but not to obtain a right to capital at that time. In such circumstances, if capital was subsequently distributed, so that the beneficiary became absolutely entitled as against the trustees, there was a disposal for CGT purposes under TCGA 1992 s 71 and it did not escape under s 260(2) (d) of the 1992 Act, which only applied where the beneficiary became entitled to the capital and income at the same time under IHTA 1984 s 71(4). If it was intended that both the capital and income were distributed at, say, age 25, it was important to make sure that TA 1925 s 31 had been excluded, as otherwise the beneficiary would have a statutory entitlement to the income from age 18 and would not be entitled to the capital until age 25. Although there was no time limit on the duration of an accumulation and maintenance trust where all the beneficiaries are grandchildren of a common grandparent, in other cases the trust could only exist for 25 years from commencement under IHTA 1984 s 71(2)(a). 9.37 The CGT problem on beneficiaries becoming absolutely entitled at a later date was avoided where the trust assets were business or agricultural assets eligible for rollover under TCGA 1992 s 165. Under the regime introduced by FA 2006, the capital gains tax position of the beneficiary is improved in these circumstances, as the trust will (post 6 April 2008) be a relevant property trust and thus able to access holdover relief on all trust assets under the provisions of TCGA 1992 s 260. 465

9.38  Trusts for Children and Young Adults A beneficiary may also become absolutely entitled to income on the expiration of the permitted accumulation period under LPA 1925 s 164.

TEMPORARY BENEFICIARIES 9.38 Sometimes, the requirement for a living beneficiary in an accumulation and maintenance settlement meant that a cousin was included as a beneficiary, as there were no grandchildren yet born, but with the intention of benefiting the grandchildren. This was often known as a ‘peg-leg’ trust and, because not all the beneficiaries were children of a common grandparent, the 25-year limit applied, which meant that it may have been necessary to distribute the trust or resettle it prior to the 25th anniversary to avoid an IHT charge on the termination of the trust with no beneficiaries with an interest in possession. If, instead of the cousin being a beneficiary, a nephew or niece was appointed, there would be a common grandparent, and the intended beneficiaries could benefit, with the peg-leg beneficiaries merely standing in until the intended beneficiaries were born.

TERMINATION 9.39 The termination of an accumulation and maintenance trust where there was an interest in possession was exempt from a charge to IHT under IHTA  1984 s  52 by s  53(2) of that Act. A  disposal of an interest in settled property escaped CGT under TCGA  1992 s  76. In practice, a number of accumulation and maintenance trusts were wound up prior to 6 April 2008 to avoid the incidence of the relevant property regime.

VARIATION 9.40 The trustees may have been given power to vary a beneficiary’s share after he had taken an interest in possession. Although this gave rise to an IHT occasion of charge, it would normally have been a potentially exempt transfer by the beneficiary who was deemed to have an absolute interest in the asset under IHTA 1984 s 49. Where a beneficiary had obtained an interest in possession, the birth of a beneficiary could have reduced his share which would have been an occasion of charge for IHT and would normally also have been a potentially exempt transfer. 9.41 The death of a life tenant is an occasion of a charge to IHT. A  resettlement by the life tenant on discretionary trusts also gives rise to a potential IHT charge. IHTA 1988 s 49 deems a life tenant to own outright the assets in which he has a life interest.

466

Chapter 10

Foreign Trusts

10.1 For the purposes of this chapter, a foreign trust is one where the trustees are resident outside the UK and the trust is administered outside the UK (see Chapter 5). The trust may be written under English law, but this would be unusual except where the trust has originally had an English trustee and has subsequently emigrated. In most cases the foreign trust will be written under the trust law of the overseas jurisdiction which may or may not differ from English trust law in material aspects. In particular, the rule against perpetuities may not apply or the perpetuity period may be, say, 100 years. Similarly, there may not be an accumulation period, or if there is one it may differ from the 125 years for English trusts established on or after 6 April 2010 under the Perpetuities and Accumulations Act 2009. Under the Perpetuities and Accumulations Act 1964 which applied before 6 April 2010, the perpetuity period could not exceed 80 years, and the accumulations period was also restricted to 21 years. Trusts created by wills made before 6  April 2010 will have to apply the old rules. A  ‘lives in being’ perpetuity period becomes 100 years but the accumulation period remains at 21 years. Some civil law jurisdictions allow trusts by statute, although there appears to be little jurisprudence in such jurisdictions to show how the law is applied in practice. Most foreign trusts are therefore set up in jurisdictions which are former colonies of the UK or previously came under the influence of the English legal system, or dependencies of the Crown – Jersey, the Bailiwick of Guernsey and the Isle of Man. 10.2 For UK tax purposes, the choice of a foreign jurisdiction is largely irrelevant but it is likely to be important for non-tax considerations such as: (a)

the powers of the trustees and any protector;

(b) the rights of the beneficiaries to enforce the trust; (c)

the right to obtain information; and

(d) the protection given to creditors or to the trustees against creditors. What is important is that the trust is actually resident in the intended jurisdiction and that the trustees act as trustees making independent decisions for the benefit of the beneficiaries, with or without guidance from the settlor. 467

10.3  Foreign Trusts 10.3 In some jurisdictions, particularly civil law jurisdictions such as Switzerland where a lot of trust administration is carried out, it is important for the trustees to recognise the difference between acting in a fiduciary capacity on the instructions of the founders of a foundation and acting independently as trustees with the advice of, but not following the instructions of, the settlor. In such cases it is often advisable to have at least one of the trustees in a common law jurisdiction. There is no reason why the trust should necessarily be administered in the same jurisdiction as the trustees making their decisions in the interests of the beneficiaries. It is not uncommon to have trustees based in more than one jurisdiction reaching their decisions by telephone or e-mail and communicating them to the administrators for implementation.

PROPER LAW 10.4 The Hague Convention on the law applicable to trusts and on their recognition, of 10 January 1986, which was brought into UK law by RTA 1987, allows the settlor to choose the proper law of the trust which must be expressly stated in or implied from the trust deed. In the absence of a choice of proper law by the settlor, the trust is governed by the law with which it is most closely connected, which would appear to replicate the common law situation (Perpetual Executors and Trustees Association of Australia Ltd v Roberts [1970] VR 732; Iveagh v IRC [1954] Ch 364). The jurisdiction with which the trust is most closely connected depends on: (a)

the place of administration of the trust designated by the settlor;

(b) the situs of the assets of the trust; (c)

the place of residence or business of the trustees;

(d) the objects of the trust; and (e)

the places where they are to be fulfilled.

10.5 The law governing the trust can be changed either by the settlor reserving the power to change the applicable law, or by the trustees, under powers given to them by the trust instrument, although a change of applicable law may require the consent of the protector, where there is one. Otherwise it may be necessary, in order to move the trust law out of England, to apply to the courts under VTA  1958. The court certainly has power to revoke the trusts of an English settlement and substitute those of a foreign settlement and appoint any foreign trustees (Re Seale’s Marriage Settlement [1961] Ch 574; Re Windeatt [1969] 1 WLR 692). However, it may choose not to do so if it does not consider this to be in the best interests of the beneficiaries (Re Weston’s Settlements [1969] 1 Ch 223). In Vogelius and Others v Vogelius and Another (2005) 8 ITELR 619, an Argentinean court held that, where an English trust held real estate in London for the benefit of the remaindermen, who were two 468

Foreign Trusts 10.7 of the children of the settlor, the trust was ignored, and the gifts had to be collated with other assets held by the deceased under Argentinean law and divided equally amongst the children in equal shares under Argentina’s forced heirship provisions.

RESIDENCE AND DOMICILE Trustees 10.6 The rules which govern the residence and domicile of trustees, the settlor and beneficiaries are explained in Chapter 5, and the implications of these factors for UK tax purposes will become apparent from this chapter. The residence of trustees is of fundamental importance in determining their liability to income tax and CGT but the situs of assets and, in particular, whether they are in the UK or abroad may also have a bearing on the tax charge. The residence rules for trustees can deem a non-resident trustee to be UK tax resident in determining the residence of the body of trustees if a non-resident trustee carries on business in the UK through a branch, agency or permanent establishment in the UK and acts as trustee in the course of that business. Trustees may be dual resident and residence may be determined under a double taxation treaty. A trust resident for part of a tax year is deemed resident for that whole year. The beneficiary of a bare trust must return the income and gains made by the trustees.

Settlor 10.7 The residence of the settlor is important in determining the application of anti-avoidance provisions, as is his domicile. The concept of deemed domicile has long applied for IHT purposes (IHTA 1984 s 267), and is extended to income tax and capital gains tax from 6  April 2017 (ITA  2007 s  835A, inserted by F(No 2)A 2017 ss 29–30 and Sch 8). A number of the anti-avoidance provisions do not apply to non-UK domiciliaries such as deeming the capital gains made by offshore companies or trusts to be those of the shareholder or settlor under TCGA 1992 s 86. A settlor who becomes deemed UK domiciled on or after 6 April 2017 is brought within the scope of the provisions of TCGA 1992 s 86 for 2017/18 and later years, subject to the operation of various rules protecting their status. A settlor who is domiciled or, for 2017/18 and later years, deemed UK domiciled and resident in the UK has to inform HMRC under TCGA 1992 Sch  5A para  3, within three months of creating a settlement with non-UK resident trustees, of the date the settlement was created, of the names and addresses of the trustees and the name and address of the person delivering the return. A non-domiciled settlor has 12 months to so inform HMRC and to specify the property transferred, the date of the transfer and the consideration, 469

10.8  Foreign Trusts if any, under TCGA 1992 Sch 5A para 2. The duty falls on the UK trustees, under TCGA 1992 Sch 5A para 5, if an existing trust becomes non-UK resident. A reporting requirement also arises for IHT purposes, see 10.129.

Beneficiaries 10.8 A  non-UK resident beneficiary is clearly not liable to UK taxation on non-UK source income and the tax liability on UK source income may be limited to tax withheld at source, if any (ITA  2007 ss  811–814). Before changes introduced from 6  April 2017, a non-resident beneficiary was also useful in managing the trusts of an international family because once income has been distributed to a non-resident it may no longer be available to be treated as the income of a UK resident beneficiary. This also gave the opportunity for a non-resident beneficiary to reallocate amounts distributed to him by, for example, resettling part of the funds for the benefit of resident beneficiaries. Obviously, this could not be achieved by conditional distributions to a nonresident beneficiary, because then he would be acting merely as nominee for the resident beneficiaries if he was required to resettle on trust for them. The scope for such planning has been considerably curtailed from 6 April 2018 and the introduction of provisions relating to ‘onward gifts’ (eg see ITTOIA 2005 ss 643I–643N and ITA 2007 ss 733B–733D, 10.50). The domicile of a beneficiary can also be important because distributions to a UK resident non-UK domiciled beneficiary from an overseas trust in respect of overseas income may be taxable only on the remittance basis. 10.9 Where a non-UK resident trust has both UK source income and at least one UK resident beneficiary, or potential beneficiary, the UK tax charge on the UK income is not limited to tax deducted at source (ITA 2007 s 812). Therefore, it seems that such income in a discretionary trust would be subject to tax at the rate applicable to trusts at the dividend rate under ITA 2007 s 479 (IRC  v Regent Trust Co Ltd [1980]  STC  140). HMRC may have difficulty collecting the tax due from non-UK resident trustees (Government of India, Ministry of Finance (Revenue Division) v Taylor [1955]  AC  491). It may, however, be in the beneficiary’s interest for the trustees to pay the tax and pass through the appropriate credit to avoid the beneficiary having to pay full UK tax on any distribution under ITA 2007 ss 714; see 7.14 above.

INCOME TAX UK source income and gains 10.10 Merely because the settlor or trustees are non-UK resident and domiciled does not mean that there is no exposure to UK taxation; UK source 470

Foreign Trusts 10.11 income such as rent will remain liable to tax and, where the trustees carry on a trade in the UK through a branch or agency, not only will the trading profits be subject to UK tax, but also assets used for the purposes of the trade will be subject to UK CGT under TCGA 1992 s 1B (formerly TCGA 1992 s 10). Non-UK resident trustees of a discretionary trust are not chargeable to UK tax on foreign income, under ITA 2007 s 479, or on FOTRA (free of tax to residents abroad) UK securities if there are no UK resident beneficiaries, under ITA 2007 s 811, but otherwise remain chargeable. Interest in possession trusts are not within s 811. Where an overseas trust is in receipt of income which has suffered UK tax or withholding tax and that income is assessable on a parent settlor under ITTOIA 2005 ss 629–632, HMRC will, by concession, allow a credit for the UK tax paid against the settlor’s liability provided that the trustees have made trust returns giving details of all sources of trust income and payments made to beneficiaries for all years for which they are required and have paid all the tax due including any interests, penalties and surcharges and have retained the relevant tax certificates (ESC A93).

Anti-avoidance provisions 10.11 One of the problems of dealing with foreign trusts is the complexity of the anti-avoidance legislation, which usually deems that which has not happened to have happened for taxation purposes, and this in turn leads to the question of when the deeming stops and the extent to which the effect of deeming is carried to its logical, or in some cases illogical, conclusion. Marshall v Kerr [1994] STC 638 is regarded as authority for the proposition that deeming is only carried through to the extent that it is necessary to achieve the anti-avoidance objective, or to allow the intended relieving provision to operate, without extending the effect of the deeming beyond its immediate purpose. In that case, a deed of family arrangement avoided CGT on the transfers resulting from the arrangement itself under TCGA 1992 s 62(6), on the basis that the reference to the section applying as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred, s 62(6) (b) did not mean that the deceased was the settlor when the assets were placed into trust as a result of the variation, it merely relieved the CGT that would otherwise have arisen as a result of the variation. This reasoning was followed in De Rothschild v Lawrenson [1995] STC 623, when it was held that a charge arose under TCGA 1992 s 87(2) on the amount on which the trustees would have been chargeable to tax if they had been resident or ordinarily resident in the UK, which was assessable on the beneficiary. It did not make the trustees themselves chargeable to tax under TCGA 1992 s 77 (repealed from 6 April 2008) as that was confined to gains actually realised by the trustees, who were non-resident and would therefore have no such liabilities. Deeming the gain 471

10.12  Foreign Trusts accruing to the beneficiary to be computed on the assumption that the trustees had been resident or ordinarily resident in the UK was merely the means of quantifying the chargeable amount which, under the anti-avoidance provisions, was then assessable on the beneficiary. The limitation of deeming in this way was approved in R v Dimsey [2001] STC 1520 at 1531.

Treaty non-residence of beneficiary 10.12 The deeming provisions are also important in the context of double taxation treaties, which may exempt actual income or gains in the hands of a resident of the treaty country from UK income tax or CGT, so that, for example, a UK domiciliary who moves to Belgium for a period and becomes resident there for treaty purposes may escape UK taxation on chargeable gains realised during the period of non-residence under the treaty, in spite of the fact that there may be no Belgian taxation on those gains. He would not be subject to tax on his return to the UK within five years, under TCGA 1992 ss 1M and 1N (formerly TCGA 1992 ss 10A and 10AA), as the actual gains were treaty protected. If, however, he were a beneficiary of an overseas trust and gains were distributed to him which would have been chargeable under s 87 of the 1992 Act had he been UK resident, or if he was the settlor such that the gains would have been charged on him under s 86 had he been UK resident, there could be a charge on returning to the UK within five years under s 1M, as the gains deemed to be realised while non-resident would not be treaty protected as the treaty only protects actual income and gains (Bricom Holdings Ltd v IRC [1997] STC 1179).

Settlement code 10.13 The settlement provisions in ITTOIA 2005 Part 5 Chapter 5 ss 619– 648, in particular ITTOIA  2005 ss  621–632, apply to foreign trusts as they apply to UK resident trusts, so that, for example, the settlor remains taxable where he has retained an interest in the settlement under ITTOIA 2005 ss 619– 627, or where payments are made to an unmarried minor child of the settlor, the settlor is taxable under ITTOIA 2005 ss 629–632. The provisions relating to capital sums paid to the settlor in ITTOIA  2005 ss  641–643, and via a company connected with the settlement under ITTOIA 2005 ss 633–640 have no territorial limitation and apply to foreign trusts as well as UK trusts. These provisions are explained in some detail in Chapter 6.

Income tax – non-UK residents and domiciliaries 10.14 It should be noted that where the settlor is not domiciled or not resident in the UK in the year of assessment, he cannot be charged under the settlement provisions on income arising under the settlement if, had he received that 472

Foreign Trusts 10.16 income directly, he would not have been subject to taxation by reason of being non-UK domiciled, resident or ordinarily resident. However, if the income is remitted to the UK, which would have been chargeable had it been the settlor’s own income, on the remittance basis, such remittances will be taxable under the deeming provisions of the settlement legislation (ITTOIA 2005 s 648(2)– (5)). Prior to 6 April 2017, this meant that provided an individual remained non-UK domiciled it was possible to avoid being taxed under the settlements code by ensuring foreign source income was not remitted to the UK.

Current position 10.15 As part of the changes to the taxation of non-UK domiciliaries introduced from 6 April 2017, the charge to tax on certain foreign source income which would otherwise be chargeable on the settlor under ITTOIA 2005 s 624 is modified where certain conditions are met. These ‘trust protections’ are designed to ensure that non-UK domiciliaries who become deemed UK domiciled on or after 6 April 2017 onwards continue to be protected from tax charges which would otherwise arise under ITTOIA 2005 s 624 on ‘protected foreign source income’ (ITTOIA 2005 s 628A, inserted by F(No 2)A 2017 s 29(2) and Sch 8), see Chapter 5. Protected foreign source income arising whilst the trust has protected status is not taxable on the settlor under ITTOIA 2005 s 624, either under the arising or remittance basis. Similar rules apply to the charge on the transferor under ITA 2007 s 720 (see 10.26) and capital gains tax charges under TCGA 1992 s 86 (see 10.95). It should be noted these trust protections apply only to individuals becoming deemed UK domiciled by reason of residence in the UK for 15 out of the previous 20 tax years under ‘Condition B’ in ITA 2007 s 835BA(4); they do not apply to formerly domiciled residents who are deemed to be UK domiciled if they are UK resident in the relevant tax year (‘Condition A’ in ITA 2007 s 835BA(3)). HMRC has published guidance on the changes introduced from 6 April 2017, see ‘Trust Protections and Capital Gains Tax changes’ available on the website at www.gov.uk/government/publications/ trust-protections-and-capital-gains-tax-changes.

Protected foreign source income 10.16 Income arising under a settlement to trustees resident outside the UK throughout a tax year is protected foreign source income for the purposes of ITTOIA 2005 s 624 if the income would be relevant foreign income if it arose to a UK resident individual, the income originates from property provided by the settlor, and the settlor was not UK domiciled at the time the settlement was created (or deemed UK domiciled if the date of the settlement is on or after 6 April 2017) (ITTOIA 2005 s 628A(3)–(5), (7)). Income arising before 6 April 2017 is not protected foreign source income as ITTOIA  2005 s  628A applies only for 2017/18 and later tax years. Foreign 473

10.17  Foreign Trusts source income arising to the trustees in 2016/17 and earlier years may be eligible for the remittance basis under ITTOIA 2005 s 648(3). ‘Transitional trust income’, meaning foreign income arising under a settlement between 6 April 2008 and 5  April 2017 which has not been distributed by the trustees, and would be protected foreign source income (ignoring the provisions regarding tainting in ITTOIA 2005 s 628A(8), is not treated as remitted under ITA 2007 s 809L where the remittance to the UK is made by the trustees (ITTOIA 2005 s 628C). This provision applies even if the trust loses protected status.

Loss of PFSI protection 10.17 ‘Tainting’ provisions stipulate that protection for foreign source income is lost if income is provided directly or indirectly for the purposes of the settlement by the settlor or by the trustees of any other settlement of which he is a beneficiary or settlor at any time in the period commencing on 6 April 2017 (or date of the creation of the settlement, if later) and ending with the end of the tax year in which the settlor is deemed UK domiciled (ITTOIA 2005 s 628A(8)). The addition of value to property comprised in the settlement is treated as the direct provision of property for the purposes of the settlement (ITTOIA 2005 s 628A(10)).

Exceptions 10.18 There are exceptions to the tainting provisions, for example where property is added by way of an arm’s-length transaction or a transaction not intended to confer gratuitous benefit (ITTOIA  2005 s  628B(2)). Particular care is required in the case of loans to the trustees by the settlor (or another settlement of which he is a settlor or beneficiary), as even where a loan is made on arm’s-length terms, tainting could occur if interest remains unpaid or is capitalised, or there is a variation of the terms such that they cease to be arm’s length (a ‘relevant event’) (ITTOIA 2005 s 628B(4)). The principal outstanding of the loan is regarded as having been provided to the settlement (ITTOIA  2005 s  628B(3)). The outstanding amount of a loan will also be treated as property provided for the purposes of the settlement where the settlor becomes deemed UK domiciled on or after 6  April 2017, and a loan to the trustees previously been made by him (or another settlement of which he is the settlor or beneficiary) on non arm’s-length terms has not been repaid before he becomes deemed UK domiciled. The principal of the loan is regarded as having been provided for the purposes of the settlement at the date on which the settlor becomes deemed UK domiciled (ITTOIA 2005 s 628B (5), (6)). A oneyear period of grace applied for 2017/18 where the settlor became deemed domiciled on 6  April 2017 and tainting was avoided provided the principal of the loan and all interest payable was repaid on or before 5 April 2018, or the loan was adjusted to reflect arm’s-length terms on or before 5 April 2018, interest was paid during 2017/18 as if the arm’s-length terms had applied 474

Foreign Trusts 10.20 throughout that tax year and interest continued to be payable in accordance with arm’s-length terms after 6 April 2018 (ITTOIA 2005 s 628B(7)). A loan is on arm’s-length terms to the trustees of a settlement if it carries interest at a rate at least equal to the official rate under FA 1989 s 178 and interest is paid at least annually (ITTOIA 2005 s 628B(8)(a)). A loan by trustees is regarded as being on arm’s-length terms provided the rate of interest payable does not exceed the official rate (ITTOIA 2005 s 628B(8)(b)).

Effect of tainting 10.19 If tainting occurs, protected trust status is lost not just in relation to the property treated as added to the settlement, but to all property comprised within the settlement. Foreign income arising to the trustees would then be taxable on the settlor, without the benefit of the remittance basis. Similarly, if the settlor becomes domiciled in the UK as a matter of general law (rather than being deemed UK domiciled under ITA 2007 s 835BA(4)), protected trust status would be lost as the condition in ITTOIA 2005 s 628A(6) is failed. Preserving protected trust status is therefore key for individuals becoming deemed domiciled in the UK for 2017/18 and later years. As part of the protected trust provisions, where a settlement has protected foreign source income (PFSI) and ‘untaxed benefits’ are provided to the settlor or a close family member, the benefit is taxable income of the recipient. If that person is not liable to tax on the benefit received, that is, because they are not UK resident or are UK resident but non-UK domiciled and taxable on the remittance basis, the tax charge is transferred to the settlor if he is UK resident (ITTOIA 2005 s 643A inserted by FA 2018 s 35 and Sch 10). The settlor has a right of recovery against the benefit recipient (ITTOIA 2005 s 643E). Close family members include the settlor’s spouse/civil partner, any person with whom he is living as if they were a spouse/civil partner, and minor unmarried children of the settlor (ITTOIA 2005 s 643H). The untaxed benefit need not be provided out of protected foreign source income; the provisions require only that there is protected foreign source income and the settlor (or close family member) receives a benefit from trustees.

Amount of charge 10.20 The amount of income charged on the UK resident settlor is the lower of the ‘untaxed benefits total’ and ‘available protected income’. To calculate the untaxed benefits total, ITTOIA 2005 s 643B(1) sets out a number of steps. Step 1 requires the benefits provided to the settlor (or close family member) in the year and any earlier year (but not before 2018/19) to be identified and (Step 2) valued in accordance with the valuation principles in ITA 2007 ss 742B–742E introduced by F(No 2)A 2017 s 31 and Sch 9. Where the person receiving the 475

10.21  Foreign Trusts benefit is the settlor, he must be ‘relevantly domiciled’ in the tax year, ie not UK domiciled under general law or deemed UK domiciled under the formerly domiciled resident rule (Condition A  in ITA  2007 s  835BA). The domicile status of close family members is not relevant where benefits are provided to them. The benefit must be provided out of property or income arising under the settlement. Under an interest in possession trust, the income arising under the settlement is that of the life tenant, and for the purposes of the untaxed benefit rules, the income is treated as provided by the trustees to that person at the time it arises, and the benefit provided is subject to adjustment for trustees’ expenses (ITTOIA 2005 s 643B(6), (7)). A deduction from total benefits is made at Step 3 for amounts subject to income tax under any other provision, income treated as arising in a prior year under these rules, income taxed under the transfer of assets abroad rules and gains matched under TCGA 1992 s 87. The net result (Step 4) is the untaxed benefits total for the current year. ‘Available protected income’ consists of ‘PFSI’ defined as protected foreign source income within ITTOIA 2008 s 628A (see 10.17 above) which would be treated as that of the settlor if protected status did not apply. The definition of PFSI is broadened to include all foreign source income whether or not the settlor would be chargeable on it if remitted to the UK (ITTOIA 2005 s 643C(3)). The income must be available to provide benefits to that person and not otherwise taxed on the settlor or close family member. From this amount is deducted amounts taken into account under the transfer of assets abroad rules (TOAA) and amounts previously subject to tax under ITTOIA  2005 s  643A (or the onward gift rules) in prior years (TI). Available protected income is therefore: PFSI – TOAA – TI Where the settlor is not UK domiciled (and not deemed domiciled), the income treated as arising under ITTOIA 2005 s 643A may be taxed on the remittance basis (ITTOIA  2005 s  643F). Matching rules apply to identify income with benefits for the purposes of identifying remitted amounts (ITTOIA  2005 s 643G).

Finance Act 2018 rules 10.21 Finance Act 2018 s 35 and Sch 10 enacted numerous complex antiavoidance provisions from 6 April 2018. There are three principal aspects to the changes. Firstly, the matching rules are modified to prevent gains being allocated to non-taxable beneficiaries (ie  beneficiaries who are non-UK resident or remittance basis users), leaving fewer gains to be allocated to UK resident beneficiaries. Further changes counter arrangements whereby a close family member of the settlor receives benefits provided by the trustees but 476

Foreign Trusts 10.22 that person is not taxable on the benefit received (because they are either not UK resident or taxable on the remittance basis and no remittance is made). In that case, a charge to tax is levied on the settlor if he is resident in the UK (ITTOIA 2005 ss 643A. In addition, in order to prevent benefits provided by trustees to a beneficiary who is not UK resident (or is UK resident but taxable on the remittance basis) being subsequently passed to one or more UK residents, a charge on ‘onward gifts’ is introduced. The effect of the FA 2018 changes is that trust distributions to non-UK individuals do not count in reducing the trustees’ pool of gains TCGA 1992 s 87, it is no longer possible to provide benefits to non-taxable close family members of a UK resident settlor, and ‘onward gifts’ to UK resident individuals are taxed (ITTOIA 2005 ss  643I–643N and TCGA  1992 ss  87D–87P, inserted by FA  2018 s  35 and Sch 10). The new income tax rules apply where an amount is treated as received by an individual within ITTOIA 2005 s 643A (the original beneficiary, meaning the settlor or a close family member) but the amount is not taxed, such as where the original beneficiary is not UK resident or is taxable on the remittance basis. If the original beneficiary is a close family member of the settlor, and the settlor is UK resident, the settlor is subject to income tax on the benefit. Where the provisions transferring liability to the settlor do not apply (eg where the settlor is deceased or not resident in the UK), or those rules do apply, but the settlor is taxable on the remittance basis and has not made a remittance before the end of the relevant tax year, the FA 2018 onward gift rules seek to tax the subsequent recipient of the gift. The amount received must be matched to a benefit provided to the original beneficiary, in the tax year or an earlier tax year. There must also be arrangements or an intention at the time the benefit was provided to the original beneficiary for all or part of it to be passed to the subsequent recipient at a time when it was reasonable to expect that person to be UK resident.

Pre-condition 10.22 The gift by the original beneficiary must be made in anticipation of the benefit being received from the trustees, or within three years of its provision (ITTOIA 2005 s 643I(1)(a)–(g)). Tracing rules apply to prevent a charge being avoided by original beneficiary substituting the property received as a benefit with other property which is then gifted to the subsequent recipient. There is a rebuttable presumption that if the original beneficiary makes an onward gift within three years of receiving a benefit, there were ‘arrangements’ or ‘an intention’ for the subsequent beneficiary to receive the gift at the time the benefit was provided (ITTOIA 2005 s 643I(6)). Some Counsel have expressed the view that the three-year limit is an absolute bar to HMRC applying these 477

10.23  Foreign Trusts provisions. The better view may be that all that changes before and after the three-year period is that the burden of proof moves from the taxpayer to show no arrangement, to HMRC having to prove that there was an arrangement. 10.23 Where the various requirements above are established, a charge to income arises on the subsequent beneficiary if he is UK resident for the year in which the gift is made, and the year in which the benefit is provided to the original beneficiary (Year Z), if later. The amount of the charge is equal to the amount of the onward gift, or such amount of it is remitted where the subsequent beneficiary is taxable on the remittance basis (ITTOIA 2005 s 643J(3)). Where the gift exceeds the benefit received by the original beneficiary, the income tax charge is restricted to the amount of the benefit (ITTOIA 2005 s 643J(4)). If the subsequent recipient is non-UK resident for the year in which the gift is made, or is resident for the gift year but not Year Z (the year in which the benefit is provided to the original beneficiary), a charge does not arise. Similarly, no charge will arise where there is no remittance to the UK notwithstanding that the subsequent beneficiary is resident in both the gift year and Year Z, if later. In both cases, however, in the event that the subsequent recipient makes a further onward gift within three years, he is treated as if he were an original beneficiary (ITTOIA 2005 s 643K). Although the onward gift rules apply to gifts made on or after 6 April 2018, the three-year period mentioned above between the date of the distribution to the original beneficiary and when a benefit may be received by a UK resident person may be before this date. To that extent, there is an element of retrospection in these provisions. 10.24 The charge is transferred to the settlor where the subsequent recipient is a close member of the settlor’s family and is either non-UK resident, or resident but taxable on the remittance basis and no part of the onward payment is remitted to the UK. The rule applies only where the settlor is UK resident and neither domiciled in the UK under general law, nor a formerly domiciled resident under Condition A in ITA 2007 s 835BA. The amount treated as the income of the settlor is the unremitted amount, reduced to the extent any part of it is subject to income tax on the settlor under another provision (ITTOIA 2005 s 643L). The settlor is entitled to recover the amount of tax suffered as a result of this provision from the subsequent recipient. The onward gift rules are extended to apply where the original recipient of a benefit is not a close family member of the settlor, but there are arrangements or an intention at the time the benefit is provided by the trustees, for the original recipient to pass on all or part of the benefit to a UK resident close family member of the settlor. The gift by the original recipient must be made (directly or indirectly) within three years of the benefit being provided (or in anticipation of it being so provided), and include the whole or part of the 478

Foreign Trusts 10.26 benefit. These provisions apply only where the original recipient is not taxed on the benefit (ITTOIA 2005 s 643M(1)). Tracing rules apply where there are a series of gifts (ITTOIA 2005 s 643M(2)). The subsequent recipient is treated as receiving a benefit provided by the trustees at the time the onward gift is made, equal to that gift. It is assumed unless proved to the contrary that if the original beneficiary makes an onward gift within three years of receiving a benefit, there were ‘arrangements’ or ‘an intention’ for the subsequent beneficiary to receive the gift at the time the benefit was provided (ITTOIA 2005 s 643M(5)).

Transfers of assets abroad 10.25 Where the income is not taxable on the settlor under the settlement provisions in ITTOIA 2005 Part 5 Chapter 5, it may be taxable under the transfer of assets abroad anti-avoidance provisions in ITA 2007 ss 714–751. ITA 2007 ss 743, 744 and 751 provide that no income should be taken into account more than once in charging tax under the provisions of ITA 2007 ss 714–751, so that income already taxed (eg  under the settlement provisions), cannot be taxed again. However, where there is a choice as to the persons in relation to whom an amount of income can be taxed under ITA 2007 ss 714–751, the income can be taxed on any one of them or apportioned to more than one in such a manner as appears to HMRC to be just and reasonable (ITA 2007 ss 743, 751). Such a decision is appealable to the Upper Tax Tribunal under ITA 2007 s 751. The income to be charged is restricted to the amount chargeable under ITA  2007 ss  714–751 and Sch  2 paras 134–141 on the income arising, the benefit to the beneficiary, or the amount of income giving rise to the benefit to the beneficiary, or the amount of income out of which the benefit is provided under ITA 2007 s 744.

Charge on transferor 10.26 ITA 2007 s 720 applies where there has been at any time a transfer of assets by an individual resident (ordinarily resident before 2013/14) in the UK as a result of which, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled outside the UK. Income which has been subject to UK tax under the controlled foreign company legislation is excluded by ITA  2007 s  725. In IRC  v Willoughby [1997]  STC  995 it was held to be necessary for the transferor to have been ordinarily resident in the UK at the time of the transfer, but the legislation was amended by FA 1997 s 81 in respect of income arising on or after 26 November 1996 to remove the requirement that the taxpayer should have been ordinarily resident in the UK at the time when the transfer was made (ITA 2007 ss 721(5), 728(3)). Accordingly, there is no tax avoidance motive required to bring these provisions into effect (Carvill v IRC [2002] STC 1167), subject to the possible motive defence under ITA 2007 ss 736–742 (see 10.52). 479

10.27  Foreign Trusts 10.27 In order for there to be a charge under ITA 2007 s 720 (ICTA 1988 s 739), the taxpayer must have the power to enjoy, whether presently or in the future, any income of a person resident or domiciled outside the UK which, if it were income received by him in the UK, would have been chargeable to income tax whether by deduction at source or otherwise. That income shall be chargeable on the taxpayer where it arises by virtue of or in consequence of the transfer of assets, either alone or in conjunction with associated operations (ITA  2007 ss  718, 720, 721). The HMRC interpretation of these provisions is that any disposal of assets made at any time by the individual to a company, trust or other person abroad is a transfer of assets or, alternatively, an associated operation for the purposes of ITA 2007 s 720. If all the necessary conditions are fulfilled, the income of the foreign person is deemed to be that of the individual who made the transfer for all the purposes of the Income Tax Acts. ITA 2007 s 720 can potentially apply not only to an individual who transfers assets, but also to someone who is ‘associated with’ a transaction (according to the decision of the courts in Vestey v IRC  [1977]  STC  414). HMRC regards this as including anyone who procured the transfer of assets (Tax Bulletin, Issue 40, April 1999; INTM600020). Where the same assets are transferred by several individuals, HMRC practice is to assess the transferors in proportion to their share of the assets transferred. Thus where, for example, shares of a UK company are held by three shareholders in the proportion 40%, 40% and 20%, and there is an ITA  2007 s  720 liability in respect of the income of an overseas person to whom the shares are transferred, the liability is assessed on each of the three shareholders in proportion to their respective holdings. 10.28 Where an individual receives, or is entitled to receive, any capital sum at any time, the payment of which is in any way connected with the transfer, or any associated operations, and income (as a result of the transfer directly or indirectly) becomes the income of a person resident and domiciled outside the UK (whether or not it would otherwise be chargeable to income tax), it is deemed to be the income of the transferor for all income tax purposes (ITA 2007 s 720). Capital sum includes any sum payable by way of a loan or the repayment of a loan, and any other sum paid or payable otherwise than as income, except where the sum is paid for full consideration in money or money’s worth (ITA 2007 s 729(3)). The right to a capital sum includes the right of a third person entitled to receive it by virtue of the individual’s direction, or by virtue of the assignment of his right (ITA 2007 s 729(4)). Income is not assessable on the individual under these provisions where the capital sum is a loan which has been repaid before the beginning of the tax year (ITA 2007 s 729(2)). From 2017/18, the amount of income charged on the transferor is adjusted for protected foreign source income (PFSI) where the settlor becomes deemed UK domiciled on or after 6 April 2017 and is not a formerly domiciled resident (ITA 2007 s 728 as amended by F(No 2)A 2017 s 29(2) and Sch 8; ITA  2007 s  729A). The rules operate in a broadly similar manner to those outlined above in relation to the charge under ITA 2007 s 720 (see 10.25). 480

Foreign Trusts 10.32 10.29 ITA 2007 s 720 is one of the earliest targeted anti-avoidance provisions and it has given rise to many cases over the years. In the leading case of Lord Howard de Walden v IRC  (1941) 25  TC  121, an individual transferred a valuable asset to four Canadian companies for a series of promissory notes, which included an income element taxable as foreign income, as held in Lord Howard de Walden v Beck (1940) 23 TC 384. The charge under ITA 2007 s 720 on Lord Howard de Walden was based on the entire income of the Canadian companies. An argument that he only had powers to enjoy a small proportion of that income was rejected, Lord Green MR commenting ‘it scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers’. A transfer of shares to a Canadian company controlled by the taxpayer for a series of promissory notes also enabled the (then) Revenue to assess him on the entire income of the company in Lee v IRC  (1941) 24  TC  207. Similar transfers to Canadian companies in return for debentures were successfully assessed by the then Revenue under ITA 2007 s 720 in Cottingham’s Executors v IRC  (1938) 22  TC  344; Admiral Earl Beatty’s Executors v IRC  (1940) 23 TC 574; and Beatty v IRC (1940) 23 TC 574. A transfer in exchange for a credit to a loan account led to a charge to tax on the company’s income in Ramsden v IRC (1957) 37 TC 619. 10.30 In IRC v Botnar [1999] STC 711 a transfer to an overseas trust, which excluded the settlor from benefiting, was not sufficiently tightly drafted to prevent the trustees from resettling at some time in the future on another trust which could include the settlor, and there was evidence that this was indeed the intention. As a result the (then) Revenue were able to tax the trust income on the settlor on the basis that he had power to enjoy the income. The sale of an interest in a partnership in return for debentures in a company led to the income of the company being taxed on the transferor’s husband under ITA  2007 s  720 in Latilla v IRC  (1943) 25  TC  107. Other cases involving associated operations include Corbett’s Executrices v IRC (1943) 25 TC 305 and Aykroyd v IRC (1942) 24 TC 515. 10.31 In spite of the title of ITA 2007 Part 13 Chapter 2 ss 714–751 referring to the transfer of assets abroad, there is in fact no requirement for the transfer to be from the UK to overseas. The only requirement is the transfer of an asset, even to a UK resident, if as a result income becomes payable overseas (Congreve and Congreve v IRC (1948) 30 TC 163). This case was unusual in that the individual assessed had not made the transfer but had procured that it be made. In Philippi v IRC (1971) 47 TC 75 the taxpayer’s father who was resident in the Republic of Ireland, had transferred UK securities to an Irish company the income for which was then taxed on the UK resident son under ITA 2007 s 720. 10.32 The definition of assets involved in a transfer of assets is extremely wide. In IRC v Brackett; Brackett v Chater [1986] STC 521 an employment contract with an overseas company amounted to a transfer of assets, namely its rights under the contract, as a result of which the income of the company 481

10.33  Foreign Trusts was assessed on the employee under ITA 2007 s 714(4). A complex scheme involving the assignment of dividends was duly caught in IRC v McGuckian [1997] STC 908. In this case the intervening sale of dividends for a capital sum was disregarded as having been inserted for the sole purpose of gaining a tax advantage, applying the doctrine in W T Ramsay Ltd v IRC [1981] STC 174. 10.33 Where investments had been transferred to an overseas company, the costs of managing the company were disallowed in computing the income assessable under what is now ITA  2007 ss  720 et seq in Lord Chetwode v IRC [1977] STC 64, as there would not have been any allowance for managing the investments if they had been retained by the individual. ITA 2007 s 720 is extended to the spouse or civil partner of the individual making the transfer by ITA 2007 s 714(4), but this does not include a widow (Lord Vestey’s Executors v IRC; Lord Vestey’s Executors v Colquhoun (1949) 31  TC  1). The (then) Revenue originally argued that ITA 2007 s 720 applied to beneficiaries of a trust set up by the transferor and had been successful in Bambridge v IRC (1955) 36 TC 313. This case was overruled, however, by Vestey v IRC [1980] STC 10, although it remains an authority for the definition of ‘associated operation’ within ITA 2007 s 719. In the Vestey case the (then) Revenue had argued that it was entitled to assess each of the beneficiaries of the trust on the whole of the trust income, although it would not normally do so. As a result, ITA 2007 s  720 was extended by legislation to enable non-transferors to be assessed under ITA 2007 ss 731–735. A case where the Revenue failed to establish an associated operation on the transfer of investments to an Irish company was Fynn v IRC (1957) 37 TC 629 and a similar result was reached in Herdman v IRC (1969) 45 TC 394. Where the transferors do not control the company to which the assets have been transferred, it was held that they did not have power to enjoy the income (IRC  v Pratt [1982]  STC  756). The power to appoint trustees is not, of itself, a power to enjoy the income of the trust (IRC v Schroder [1983] STC 480). 10.34 An argument that income was taxable under ITA 2007 s 720 was not successful in avoiding a criminal prosecution for cheating the Public Revenue in R v Dimsey [2001] STC 1520 and R v Allen [2001] STC 1537. The potential criminal consequences of unsuccessfully trying to avoid tax through the use of overseas companies and trusts is illustrated in these cases and in R v Charlton [1996] STC 1418; R v Hunt [1994] STC 819; and R v W [1998] STC 550. 10.35 The basic provisions in ITA 2007 s 720 are supplemented to confirm that income tax at the basic rate or the starting rate for savings (or Scottish and Welsh equivalents from 6 April 2018 and 2019 respectively) or the appropriate dividend rate shall not be charged under ITA 2007 ss 714–751 to the extent that income has already borne tax at that rate by deduction or otherwise; but, apart from that, the income is taxable as miscellaneous income (ITA 2007 s 745(1)). Prior to the abolition of the dividend tax credit from 6 April 2016, this also applied to income chargeable at the dividend rate, which would have been 482

Foreign Trusts 10.37 assessed if it came from a foreign source and is chargeable under ITTOIA 2005 Part 8, it was a non-qualifying distribution on which the dividend ordinary rate was deemed to have been paid under ITA 2007 s 451 or ITTOIA 2005 ss 399, 400, or a stock dividend under which ordinary dividend rate tax was deemed to have been paid under ITTOIA 2005 ss 409–414, or tax was due on the release of a close company loan in respect of which dividend ordinary rate tax was deemed to have been paid under ITTOIA 2005 s 421(1). In computing the tax due under ITA 2007 s 720, the same deductions and reliefs shall be allowed as would have been allowed if the income deemed to be his had actually been received by him (ITA 2007 s 746). 10.36 A non-UK domiciliary is not chargeable to tax on any income deemed to be his if it would not have been taxed had it in fact been his income, ie if it had not been remitted to the UK where the remittance basis applies by reason of his non-UK domicile (ITA 2007 ss 726, 730). Trustees of an offshore trust settled by a UK resident non-domiciliary could, by investing directly in UK assets, give rise to a deemed remittance by the settlor under these provisions. Where the deemed income has been taxed under ITA 2007 s 720 and is subsequently received by the individual who is being taxed, it does not again form part of his income for tax purposes (ITA 2007 s 743(4)). Where an individual is taxable on a benefit under ITA 2007 ss 722, 723 as a result of a transfer which makes him liable to tax under ITA 2007 s 720, the whole amount of the benefit is taxable except to the extent that it can be shown to have been derived from income already charged to tax, notwithstanding the credit for basic rate or (prior to 2016/17) dividend ordinary rate tax normally available under ITA 2007 ss 720, 727 (IRC v Botnar [1999] STC 711). From 6 April 2017, the transfer of asset abroad rules incorporate protection from tax charges which would otherwise arise under ITA 2007 s 720 on ‘protected foreign source income’ (ITA 2007 s 721A, inserted by F(No 2)A 2017 s 29(2) and Sch 8). These trust protections do not apply to formerly domiciled residents who are deemed to be UK domiciled within ITA 2007 s 835A. 10.37 The form of the trust protections under the transfer of assets abroad code closely follows that of the settlor-interested settlement rules described above in 10.16. Income of a non-UK resident trust and underlying overseas companies held by the trustees (the ‘person abroad’) is protected foreign source income for the purposes of ITA 2007 s 720 if the income would be relevant foreign income if it arose to the transferor directly, and the settlor/transferor was not UK domiciled at the time the settlement was created (or deemed UK domiciled if the date of the settlement is on or after 6 April 2017) (ITA 2007 s 721A(3)(a)–(d)). ‘Tainting’ provisions operate such that protection for foreign source income is lost if income is provided directly or indirectly for the purposes of the settlement by the settlor/transferor or by the trustees of any other settlement of 483

10.38  Foreign Trusts which he is a beneficiary or settlor at any time in the period commencing on 6 April 2017 (or date of the creation of the settlement, if later) and ending with the end of the tax year in which the settlor/transferor is deemed UK domiciled (ITA 2007 s 721A(3)(e)). The addition of value to property comprised in the settlement is treated as the direct provision of property for the purposes of the settlement (ITA 2007 s 721A(5)). As with the settlor-interested settlement rules, there are exceptions to the tainting provisions for arm’s-length transactions and transactions not intended to confer gratuitous benefit (ITA 2007 s 721B(2). For further details, see 10.16–10.19. 10.38 The transfer of assets abroad charge also incorporates rules providing for a charge on a UK resident settlor (transferor) where benefits are received by a close family member (defined as the settlor’s spouse/civil partner, person with whom he is living as a spouse/civil partner, and his minor unmarried children) and are not subject to tax on the beneficiary, ie where the beneficiary is non-UK resident or taxable on the remittance basis). The charge on the UK resident settlor is the lower of the value of the benefit and the protected income (ITA 2007 s 733A; s 721(3BA)). Where the settlor is non-UK domiciled (and not deemed domiciled), the remittance basis may apply to the charge arising under ITA 2007 s 733A (ITA 2007 s 735B(1), (2)). A remittance by the settlor in the overseas part of a split year is taxable, as the usual rule in ITTOIA 2005 s 832(2) is disapplied (ITA 2007 s 735B(4)). The provisions closely follow those under ITTOIA 2005 s 643A et seq, however, an important difference to note is that the provisions of ITA s 733A apply from 2017/18 and not 2018/19.

Associated operations 10.39 Associated operation for these purposes is defined by ITA 2007 s 719 as an operation of any kind effected by any person in relation to any of the assets transferred or any assets representing, whether directly or indirectly, any of the assets transferred, or to the income arising from any such assets, or to any assets representing, whether directly or indirectly, the accumulations of income arising from such assets. As will be appreciated, this is an extremely wide definition. Cases on associated operations mentioned above include Latilla v IRC (1943) 25  TC  107; Corbett’s Executrices v IRC  (1943) 25  TC  305; Bambridge v IRC (1955) 36 TC 313; and Congreve and Congreve v IRC (1948) 30 TC 163 (subject to Viscount Dilhorne’s comments in Vestey v IRC [1980] STC 10).

Power to enjoy 10.40 Power to enjoy income of a person resident or domiciled outside the UK includes income so dealt with as to be calculated at some point in time, and 484

Foreign Trusts 10.42 whether in the form of income or not, to enure for the benefit of the individual (ITA 2007 ss 721–724). Where the receipt or accrual of income increases the value to the individual of any assets held by him or for his benefit, he has power to enjoy. Where the individual actually receives a benefit provided out of the income arising as a result of the transfer of assets, he is taxable on the value of the benefit (IRC v Botnar [1999] STC 711). The value of the benefit is the market value which, on the basis of the CGT cases of Billingham v Cooper and Edwards v Fisher [2001] STC 1177, would seem to be the amount which would be paid by the recipient of the beneficiary if he were in receipt of the benefit on arm’s-length terms. 10.41 For 2017/18 (and subsequent tax years), the valuation of certain benefits is provided by ITA 2007 ss 742B–742E (inserted by F(No 2)A 2017 s 31, Sch 9 para 2). In the case of loans, the value of the benefit is calculated by reference to the official rate of interest for the tax year (ITA 2007 s 742C). For tangible movable property, such as paintings, the value of the benefit is found by applying the official rate to the capital cost of the property during the year, with deductions given for any amounts paid by the person receiving the benefit, for example insurance, maintenance or storage. The capital cost is the property’s market value at the time of acquisition plus enhancement expenditure, or the consideration given for the property, whichever is the greater (ITA 2007 s 742D). For value of the benefit in respect of land is the rental value, defined as the ‘annual value’, ie the rent which the land might reasonably be expected to yield if the tenant were to pay all the taxes, rates and charges which are usually the responsibility of the tenant. A deduction is given for any amounts in respect of repairs, insurance or maintenance by the person receiving the benefit (ITA 2007 s 742E). 10.42 Prior to 6 April 2017, there were no statutory provisions governing the valuation of benefits. In some cases, the value of the benefit was readily ascertainable from the market, eg  the rental value of a property or the cost of hiring a yacht or car or the benefit of an interest-free loan. In the Special Commissioners’ decision of IRC  v Botnar [1998]  STC  38 concerning the rent-free occupation of a flat, under licence from the trustees, the value of the benefit was held to be the rent which the taxpayer would have had to pay on an arm’s-length letting. In other cases it was far harder to find a market value – the benefit of having an Old Master on the wall is difficult to quantify. Many owners of such works lend them to museums and art galleries on the basis that the museum takes responsibility for the painting and makes sure that it is secure and in a properly controlled environment, but no rent is paid for its loan. If the trustees of an offshore settlement lent such a painting to the UK resident beneficiary on condition that the beneficiary insured the painting and provided a proper controlled environment and security, it could have been quite proper to argue that there was no taxable benefit under ITA 2007 s 723, or that 485

10.43  Foreign Trusts the non-monetary benefit of the enjoyment of the painting may be covered by the actual costs of the insurance and security measures required by the trustees. A similar argument may have been equally valid in the case of antique furniture, sculptures and other assets for which there is no rental market. HMRC, however, usually seemed to argue that the value of the benefit is at least 1% of the value of the asset. The introduction of ITA 2007 ss 742B–742E put such arguments out of the taxpayer’s reach, at least for 2017/18 and later years. 10.43 If an individual may, on the exercise or successive exercise of one or more powers, with or without the consent of another person, become entitled to the beneficial enjoyment of the income, he is taxable on it under ITA 2007 s 723(4)–(6). Although this is extremely widely drawn, it can hardly mean that a discretionary beneficiary who has not benefited from a trust, but could if the trustees were to exercise their discretion in his favour, be taxed on the income of the trust, as this would reintroduce the situation identified as unacceptable in Vestey v IRC [1980] STC 10. What it is aimed at is a situation where the trustees have power to appoint back to the settlor or to resettle for his benefit, as in IRC v Botnar [1999] STC 711. 10.44 If the individual is able to control the application of the income directly or indirectly, he has power to enjoy it under ITA  2007 s  723(7) (ICTA 1988 s 742(2)(e)). This was held to apply in the case of a taxpayer who had retained voting shares in a company (Lee v IRC (1941) 24 TC 207) but not to fiduciary powers as in Lord Vestey’s Executors v IRC and Vestey’s Executors v Colquhoun (1949) 31 TC 1 and IRC v Schroder [1983] STC 480. 10.45 It has been established by the courts (in Lord Howard de Walden v IRC (1941) 25 TC 121) that ‘power to enjoy’ the income of a person resident or domiciled outside the UK is not restricted to the income or benefit actually received. However, it has not been determined by the courts whether all the income of the overseas person should be assessed, or only the income of that person to the extent that it arose by virtue or in consequence of the relevant transfer of assets and any associated operation(s). It has been HMRC’s practice (since the decision in Vestey v IRC [1977] STC 414) to assess on the second of those two possible bases (Tax Bulletin, Issue 40, April 1999). 10.46 In determining whether an individual has power to enjoy income it is necessary to look at the overall picture, including the effect of the transfer and associated operations and the benefits which he might as a matter of practice enjoy (ITA 2007 s 722) ITA 2007 s 747 ensures that the liability under ITA  2007 s  720 takes proper account of charges and allowances under the accrued income scheme (ITA 2007 ss 616–677). A number of terms are widely defined by ITA 2007 ss 714–719, such as references to an ‘individual’ including the spouse of the individual, ‘assets’ as including property rights of any kind, ‘transfer’ including the creation of such rights, and ‘benefit’ including any 486

Foreign Trusts 10.48 payment of any kind. Spouse could include a future spouse (IRC  v Tennant (1942) 24 TC 215), however unlikely the individual is to marry (Unmarried Settlor v IRC [2003] STC (SCD) 274).

Potential double charge 10.47 Where a company is incorporated outside the UK, it is treated for the purposes of ITA 2007 s 720 as if it were resident outside the UK, even though it may be resident in the UK by reason of central management and control being in the UK (ITA 2007 s 718 and Sch 2 para 138). It is quite common for non-UK domiciliaries to use non-UK companies to trade in the UK for IHT or CGT reasons, even though the company is managed and controlled in the UK and liable to UK corporation tax. It would seem, therefore, that the income of the company which was subject to UK corporation tax could also be taxed on the individual making a transfer under ss 720–739. The Court of Appeal, in R v Dimsey and R v Allen [1999] STC 846, accepted that this potential double charge on the same income was possible under the legislation, although the courts might be invited to prohibit it as an abuse of power; in the House of Lords, counsel for the (then) Revenue, in R v Dimsey [2001] STC 1520 per Scott LJ at 1530, confirmed that, if the Revenue were seeking to recover income tax against a transferor on the basis of a foreign incorporated UK resident company under these provisions, credit would always be given for any tax that had been paid on the same income by the company. The courts, however, accepted that profits were liable both to corporation tax on the company and income tax on the transferor under ITA 2007 s 720.

Charge on beneficiary 10.48 The extension of the transfer of asset provisions to non-transferors applies where, by virtue or in consequence of a transfer of assets, either alone or in conjunction with associated operations, income becomes payable to a person either domiciled or resident outside the UK, and an individual resident in the UK, who is not subject to tax under ITA 2007 s 720 by reference to the transfer, receives a benefit provided out of assets which is available for the purpose by virtue or in consequence of the transfer or any associated operations (ITA 2007 ss 716, 718). The amount of the benefit which is taxable is limited in the first instance to the income arising up to and including the year of assessment in which the benefit is received (ITA  2007 ss  731–733). However, if the value of the benefit exceeds the available income the excess is carried forward and treated as income of the individual for future years, to the extent of the income that becomes available in future years (ITA ss  731–733). Where there is no income in the trust because, for example, the only asset is property in the UK owned by the foreign trustees and occupied by the individual as beneficiary, there is no income to deem to be that of the beneficiary under these provisions 487

10.49  Foreign Trusts in spite of the fact that he is in receipt of a benefit. If, however, the property were held through an overseas company of which the individual could be held to be a director or a shadow director, he could be taxed on employment income as receiving a benefit in kind under ITEPA 2003 ss 67, 97–113, 201–210 (R v Allen [2001) STC 1537). 10.49 The relevant income tax year of assessment is that in which the benefit is provided, and the assessment on the beneficiary is as miscellaneous income (ITA  2007 s  722). A  non-domiciliary is not to be taxed on any benefit not received in the UK if he would not have been subject to tax if he had received it directly, and not through the trust, on account of not being UK domiciled, ie  if it would not have been a constructive remittance within ITTOIA  2005 ss 832–832B, ITA 2007 s 747. Where a benefit is taxed on a beneficiary under the CGT anti-avoidance provisions in TCGA  1992 ss  87, 89(2) or Sch  4C para 8, he is treated as having been taxed on the benefit for the purposes of future income arising in the trust, which would otherwise be taxable on him under ITA 2007 ss 731–734. For the purpose of these sections, a transfer or associated operations can take place at any time, but it only applies to relevant income arising on or after 10 March 1981, when the legislation to catch nontransferors first became effective, following the Revenue’s defeat in Vestey v IRC [1980] STC 10. Before 6 April 2018, it was potentially possible for a non-resident beneficiary to reallocate amounts distributed to him by non-UK resident trustees through, for example, resettling part of the funds for the benefit of resident beneficiaries. FA 2018 s 35 para 10 introduce provisions aimed at ensuring those receiving benefits under the transfer of assets abroad rules are not able to pass this on to UK resident individuals. 10.50 The ‘onward gifts’ rules apply from (ITA 2007 ss 733B–733E inserted by FA 2018 s 35 and Sch 10) to counter such planning. The rules closely follow those applying to settlor interested trusts under ITTOIA 2005 s 643A etc seq and broadly apply where: (a) a benefit arises but is not taxed on a beneficiary, for example, owing to the beneficiary’s residence outside the UK or is taxable on the remittance basis); (b)

the settlor attribution rule in ITA 2007, s 733A does not apply (or it does apply but the settlor is taxable on the remittance basis);

(c) the benefit giving rise to the deemed income must be matched with protected foreign source income (ITA 2007 s 735A); (d)

at the time the benefit was provided to the original beneficiary, which may be before or after 6 April 2018, there was an intention or arrangement for all or part of the benefit to be passed to the subsequent recipient at a time when it was reasonable to expect that person to be UK resident; 488

Foreign Trusts 10.52 (e) the original beneficiary makes a gift to the subsequent recipient in anticipation of a benefit being received, or within three years of its provision (ITA 2007 s 733B(1)(a)–(g)). The charge applies where the property which is the subject of the gift is derived from or represents the property received as a benefit by the original beneficiary. Unless it can be demonstrated to the contrary, if the original beneficiary makes an onward gift within three years of receiving a benefit, it is assumed there were ‘arrangements’ or ‘an intention’ for the subsequent beneficiary to receive the gift at the time the benefit was provided (ITA 2007 s 733B(6)). 10.51 Where the various requirements above are met, a charge to income arises on a UK resident subsequent beneficiary equal to the amount of the onward gift, or such amount of it is remitted where the subsequent beneficiary is taxable on the remittance basis (ITA  2007 s  733C(3)). Where the gift exceeds the benefit received by the original beneficiary, the income tax charge is restricted to the amount of the benefit (ITA 2007 s 733C(4)). A  charge does not arise under these rules if the subsequent recipient is not resident for the year in which the gift is made, or is resident for the gift year but not the year in which the benefit is provided to the original beneficiary (if later). Similarly, no charge will arise where the subsequent recipient is taxable on the remittance basis and does not remit the gift. In both cases, however, in the event that the subsequent recipient makes a further onward gift within three years, he is treated as if he were an original beneficiary (ITA 2007 s 733D). The charge is transferred to the settlor where the subsequent recipient is a close member of the settlor’s family and is either non-UK resident, or resident but taxable on the remittance basis and no part of the onward payment is remitted to the UK. The rule applies only where the settlor is UK resident and neither domiciled in the UK under general law or a formerly domiciled resident under Condition A in ITA 2007 s 835BA. The amount treated as the income of the settlor is the unremitted amount, reduced to the extent any part of it is subject to income tax on the settlor under another provision (ITA s 733E). The settlor is entitled to recover the amount of tax suffered as a result of this provision from the subsequent recipient.

Non-tax-avoidance motive 10.52 It was possible, prior to 5  December 2005, although often difficult in practice, to avoid the rigours of ITA 2007 ss 714–751 by showing, to the satisfaction of HMRC, that the purpose of avoiding liability to taxation was not the purpose or one of the purposes for which the transfer or associated operations or any of them were effected, or that the transfer and any associated operations were bona fide commercial transactions and were not designed 489

10.53  Foreign Trusts for the purpose of avoiding liability to taxation (ITA 2007 ss 739–742). Any decision of HMRC on this was subject to appeal to the Special Commissioners. An argument that the avoidance of estate duty was not the avoidance of taxation failed in Sassoon v IRC (1943) 25 TC 154. By analogy, it also included the avoidance of CGT. The Special Commissioner rejected a case where 59% of the shares in a UK company, held by a non-domiciliary, were transferred to a Bermudan company (Carvill v IRC [1996] STC 126). However, in a subsequent hearing relating to the same company, the Special Commissioner, having heard further evidence, came to the conclusion that the transfers were bona fide commercial transactions within s  741(b) (Carvill v IRC (No  2) [2000]  STC (SCD) 143). In Beneficiary v IRC  [1999]  STC (SCD) 134 it was held that the rearrangement of funds by a Japanese citizen transferring money to Jersey was legitimate tax mitigation, not tax avoidance, within ITA 2007 ss 739–742 (ICTA  1988 s  741(a)), relying on the distinction in IRC  v Challenge Corpn Ltd [1986] STC 548. This distinction, however, was criticised in MacNiven v Westmoreland Investments Ltd [2001] STC 237. The transfer of assets to Jersey companies was caught in Burns and Another v RCC (2009) STC (SCD) 165. 10.53 From 5 December 2005, the requirements for the non-tax avoidance motive exemption were tightened and re-written in ITA 2007 ss 736–742. After that date, it is necessary to satisfy an officer of HMRC that condition A  or condition B is met. Condition A is that it would not be reasonable to draw the conclusion from all the circumstances of the case that the purpose of avoiding liability to taxation was the purpose or one of the purposes for which the relevant transactions or any of them were effected. Condition B applies where all the relevant transactions were genuine commercial transactions and it would not be reasonable to draw the conclusion from all the circumstances of the case that any one or more of those transactions was more than incidentally designed for the purpose of avoiding liability to taxation. The intentions and purposes of any person, such as a tax adviser, who has designed, effected or provided advice in relation to the transactions must be taken into account. Commercial transactions are defined by ITA 2007 s 738 as effected in the course of a trade or business and for its purposes or with a view to setting up and commencing such a trade or business, and must not be other than on arm’s-length terms or with unconnected persons dealing at arm’s length. Making and managing investments is only a trade or business so far as the transactions were between unconnected persons dealing at arm’s length. 10.54 A defence to a charge under ITA 2007 s 720 et seq of that Act was not always a good idea if the alternative led to a CGT charge under TCGA 1992 s  87, which, because the gains had been rolled up within the trust, became subject to a surcharge as notional interest under TCGA 1992 s 91, which could have increased the effective rate of tax from 40% to 64% (six years at 10% of 40% see 10.119 et seq). From 6 April 2008, however, the effect of the reduction of the rate of capital gains tax to 18% (FA 2008 s 8) and the change in the basis of matching capital payments from a FIFO to a LIFO basis by TCGA 1992 490

Foreign Trusts 10.57 ss 91(1A) and 87A has reduced the maximum effective rate to 28.8%. However from 23 June 2010 28% plus the increase in the rate of capital gains tax to 28% has increased the maximum effective rate to 44.8% (28% plus six years at 10% of 28%), (F(No 2)A 2010 Sch 1).

Information powers 10.55 HMRC is given wide powers to obtain information in connection with transfers of assets abroad by ITA 2007 s 748. They may issue a notice requiring information to anyone, allowing a minimum of 28 days to respond. Attempts to avoid a notice failed in Royal Bank of Canada v IRC  (1971) 47 TC 565 and in Clinch v IRC [1973] STC 155. The favourite recipients of these notices are banks, as HMRC has apparently found notes made by bank managers in relation to offshore planning structures refreshingly informative. Solicitors are required only to confirm that they were acting on behalf of a client and to give their name and address and the name and address of any transferor and transferee for whom they have acted and a name and address of any body corporate which they have formed and similarly in connection with any offshore trust (ITA 2007 ss 748(4), 749(1)). The companies referred to are those which would be close companies if resident in the UK. Banks are not compelled to furnish particulars of ordinary banking transactions, but the onus of proof is on the bank to show that the transactions were such (Royal Bank of Canada v IRC (1971) 47 TC 565). 10.56 A  notice under ITA  2007 s  748(3) may require particulars as to transactions with respect to which the recipient of the notice has acted on behalf of others, whether or not any tax liability is thought to arise for the recipient of the notice, and whether or not the recipient of the notice has taken any part in any transactions of a description specified in the notice. Failure to comply with a notice under these provisions resulted in penalties being charged in Mankowitz v Special Commissioners and IRC (1971) 46 TC 707. 10.57 HMRC is authorised to disclose information relating to the affairs of taxpayers to the authorities of another European Union state under the Mutual Assistance Directive 2011/16/EU aimed at improving mutual assistance between Member States’ tax authorities for the recovery of taxes, duties and other measures, and for improving administrative cooperation between Member States in the field of taxation. The Directive encompasses all taxes with the exception of VAT, customs duties, excise duties and social security contributions, which are covered by separate arrangements, and has been amended to extend the scope of automatic exchange provisions, for example to encompass new requirements such as country-by-country reports (Directive 2016/881/EU), beneficial ownership information (Directive 2018/2258/EU) and reportable cross-border arrangements (Directive 2018/822/EU). The authorities must be satisfied that the overseas Revenue authorities have similar 491

10.58  Foreign Trusts rules of confidentiality to those of the UK and that the information will only be used for tax or tax enforcement purposes by the other states. The mutual assistance provisions in VATA 1994 s 48 are defined by reference to FA 2011 s 87 and Sch 25, FA 2006 s 173 and Council Regulation (EC) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax. These may be amended by Treasury Order. 10.58 Exchange of Information provisions in double taxation treaties under TIOPA 2010 Part 2, Chapters 1–3 ss 2–4 and IHTA 1984 ss 158 include any information foreseeably relevant to the administration or enforcement of the tax laws of either territory. FA 2011 s 87 and Sch 25 implement the EU Council Directive 2010/24/EU on mutual assistance for the recovery of taxes, entitled the Mutual Assistance Recovery Directive (MARD). No obligation of secrecy precludes a public authority, etc from disclosing information in relation to a MARD-related agreement but to do so otherwise is an offence. It allows a foreign tax claim to be enforced in the UK if another Member State requests assistance in accordance with MARD but it must be halted if under appeal and ceased if a claim is determined in the taxpayer’s favour, but otherwise cannot be challenged. 10.59 The exchange of information among Revenue authorities in connection with taxpayers’ affairs has increased substantially in recent years, for example by the introduction of country-by-country reporting and reportable cross-border arrangements, and is likely to continue to do so. Structures are only tax efficient if they will withstand scrutiny by the Revenue authorities in all relevant jurisdictions on the assumption that the full facts are known to the authorities. 10.60 The EU made a Council Directive of 3 June 2003 on taxation of savings income in the form of interest payments (2003/48/EC  2003  STWI  1/2/05), the Savings Directive, which applied from 1 July 2005 to 31 December 2015 following the adoption of Directive 2014/107/EU, amending the provisions relating to the automatic exchange of information from 1 January 2016 under the Mutual Assistance Directive. The intention was that EU countries would exchange information on cross-border payments of interest and savings income payable to an individual to Competent Authorities within the EU. However, Austria and Luxembourg instead levied a withholding tax for a period as did Switzerland, Liechtenstein, Andorra, Monaco and San Marino. TMA  1970 ss  18B–18E provide the vires for regulations to be made to require paying agents to obtain information about the identity and residence of payees to whom they make savings payments, and to furnish this information to HMRC for submission to overseas Revenue authorities within the EU. The regulations are made by Treasury Order and allow HMRC inspection and provide for the levying of penalties for non-compliance under TMA 1970 s 98. Paying agents include public officers and government departments. At the time of writing, 109 countries have implemented exchange of information agreements. The 492

Foreign Trusts 10.62 first reports under the revised automatic exchange provisions (the Common Reporting Standard, or CRS) were made at the end of September 2017.

Information requirements Introduction 10.61 The world has changed significantly in recent years and it is convenient to divide reporting requirements into three separate categories: the EU, the USA and the rest of the world. To ensure that relevant information about taxpayers’ income, gains and assets reaches the tax authority in which they are resident, the EU has amended Council Directive 2011/16/EU on administrative cooperation in the field of taxation to require AEOI (automatic exchange of information) between the relevant tax authorities. Accordingly, trusts, trustees and their beneficiaries will need a TIN (taxpayer identification number) to hold or transfer money. A TIN tells a tax authority or reporting financial institution which tax authority it needs to report to and the identity of the relevant taxpayer, be it the beneficiary, the trust or the relevant taxpayer. Whichever rules apply, they tend to follow to a large extent the drafting of the original US FATCA rules. 10.62 All professional trustees are ‘Reportable Foreign Financial Institutions’ and if they have EU trustees, or beneficiaries, must therefore collate the data outlined above for reporting purposes. Non-professional trustees, for example, the father or brother of the settlor, are not required to report. Under EU anti-money laundering legislation, the most recent of which is the Fifth Anti-Money Laundering Directive (5AMLD), professional trustees are also required to hold identification verification (‘Know Your Client’ or KYC) information on all beneficiaries. If this includes, as is very common, children and grandchildren, this gives rise to some practical difficulties as not all individuals have a passport, driving licence or identity card. In practice, professional trustees might take the view that they can only practically enforce the KYC requirements on those who benefit from the relevant trust. However, we have no knowledge of this being sanctioned by any regulatory authority and guidance published by HMRC in respect of its Trust Registration Service makes it clear that trustees are required to provide detailed identity information regarding all named beneficiaries, irrespective of whether or not such beneficiaries have actually received a benefit from the trust unless their interest is contingent (see HMRC TRS FAQ’s published 22 November 2017). There are three principal regimes relevant to readers of this book. These are US FATCA, the EU AEOI regime and the OECD TIEA . 493

10.63  Foreign Trusts

US Foreign Account Tax Compliance Act 10.63 In 2010 the USA implemented a one-way system of reporting, Foreign Account Tax Compliance Act 2010 (FATCA). The sanction was that ultimately, a country could find itself with no compliant jurisdictions and effectively shut out of the global banking system. Furthermore, FATCA imposes a 30% withholding tax on anyone not identified as a US person. To avoid the withholding tax, a Reporting Foreign Financial Institution must identify a payee as a non-US taxpayer. If the payee is not identified as a taxpayer anywhere, the 30% withholding applies. Owing to the global nature of US FATCA, readers will be familiar with W8-BEN-E  and for many ordinary clients it will be simply a question of reporting their TIN and/or their FATCA status. For example, most trading businesses are Non-reporting Foreign Financial Entities (NFFEs). Professional trustees should already be registered for FATCA under a type A  or type B  arrangement. Type A  is where registration is with the local tax authority (eg  HMRC in the UK). Type B  arrangements require RFIs to register direct with the US  Inland Revenue Service. US FATCA does not apply to US overseas territories some of which, primarily Puerto Rico, have marketed themselves as US FATCA-free zones, however, this is because they report directly to the US IRS in any event. In addition, for families with members all over the world, US trusts are becoming more popular owing to the US/IRS reluctance to share data. The US has stated that it will share data with 24 countries, including the UK, but whether they will share, even on a request basis, remains to be seen. As an early adopter, the UK copied FATCA and imposed it on the Crown Dependencies and Overseas Territories (CDOTS) through a series of intergovernmental agreements. These have now been superseded by the CRS.

EU 10.64 At the time of writing, the EU consists of 28 member states, but at the time of publication this may be 27. The EU sees itself as a single country with many administrative regions contained within 28 countries, some of those countries eg Germany, Austria and Italy are federal in nature and states within them have autonomous tax powers. The EU information requirement is set out in EU Council Directive 2011/16/ EU as amended by Council Directive (EU) 2015/2376 on the automatic exchange of information. It is important to note that the EU regime only applies to EU-based trustees and payments to EU resident beneficiaries. The Channel Islands and other Crown Dependencies are not part of the EU for this purpose. 494

Foreign Trusts 10.67 Member states’ implementation of the Directive tend to follow to a large extent the drafting of the original US FATCA rules but unfortunately not with identical information fields.

Rest of world 10.65 The rest of the world relies on bilateral agreements or existing double tax treaties. Some countries have chosen to implement relevant provisions by entering into the MLIs. The scope of this very complex regime is outside the scope of this book.

Offshore funds 10.66 Under TIOPA  2010 ss  354–363 and the Offshore Funds (Tax) Regulations (SI  2009/3001) as amended offshore funds are classified as reporting or non-reporting funds with effect from 1 December 2009. Capital gains on disposal of reporting funds by individuals are subject to CGT at the usual rates of 20% or on the excess over the annual exemption of £12,000 (2019/20). Capital gains on disposals of non-reporting funds are taxed as income at income tax rates (20%, 40% or 45%) after allowances on the first £37,500, the next £100,000 and over £150,000, for 2019/20. Where the investor is a UK trust, a reporting fund gain is taxed at 20% for gains in excess of the annual exemption of £6,000 (2019/20). A non-reporting fund gain is taxed at the trust rate of 45% in 2019/20 with no annual exemption, under ITA 2007 ss 481 and 482 and SI 2009/3001 reg 17. An offshore fund is defined by TIOPA 2010 s 355 as a mutual fund, constituted by a non-UK resident body corporate, or held in a non-UK resident trust or coownership fund other than a partnership carrying on a trade or business. ‘Mutual fund’ is defined by s 356 as an arrangement under which the participants hold, manage, acquire or dispose of property or receive profits therefrom, but do not have day-to-day control of the management of the property. Also included are funds where an investor would expect to realise his investment by reference to the net asset value of the fund or an index of any description.

Reporting funds 10.67 A  reporting fund under SI  2009/3139 must produce accounts in accordance with international accounting standards and generally accepted 495

10.68  Foreign Trusts accounting practice and complete the reportable income for each accounting period. It must report the income to the participants and HMRC, per unit, and any reportable income not distributed as well as applying to HMRC to be accepted as a reporting fund. Undistributed income is taxed as though it were distributed on the last day of the reporting period in which it arises. Income from a reporting fund will usually be taxed at dividend rates of 7.5%, 32.5% and 38.1% of the distribution for basic higher and additional rate taxpayers respectively. For 2015/16 and earlier years, an imputed tax credit of 1/9 attached to the dividend distribution. This was withdrawn with effect from 6 April 2016. A dividend allowance (£2,000 in 2019/20) applies to the first tranche of dividend income, with the excess being taxed at the rates set out above. A  non-corporate transparent fund is taxed as miscellaneous income at the normal income tax rates of 20%, 40% and 45% as appropriate. 10.68 Reporting funds must be approved as such by HMRC. A  fund can cease to be a reporting fund on giving notice to HMRC, in which case an investor can elect to treat the fund as having been disposed of at market value and reacquired as a non-reporting fund. A similar election can be made on a non-reporting fund becoming a reporting fund with the investor being liable to income tax on any gains up to the date of change and capital gains tax thereafter. 10.69 Non-trading offshore funds must be an Undertaking for the Collective Investment in Transferable Securities (UCITS) under 2014/91/ EU or recognised by the Financial Services Authority under the relevant provisions of FSMA  2000. It must also meet the general diversity of ownership conditions for which clearance is available. Investment transactions of such a fund include options, futures and contracts for differences, as well as transactions in collective investment schemes and carbon emission trading products. A  reporting fund has to report to participants for each reporting period, which cannot exceed 12 months, and which has to include particulars of distributions. Where the unit holder is taxable on the income as relevant foreign income under ITTOIA  2005 s  830, if it is not a transparent fund, any excess of the reported income over the distributed income is treated as additional income of the unit holder. There are special rules for charities, under which the deemed income of the non-transparent fund is exempt from tax. There are anti-avoidance provisions which apply to financial traders. The reporting requirements of the reporting fund are specified, as are the consequences of breaches of these requirements. A fund which ceases to be a reporting fund must report the fact to HMRC. There are also special rules for constant net asset value funds, where the value will not fluctuate significantly, for example, a fund which invests in deposits and distributes the income. 496

Foreign Trusts 10.71 The reporting fund rules effectively replace the old distributing fund rules, which applied up to 1  December 2009, although the distributor fund status could be maintained until the end of the accounting period and for the subsequent accounting period. Most distributing funds became reporting funds under the revised provisions.

Non-reporting offshore funds 10.70 Where a transparent non-reporting fund has an interest in a reporting fund which has an excess of income over distributions, the additional income is taxed on the investor as relevant foreign income under ITTOIA 2005 s 830 or as miscellaneous income on a company subject to corporation tax under Corporation Tax Act 2009 (CTA 2009) Part 10 Chapter 8. A disposal of an interest in an offshore non-reporting fund which results in an offshore income gain is taxed as income under ITTOIA 2005 Part 5 Chapter 8 or, for a corporate investor, the offshore income gain is chargeable to corporation tax. If the fund was a reporting fund at the time of the disposal but has previously been a non-reporting fund, the gain applicable to that period is an offshore income gain. If the individual is a remittance basis user, not domiciled in the UK (and not deemed UK domiciled for 2017/18 and later years), the offshore income gain is treated as relevant foreign income. An offshore income gain of a UK resident trust may be treated as the income of the settlor under ITTOIA 2005 s 624. In contrast, an offshore income gain of a non-UK resident settlement is not treated as income of the settlor as ITTOIA 2005 Pt 5 Ch 5 is disapplied by SI 2009/3001 reg 20(1)). Under TCGA 1992 s 87 and SI 2009/3001 reg 20(3), distributions of offshore income gains are taxed as income as an offshore income gain on the beneficiary, subject to the operation of the remittance basis, where available. The surcharge under TCGA  1992 s  91 does not, however, apply to offshore income gains apportioned to a beneficiary under s 87. The transfer of assets abroad provisions in ITA 2007 Chapter 2 Part 13 apply if the offshore income gain was income payable to the settlor or beneficiary, unless it is already charged under the temporary non-residence provisions of TCGA 1992 s 1M, or was treated as arising in the tax year in which the investor is resident (or ordinarily resident, before 2013/14) in the UK. It is, therefore, already chargeable to income tax as an offshore income gain (SI 2009/3001 reg 21(1)). 10.71 The offshore income gain is calculated by applying the normal capital gains tax rules, including chargeable gains of non-resident companies under TCGA 1992 s 3. These provisions do not apply where the interest in the offshore fund is otherwise chargeable to tax as a loan relationship derivative contract, 497

10.72  Foreign Trusts intangible fixed asset, an excluded interest security, or is a right arising under a policy of insurance. Similar exemptions apply where the interest in the fund is held as trading stock or included in calculating a trading profit. Also excluded are assets of an insurance company’s long-term insurance fund or participating loans and interests in transparent funds, unless they held an interest in another non-reporting fund or the fund gives insufficient information to investors to enable them to comply with their UK tax obligations. There are grandfathering provisions to exempt interests in offshore funds acquired before 1 December 2009 or in accordance with a legally enforceable written agreement entered into before 30 April 2009, provided that the right did not constitute a material interest in an offshore fund within ICTA 1988 s 759. There is also an exemption for charities. 10.72 The disposal of an interest in a non-reporting fund arises if there would be a disposal of an asset under TCGA  1992. However, an interest in a non-reporting offshore fund is deemed to have been sold and reacquired at market value immediately prior to death, so crystallising the offshore income gain, which will be subject to income tax. The personal representatives are deemed to acquire the asset on death at market value as usual. The rollover relief provisions, which apply as for capital gains tax under TCGA 1992 ss 135, 136, do not apply where an interest in a non-reporting fund is exchanged for an asset that is not such an interest, thus crystallising the offshore income gain; similarly where there is an exchange of interest of different classes which would normally be exempt from capital gains tax under TCGA 1992 s 127, if an interest in a non-reporting fund is exchanged for an asset that is not such an interest, so that the offshore income gain is crystallised (SI 2009/3001 regs 36–37). Although an offshore income gain is calculated generally in accordance with the capital gains tax rules, indexation allowance up to its abolition on 31  December 2017 is not available for a corporate investor. Nor is rollover relief available on the transfer of business assets or relief for gifts. If these rules produce a loss, then the basic gain on disposal, ie the offshore income gain, is nil. Where the disposal gives rise to an offshore income gain and is also a disposal for capital gains tax purposes, the proceeds included in the computation of the offshore income gain are deductible from the proceeds for computing the chargeable gain. This also applies to rollover relief claims under TCGA 1992 s 162 and paper-for-paper transfers under TCGA 1992 ss 135, 136. Where a non-reporting fund is converted into a reporting fund, the investor may make an election under which he is deemed to dispose of the interest in the non-reporting fund at its market value on the disposal date and reacquire it as a holding in a reporting fund at that value. The election must be made in the investor’s income tax or corporation tax return and can only be made where the offshore income gain is greater than zero. 498

Foreign Trusts 10.74

CAPITAL GAINS TAX 10.73 Under TCGA  1992 s  1A, CGT is normally confined to a person, which would include a body of trustees, who is resident in the UK in any part of the year of assessment. This broad principle is subject to a number of anti-avoidance rules, principally TCGA 1992 s 3 (formerly s 13) which deems gains realised by certain non-UK resident companies as arising to shareholders (see  10.84). In addition, specific rules relate to settlors and beneficiaries of non-UK resident trusts (see 10.95 and 10.110). The scope of UK CGT has been further expanded since 2013 to encompass transactions in UK situs residental property and most recently (from 6 April 2019), UK commercial real estate. In the context of liability to UK CGT, it is therefore convenient to deal with the regimes prior to 2015, from 2015 to 2019, and from 2019 onwards. In summary, the rules are: •

pre-2015: non-residents were liable to CGT on gains on fixed assets of a UK trading branch, under pre-2016 development of UK land schemes and ATED-related CGT;

•

6  April 2015 to 5  April 2019: NRCGT for UK residential property is introduced; rebasing of property as at 6 April 2015;

•

6 April 2019 onwards: ATED-related CGT and NRCGT are abolished, and CGT applies to all disposals of UK land and companies which are rich in UK property; rebasing as at 6 April 2019 for all assets previously not in scope.

Pre-6 April 2015 10.74 Prior to 6  April 2015, non-UK resident trustees were within the scope of UK CGT, for example on a disposal of chargeable assets by a UK branch or agency (former TCGA  1992 s  10), or under the anti-avoidance provisions relating to UK land (ITA  2007 ss  752–772). The provisions relating to UK land were abolished in 2016 (Finance Act 2016, s  79) when the rules removing the residence requirement for taxation of development of land in the UK were introduced (ITA  2007 ss  517A–517U). Finally, from 6  April 2013, a charge to CGT arose on the disposals of residential property in the UK which was subject to a charge under the Annual Tax on Enveloped Dwellings CGT regime (ATED-related CGT), see Chapter 17, 17.59 and 17.60). These provisions had only to be considered where the property concerned was ‘high value’ ie  with a value in excess of £500,000 and the disposal was made by an entity such as a company, rather than directly by trustees. 499

10.75  Foreign Trusts

UK Residential Property Disposals 6 April 2015 to 6 April 2019 10.75 Between 6 April 2015 and 5 April 2019, non-UK resident trustees and other non-resident persons were chargeable to tax under the non-resident CGT (NRCGT) rules on the disposal of UK residential property interests on or after 6 April 2015 (TCGA 1992 s 14B), unless the disposal was already caught by the ATED related CGT provisions (TCGA 1992 ss 2B–2F and Schs 4ZZA and 4ZZB). A disposal was caught by these provisions if the trustees are non-UK resident at any time in the tax year. A ‘UK residential property interest’ is defined in TCGA  1992 Sch B1 as a disposal of an interest in UK land which consists of or includes a dwelling, subsists for the benefit of land that has included or consisted of a dwelling, or subsists under a contract for the acquisition of land consisting of or including a building to be constructed or adapted for use as a dwelling (ie  an off-plan purchase) (TCGA  1992 Sch B1 para  4, before repeal by FA 2019 Sch 1 para 10). A dwelling is a building which is used or suitable for use as a dwelling, or in the process of being constructed or adapted for use as a dwelling. The definition excludes certain ‘institutional’ buildings, such as schools, accommodation for members of the armed forces, care homes, hospitals, prisons, student accommodation and hotels. 10.76 The chargeable gain arising was calculated as the disposal proceeds, less the value of the property at 6 April 2015 or the date of acquisition, if later, and then time apportioned to remove any days in the post-6 April 2015 period during which the property did not consist of a dwelling. The resultant amount is the NRCGT gain (or loss, as appropriate). Where the property consisted of a mix of residential and non-residential use, a just and reasonable apportionment is made (TCGA 1992 Sch 4ZZB para 6). For UK residential property held at 6 April 2015, an election may be made for an alternative method of calculation. Under the first alternative method, the gain/loss was computed by reference to the disposal proceeds less original cost/enhancement expenditure, and that amount was then time apportioned on a straight-line basis. The post-6 April 2015 gain/loss was then adjusted as above in respect of any days post-6 April 2015 in which the property did not consist of a dwelling to reach the NRCGT gain/loss (TCGA 1992 Sch 4ZZA para 3). Where the dwelling was acquired after 6 April 2015, or on election, the NRCGT gain or loss was calculated over the whole period of ownership, adjusted for days on which the property did not consist of a dwelling. 10.77 Members of an NRCGT group were able to elect for gains and losses realised by members of the group to be pooled, and all gains and losses are treated as having been made by a single member (TCGA 1992 s 188A, prior to repeal by FA 2019 s 13 para 1). The election, which is irrevocable, must have been made by all members of the group within 30 days of the time it was 500

Foreign Trusts 10.79 specified as having effect (TCGA 1992 s 188A(5), before repeal by FA 2019 s 13 paras 23, 68). Disposals between members of a CGT group were outside the scope of the charge (TCGA 1992 s 188C prior to repeal by FA 2019 s 13 paras 23, 68). Losses on the disposal of UK residential property arising in the year were offset against NRCGT gains in that year. Brought forward NRCGT losses from an earlier tax year were offset against NRCGT gains arising in a later year. Losses on UK residential property disposals could not be offset against other gains, or (in the case of trustees) carried back. Trustees were charged to CGT at the rate of 28% after deduction of the truest annual exempt amount, which is half the exemption available to individuals TCGA 1992 s 1K and Sch 1C. The tax due was payable within 30 days of the disposal, at the same time which the trustees were required to submit an NRCGT return to HMRC. An exception applied where the trustees were already registered for self-assessment, in which case the CGT due was payable on the normal due date of 31 January following the end of the tax year in which the disposal takes place. An NRCGT return was still required in this case within 30 days of completion of the disposal.

Disposals of UK Land after 6 April 2019 10.78 The government announced at the Autumn Budget in 2017 that it was proposing an extension of the existing NRCGT regime to gains made on the disposal of all immovable property by non-UK residents, in order to more closely align the position of UK residents and non-UK residents. A consultation document was issued on 22  November 2017 (‘Taxing gains made by nonresidents on UK immovable property’) stating the government’s plans to introduce legislation from 6  April 2019, and announcing anti-forestalling measures applying from 22  November 2017 to prevent non-UK residents seeking to exploit double tax treaty arrangements in order to fall outside the new charge. From 6  April 2019, a disposal of any UK land, whether residential or commercial, by a non-UK resident person is chargeable to CGT. Further, the charge is extended to indirect disposals of land, for example, the sale of a ‘property rich’ company, ie a company deriving at least 75% of its value from UK land (TCGA 1992 s 1C, inserted by FA 2019 s 13 Sch 1). Hence a company owning a UK property worth £1m and a non-UK property worth £5m, will not be property rich for these purposes. 10.79 As under the previous NRCGT regime, a tax charge under the provisions applying to the disposal of assets by a UK branch or agency etc take precedence over the charge on UK land (TCGA 1992 1B). An interest in UK land is defined as an estate, interest, right or power in or over land in the UK, or the benefit of an obligation, restriction or condition affecting the value of an estate, interest, 501

10.80  Foreign Trusts right or power in or over UK land, but excludes a licence to occupy and a tenancy at will (TCGA 1992 s 1C(1)). The grant of a binding option over UK land is an interest in land for this purpose (TCGA 1992 s 1C (4), (5)). The rules apply to the element of chargeable gain (or allowable loss) arising on or after 6  April 2019 (for commercial land). Where a disposal relates to residential property, the previous rules rebasing the asset to its value on 6 April 2015 continue to apply. 10.80 An asset derives at least 75% of its value from UK land if the asset consists of a right or interest in a company where 75% or more of the total gross market value of the company’s assets derive directly or indirectly from UK land at the time of the disposal (TCGA 1992 s 1D and Sch 1A para 3(1)). The land may be commercial, residential, or mixed use. All assets are included in determining the gross market value, other than where an asset (other than UK land) may be matched with a related party liability (TCGA 1992 Sch 1A para  4). Where there is a chain of two or more companies, value is traced through the chain. The indirect disposal rules (ie shares in a property rich company) apply only where the person has a ‘substantial interest’ in the company, defined as an interest of 25% or more, at any time in the two year period preceding the disposal (TCGA 1992 Sch 1A para 3). In calculating the 25% threshold, the rights of connected persons are aggregated (TCGA 1992 Sch 1A para 9). 10.81 A  property rich company is outside the scope of the charge if the underlying UK land is used for the purposes of a qualifying trade for at least one year prior to disposal (TCGA  1992 Sch  1A para  5). Letting out of the property is not a qualifying trade, but property rich trading companies such as hotels etc may benefit from the exemption. Trustees are chargeable to CGT at the rate of 28% on all gains arising from UK land. A return reporting the disposal to HMRC must be submitted within 30 days of completion of the disposal, and an estimate of the CGT due paid at the same time. The gain arising on a direct residential property disposal is calculated in the same manner as set out above for pre-6 April 2019 gains, ie the asset is rebased to its value as at 6 April 2015, with the option to elect for an alternative basis where appropriate (TCGA 1992 Sch 4AA paras 6, 7). For commercial property gains (and non-residents who were previously outside the regime, such as widely held companies), rebasing will apply to the value at 6  April 2019, assuming the asset is held at that date (TCGA 1992 Sch 4AA para 3). An irrevocable election may be made to compute the gain (or loss) arising by reference to the asset’s original cost, rather than value at 6  April 2019 (TCGA 1992 Sch 4AA paras 4, 5) over the entire period of ownership. The 502

Foreign Trusts 10.84 gain is apportioned on a time basis between residential and non-residential elements, where necessary. 10.82 Where the disposal relates to an indirect disposal of UK land, the gain arising to the trustees is computed by reference to the value of the shares which are the subject of the disposal, and not the underlying land. Unlike the position for direct disposals where gains realised by non-resident trustees may be charged at 20% or 28% depending on whether the disposal is of residential property, the nature of the underlying land does not affect the rate of CGT payable. An election may be made to calculate the gain or loss arising on an indirect disposal of land on the alternative basis by reference to the entire period of ownership and original acquisition cost, however, any loss arising will not be an allowable loss (TCGA 1992 Sch 4AA paras 3, 4)). 10.83 The gain or loss arising to a non-UK company held by non-UK resident trustees will be calculated by reference to rebased values (at 6  April 2015 or 6 April 2019, depending on whether the disposal is of residential or commercial property, or whether the company was previously exempt from the charge on nonresidents, for example where the company was widely held). A company may make an irrevocable election for the gain or loss arising to be calculated by reference to the entire period of ownership and original acquisition costs (TCGA  1992 Sch 4AA paras 8, 14). Such an election would enable indexation allowance to be claimed where the asset concerned was purchased prior to 31 December 2017. Where a company makes an indirect disposal of land on or after 6 April 2019, consideration will also need to be given as to whether the gain may be exempt under the substantial shareholdings rules of TCGA 1992 Sch 7AC.

Non-resident companies – deemed gains of trustees 10.84 Where a chargeable gain accrues to a company which is not resident in the UK, and which would be a close company if it were so resident, the gain, which is not chargeable on the company because it is not resident, is apportioned to a UK resident or ordinarily resident individual participator who is subject to CGT as if the apportioned part of the chargeable gain had been made by him (TCGA  1992 s  3(2)). The gain, calculated as if it were made by a UK resident company, is apportioned by reference to the participator’s interest in the company, normally the number of ordinary shares, but no gain is apportioned to a participator to whom no more than 25% of the gain is apportioned (s 3(4), (6)). Apportionment does not apply where the asset is already within the charge to CGT. The gain is computed in accordance with corporation tax rules under s 3G(3). This remains an important exception today. Where the person to whom a gain is apportioned is a non-UK resident trust, then no tax charge arises, but the gain can be added to the amount of gains attributed to beneficiaries under TCGA 1992 (see 10.110 below). 503

10.85  Foreign Trusts 10.85 Apportionment through a chain of companies is allowed by s  3(8). Where the participators are trustees who are neither resident nor ordinarily resident in the UK, gains may be apportioned to them where the shares are held either directly or indirectly through a chain of companies under s 3B. It is this provision which allows capital gains made by non-resident companies to be apportioned through to UK resident settlors or beneficiaries under the foreign trust apportionment rules in TCGA 1992 s 86 et seq, and which can result in a further charge on disposal of the shares in the underlying company which is a double charge, unless this is done within three years and apportioned to the same taxpayer to whom the original gain was apportioned, under ss 3B and 3C. TCGA  1992 s  3G allows the non-resident company to pay the CGT on behalf of chargeable participators without it being regarded as a payment to the participator. Participator is defined by reference to the close company definition in CTA 2010 ss 438–454, and apportionment among participators by reference to their interests is covered in TCGA 1992 s 3B. The intra-group transfer provisions and company leaving a group provisions are extended to non-resident groups of companies for apportionment purposes by TCGA 1992 s 3F. Delayed remittance relief under TCGA 1992 s 279 is not available to a participator where the company does not make a distribution of the gain (Van Arkadie v Plunket [1983] STC 54). In Marshall v Kerr [1991] STC 686 at 692 the gains of the company owned by the trust, Brookside Investments Ltd, were apportioned through to the trustees and taxed on the settlor, Mrs Kerr. 10.86 In terms of obtaining information about non-resident companies and trusts, it should be remembered that HMRC may serve a notice on any person holding shares or securities in a non-resident company to provide such particulars as HMRC may consider are required to determine whether the company falls within TCGA 1992 s 3, and whether any chargeable gain has accrued to the company under TMA 1970 s 28. It has similar powers to require, by notice in writing, that any party to a settlement should furnish it with such particulars as are necessary for CGT purposes within such time as it may direct, being not less than 28 days (TMA 1970 s 27).The scope of the charge was extended from 6  April 2015, and applied to all disposals of UK residential property, irrespective of value (TCGA 1992 s 14B, now TCGA 1992 s 1C) by non-UK resident persons, including individuals, trustees, personal representatives and certain companies and partnerships. The provisions were widened further from 6 April 2019, so that non-UK residents are subject to CGT on all disposals of UK land, directly or indirectly and whether commercial or residential.

Trust emigration 10.87 Where the trustees of a settlement become non-UK resident, the trustees are deemed to have disposed of the trust assets and immediately reacquired them at their market value immediately before emigration, which 504

Foreign Trusts 10.91 would obviously produce a chargeable gain or loss within the CGT regime, chargeable on the trustees (TCGA  1992 s  80(1), (2)). The assets deemed to be disposed of are all the assets constituting settled property of the settlement immediately prior to emigration, except for assets used in a trade carried on in the UK through a branch or agency which will continue to be so used after emigration of the trustees. Assets protected by a double taxation treaty are excluded from the emigration charge (s  80(3)–(5)). The rollover relief for business assets under TCGA  1992 s  152 is excluded unless the new assets are situated in the UK and used for the purposes of a trade carried on by the trustees through a branch or agency (ss 152, 159 and 80(6)–(8)). These sections may be contrary to EU law following De Lasteyrie du Saillant v Ministere de l’Economie, des Finance et de l’Industrie [2004] ST1 890 (Case C-9/02). Where the trustees hold UK land within the scope of the non-UK resident CGT rules (see 10.78), an election can be made to defer the gain or loss arising until a subsequent disposal (or part disposal) of the property (TCGA 1992 s 80A, as amended by FA 2019 s 13 and Sch 1). 10.88 TCGA 1992 s 83A applies to disposals made on or after 16 March 2005 and prevents reliance on a double taxation treaty to avoid a capital gains tax charge where the trustees are within the charge to capital gains tax in a year of assessment but are non-UK resident at the time of the disposal. 10.89 Where the trust becomes non-resident because of the death of a trustee and a new UK resident trustee is appointed within six months, the emigration charge under TCGA 1982 s 80 is restricted to any assets disposed of while the trust is temporarily non-resident, or they become treaty protected (s  81(2)– (4)). Conversely, if a non-resident trust becomes resident as a result of the death of a trustee and becomes non-resident within six months, normally on the appointment of another non-resident trustee, the deemed disposal is limited to any assets acquired during the period of temporary UK residence as a result of gifts to the trustees in respect of which rollover relief was claimed under TCGA 1992 s 165 or 260(3). Trustees are normally liable to CGT in the UK if they are resident or ordinarily resident in the UK in the fiscal year (SP 5/92 para 2). 10.90 The obvious problem HMRC might have on a trust emigrating is that the UK resident trustees may have transferred all the assets to non-resident trustees, against whom HMRC would find it difficult to enforce the collection of any tax due on emigration under TCGA 1992 s 80(2). Therefore, if the tax is not paid within six months of when it became payable, HMRC may, within three years of the determination of the final tax liability, serve notice on a former trustee of the settlement stating the amount of tax payable, together with interest, and requiring payment within 30 days (s 82(1)–(3)). 10.91 If, at the time a trustee ceased to be a trustee prior to the trust emigrating, there was no proposal that the trustees might become neither 505

10.92  Foreign Trusts resident nor ordinarily resident in the UK, he may escape liability under s 82(3). A trustee who has to pay the tax may recover it from the emigrating trustees under s 82(4), and his right of recovery is not in any way chargeable upon him as a capital payment, a distribution from the trust or within ITA  2007 ss  720–747 and there are no IHT implications (SP  5/92 para  6). The payment, however, is not allowed as a deduction for tax purposes. The provisions only apply to a trustee who was acting as a trustee within 12 months prior to the emigration of the trust (s  82(6)). The charge cannot be raised on a trustee who dies before the notice of liability has been served on him. HMRC normally starts with the last serving UK resident trustee in order to hold him responsible but will then consider other trustees within the relevant period of 12 months ending with the emigration as necessary (SP 5/92 paras 4 and 5). 10.92 Trustees who are treated as non-UK resident under a double taxation treaty, so that gains on the disposal of trust assets are treaty protected, are deemed to have emigrated under TCGA  1992 s  83. Rollover relief on reinvestment of business assets is denied where the new assets are acquired by treaty non-resident, dual-resident trustees such that a disposal of the new assets would not be within the charge to UK CGT under s 84.

Interests in settled property 10.93 A  disposal of an interest in settled property is normally exempt from CGT under TCGA 1992 s 76, as explained in Chapter 6. However, this exemption does not apply where the trustees are neither resident nor ordinarily resident in the UK (TCGA  1992 s  85(1)). Where the trustees cease to be resident in the UK and the trust assets are deemed to have been disposed of and immediately reacquired under TCGA 1992 s 80, and after the emigration there is a deemed disposal of the interest in the settlement created for the benefit of the beneficiary or otherwise acquired by him prior to the emigration, the gain on disposal is treated as if he had, immediately prior to emigration, sold the interest in the trust and immediately reacquired it at market value. This would have been an exempt disposal under s 76(1) and would effectively rebase the interest at the time of the trust emigrating (s 85(2), (3)). This rebasing does not apply where, prior to their acquisition, the trustees were treaty protected within ss 83 and 85(4). 10.94 In similar circumstances, but where the trustees became treaty protected after creation or acquisition of the interest in the trust, it is treated as having been disposed of and reacquired at market value when the trustees became treaty protected, within TCGA 1992 s 83 (TCGA 1992 s 85(5)–(9)). Rebasing does not apply where, at the appropriate time, the interest was in a settlement which had relevant offshore gains chargeable on beneficiaries under TCGA 1992 s 89(2) or Sch 4C para 8(3) (s 85(10), (11)). 506

Foreign Trusts 10.97 TCGA 1992 Sch 4C attributes gains to beneficiaries by TCGA 1992 s 85A. This Schedule applies where there was a transfer of value after 20 March 2000 (see below) (FA 2000 s 92(5)).

Attribution of gains to settlors 10.95 TCGA  1992 s  86 will normally deem the gains made by a nonresident trust to have been made by the settlor if a number of conditions are met. First of all the non-resident trust has to be a ‘qualifying settlement’ as defined by TCGA 1992 Sch 5 para 9, ie it qualifies to have its gains charged to the settlor. This applies to settlements created on or after 19 March 1991 for the year of assessment in which it was created and subsequent years of assessment. A  settlement created before 19  March 1991 is a qualifying settlement in 1999/2000 and subsequent years of assessment unless it is a protected settlement. A  protected settlement is one where the beneficiaries are confined to children of the settlor or of the spouse of the settlor, who are under the age of 18 at the time of the disposal, or who were under that age at the end of the immediately preceding year of assessment, unborn children of the settlor or spouse or of a future spouse, and future spouses of any such children. A future spouse of the settlor and other persons are outside the defined categories if there is no settlor by reference to whom they can be defined (Sch 5 para 9(10A), (10B)). The beneficiary of a settlement and various other terms are defined in Sch 5 para 9(10C)–(11). 10.96 A  settlement created before 19  March 1991, which is a protected settlement at 6  April 1999, is treated as a qualifying settlement only if five conditions are satisfied (TCGA 1992 Sch 5 para 9(1B)). The first such condition is that property must be provided to the settlement on or after 19 March 1991, other than under an arm’s-length transaction or earlier liability incurred, ignoring in most cases the trust expenses of administration or taxation (Sch 5 para 9(3)). The second condition is that the trustees became non-UK resident or were regarded as such under a double tax treaty (Sch 5 para 9(4)). The third condition is that the terms of the settlement are varied on or after 19 March 1991 to include unacceptable beneficiaries, known as defined persons (Sch 5 para 9(5)). These are the settlor, the spouse of the settlor, the child of a settlor or of a settlor’s spouse, the spouse of any such child, any grandchild of the settlor or the settlor’s spouse, any spouse of such grandchild, a company controlled by such persons or a company associated with a company controlled by such persons (Sch 5 para 7). The close company definition of control and associates in CTA 2010 ss 450, 451 is applied (Sch 5 para 7(9), (10)). A beneficiary of the settlement is not treated as a participator solely because he or she is a beneficiary (Sch 5 para 7(10ZA), enacting former ESC D40). 10.97 The fourth condition is that an unacceptable beneficiary enjoys a benefit from the settlement for the first time who would not have qualified as a 507

10.98  Foreign Trusts beneficiary before 19 March 1991 (Sch 5 para 9(6)). The fifth condition is that the settlement ceases to be a protected settlement at any time on or after 6 April 1999 (Sch 5 para 9(6A)). These provisions are explained further in SP 5/92 paras 11–37. They are also referred to in the ICAEW guidance note of 14 December 1992 and Tax Bulletin, Issue 8, August 1993 and Issue 16, April 1995. The remarkably easy procedure of inadvertently turning a pre-19  March 1991 protected settlement into a qualifying settlement subject to potential apportionment under TCGA  1992 s 86 is known as tainting. 10.98 In addition to being a qualifying settlement, a non-resident trust has to fulfil further conditions before the chargeable gains are apportioned to the settlor. These are that the trustees are not resident in the UK during any part of the year, or are treated as such under a double taxation arrangement (TCGA 1992 s 86(1)(b), (2)). The settlor must be domiciled in the UK at some time in the year, or deemed UK domiciled (for 2017/18 and later years) and be resident in the UK during any part of the year (or before 2013/14, ordinarily resident) (s 86(1)(c)). The deeming provisions therefore have no application where the settlor is non-UK domiciled or is non-resident for the entire year. Following the extension of deemed UK domiciled status to CGT and income tax from 6 April 2017 (ITA 2007 s 835BA), settlors who become deemed UK domiciled for CGT purposes are potentially within the scope of the settlorinterested CGT charge under s 86. Gains arising to a trust settled by an individual who was non-UK domiciled at the time will continue to be protected from charge under s 86 when the settlor becomes deemed UK domiciled on or after 6 April 2017, provided the trust has not been ‘tainted’ (TCGA 1992 Sch 5 para 5A). A formerly domiciled resident settlor is unable to take advantage of ‘protected trust’ status. The tainting rules mirror those applying under the settlor-interested settlement income tax provisions in ITTOIA 2005 s 628A (see 10.16). 10.99 Protected status is lost if property or income is provided directly or indirectly for the purposes of the settlement by the settlor or by the trustees of any other settlement of which he is a beneficiary or settlor at any time in the period commencing on 6 April 2017 (or date of the creation of the settlement, if later) and ending with the end of the tax year in which the settlor is deemed UK domiciled (TCGA  1992 Sch  5 para  5A(5) (see 10.17). The addition of value to property comprised in the settlement is treated as the direct provision of property for the purposes of the settlement (TCGA 1992 Sch 5 para 5A(7)). There are exceptions to the tainting provisions, for example where property is added by way of an arm’s-length transaction or a transaction not intended to confer gratuitous benefit (TCGA  1992 Sch  5 para  5B). Where a loan is made on arm’s-length terms, tainting could occur if interest remains unpaid or is capitalised, or there is a variation of the terms such that they cease to be 508

Foreign Trusts 10.100 arm’s length (a ‘relevant event’) (TCGA 1992 Sch 5 para 5B(3)). The principal outstanding of the loan is regarded as having been provided to the settlement. The outstanding amount of a loan will also be treated as property provided for the purposes of the settlement where the settlor becomes deemed UK domiciled on or after 6 April 2017, and a loan to the trustees previously been made by him (or another settlement of which he is the settlor or beneficiary) on non arm’s-length terms has not been repaid before he becomes deemed UK domiciled. The principal of the loan is regarded as having been provided for the purposes of the settlement at the date on which the settlor becomes deemed UK domiciled (TCGA  1992 Sch  5 para  5B(6)). A  one-year period of grace applied for 2017/18 where the settlor became deemed domiciled on 6 April 2017 and tainting was avoided provided the principal of the loan and all interest payable was repaid on or before 5  April 2018, or the loan was adjusted to reflect arm’s-length terms on or before 5 April 2018, interest was paid during 2017/18 as if the arm’s-length terms had applied throughout that tax year and interest continues to be payable in accordance with arm’s-length terms after 6 April 2018 (TCGA 1992 Sch 5 para 5B(7)). A loan is on arm’slength terms to the trustees of a settlement if it carries interest at a rate at least equal to the official rate and interest is paid at least annually (TCGA  1992 Sch 5 para 5B(8)(a)). A loan by trustees is regarded as being on arm’s-length terms provided the rate of interest payable does not exceed the official rate (TCGA 1992 Sch 5 para 5B(8)(b)). As with the income tax tainting rules, once a settlement has become tainted protected trust status is lost not just in relation to the property treated as added to the settlement, but to all property comprised within the settlement. Foreign income arising to the trustees would then be taxable on the settlor, without the benefit of the remittance basis. Similarly, if the settlor becomes domiciled in the UK as a matter of general law (rather than being deemed UK domiciled under ITA 2007 s 835BA(4)), protected trust status would be lost as the condition in TCGA 1992 Sch 5 para 5A(3)(a) is failed. Preserving protected trust status is therefore key for individuals becoming deemed domiciled in the UK for 2017/18 and later years. 10.100 For s 86 to apply, the settlor has to have an ‘interest’ in the settlement, which is a rather misleading test because it has a special meaning given to it by TCGA 1992 Sch 5 para 2. It applies where any defined person, as listed in 10.96 is or may become a beneficiary in any circumstances to property or income originating from the settlor, except on bankruptcy or death (Sch 5 para 2(1)– (6)). Various terms are defined and close company definitions adopted in Sch 5 para 2(7)–(10). The settlor is not treated as having an interest in a settlement created before 17 March 1998 merely because a grandchild or the spouse of a grandchild was a beneficiary, unless the settlement becomes tainted by, for example, adding property to the trust, the trustees becoming non-resident, varying the terms of the settlement to include a grandchild or allowing them to benefit for the first time after 17 March 1998 (Sch 5 para 2A(1)–(10)). 509

10.101  Foreign Trusts 10.101 In essence, a trust created prior to 17  March 1998 for the benefit of grandchildren, which remains untainted, is not subject to deeming within TCGA  1992 s  86 during the minority of the beneficiaries. For the deeming provisions to apply there must be gain which would be chargeable were the trust to be resident in the UK (s  86(1)(e), (3)). All of these provisions have to apply before the trust gains are deemed to be those of the settlor, and the provisions must not be prevented from applying by Sch 5 paras 3–5 (s 86(1) (f)), ie where the settlor dies in the year, where beneficiaries include former spouses of the settlor, child or grandchild, or where the defined person tainting the trust dies in the year (Sch 5 paras 3–5). 10.102 Where TCGA 1992 s 86 applies, chargeable gains calculated on the basis that the trust was resident in the UK, are treated as accruing to the settlor as the highest part of the gains on which he is chargeable to CGT (s 86(4)). Taper relief was taken into account in computing the trust gains but no further taper relief was allowed to the settlor to whom they are deemed to accrue (s  86(4A)). The settlor is defined as a person from whom trust property originated, and the meaning of originating is explained as property directly or indirectly provided by the settlor or under a reciprocal arrangement, or by a qualifying company controlled by the settlor (TCGA  1992 Sch  5 paras 7, 8). The definition of ‘control’ is that in CTA 2010 ss 450, 451 as modified by Sch 5 para 8, but a person is not regarded as a participator solely because he has an interest in the settlement (Sch 5 para 8(8A). A qualifying company is a close company, or would be if it were resident in the UK, under the close company definitions of control etc CTA 2010 ss 450, 451. 10.103 The basis of computing the chargeable gains deemed to have accrued to the settlor ignores the annual exempt amount in TCGA 1992 s 1K, and the charge on a resident trust where the settlor has an interest. Losses may be set against capital gains in accordance with TCGA 1992 1(3) including losses that would otherwise be disallowed to a non-resident under TCGA 1992 s 16(3) (Sch 5 para 2). Gains or losses of companies apportioned to the participators under TCGA  1992 s  3 are included in the gains deemed to be those of the settlor (Sch 5 para 1(3)). Gains from treaty protected assets are excluded by Sch 5 para 1(4). Where the conditions necessary for the attribution of chargeable gains to the settlor did not apply in an earlier year, losses brought forward are excluded by TCGA 1992 Sch 5 paras 5 and 6. Pre-19 March 1991 losses are disallowed by Sch 5 para 1(7). Treaty-protected assets are defined by Sch 5 para 1(8) and (9). 10.104 Where CGT is assessed on the settlor under these provisions, and paid by him, he has a right of recovery of the tax from the trustees and may require from HMRC a certificate specifying the amount of the chargeable gains and the amount of tax paid, as conclusive evidence of those facts to confirm 510

Foreign Trusts 10.106 his right of recovery (TCGA 1992 Sch 5 para 6). However, although the right of recovery is clearly stated it is difficult to see how this can be enforced by the settlor against trustees in a foreign jurisdiction when, as will normally be the case, he is excluded from benefit under the trust and UK tax legislation is unlikely to be binding on the trustees. Many well-drafted trusts will actually include a clause allowing the non-resident trustees to pay unenforceable tax liabilities payable in such circumstances. If reimbursement is made to the settlor HMRC has confirmed that there are no adverse UK tax consequences on him as a result of his being reimbursed (SP 5/92 paras 7–10). In Re The T Settlement (2002) ITELR 820, it was considered necessary to ask the court to approve a change in the trust deed to enable the settlor’s capital gains tax liability under these provisions to be met by the trustees. The application was supported by all the adult beneficiaries but the court had to give approval for what would otherwise have been a breach of trust, on behalf of the minor and unborn beneficiaries. On the basis of Re Hampden Settlement Trusts [1977] TR 177 and Lord Inglewood v IRC [1983] STC 133 the court approved the appropriate amendment under the Trusts (Jersey) Law 1984 (as amended) art 43, as art 41 did not give the court the power to authorise a breach of trust in advance. 10.105 If the trust is written under English law, the trustees may have a better argument for reimbursing the settlor, although under Government of India v Taylor [1955] AC 491 it is difficult to see how – if HMRC could not require the trustees to pay the tax under UK tax law, if they were so liable – a settlor can exercise the right of indemnity that is also based on UK tax law. If the trustees were to indemnify the settlor in accordance with these provisions it might well be sensible for them to seek a counter indemnity against any action by beneficiaries, binding against the settlor and his estate, in order to avoid possible personal liability if a beneficiary were to object to the trustees’ actions needlessly depleting the trust fund. This is particularly relevant where there are minor beneficiaries who cannot approve the trustees’ reimbursement of the settlor. HMRC may, by notice, require a person who is, or has been, a trustee or beneficiary to provide information in connection with the settlement for the purposes of TCGA 1992 s 86 and Sch 5, within a specified period of not less than 28 days (Sch  5 para  10). There are also general information-gathering powers in connection with settlements with a foreign element under Sch 5A. 10.106 In order for gains to be chargeable on the settlor he must be resident (or for 2012/13 and earlier years, ordinarily resident) in the UK during the year (TCGA 1992 s 86(1)(c)). However, if he has left the UK since 17 March 1998 and returned within five complete fiscal years, he may be liable to CGT on his return under TCGA 1992 s 1M. While the settlor is non-resident and s 86 does not apply to attribute gains to him, there could have been capital payments made to beneficiaries taxed on them under s 87. If these exceed the ‘s 87 pool’ 511

10.107  Foreign Trusts at the end of the year of departure, in other words if the gains during the nonresidence of the settlor have been taxed on the beneficiaries, the tax so paid, as determined under s 86A(1)(b), is deducted from the amount chargeable on the settlor on his return (s 86A(2)). In order to reduce the s 86 charge on the settlor on return the gains have actually to be chargeable to tax on the beneficiaries. The ‘s 87 pool’ is calculated in accordance with s 86A(4) and (5) and, to the extent that the settlor is charged under TCGA 1992 s 1M on his return, there is a corresponding reduction in the amount of the s 87 pool carried forward (s 86A(6)–(8)).

Deduction of personal losses from gains treated as accruing to settlors 10.107 TCGA 1992 s 2(5) was amended from 2003/04, by FA 2002 s 51 and Sch 11, so that a settlor can set personal losses against deemed gains attributed to him under TCGA 1992 s 77 or 86. Losses must be set against personal gains first, then against deemed gains. If there are gains from different settlements, personal losses are deducted from each pro rata. These provisions also apply where gains during temporary non-residence are attributed to a settlor, except to the extent that these have already been attributed to beneficiaries (FA 2002 Sch  11 para  2). A  taxpayer was able to elect, prior to 31  January 2005, for the amended calculation rules to apply for 2000/01, 2001/02 and/or 2002/03 (Sch 11 para 8). 10.108 TCGA  1992 s  86(1)(e) was amended to ensure that the attributed gains were calculated before taper relief, but trust losses were set against trust gains as though taper relief were available, so that losses were first used against gains with no taper relief. Gains attributed to a settlor who retained an interest in the settlement had previously been attributed after taper relief but with no relief for personal losses available against the gain. The amended provisions enabled the gross gains before taper relief to be attributed to the settlor, who was allowed to set personal losses against the attributable gains and then apply taper relief to the net gains at the rate available to the trustees if they had been eligible for taper relief (FA 2002 Sch 11 para 4). Taper relief was abolished by FA 2008 s 8 and Sch 2 paras 25 and 45, with effect from 6 April 2008. 10.109 TCGA  1992 s  86A(2) and (7) was amended to require the trustees to deduct taper relief before attributing gains to a temporary non-resident on return, where chargeable gains had already been attributed to beneficiaries under TCGA 1992 s 87. Under s 86A a settlor could not set losses against gains attributed to him on his return to the UK, as the attribution to beneficiaries was from a pool of tapered gains (FA 2002 Sch 11 para 5). The pool of gains to be attributed to beneficiaries under s 87 was reduced by gains attributed to the settlor after the deduction of notional taper relief. 512

Foreign Trusts 10.112

Attribution of gains to beneficiaries 10.110 Under the rules for the attribution of gains to beneficiaries, TCGA  1992 s  87, chargeable gains are treated as accruing to a beneficiary who has received a capital payment from the trustees in the relevant tax year or any earlier year, to the extent that it is matched with the net gains for the year under TCGA 1992 s 1(3), referred to as the TCGA 1992 s 1(3) amount’ (until 2018/19, the ‘Section 2(2) amount’). The amount treated as accruing to a beneficiary is the lower of the amount of the capital payment or part of the capital payment that is matched with a chargeable gain made by the trustees. Capital payments made to the non-resident beneficiaries are not chargeable. If this section does not apply because, for example, the trustees are UK resident, the s 1(3) amount is nil. These provisions apply to settlements under a will or intestacy, as if made by the testator or intestate at the time of death. The matching provisions are set out in TCGA 1992 s 87A, which attributes gains on a last-in, first-out (LIFO) basis, with the current year’s capital payments being matched with the net gains for the year. If the capital payment exceeds the gains for the year, the unmatched gains for the latest earlier year are matched. 10.111 Where a beneficiary is not domiciled in the UK and the remittance basis applies under ITA 2007 s 809B or s 809E, the chargeable gains are treated as foreign chargeable gains within TCGA 1992 s 12, whether or not the assets are situated in the UK (TCGA 1992 s 87B). As the exemption for distributions to non-UK domiciled beneficiaries in the old TCGA  1992 s  87(7) does not apply to distributions on or after 6 April 2008, non-domiciled beneficiaries are chargeable either on the amounts distributed, whether brought to the UK or not, or, where the remittance basis applies, to the extent that there are relevant property or benefits deriving from the chargeable gains. Distributions include property held as nominee for a beneficiary (TCGA 1992 s  87B(4)). A  capital payment to a non-UK resident company that would be a close company if it were resident in the United Kingdom is ignored under TCGA 1992 s 87C. 10.112 Where the trustees are resident in the UK during any part of the year, but are treated under a double taxation treaty as resident outside the UK, the net chargeable gain for the year is the amount on which the trustees would have been chargeable to capital gains tax had they been resident and ordinarily resident in the UK (TCGA 1992 s 88), unless the gain is taxable only in the other jurisdiction under the treaty; assets so dealt with are known as ‘protected assets’. The matching rules under TCGA 1992 s 87A were modified by FA 2018 s 35 para 10 for 2018/19 and later years by the introduction of new TCGA 1992 ss 87D and 87E. 513

10.113  Foreign Trusts Capital payments made on or after 6 April 2018 to non-UK resident individuals are not matched, and so do not reduce the trustees’ s  87 pool (TCGA  1992 s 87D). The matching rules are also disapplied in the case of an unmatched capital payment received by a non-UK resident individual before 6 April 2018. In both cases, where the payment to the non-UK resident is treated as received by the settlor in a tax year in which he is UK resident under the provisions of TCGA 1992 ss 87G and 87H (see below). Where the individual is temporarily non-resident, a capital payment received during the period of temporary nonresidence is matched in the tax year of return (TCGA 1992 s 87E). 10.113 The matching rules also do not apply to a capital payment made to a beneficiary in a tax year in which he is UK resident if matching of that capital payment with trust gains takes place in a tax year (2018/19 or later) in which the beneficiary is non-UK resident (TCGA  1992 s  87N). If the beneficiary is temporarily non-UK resident, the unmatched payment is matched in the tax year in which he resumes UK residence (TCGA 1992 s 87P). These rules effectively counteract a common planning technique for ‘washing’ trust gains through the making of capital payments to non-UK resident beneficiaries, enabling payments to be made to UK resident beneficiaries free of capital gains tax charge (trust gains having been matched against payments to the non-UK resident beneficiaries). Further changes counter arrangements whereby capital payments are made to a non-resident close family member of the settlor, or to a non-UK resident beneficiary who passes the payment on to a UK resident person at a later date. The changes introduced to the operation of TCGA  1992 s  87 in this regard closely follow those made in relation to income tax under the settlor-interested trust rules and the transfer of assets abroad provisions. 10.114 From 6  April 2018, TCGA  1992 ss  87G and 87H provide for a charge on a UK resident settlor where a capital payment is received by a close family member (defined as the settlor’s spouse/civil partner, person with home he is living as a spouse/civil partner, and his minor unmarried children – TCGA 1992 s 87H) and is not subject to tax on the beneficiary (ie where the beneficiary is non-UK resident or taxable on the remittance basis and the capital payment is not remitted). The capital payment is treated as made to the settlor (and not the non-resident close family member) and is subject to CGT in his hands (TCGA 1992 s 87G(2)). The settlor is entitled to recover from the close family member the amount of tax suffered on the capital payment and to request HMRC to issue a certificate showing the amount of gain and the CGT paid (TCGA 1992 s 87G(4)). 10.115 TCGA  1992 ss  87I–87M apply to ‘onward gifts’ by a non-UK resident beneficiary (the ‘original recipient’) of a capital payment, but there are arrangements or an intention at the time the benefit is provided by the trustees, for the original recipient to pass on all or part of the benefit to a 514

Foreign Trusts 10.117 person who is reasonably expected to be UK resident. Where the subsequent recipient is a close family member of the settlor, and that person is not resident or a remittance basis user, tax is charged on the settlor (assuming he is UK resident) (TCGA 1992 s 87L). The gift by the original recipient must be made (directly or indirectly) within three years of the benefit being provided (or in anticipation of it being so provided), and include the whole or part of the benefit. These provisions apply only where the original recipient is not taxed on the benefit (TCGA 1992 s 87I(1)). Tracing rules apply where there are a series of gifts (TCGA 1992 s 87I(2)). The subsequent recipient is treated as receiving a capital payment from the trustees at the time the onward gift is made, equal to that gift (or part of it, where the gift exceeds the capital payment) (TCGA 1992 s 87J). It is assumed unless proved to the contrary that if the original beneficiary makes an onward gift within three years of receiving a benefit, there were ‘arrangements’ or ‘an intention’ for the subsequent beneficiary to receive the gift at the time the benefit was provided (TCGA 1992 s 87(8)). For the operation of TCGA 1992 s 87 for 2007/18 and earlier years and the transitional provisions applying under FA  2008 Sch  7, reference should be made to earlier editions of this work.

Migrant settlements 10.116 A  migrant settlement is one where a trust is resident in the UK for a period and then becomes non-resident. Capital payments received by a beneficiary in the resident period are not chargeable under TCGA  1992 s  87, unless made in anticipation of a disposal made by the trustees in the non-resident period (TCGA  1992 s  89(1)). Where a non-resident period is succeeded by a resident period, and the trust gains in the non-resident period have not been wholly charged on the beneficiaries, they will be chargeable on the beneficiaries when distributed under s 87 (s 89(2), (3)).

Resettlement of a trust or transfers from trust to trust 10.117 It is not possible to avoid the attribution of gains to beneficiaries rules by the simple expedient of resettling, because TCGA  1992 ss  90 and 90A apply for inter-trust transfers on or after 6 April 2008 and provide that where all the assets of a transferee settlement are transferred, the transferee settlement is treated as acquiring the transferor settlement’s s  1(3) amount (ie  the net chargeable gains). This amount is added to the transferee settlement’s own net chargeable gain. If some of the assets of the transferor settlement are transferred, the transferee settlement’s net chargeable gains are increased by a pro rata proportion of the transferor settlement’s net chargeable gains, and the transferor settlement’s net chargeable gains are reduced by the amount transferred. The appropriate proportion is calculated by reference to the value 515

10.118  Foreign Trusts of the property transferred at its market value in relation to the transferor settlement’s total value prior to the transfer. The asset values are reduced by any relevant liabilities. The transferee settlement’s net chargeable gains are increased in the year of transfer and subsequent fiscal years, but the transferor settlement’s reduction in net chargeable gains only applies to subsequent years of assessment. This means that any capital payments made by the transferor settlement will be matched against the full net relevant gains for the year. If there are no gains attributable to beneficiaries under TCGA 1992 s 87 or as a migrant settlement under s  89(2), it is treated as a migrant settlement for the year of transfer and subsequent tax years under TCGA 1992 s 90(6). The transfer of an interest in a settlement in consideration of money or money’s worth does not apply where the consideration is equal to or exceeds the market value of the property transferred, under TCGA 1992 s 90A. 10.118 Where the anti-flip-flop scheme provisions in TCGA  1992 Sch  4B apply (see 10.125) there is no charge under TCGA 1992 s 90(5), which was intended to prevent a double charge to tax. However, where a non-resident trust has substantial realised gains, known as stockpiled gains, it can enter into a linked borrowing under which funds are advanced to a new trust to bring it within Sch 4B, and flip-flop the stockpiled gains into the new trust, which are excluded from being trust gains of the transferee settlement by s 90(5). Any unrealised gains will be caught by the proposed transfer unless any further avoiding action is possible.

Surcharge in lieu of interest 10.119 A trap for the unwary arises where an offshore settlement has realised chargeable gains over several years and not distributed them to beneficiaries, perhaps merely because the beneficiaries have no need of further funds at that time. A  supplementary charge is made where a capital payment is matched under TCGA 1992 s 87A with a s 1(3) amount for a year which is at least one year prior to that in which the capital payment is made. For tax years on or after 2018/19, the supplementary charge also arises in relation to capital payments which are attributed to the recipient of onward gifts within TCGA  1992 ss 87I–87M. Reference should be made to earlier editions of this publication for further information on the rules applying to 2007/08 and earlier years.

Capital payments from connected companies 10.120 Where a capital sum is received from a qualifying company controlled by the trustees, it is treated as received directly from the trustees for the purposes of the attribution of gains to beneficiaries (TCGA 1992 s 96(1)). A qualifying company is a close company or one which would be if it were resident in the UK (s 96(6)). It is controlled by the trustees of a settlement if it is controlled 516

Foreign Trusts 10.122 by the trustees alone or together with the settlor or a person connected with him (s 96(7), (8)). Where the recipient is a non-resident qualifying company that would have been a close company had it been resident, and it is controlled by a person resident or ordinarily resident in the UK, the capital sum is treated as a capital payment received by that person (s 96(2), (3) and (9)). A person is resident in the UK if the year of assessment is an intervening year while he is temporarily non-UK resident for the purposes of TCGA 1992 s 10 (s 96(9A), (9B)). Where the company is controlled by two or more persons, if one of them is resident or ordinarily resident in the UK it is treated as a capital payment received by that person and if two or more of them are so resident it should be treated as separate capital payments received by each of them, quantified on a just and reasonable basis (s 96(4), (5)). The close company provisions in ICTA 1988 ss 416 and 417 are used for these provisions (s 96(10)).

Information powers 10.121 HMRC may obtain information for the attribution of gains from overseas trusts by requiring any person to furnish them, within a period of not less than 28 days, such particulars as it thinks necessary (TCGA 1992 s 98(1)). The income tax information-gathering powers in ITA 2007 ss 748–750 were imported by s 98(2). Further information powers are contained in TCGA 1992 Sch 5A introduced by s 98A. These additional information provisions apply from 3  May 1994 (TCGA  1992 Sch  5A para  1). Where a settlement was created before 17 March 1998 and further assets are transferred to it, and the trustees are not resident or ordinarily resident in the UK, the transferor must, within 12 months, deliver a return to HMRC identifying the settlement and specifying the property transferred, the day on which it was made and the consideration, if any, for the transfer (Sch 5A para 2). Where the trust is created on or after 3 May 1994 with non-resident trustees, a UK domiciled and resident or ordinarily resident settlor must, within three months of the creation of the settlement, inform HMRC of the name and address of the person delivering the return and names and addresses of the trustees (Sch  5A para  3). Where the settlement is created on or after 19 March 1991 with non-resident trustees, a settlor who subsequently becomes domiciled and resident in the UK must, within 12 months of so becoming, give particulars to HMRC of the date on which the settlement was created, the name and address of the person delivering the return and the names and addresses of trustees (Sch 5A para 4). 10.122 Where the trustees of the settlement become neither resident nor ordinarily resident in the UK, or are deemed to be so under a double taxation treaty, a trustee immediately prior to the trust becoming non-resident must, within 12 months of that date, inform HMRC of the date on which the settlement was created, the name and address of the settlor and the names and addresses of the trustees (TCGA 1992 Sch 5A para 5). Information is not required if it has already been submitted to HMRC (Sch 5A para 6). HMRC’s 517

10.123  Foreign Trusts information-gathering powers were amended and increased by FA 2008 Sch 36 by serving a notice on the taxpayer or third parties. There are also powers to inspect business premises and to copy or remove documents with penalties for failing to comply.

Anti-avoidance 10.123 Attempts were made to shelter unrealised gains in a non-resident trust by moving the residence of the trust to a suitable treaty-protected jurisdiction, by appointing new trustees and establishing the trust’s residence in the other jurisdiction. During this period the trust assets would be disposed of, realising a capital gain which would be treaty protected under the relevant double taxation treaty, and not subject to taxation in the other jurisdiction. In the same fiscal year the trustees would then resign in favour of UK resident trustees bringing the trust, with its now realised gains, into the UK. As the settlor would be resident in the UK during a part of the same fiscal year in which the gain arose there should be no attribution to the settlor under TCGA 1992 s 86(1)(c) and the gains would have been realised while the trust was still not resident and therefore there would be no charge on the settlor with an interest in the settlement under TCGA 1992 s 77. Mauritius used to be a favourite jurisdiction in such cases until a protocol to the UK-Mauritius double taxation treaty was signed on 27  March 2003 which overrode the treaty exemption for capital gains (2003 SWTI 521, SI 2003/2620). In Smallwood and Another as trustees of the Trevor Smallwood Trust v RCC (2009) EWHC 777 (Ch), such a scheme succeeded in the High Court but lost in the Court of Appeal [2010] EWCA Civ 778 as the place of effective management of the trust was in the UK and not Mauritius under the treaty tie breaker. 10.124 An interesting variation using the Mauritius treaty was successfully exploited in Davies v Hicks [2005] STC 850. The trustees of a UK trust sold shares. The trustees were replaced by those resident in Mauritius who used the cash proceeds in the trust to acquire shares of the same class within 30 days and matched them with the previous trustees’ disposal under TCGA 1992 s 106A, the bed and breakfast anti-avoidance rules, eliminating the gain on the earlier disposal. This loophole was blocked by FA 2006 s 74.

Trustee borrowing 10.125 Prior to 2003, ‘flip-flop’ schemes sought to avoid a charge to CGT on the settlor under TCGA 1992 s 86 and beneficiaries under TCGA 1992 s 87. The straightforward flip-flop scheme was usually one where the settlor, and/or his children, were beneficiaries of a non-resident trust with substantial assets. The trustees would borrow an amount equal to practically the whole of the value of the trust fund and advance the money to a new UK settlement in which 518

Foreign Trusts 10.126 the original beneficiaries would be beneficiaries. The class of beneficiaries in the offshore settlement would be changed to exclude defined persons under TCGA  1992 Sch  5 para  2(3), ie  the settlor and his immediate family, and appoint, for example, a sibling or cousin or parents of the settlor, who are not defined persons, as beneficiaries. In the next fiscal year the trustees would sell the assets and repay the borrowing. The overseas trust would no longer be a qualifying trust within TCGA  1992 s  86, having no beneficiaries who were defined persons, and therefore the gains would not be deemed to be those of the settlor. As the assets were sold to repay the loan there would be no material net assets available to make capital payments to beneficiaries, which would be caught under section 87. The value in the original trust would therefore end up in the new UK trust as free capital, which in due course could be distributed to beneficiaries free of CGT, provided that the courts, in due course, hold that the scheme worked. The first such case was successful before the Special Commissioners in Tee v Inspector of Taxes [2002] STC (SCD) 370, but this decision was overturned by the High Court in West v Trennery [2003] STC 580, but allowed by the Court of Appeal ([2004] STC 170). The House of Lords in Trennery v West [2005] STC 214, finally held that this particular flip-flop scheme involving UK settlement was caught by TCGA 1992 s 77(2) and the scheme therefore failed. The anti flip-flop rules in TCGA 1992 s 85A and Schs 4B and 4C were replaced and amended in 2003 and again in 2008. The rules are widely drawn, but in essence provide that where a trust is within scope of TCGA 1992 s 86 or 87 and there is a ‘transfer of value’ at a time where there is outstanding ‘trustee borrowing’ (which can be from any source), there is a deemed disposal by the trustees of all chargeable assets held in the trust at the material time. A transfer of value includes the transfer of an asset for consideration of less than market value, lending money or other assets to another person or the issue of a security for less than market value. Where the settlor is within scope of TCGA 1992 s 86 an immediate charge to CGT arises; otherwise the gains go into the Sch 4C pool and are attributed to capital payments by UK resident beneficiaries.

INHERITANCE TAX 10.126 For IHT purposes, the residence of the trustees has no particular significance. A  charge on trust assets arises either as though they were the property of the life tenant under IHTA  1984 s  49, or subject to the relevant property trust regime of a ten-yearly charge and exit charge under IHTA 1984 ss 64 and 65, unless otherwise exempted. The exemption which is available in respect of trust assets applies where property comprised in a settlement is situated outside the UK, which is treated as excluded property, although a reversionary interest in it is not, provided that the settlor was not domiciled in the UK at the time the settlement was made (IHTA  1984 s  48(3)(a)). A reversionary interest in the property is excluded property if it falls within 519

10.127  Foreign Trusts IHTA 1984 s 6(1) under s 48(3)(b). Section 6(1) provides that property situated outside the UK is excluded property if the person beneficially entitled to it is an individual domiciled outside the UK. Such excluded property is taken out of the discretionary trust regime by IHTA 1984 s 58(1)(f). It was common practice for a non-UK domiciliary to hold UK property through an offshore company wholly owned by an overseas trust. This structure enabled the value of the UK property to be sheltered from inheritance tax as the asset held by the trustees consisted of shares in a foreign company, which are excluded property within IHTA 1984 s 48(3)(a), rather than a UK situs asset. 10.127 Whilst many thought the introduction of ATED, and its related CGT and SDLT charges was an attack on SDTLT schemes, the actual tax affected was IHT. However, the IHT benefit did not produce the level of expected de-enveloping and from 6 April 2017, the definition of excluded property is amended to provide that assets, such as shares in an overseas company which derive a substantial element of their value from a UK residential property interest are not excluded property (IHTA 1984 Sch A1 para 2(2), inserted by F(No  2)A  2017 s  33 and Sch  10). The value of UK residential property is therefore brought within the relevant property regime for chargeable events occurring on or after 6  April 2017, but will be excluded property until that time for the purposes of calculating chargeable events (IHTA  1984 s  66). At the time of writing, interests in UK commercial property are outside the scope of these provisions, and will continue to be excluded property if held through a non-UK company. Property which consists of both residential and commercial elements will be relevant property only to the extent of the residential interest. 10.128 A UK residential property interest is defined as land consisting of or including a dwelling, using the same definition as applies for CGT purposes, TCGA 1992 Sch 1B para 4 (inserted by FA 2019 s 13 and Sch 1 from 6 April 2019; rewriting Sch B1 from 6 April 2019). A dwelling means a building used or suitable for use as a dwelling, and includes a building in the process of being constructed or adapted for use as a dwelling (TCGA  1992 Sch  1B para  5). There are exclusions for certain ‘institutional’ dwellings, such as prisons, hospitals, care homes and hotels. Shares in companies which would be close if they were UK resident and interests in a partnership are not excluded property if they derive their value from UK residential property (IHTA 1984 Sch A1 para 2, para 9). Interests of less than 5% are ignored (IHTA 1984 Sch A1 para 2(3)). A person’s interest for this purpose is computed by reference to all the interests of connected persons, and also including uncles, aunts, nieces and nephews (IHTA 1984 s 270 and Sch A1 para 2(4)). The value to be included in calculating an interest in UK residential property is reduced to reflect any liabilities of the close company or partnership, however, liabilities are to be attributed rateably to all the company 520

Foreign Trusts 10.130 or partnership’s property. This is the case even if the only security given for the debt is against UK residential property (IHTA 1984 Sch A1 para 2(5)). 10.129 IHTA  1984 Sch A1 also incorporates provisions relating to ‘relevant loans’, so that it is not possible to reduce the value of (say) the shares in an offshore company holding UK residential property through loan arrangements. However, these provisions apply whether the loan is actually deductible for IHT or not. To be deductible the loan must not only have been used to acquire or enhance the property, but in addition, if made from a non-UK lender must either be repayable in London (which could be costly for remittance basis users) or secured on the UK property in question (which gives rise to UK source and therefore withholding tax concerns) IHTA 1984, s 162(5). A  loan is a relevant loan if it is used to finance directly or indirectly the acquisition, maintenance or enhancement of a UK residential property interest by an individual, a partnership or trustees of a settlement, or the acquisition by one of the above of an interest in a close company or a partnership deriving its value from UK residential property (IHTA 1984 Sch A1 paras 4(1) and (3)). The loan (or part thereof) ceases to be a relevant loan where the UK residential property interest is disposed of (IHTA  1984 Sch A1 para  (4)(4)). A  loan for this purpose includes any acknowledgement of debt by a person or any other arrangement by which a debt arises, whether or not the loan is on commercial terms (IHTA 1984 Sch A1 para 4(6)). Assets made available as security, collateral or guarantee for a relevant loan are also caught and will not be excluded property (IHTA  1984 Sch A1 para  3). There are also tracing provisions so that a loan made to finance the purchase of another asset will be a relevant loan if the original asset is sold and the proceeds used to acquire a UK residential property interest (IHTA 1984 Sch A1 para (4)(2)). 10.130 A two-year ‘tail’ also applies, so that the sale proceeds realised on the disposal of certain assets, or the repayment of a relevant loan, will not be regarded as excluded property for IHT purposes for two years following the sale or date of repayment of the debt, even if the funds are placed in a foreign bank account and would otherwise qualify as excluded property under IHTA 1984 s 157 (IHTA 1984 Sch A1 para 5). This rule applies to the disposal of an interest in a close company or partnership, the repayment of a relevant loan or other assets directly or indirectly representing the above. It does not therefore apply where UK residential property is sold by a company or partnership, or assets held as security for a loan. It is provided by IHTA 1984 Sch A1 paras 6 and 7 that arrangements designed to avoid or reduce the effect of these rules are to be ignored, as is the operation of any double tax treaty unless the overseas territory levies a tax similar in character to inheritance tax. 521

10.131  Foreign Trusts 10.131 So long as the settlor was non-UK domiciled at the time of creation of the settlement, for IHT purposes it does not matter if he subsequently acquires a UK domicile or is treated as domiciled in the UK for IHT purposes (IHTA  1984 s  267) unless property is added to the settlement, in which case the added property will not be excluded property (IHTA  1984 s  82A), see 7.41 above. It is by no means uncommon for an expatriate working abroad for a long time to settle surplus funds earned overseas on trusts in an offshore jurisdiction without giving a thought to the UK IHT liability arising. If, however, he was domiciled in the UK at the time of his departure, and his intention was to return to the UK on his retirement, he has probably retained his UK domicile throughout his period of non-residence, and has therefore remained within the UK IHT net, and may well have made chargeable transfers, say, on settling discretionary trusts (Civil Engineer v IRC [2002] STC (SCD) 72).

Disclosure of settlements with a foreign element 10.132 Where a person in the course of a trade or profession carried on by him, other than as a barrister, has been concerned with the making of a settlement, where the settlor was domiciled in the UK and the trustees of the settlement are not resident in the UK, he must within three months of the making of the settlement make a return to HMRC stating the names and addresses of the settlor and the trustees of the settlement (IHTA 1984 s 218(1)). This does not apply to a settlement made by will or a settlement where a return has already been made by another person or an account has been delivered in relation to the death under IHTA 1984 s 216. The trustees should be regarded as not resident in the UK unless the general administration of the settlement is ordinarily carried on in the UK and the trustees, or a majority of them, are for the time being resident in the UK (s  218(3)). Failure to make a return under these provisions results in a liability to a penalty not exceeding £300 and a further penalty not exceeding £60 for every day after the day on which the failure has been declared by a court or the tribunal, and before the day on which the return is made (IHTA 1984 s 245A(1)).

522

Chapter 11

Charitable Trusts

DEFINITION 11.1 A charity is an organisation set up for charitable purposes only, as set out in the Charities Act 2011 ss 1–4 (see 11.18). A charity is often formed as a company, normally a company limited by guarantee.

Charities Act 2011 11.2 The Charities Act 2011 repealed and replaced the Recreational Charities Act 1958, the Charities Act 1993 and most of the Charities Acts of 1992 and 2006 and Orders thereunder and applies to charities in England and Wales. CA 2011 s 3 defines existing charitable purposes (with some slight extensions or clarification) under a set of broad headings rather than creating any new charitable purposes. The headings covered in s 3 are the: (a)

prevention or relief of poverty;

(b) advancement of education; (c)

advancement of religion;

(d) advancement of health or the saving of lives; (e)

advancement of citizenship or community development;

(f)

advancement of the arts, culture, heritage or science;

(g) advancement of amateur sport; (h)

advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity;

(i)

advancement of environmental protection or improvement;

(j)

the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage; 523

11.3  Charitable Trusts (k) advancement of animal welfare; (l)

the promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services; and

(m) any other purposes not within subsections (a to l) but which are recognised as charitable purposes by virtue of s 5 (recreational and similar trusts etc) or under the old law that may be reasonably regarded as analogous to or within the spirit of any purposes recognised under charity law. Charities which were registered continued to be so without the need to take any further action.

‘Public benefit’ 11.3 There is no statutory definition of ‘public benefit’, required by CA 2011 s 2, and the current non-statutory approach will remain because it gives flexibility, certainty and the capacity to accommodate the diversity of the sector. However, the presumption of public benefit for charities for the relief of poverty, the advancement of religion and the advancement of education were removed by the Charities Act 2006, and charities registered under these headings have to show that, as well as being established for a recognised charitable purpose, they are also providing benefit to the public (see 11.12). One of the recommendations in the report leading to CA  2006 was that the Commission should carry out checks into the public character of charities to make sure they existed for the public benefit. 11.4 Charitable objectives may, however, be achieved through the medium of a charitable trust, which is one of the few types of purpose trust allowed by English law. Trusts normally have human beneficiaries who can be identified and, in fact, this is one of the so-called three certainties that are necessary for a valid trust. A charitable trust is different, in that it is designed to achieve a purpose, and that purpose must fall within one of the charitable heads described above (Income Tax Special Purposes Comrs v Pemsel (1891) 3 TC 53). A charitable trust does not have to be established in the UK in order to carry out its charitable objects, but it previously had to be established in the UK in order to qualify for the tax benefits available to charities (Camille and Henry Dreyfus Foundation Inc v IRC (1955) 36 TC 126; IRC v Gull (1937) 21 TC 374; Civil Engineer v IRC [2002] STC (SCD) 72). This was contrary to the EU free movement of capital provisions following Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften, Case C-386/04 and Heine Persche v Finanzamt Lüdenscheid, Case C-318/07. FA 2010 Sch 6 Part 524

Charitable Trusts 11.8 1 para  1 defined a charity as a body of persons or trust that is established for charitable purposes only under s 2 of the Charities Act 2011 which meets the jurisdiction conditions in para 2, ie the High Court in England and Wales, the Court of Session in Scotland or the High Court in Northern Ireland or corresponding jurisdiction in another Member State of the European Union. HMRC can make regulations to extend this to other territories but have not done so at the time of writing. If, on the termination of an interest in possession, the residue passes directly to charity it is not a taxable event (IHTA 1984 s 11): McKelvey (Ex of McKelvey deceased) v RCC  2008  SSCD  944; Bailhache Labesse Trustees Limited v RCC (2008) SSCD 869. A charity may carry out its objectives overseas, such as relieving poverty in third-world countries, or as a missionary society. 11.5 The relief of poverty included almshouses (Mary Clark Home Trustees v Anderson (1904) 5 TC 48) and societies for the relief of widows or disabled persons, even if limited to people in their particular occupation (IRC v Society for the Relief of Widows and Orphans of Medical Men (1926) 11 TC 1; IRC v Medical Charitable Society for the West Riding of Yorkshire (1926) 11 TC 1). A mixed trust that makes charitable payments is not exempt from tax, as the income is not applicable to charitable purposes only (Lawrence v IRC (1940) 23 TC 333). 11.6 There have been a number of tax cases on what is meant by the advancement of education, which includes the running of schools and universities (Blake v London Corpn (1887) 2  TC  209; Cardinal Vaughan Memorial School Trustees v Ryall (1920) 7  TC  611; Ereaut v Girls Public Day School Trust Ltd (1930) 15 TC 529; R v Income Tax Special Comrs (ex p University College of North Wales) (1909) 5  TC  408; London Hospital Medical College v IRC (1976) 51 TC 365; Scottish Woollen Technical College Galashiels v IRC (1926) 11 TC 139). 11.7 Education includes the promotion of music and science and the furtherance of craftsmanship (IRC  v Glasgow Musical Festival Association (1926) 11 TC 154; Royal Choral Society v IRC (1943) 25 TC 263; Institution of Civil Engineers v IRC (1931) 16 TC 158; IRC v White (Re Clerkenwell Green Association of Craftsmen) (1980) 55 TC 651). Education in its widest form has embraced the publication of law reports, the Ethical Society and the Football Association Youth Trust (Incorporated Council of Law Reporting v A-G (1971) 47  TC  321; Barralet (South Place Ethical Society Trustees) v A-G  (1980) 54  TC  446; IRC  v McMullen (1980) 54  TC  413). The Chartered Institute of Taxation is a registered charity, number 1037771, as is the Association of Taxation Technicians, number 803480. Many associations which are not themselves charities fund charitable trusts for their members in distress. 11.8 The advancement of religion includes the support of missionary work (Special Comrs of Tax v Pemsel (1891) 3 TC 531), and looking after the 525

11.9  Charitable Trusts widows and orphans of ministers (Baptist Union of Ireland (Northern) Corpn Ltd v IRC (1945) 26 TC 335). The advancement of religion is fairly widely defined and includes, for example, the Salvation Army (Re Fowler (1914) 31 TLR 102) but not Freemasonry (United Grand Lodge of Ancient Free and Accepted Masons v Holborn Borough Council [1957] 1 WLR 1080). 11.9 Purposes beneficial to the community include nursing homes and convalescent homes (IRC  v Peeblesshire Nursing Association (1927) 11  TC  335; Grand Council of the Royal Antediluvian Order of Buffalos v Owens (1927) 13  TC  176). The definition encompasses holiday homes, agricultural societies and municipal recreation grounds (IRC v Roberts Marine Mansions Trustees (1927) 11  TC  425; IRC  v Yorkshire Agricultural Society (1927) 13  TC  58; IRC  v Tayport Town Council (1936) 20  TC  191). It also includes the Crystal Palace (Crystal Palace Trustees v Minister of Town and Country Planning [1950] 2 All ER 857n) and temperance cafés (IRC v Falkirk Temperance Café Trust (1926) 11  TC  353; Dean Leigh Temperance Canteen Trustees v IRC  (1958) 38  TC  315). The Charity Commission will now treat as charitable a trust holding land which is occupied by one or more community amateur sports clubs. The protection of the environment was held to be charitable in the New Zealand case of Re Centrepoint Community Growth Trust (2000) 3 ITELR 269. 11.10 English PEN was established as a company with the object of promoting, inter alia (1) the education of the public by encouraging the understanding, appreciation and development of writing in any style or form; (2) the human rights of writers, authors, editors, publishers and other persons similarly engaged (the beneficiaries) throughout the world; and (3) relieving poverty and distress among the dependants, family and/or household members of beneficiaries. It applied to be registered as a charity. The Charity Commission considered the case put by and on behalf of the company under the Commission’s Review procedures and, having considered and reviewed the application and the relevant law, the Commission concluded that the company was established for exclusively charitable purposes and should be registered as a charity ([2008]  WTLR  1799). In this case, the Commission considered the activities and the purpose of the company under its various objectives in the light of the requirement for public benefit under CA  2006 s  2(2) now CA  2011 s  2(1)(b) ‘The principle is that a beneficial class must be an “appreciably important class of the community” (Verge v Somerville [1924]  AC  496 at 499) and that any restrictions on who can benefit must be legitimate, proportionate, rational and justifiable given the nature of the organisation’s purposes’. There was a discussion over the political activities carried on by the company which could have prevented qualifying as a charity, following McGovern v Attorney-General [1981] 3 All ER 493 which had held that, because of its political activities, Amnesty International Trust was not a charity. In the English PEN case, however, it was accepted that the political activities carried on by the company were ancillary to the promotion of human 526

Charitable Trusts 11.13 rights, and therefore acceptable as non-charitable activities which were merely subsidiary or incidental to the charitable purposes, following Southwood v Attorney-General [2000] WTLR 1199 and R v Radio Authority ex parte Bull [1997] 2 All ER 561. 11.11 An educational trust for a limited class of beneficiaries is unlikely to be charitable (IRC v Educational Grants Association Ltd (1967) 44 TC 93). Professional associations, by and large, do not qualify for charitable status although some do, including, for example, the Chartered Institute of Taxation. Relevant cases include R  v Special Comrs, ex p Headmasters Conference (1925) 10  TC  73; General Medical Council v IRC  (1928) 13  TC  819; General Nursing Council for Scotland v IRC  (1929) 14  TC  645; Midland Counties Institution of Engineers (1928) 14 TC 285; Geologists Association v IRC  (1928) 14  TC  271; and Honourable Company of Master Mariners v IRC (1932) 17 TC 298. 11.12 Similarly, members’ clubs, societies and other associations are not charitable (Scottish Flying Club Ltd v IRC (1935) 20 TC 1; Sir H J Williams Trust v IRC (1947) 27 TC 409; Tennent Plays Ltd v IRC [1948] 1 All ER 506). Mixed charitable and non-charitable activities prevent an organisation from being registered as charitable (IRC  v Oldham Training and Enterprise Council [1996] STC 1218; IRC v Glasgow Police Athletic Association (1953) 34 TC 76). The last surviving member of a non-charitable unincorporated association is entitled to its assets (Hanchett-Stamford v Attorney General and Others [2008] EWHC 330 (Ch). 11.13 The Charity Commission for England and Wales published Charitable Purposes and public benefit guides on 16 September 2013. These are ‘Public benefit: the public benefit requirement’ (PB1); ‘Public benefit: running a charity’ (PB2); and ‘Public benefit: reporting’ (PB3) (available at www. charitycommission.gov.uk). There are two key principles of public benefit, the benefit aspect and the public aspect, which are enlarged upon in PB1: ‘The Legal requirement for a purpose to be charitable it must be beneficial in a way that is identifiable and capable of being proved by evidence where necessary not based on personal views’. It must also benefit either the public in general or a sufficient section of the public. The principles of public benefit apply to all charities, whatever their aims. Each charity must be able to demonstrate that its aims are for the public benefit. Public benefit decisions are about whether an individual organisation is a charity and not about whether particular types of charity or groups of charities, as a whole, are for the public benefit. 527

11.14  Charitable Trusts 11.14 The Recreational Charities Act 1958, now encapsulated within the Charities Act 2011, was introduced to clarify the law, following IRC v Baddeley (Newtown Trust) v IRC (1955) 35 TC 661, which extended the meaning of ‘for the public benefit’ to social and physical training and recreation, and made clear that this was charitable. The Charities Act 2011 covers the meaning of charity and charitable purpose, the Charity Commission, exempt charities and the principal regulator, registration and names of charities, information powers, cy-près powers. The act also covers the assistance and suspension of charities by the court and Commission, charity land, charity accounts reports and returns, audit and examination of accounts and public access thereto. Further provisions relate to charity trustees and auditors, charitable companies, charitable incorporated organisations (CIOs), and conversion amalgamation and transfers, the incorporation of charity trustees, unincorporated charities, special trusts and local charities. Charity mergers are covered as is the appeals tribunal and miscellaneous and supplementary provisions. The Charities (Protection and Social Investment) Act became law on 17 March 2016. The measures in the Act include: ‘•

Banning people with convictions for certain criminal offences, such as terrorism or money laundering, from being a charity trustee.

•

A new power to disqualify a person from being a charity trustee where the Charity Commission (www.gov.uk/government/organisations/ charity-commission) considers them unfit.

•

A new power for the Commission to require a charity to shut down following an inquiry into misconduct or mismanagement, where this would help maintain public trust and confidence in charities.

•

A new power for the Commission to issue official warnings for less serious cases: the Commission can put this on the charity’s official record and if evidence is found that they have not dealt with the problem, the Commission will take further action.

•

Closing loopholes that have prevented the Charity Commission from taking enforcement action in the past, eg where trustees have resigned to avoid removal and disqualification.’

The Charity Commission for England and Wales has the responsibility for approving charities under the Charities Act 2011. Scottish charities are dealt with by the Office of the Scottish Charities Regulator. 11.15 Generally speaking, trusts for the promotion of political or sporting purposes are unlikely to be charitable (Anglo-Swedish Society v IRC  (1931) 16 TC 34; Keren Kayemeth Le Jisroel Ltd v IRC (1932) 17 TC 27; McGovern 528

Charitable Trusts 11.19 v A-G [1981] 3 All ER 493; IRC v National Anti-Vivisection Society (1947) 28  TC  311; Bonar Law Memorial Trust v IRC  (1933) 17  TC  508; IRC  v Temperance Council of the Christian Churches of England and Wales (1926) 10 TC 748). 11.16 A  disaster fund is unlikely to be charitable. In Re Gillingham Bus Disaster Fund [1958] 1 All ER 37 it was suggested that, where a fund was contributed to by a large number of anonymous small donors, if the beneficiaries could not be identified, there was nevertheless a resulting trust in favour of the donors, or the Treasury Solicitor could claim the balance as bona vacantia. Such funds would normally not be charitable, and the trustees would have to pay any surplus into court pending a decision on its distribution or return to the original donors. 11.17 In the case of a charitable trust where the original purpose cannot be carried out, it can be used for other purposes as close as possible to the original purpose, under what is known as the cy-près doctrine, now encapsulated in CA 2011 ss 61–68. In the case of a small charity with an income of less than £10,000, the assets may be transferred to another charity under CA  2011 ss 267–272. A recent case reviewing the approach to be taken in cy-près cases was the Trustees of the Christian Brothers in Western Australia (Inc) and Others v Attorney General of Western Australia (2006) 9 ITELR 212. 11.18 In order to attain charitable status, it is necessary to apply to the Charity Commission, which publishes booklet CC21 entitled ‘How to Set Up a Charity’. The draft statutes or trust deed of the charity are normally submitted for approval and, if approved, the charity is registered- and given a registration number. A  charity that is accepted as such by the Charity Commission will normally be accepted as charitable for taxation purposes.

Community Amateur Sports Clubs 11.19 Community amateur sports clubs (CASCs) are not charities but qualify for many similar reliefs under CTA 2010 Part 13 Chapter 9 ss 658–671 and FA 2013 s 46 and Sch 21 and FA 2014 s 35. Such clubs are normally set up as incorporated associations of members rather than as trusts and, to obtain the tax benefits, they have to register with HMRC. Membership subscriptions are controlled. Such clubs are exempt from tax on trading profits if the turnover with non-members does not exceed £50,000 per annum. The profits from such activities are taxable in full if they exceed this limit. Such turnover normally takes the form of bar sales to non–members, green fees and other fees from the use of the clubs facilities by non-members. CASCs must be open to the whole community CTA  2010 s  659, organised on an amateur basis (s  660), and have as their main purpose the provision of facilities for and promotion of participation in one or more eligible sports (s 661). As well as exemption from 529

11.20  Charitable Trusts tax on trading income with a turnover of less than £50,000 per annum, such clubs also qualify for exemption for interest and Gift Aid income subject to anti-avoidance rules in CTA 2010 ss 202A–C, property income up to £30,000 (s 663), and chargeable gains (s 665). Donations qualify for Gift Aid relief under CTA 2010 ss 660D, 660E and 664. Section 660A allows restrictions on social members. Section 661A allows relief for EU clubs; managers must be fit and proper persons (s 661B) throughout the claim period (s 660C). There are antiavoidance restrictions on non-qualifying expenditure and income allocation rules (ss 666–668), deemed disposals of assets on ceasing to qualify (s 669) and HMRC decisions and appeals in ss 670 and 671. CASCs may pay up to £10,000 pa in total to playing members, and reasonable travel and subsistence costs. There is no VAT relief, as such, for CASCs, although there are usually VAT exemptions on fundraising events and certain sporting activities. The normal registration limits apply to the trading business activities of the club. Such clubs are often incorporated as companies limited by guarantee. HMRC published detailed guidance notes on CASCs on 8  April 2015, 2015 SWTI 1494–1530.

TAXATION ON SETTING UP Stamp duty and stamp duty land tax 11.20 A transfer into a charitable trust of assets or property should not be subject to stamp duty, in view of the specific exemption for transfers to charities in FA 1982 s 129. Inter vivos gifts generally are exempt under FA 1985 s 82. Stamp duty land lax is not normally payable where there is no consideration (FA 2003 s 49 and Sch 3 para 1).

Income tax, settlements of income and Gift Aid 11.21 The provisions relating to charitable covenants under F(No 2)A 1992 s 27 and ICTA 1988 s 347(2)(b) were repealed by FA 2000 s 41, which also repealed covenanted subscriptions to charities under FA 1989 s 59 and removed the requirement to deduct tax from such payments under ICTA 1988 s 348(3). Effectively, the old deed of covenant system was swept away and replaced by an extended Gift Aid scheme under FA 1990 s 25, which was amended by FA 2000 s 39 in respect of gifts made on or after 6 April 2000 for covenanted payments falling to be made after that date, and is now contained in ITA 2007 ss  413–430 for individuals. Where a deed of covenant was executed before 6  April 2000, FA  2000 s  41(8) provides for the covenanted payments to be what they would have been had the payer continued to be entitled to deduct tax at the basic rate from each payment. This reflects the fact that the payment is relieved under Gift Aid, which is a net payment grossed up by the recipient 530

Charitable Trusts 11.22 charity (ITA 2007 ss 414–423). Where the covenant is in what used to be a common format of ‘such a sum as after deduction of income tax at the basic rate for the time-being is equal to £X’, the taxpayer will actually continue to pay the same amount as previously. Covenants made after 5 April 2000 would normally be for a specific sum with no grossing-up formula. Millennium Gift Aid under FA 1998 s 48 was repealed by FA 2000 s 42, as it was unnecessary in the light of the extension of Gift Aid to all donations to charity, however small, after 5 April 2000. 11.22 The current Gift Aid rules, are set out in detail in ITA 2007 ss 413–430. A gift to a charity by an individual is a qualifying donation if it takes the form of the payment of a sum of money, is not subject to repayment, is not within the payroll deduction scheme under ITEPA 2003 ss 713–715, and neither the donor nor any person connected with him receives a benefit from the donation unless it is small (see 11.24 below). The gift must not be conditional on, or associated with, any arrangement involving the acquisition of property by the charity otherwise than by way of gift from the donor or person connected with him, ie it must not be a gift of cash requiring the charity to buy an asset from the donor. The donor must be resident in the UK, or be a Crown employee serving overseas treated as if he were resident in the UK, or if the grossed-up amount of the gift would be payable out of profits or gains brought into charge to income tax or CGT in the hands of a non-resident. The donor must give an appropriate declaration to the charity (ITA 2007 s 428. HMRC has published on its website (www.hmrc.gov.uk/charities/appendix-B1.pdf) a pro forma gift aid declaration as follows: ‘Charity Gift Aid Declaration – multiple donation Boost your donation by 25p of Gift Aid for every £1 you donate Gift Aid is reclaimed by the charity from the tax you pay for the current tax year. Your address is needed to identify you as a current UK taxpayer. In order to Gift Aid your donation you must tick the box below: I want to Gift Aid my donation of £__________________ and any donations I make in the future or have made in the past 4 years to: Name of charity ______________________________________________ Donor’s details Title _________________ First name or initial(s) ______________________ Surname____________________________________________________ 531

11.23  Charitable Trusts Full home address_____________________________________________ ___________________________________________________________ ___________________________________________________________ Postcode _______________ Date ________________________________ Please notify the charity or CASC if you: ·

Want to cancel this declaration.

·

Change your name or home address.

·

No longer pay sufficient tax on your income and/or capital gains.

If you pay Income Tax at the higher or additional rate and want to receive the additional tax relief due to you, you must include all your Gift Aid donations on your Self Assessment tax return or ask HM  Revenue and Customs to adjust your tax code.’ 11.23 Regulations were introduced by FA 1990 s 25(3A) (The Donations to Charity By Individuals (Appropriate Declarations) Regulations 2000 (SI 2000/2074) as amended by SI 2003/2155 and SI 2005/2790). These provisions allow declarations to be given by a donor to a charity to treat a gift as falling under Gift Aid, in writing, orally or by means of electronic communications, which allows, for example, phone-in donations during a television charity show to be made by credit card, provided that the charity makes a note of the name and address of the donor, the name of the charity, a description of the gift and that they are treated as falling under the Gift Aid provisions. The charity must then send a written copy of the record to the donors (SI 2000/2074 para 5). An oral declaration may be cancelled within 30 days of receipt of the notice from the charity by giving notice in writing to the charity, in which case the donation is treated as never having taken effect (SI 2000/2074 para 6). 11.24 There are provisions for establishing the value of a small benefit, which in aggregate must not exceed £500 per annum, and must not exceed 25% of the amount of the gift of up to £100, no more than £25 for a gift between £100 and £1,000 and no more than 2.5% of a gift in excess of £1,000 (ITA 2007 ss 418, 419). ITA 2007 ss 420, 421 allow free admission to view property, the preservation of which is the sole or main purpose of the charity, or to observe wildlife, the conservation of which is the sole or main purpose of the charity, provided that the opportunity to make gifts which attract such rights is available to members of the public generally. However, from 6 April 2006 the Gift Aid donation must exceed the admission charge to the public by at least 10% (ITA 2007 s 420(8)(b)). 11.25 A gift which is a qualifying donation is treated as a net amount after deduction of income tax at the basic rate (ITA 2007 s 415). This enables the charity to recover the tax on the grossed-up equivalent of the amount of the 532

Charitable Trusts 11.28 gift. As far as the donor is concerned, the basic rate limit is increased by the grossed-up amount of the Gift Aid payment, which effectively gives higher rate tax relief for the grossed-up gift (ITA 2007 s 414). There are a number of anti-avoidance provisions, the most important of which is that, where the tax on grossing up a Gift Aid donation exceeds the donor’s liability for the year, the excess may be claimed from him under ITA 2007 s 424. The right of the charity to recover the basic rate tax treated as if it were deducted from the grossed-up equivalent of the gift is given by ITA 2007 ss 520, 521. 11.26 Under ITA 2007 ss 426, 427, a Gift Aid donation may be carried back to the previous year of assessment on making the appropriate election to HMRC before the tax return is delivered, and not later than 31 January following the end of the year of assessment to which the gift is to be related back. Such an election can only be made if the donor’s income was sufficient to frank the grossed-up donation. Gift Aid relief is then available as if the donation had been made in the previous year of assessment. This does not affect the date of receipt of the donation by the charity. From April 2004, taxpayers were able to nominate all or part of a tax repayment, which was due to them, in favour of a charity, under ITA 2007 s 429, which was repealed from 6 April 2012 by FA 2012 s 50(1). 11.27 There are provisions to allow Gift Aid relief under the payroll giving scheme (ITEPA  2003 ss  713–715). A  transitional Gift Aid supplement was paid by HMRC to charities losing out as a result of the reduction in the basic rate from 22% to 20% by FA 2008 s 1 under FA 2008 s 53 and Sch 19 for the years 2008/09 to 2010/11 inclusive. Under the Small Charitable Donations Act 2012 and the Small Charitable Donations Regulations 2013 (SI 2013/938), eligible charities may claim topup payments, limited to £5,000 per annum, from HMRC as if the donations had suffered tax at the basic rate of income tax. An eligible charity is one which has made a successful gift aid exemption claim in at least two of the previous four tax years and the charity has been a charity for at least two consecutive tax years. Certain national charities are excluded. There are special rules for charities running charitable events in community buildings.

Corporation tax 11.28 Gift Aid payments may be made by companies under CTA  2010 ss  189–217 and treated as qualifying payments, which are deducted from total profits under CTA 2010 s 191. Gift Aid payments by companies are paid gross under CTA 2010 s 189, 190, unless they take the form of distributions (CTA 2010 s 194). There are restrictions on close company donations which are disguised loans or which provide a benefit in excess of an aggregate of £500. The benefit provisions relating to individuals are applied to company 533

11.29  Charitable Trusts Gift Aid (CTA 2010 s 197). The normal connected person definition is applied for these purposes (CTA 2010 s 201). 11.29 The amount paid by a company to a charity is tax-free in the hands of the charity under ITA 2007 ss 518–564, as amended by CTA 2009 ss 977 and 979. 11.30 The corporation tax treatment of charitable donations in CTA 2010 ss 191–202 is modified in the case of a qualifying donation to a charity made by a company which is wholly owned by a charity. The gift of a sum of money to a charity by a company is allowed as deductions from a company’s total profits in computing the corporation tax for an accounting period. However, in the case of a company owned by a charity, the company may claim that a donation paid within nine months of the end of the accounting period should be treated as deductible for that accounting period (CTA 2010 s 199). 11.31 This enables the profits of a trading company owned by a charity to be paid up under the Gift Aid regulations to the charity, to eliminate the taxable profit of the trading company, which typically produces Christmas cards or runs charity shops not directly connected with the purposes of the charity and is therefore taxable as a trade. It was previously necessary to pay out the profits by way of a variable deed of covenant immediately prior to the company’s accounting year end in order to have a deduction for a charge on income against the company’s trading profits, which obviously produced problems of estimating the level of the company’s profits in order to make the payment in time. The nine-month leeway should enable the charitable company to avoid taxation in most cases by gifting its profits to charity, interestingly not necessarily the charity owning the shares in the company. 11.32 Charities for tax purposes include exempt bodies within ITA  2007 s 430 and scientific research associations within CTA 2010 ss 469, 470.

Capital gains tax 11.33 Although, in order to qualify for Gift Aid, donations must be in cash (ITA 2007 s 416(2)) gifts of assets to charities, or for national purposes etc to bodies listed in IHTA 1984 Sch 3 (which are not disposals of shares in a venture capital trust already exempt under TCGA 1992 s 151A) are treated as made on a no gain/no loss disposal, with the charity taking over the donor’s base value (TCGA 1992 s 257(1), (2)). Relief also applies to a sale for consideration not exceeding the capital gains base cost under TCGA 1992 s 38, which extends to gifts into settlement. 11.34 Where there is a disposal by trustees, other than on the termination of a life interest within TCGA 1992 s 72, the disposal is treated as a no gain, 534

Charitable Trusts 11.38 no loss disposal under TCGA 1992 s 257(3) where the donee is a charity or recognised body for gifts for national purposes. 11.35 Where, other than on a bargain made at arm’s length, an individual or company disposes of the whole of the beneficial interest in qualifying investments to a charity, a claim may be made to HMRC and the relevant amount transferred will be treated as a deduction from the total income of the individual, or a charge on income where the donor is a company, provided that it is not a gift of a trading asset exempt under ITTOIA 2005 ss 108, or a gift of shares, securities or real property under ITA 2007 ss 431–436 or a gift of trading stock under CTA 2009 ss 105–108. 11.36 The relevant amount is the market value of the investment at the time of disposal to the charity or the undervalue where there is consideration below the market value (ITA 2007 s 434(1)). The relevant amount is reduced by any benefit to the donor or connected person and increased by the incidental costs of the disposal by the donor (ITA 2007 ss 434(1), (2), 1021(1)). The incidental costs of making the disposal can be increased where the consideration is less than the donor’s base value under TCGA 1992 s 257(2)(a) (ITA 2007 ss 434(2), (4), 436). The relief is modified in the case of tax avoidance schemes by ITA 2007 ss 437–440. ‘Qualifying investment’ means shares or securities listed or dealt in on a recognised stock exchange, authorised unit trusts, shares in an open-ended investment company, interests in an offshore fund or a freehold or leasehold interest in land (ITA 2007 ss 431–433). FA 2010 ss 31, 32 and Schs 7 and 8 introduced anti-avoidance measures to prevent the exploitation of charity reliefs. 11.37 Market value is that applicable for CGT purposes, except for offshore funds where TCGA 1992 s 272(5) applies (ITA 2007 s 438). In the case of a qualifying interest in land, joint interests are treated as disposals by each of the joint owners and the relief apportioned among them ITA 2007 ss 441–444. In order to claim relief for a donation to charity under these provisions, it is necessary to obtain a certificate from the donee charity specifying the qualifying interest in land (ITA 2007 s 441). There are anti-avoidance provisions to prevent a disposal to a connected person through a charity (ITA 2007 s 444 (2)–(7)).

Miscellaneous 11.38 A gift in kind to a charity by a person carrying on a trade, profession or vocation which is an article manufactured or sold in the course of trade is allowable for tax purposes by excluding any deemed income based on the value of the stock transferred to the charity CTA 2009 ss 105–108; ITTOIA 2005 ss 108, 109). A similar relief is available on the disposal of plant or machinery to a charity, heritage body or educational establishment where no disposal value is to be brought into account for capital allowances purposes under Capital Allowances Act 2001 s 63(2). 535

11.39  Charitable Trusts 11.39 From 1 or 6  April 2002, depending on whether or not the club is incorporated, gifts to community amateur sports clubs qualify for Gift Aid as if the club were a registered charity (IHTA 1984 s 23). CGT and IHT relief for gifts etc to charities is also available as if the sports club were a charity. 11.40 Where a settlor retains an interest in a settlement, the income is taxable on him under ITTOIA 2005 ss 622–627 except to the extent that that income is given to a charity, or is income to which the charity is entitled under the terms of the trust (ITTOIA 2005 s 628). Income partly distributed to charities is apportioned pro rata with that not so given, unless the trustees otherwise specify. Management expenses are similarly apportioned. These provisions apply for trust income arising on or after 6 April 2000 and various terms are defined. The settlement provisions do not apply to loans to charities in respect of income arising on or after 6 April 2000 (ITTOIA 2005 ss 620, 628, 630).

Inheritance tax 11.41 IHT relief is available on gifts to charities which are treated as exempt transfers of value (IHTA 1984 s 23(1)). Relief is not available for a deferred gift where someone else has use of the property in the meantime, or where the gift is conditional or defeasible within 12 months (s 23(2)). A disposal of an interest in a property to a charity which is less than that held by the donor, or is given for a limited period, is excluded from relief by s 23(3). A transfer subject to a reserved interest by the donor is also excluded unless an arm’slength price is paid for the interest retained (s 23(4)). A gift to a charity must become the property of the charity or be held on trust for charitable purposes only (s 23(6)). Relief does not apply to a gift of property if any part of it may become applicable otherwise than for charitable or national purposes, or to a housing association within IHTA 1984 s 24A (s 23(5)). A charitable trust is excluded from being relevant property for the ten-yearly or exit charges under IHTA 1984 ss 64–69 by s 58(1)(a) of that Act. 11.42 Where the loss to the donor’s estate exceeds the value of the asset in the hands of the charity, eg a small tranche of shares from a marginal majority shareholding, the charitable exemption nonetheless extends to the whole value transferred (SP E13). 11.43 Property ceasing to be relevant property held in a discretionary trust or leaving a favoured trust or maintenance fund for historic buildings etc, which then becomes held for charitable purposes only or property of a political party within IHTA 1984 s 24 or held for national purposes etc, escapes an exit charge. The exemption does not extend to a charge arising on a conditionally exempt transfer of a work of art etc to a settlement chargeable under IHTA 1984 s 79 (IHTA 1984 s 76(1)). In the case of a transfer from a settlement where the 536

Charitable Trusts 11.46 amount that would otherwise be chargeable exceeds the value of the property transferred to the charity etc or is reduced by any consideration given for the property, the exemption is not available but the amount chargeable to tax is limited to the difference (s 76(3), (4)). 11.44 (a)

The relief does not apply where:

the transfer is defeasible within 12 months; or

(b) the property may become applicable for purposes other than charitable purposes; or (c) the property may become applicable for the purposes of an approved body; or (d) an interest under the settlement has been sold to a non-exempt body, IHTA 1984 s 76(5)–(8). A  gift to a charity or on trust for charitable purposes only remains related property of the donor for five years after the gift (IHTA 1984 s 161(2)(b)). 11.45 Where property is held on charitable trusts only until the end of a period, there is an IHT charge at the end of the period unless the property is then applied for charitable purposes, or where there is a non-charitable disposition from a charity (IHTA 1984 s 70(1), (2)). There is no charge where the disposition relates to proper costs or expenses or which is subject to income tax in the hands of a recipient, or would be if he were resident in the UK (s  70(3)). Nor does it apply to dispositions at arm’s length not intended to confer a gratuitous benefit, or the grant of a tenancy of agricultural property (s 70(4)). The charge is on the reduction in value in the settlement as a result of a chargeable event, which has to be grossed up if the tax is payable by the trustees (s 70(5)). The rate at which the tax is payable is the aggregate of: (a) 0.25% for each of the first 40 complete successive calendar quarters; since the later of the last day on which the property became chargeable property or 13 March 1975; (b) 0.20% for each of the next 40 quarters; (c)

0.15% for each of the next 40 quarters;

(d) 0.10% for each of the next 40 quarters; and (e)

0.05% for each of the next 40 quarters.

11.46 If a property was excluded property during the relevant period for an entire quarter, that quarter is left out of account (IHTA 1984 s 70(6)–(8)). In certain cases, the starting date may be modified under s 70(9). The deliberate omission to exercise a right is treated as a disposition by s  70(10). Where the terms of a discretionary trust require part of the income to be applied 537

11.47  Charitable Trusts for charitable purposes, a corresponding part of the settled property itself is regarded as held for charitable purposes under IHTA 1984 s 84.

CHARITY TAX RELIEF Income tax relief 11.47 In order to claim tax relief HMRC is encouraging repayment claims for charities and community amateur sports clubs to be made online. However HMRC’s contact details are HM Revenue & Customs Charities, Savings and International 2 BX9 1BU  United Kingdom Helpline: 0300 123 1073 – please leave a contact telephone number. Monday to Friday 8.30am to 5pm www.hmrc.gov.uk/charitiesonline 11.48

On 11 February 2013 HMRC announced that:

‘From 22nd April 2013, charities and community amateur sports clubs (CASCs) can enrol to make repayment claims electronically. The new online service, called Charities Online, is being introduced in response to customer feedback to make claiming online quicker and easier. If you want to continue to make Gift Aid claims, you must make sure that your organisation is ready for Charities Online. ‘All versions of the current R68 form will be replaced by three new options for making claims. For each of the options we will need extra information about your donors. •

Option 1: Claim using an HMRC Online Services form. You should complete your donor information in the correct spreadsheet template, which will be published in March on the HMRC website.

•

Option 2: Claim using your own database (if you use one). Check with your software provider to see if they will be providing this service as part of their package.

•

Option 3: Claim using a new paper form ChR1 Gift Aid and tax repayment claim. This form is available for those who do not have access to the internet from the HMRC Charities Helpline.

‘Gift Aid Small Donations Scheme (GASDS) ‘GASDS is a new scheme being introduced in April 2013. It will allow charities and CASCs to claim a top-up payment on cash donations of £20 538

Charitable Trusts 11.50 or less, without the need to collect Gift Aid declarations. Charities will generally be able to claim payments on small donations of up to £5,000 each year. For example, cash donations received in collection boxes, bucket collections and during religious services. ‘For more information about the Charities Online service and GASDS go to www.hmrc.gov.uk/charities online. If you do not have access to the internet and need more information, the HMRC Charities Helpline will be able to give you more details.’ 11.49 Charitable trusts are only exempt from taxation where specifically so provided, under ITA 2007 ss 518–564 in respect of income tax, and under TCGA 1992 s 256 in respect of chargeable gains. The Income Tax Act 2007 rewrote the income tax provisions to charitable trusts in Part 9 Chapter 10 (ss 518–564). ITA 2007 s 518 explains that ss 520–523 deal with gifts and payments to charitable trusts. Sections 524–537 specify the income that is exempt from income tax, while s 538 deals with claims for exemption. Non-exempt amounts received by a charitable trust are dealt with in ss 539–542, and non-charitable amounts in ss 543–564. 11.50 The definition of a charity and community amateur sports club for tax purposes is set out in FA  2010 Sch  6 Part 1 with effect from 1  April 2012 under SI  2012/735, Finance Act 2010 Schedule  6 Part 1 (Further Consequential and Incidental Provisions etc) Order 2012 and Finance Act 2010 Schedule  6 Part 2 (commencement) Order 2012 (SI  2012/No  736), as follows: ‘Part 1 DEFINITION OF “CHARITY”, “CHARITABLE COMPANY” AND “CHARITABLE TRUST” Definition of “charity” etc 1. (1) For the purposes of the enactments to which this Part applies “charity” means a body of persons or trust that – (a) Is established for charitable purposes only, (b) Meets the jurisdiction condition (see paragraph 2), (c) Meets the registration condition (see paragraph 3), and (d) Meets the management condition (see paragraph 4). (2) For the purposes of the enactments to which this Part applies – “charitable company” means a charity that is a body of persons; “charitable trust” means a charity that is a trust. (3) Sub-paragraphs (1) and (2) are subject to any express provision to the contrary.

539

11.50  Charitable Trusts (4) For the meaning of “charitable purpose”, see section 2 of the Charities Act 2011 (which – (a) applies regardless of where the body of persons or trust in question is established, and (b) for this purpose forms part of the law of each part of the United Kingdom (see sections 7 and 8 of that Act) Cross-reference – Finance Act 2010, Schedule 6, Part 1 (Further Consequential and Incidental Provision etc) Order, SI 2012/735, arts 5, 6 (definition of “charity” in Part 1 of this Schedule applies for the purposes of enactments relating to value added tax, and capital gains tax). Amendments – In sub-para (4) words substituted by the Charities Act 2011 s 354, Sch 7 para 143 (1), (2) with effect from 14th March 2012. Jurisdiction Condition 2. (1) A body of persons or trust meets the jurisdiction condition if it falls to be subject to the control of – (a) A relevant UK court in the exercise of its jurisdiction with respect to charities, or (b) Any other court in the exercise of a corresponding jurisdiction under the law of a relevant territory. (2) In sub-paragraph (1) (a) “a relevant UK court” means – (a) the High Court, (b) the Court of Session, or (c) the High Court in Northern Ireland. (3) In sub-paragraph (1) (b) “a relevant territory” means – (a) a Member State (of the European Union) other than the United Kingdom, or (b) a territory specified in regulations made by the Commissioners for Her Majesty’s Revenue and Customs. (4) Regulations under this paragraph are to be made by statutory instrument. (5) A statutory instrument containing regulations under this paragraph is subject to annulment in pursuance of a resolution by the House of Commons. Regulations – Taxes (Definition of Charity) (Relevant Territories) Regulations, SI 2010/1904 (the Republic of Iceland and the Kingdom of Norway specified as “relevant territories” for the purpose of the meaning of a relevant territory in subpara (3)). Taxes (Definition of Charity) (Relevant Territories) Regulations SI 2014/1807 (The Principality of Liechtenstein specified as a “relevant territory” for the purposes of the meaning of a relevant territory in sub para (3)). Cross-reference – Finance Act 2010, Schedule 6, Part 1 (Further Consequential and Incidental Provision etc) Order, SI 2012/735, arts 5, 6 (definition of “charity” in Part 1 of this Schedule applies for the purposes of enactments relating to value added tax, and capital gains tax).

540

Charitable Trusts 11.50 Registration Condition 3. (1) A body of persons or trust meets the registration condition if – (a) In the case of a body of persons or trust that is a charity [within the meaning of section 10 the Charities Act 2011], condition A is met, and (b) In the case of any other body of persons or trust, condition B is met. (2) Condition A is that the body of persons or trust has complied with any requirement to be registered in the register of charities kept under [section 29 of the Charities Act 2011]. (3) Condition B is that the body of persons or trust has complied with any requirement under the law of a territory outside England and Wales to be registered in a register corresponding to that mentioned in sub-paragraph (2). Cross-reference – Finance Act 2010, Schedule 6, Part 1 (Further Consequential and Incidental Provision etc) Order, SI 2012/735, arts 5, 6 (definition of “charity” in Part 1 of this Schedule applies for the purposes of enactments relating to value added tax, and capital gains tax). Amendments – In sub-paras (1) (a), (2) words substituted by the Charities Act 2011 s 354, Sch 7 para 143 (1), (3), (4) with effect from 14th March 2012. Management Condition 4. (1) A body of persons or trust meets the management condition if its managers are fit and proper persons to be managers of the body or trust. (2) In this paragraph “managers”, in relation to a body of persons or trust, means the persons having the general control and management of the administration of the body or trust. Cross-reference – Finance Act 2010, Schedule 6, Part 1 (Further Consequential and Incidental Provision etc) Order, SI 2012/735, arts 5, 6 (definition of “charity” in Part 1 of this Schedule applies for the purposes of enactments relating to value added tax, and capital gains tax). Periods over which management condition treated as met 5. (1) The management condition is treated as met throughout the period if the Commissioners for Her Majesty’s Revenue and Customs consider that – (a) the failure to meet the management condition has not prejudiced the charitable purposes of the body or trust, or (b) it is just and reasonable in all the circumstances for the condition to be treated as met throughout the period. Cross-reference – Finance Act 2010, Schedule 6, Part 1 (Further Consequential and Incidental Provision etc) Order, SI 2012/735, arts 5, 6 (definition of “charity” in Part 1 of this Schedule applies for the purposes of enactments relating to value added tax, and capital gains tax). Publication of names and addresses of bodies or trusts regarded by HMRC as charities 6. (1) Her Majesty’s Revenue and Customs may publish the name and address of any body of persons or trust that appears to them to meet, or at any time to have met, the definition of a charity in paragraph 1.

541

11.51  Charitable Trusts Enactments to which this Part applies 7. (1) The enactments to which this Part applies are the enactments relating to – (a) Income tax (b) Capital gains tax (c) Corporation tax (d) Value added tax (e) Inheritance tax (f) Stamp duty (g) Stamp duty land tax (h) Stamp duty reserve tax, and (i) Annual tax on enveloped dwellings. Amendments – Word “and” in para (g) repealed and para (i) and preceding word “and” inserted, by FA 2013 s 168, Sch 35 para 3 with effect from 17th July 2013. Cross-reference – Finance Act 2010, Schedule 6, Part 1 (Further Consequential and Incidental Provision etc) Order, SI 2012/735, arts 5, 6 (definition of “charity” in Part 1 of this Schedule applies for the purposes of enactments relating to value added tax, and capital gains tax).’

Gifts and other payments 11.51 Gifts made under the Gift Aid scheme for individuals are treated as exempt amounts of the gross equivalent of the amount actually paid, so that a gift to the charity of £80, where the basic tax rate is 20%, is multiplied by 100/80 and treated as a gross receipt of £100 by the charity, on which basic rate tax is treated as having been paid and is recoverable by the trustees of the charitable trust (ITA 2007 s 520). The donor is treated as having made a payment of £100 and is entitled to claim a deduction for higher rate income tax purposes by extending his basic rate band by the amount of the Gift Aid payment. If, therefore, the basic rate is 20% and the higher rate is 50%, the donor effectively obtains tax relief on 30% of the grossed-up donation. Conversely, if the tax treated as having been paid on the gift is greater than the taxpayer’s own liability, he is chargeable to tax on the difference. 11.52 ITA 2007 s 521 provides that the grossed-up amount received by the charity is treated as income chargeable to tax, but only to the extent that it is not exempt from tax as being applied for charitable purposes. To the extent that it is not so applied, an income tax charge falls on the trustees of the charitable trust. When the basic rate of income tax was reduced from 22% to 20% by FA 2008 s 1, it was appreciated that charities would probably suffer a substantial fall in income, unless donors increased their cash donations, and so FA 2008 s 33 and Sch 19 were introduced to provide a Gift Aid supplement as a transitional relief for the years 2008/09 to 2010/11. Under these provisions, donations in 542

Charitable Trusts 11.55 the transitional period were grossed up at a notional basic rate of 22%, ie to 100/78 times the cash donation, only for the purposes of tax repayments to the charity. The transitional supplement was therefore 2% for each transitional year (FA 2008 Sch 19 para 3). In the case of donations made by a company, there is no grossing-up procedure and the amount of the donation is taxable on the charity under ITA 2007 s 552, except to the extent that it is applied for charitable purposes. Most charities apply the whole of their income for charitable purposes. 11.53 A  payment by a charity to another charity is a payment for charitable purposes following IRC  v Helen Slater Charitable Trust Limited [1981] STC 471. The recipient charity, unless the payment is received for full consideration in money or money’s worth, is chargeable to income tax, unless the sum is applied for charitable purposes only, under ITA 2007 s 523. This does not apply to payments from a source outside the UK. Where the amount received is a discretionary payment from a charitable trust, it is grossed up at the trust rate under ITA 2007 s 494, and the tax is recoverable by the recipient charity.

Other exemptions 11.54 Trading profits under ITTOIA  2005 Part 2 which arise from a charitable trade are exempt from income tax. This includes adjustment income under ITTOIA 2005 s 228 arising from a change in the basis of assessment or post-cessation receipts. A charitable trade is defined by ITA 2007 s 525 as one which represents a primary purpose of the charity, or is carried on mainly by the beneficiaries (see, for example, Grove v Young Men’s Christian Association (1903) 4TC 613; Governors of Rotunda Hospital, Dublin v Colman (1920) 7TC 517; British Legion, Peterhead Branch v IRC (1953) 35 TC 509; and Religious Tract & Book Society of Scotland v Forbes (1896) 3  TC  415). A  charitable trade does not have to be carried out in the UK. If it is carried on only partly for the purposes of the charity, it is divided into two notional separate trades on a just and reasonable apportionment of receipts and expenses. Similarly, where the trade is carried on partly, but not mainly, by the beneficiaries of the charity, apportionment is provided for. The amount apportioned to the charitable trade is exempt from tax. 11.55 Under ITA 2007 s 526, income applied for charitable purposes from a small-scale trade may be exempt from tax. ITA 2007 s 527 cross-refers to ITA  2007 s  1016 and lists a number of types of sundry income, apart from certain types of income deemed to be income of other persons which are not subject to tax if applied for the purposes of the charitable trust only and the conditions in ITA 2007 s 528 are met, namely that the combined trading and miscellaneous income does not exceed 25% of the charity’s income resources 543

11.56  Charitable Trusts for the tax year, which must not be less than £5,000 or more than £50,000, whichever is the lower. These rates are reduced pro rata for periods of less than 12 months. 11.56 Profits arising from events organised by voluntary organisations for the purpose of raising funds for a charity and used for the purposes of the charitable trust, such as bazaars, jumble sales etc, are exempt from income tax in the hands of the charity if the funds are applied for charitable purposes and the event is VAT exempt under VAT 1994 Sch 9 Group 12. This allows up to 15 events of the same kind at the same location in any financial year and unlimited small-scale events, provided that the weekly gross takings do not exceed £1,000. This provision, in ITA 2007 s 529, is extended by s 530 to the profits arising to a charitable trust from a lottery which meets various conditions, as defined, provided that the profits are applied for the purposes of the charitable trust only. 11.57 Property income treated as trading profits under ITTOIA 2005 Part 2, by virtue of ITTOIA 2005 s 261, is exempt from income tax in the hands of the charitable trust so long as the income is applied for the purposes of the charitable trust. Property income chargeable under ITTOIA 2005 Part 3, ie nontrading income, is similarly exempt where the interest in land is held in trust for a charitable trust or for charitable purposes. This exemption, in ITA 2007 s 531, extends to distributions from a real estate investment trust (REIT), under FA 2006 s 121, where the shares in the REIT are held in trust for a charitable trust or for charitable purposes only. The property income exemption only applies so far as the income is applied for charitable purposes only. 11.58 Where a charity is carrying on a trade which is neither a charitable trade nor a small-scale trade, the income is liable to tax. It is, therefore, normal for such trades to be carried on through a company, the shares of which are wholly owned by the charity, which pays up the whole of its profits as a Gift Aid payment to the charity so that no profit remains in the trading company, and the Gift Aid receipt is not subject to tax in the charity so long as it is used for charitable purposes only. This structure is commonly adopted by charities selling Christmas cards or running charity shops to raise funds for the charity. 11.59 A  charitable trust is exempt from income tax on most forms of savings and investment income, including interest, dividends, annuity receipts, profits on the disposal of deeply discounted securities or from unauthorised unit trusts, so far as the income is applied to charitable purposes only, under ITA 2007 s 532. Public revenue dividends are also specifically exempt under ITA  2007 s  533 if applied for the repair of a cathedral, college, church or chapel or building used for the purposes of divine worship. Profits arising from transactions in certificates of deposit and deposit rights are exempt from tax, insofar as they are applied for the purposes of the charitable trust under 544

Charitable Trusts 11.61 ITA  2007 s  534. ITA  2007 s  535 exempts offshore income gains within the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001) so far as the income is applied for charitable purposes only. Various categories of miscellaneous income which are applied for charitable purposes only, such as royalties and other income from intellectual property, telecommunications, rights to annual payments and relevant foreign distributions, are exempt from taxation under ITA 2007 s 536. Income from estates in the course of administration received by the trustees of a charitable trust are not subject to income tax if it is income from a UK estate within ITTOIA 2005 s 649 and the income is applied to the purposes of the charitable trust only, under ITA 2007 s 537.

Claims 11.60 It is necessary to make a claim under ITA 2007 s 538 for exemptions under ITA  2007 ss  521–537 except for the exemption for transactions in deposits and offshore income gains under ITA 2007 ss 534 and 535. However, where a charitable trust receives a gift as a result of a direction for a repayment made to a charity under ITA 2007 s 429, the trustees are treated as having made the necessary claim for exemption. Claims are made to HMRC and appeals are to the First-tier Tax Tribunal under the Tribunals, Courts and Enforcement Act 2007. Prior to 1 April 2009, appeals had to be made to the Special Commissioners under TMA 1970 s 46C.

Restrictions on exemptions 11.61 The exemptions under ITA  2007 ss  521–537, ie  the general relief for investment income and certificated deposits, offshore income gains, small trades carried on by charities, disposals of chargeable assets etc, are restricted where the charity incurs non-charitable expenditure. Under ITA 2007 s 539, if a charity incurs non-charitable expenditure, it has a corresponding loss of exemption under ITA  2007 ss  521–537. The restriction is the lower of the non-charitable expenditure (amount A) during the year and the attributable income and gains for the year (amount B) which is referred to as the nonexempt amount (ITA  2007 s  540). The attributable income and gains is the charitable trust’s aggregate exempt income under ITA 2007 ss 521–537 and the exempt capital gains under TCGA  1992 s  261. The non-exempt amount reduces the charitable trust’s attributable exempt income and gains until it has been fully offset under ITA 2007 s 541. The trustees of a charitable trust which incurs non-charitable expenditure may specify under ITA 2007 s 542 the order in which the attributable income or gains are restricted, within 30 days of receiving a notice of chargeability. If the trustees fail to do so, HMRC may determine the order in which exemptions are withdrawn until the non-exempt amount has been fully recovered. 545

11.62  Charitable Trusts

Non-charitable expenditure 11.62 Non-charitable expenditure, under ITA  2007 s  543, includes any loss made as a result of carrying on a non-charitable trade unless the profits of the trade would have been exempt under ITA  2007 ss  526, 529 or 530. ITA 2007 further provides that the definition extends to post-cessation trade relief under ITA 2007 s 96 in similar circumstances and losses of a trade or property business which relates to land, unless corresponding profits would have been exempt under ITA 2007 s 531. ITA 2007 s 543 also includes various miscellaneous transactions realised at a loss unless the corresponding profit from such a transaction would have been exempt in the hands of the trustees. ITA 2007 ss 544–548 expand on the definition of non-chargeable expenditure in relation to the calculation of losses, the exclusion of investments and loans, the definition of expenditure and the tax year in which it is treated as incurred, in which the charity would have been required to take the expenditure into account under UK generally accepted accounting practice (UK GAAP). Payments to a non-UK charity will be non-charitable expenditure unless the trustees have taken reasonable steps to ensure that the payment will be applied for charitable purposes. The UK charitable reliefs are extended to charities established in the EU, the UK, Norway, Iceland and Liechtenstein by FA 2010 s 30 and Sch 6 para 2, following Persche v Finanzamt Lűdenscheid, CJEC (case C-318/07). Investments or loans which are not approved charitable investments or loans within ITA 2007 ss 558 and 561 which are realised or repaid and reinvested do not give rise to further non-charitable expenditure in view of ITA 2007 s 548.

Substantial donor transactions 11.63 A  substantial donor within ITA  2007 s  549 is a person who gives relievable gifts of at least £25,000 in a 12-month period, or at least £150,000 in a six-year period to a charity. The transactions with substantial donors consist of the sale or letting of property by a charity to a substantial donor, or vice versa, including an exchange of property, or the provision of services or financial assistance by a charity to a substantial donor, or vice versa, or an investment by a charity in the business of a substantial donor. A relievable gift, under ITA 2007 s 550, is a gift in kind, covenanted donation, gift of shares or real property, which qualified for Gift Aid, or gifts of chargeable assets, plant or machinery, payroll giving and gifts of trading stock or gifts from a settlor interested trust. A payment by trustees of a charitable trust to a substantial donor is non-charitable expenditure under ITA  2007 s  551. Any other transaction where the terms are less beneficial to the charity than would be expected in an arm’s-length transaction also gives rise to non-charitable expenditure for the excess cost. Remuneration paid to a substantial donor is also disallowed as non-charitable expenditure unless it is approved by the Charity Commission or other regulating body or a court. 546

Charitable Trusts 11.66 11.64 ITA 2007 s 552 prevents a double charge where a payment is made by a charitable trust to a substantial donor in respect of a non-arm’s length transaction. Minor benefits arising to a substantial donor within the restrictions on associated benefits rules in ITA 2007 s 416 for individuals, or ICTA 1988 s 339(3)(b) for corporate donors, are ignored, under ITA 2007 s 553. 11.65 Transactions between a substantial donor and a charitable trust as part of the donor’s business activities at an arm’s-length price are not treated as non-charitable expenditure unless they form part of an arrangement for the avoidance of tax. ITA 2007 s 554 also provides that, where services are provided by a charitable trust to a substantial donor as part of its normal functions and not on preferential terms, this is not non-charitable expenditure unless it forms part of an arrangement for the avoidance of tax. An investment by a charity in the business of a substantial donor, which consists of the purchase of shares in a listed company, is not non-chargeable expenditure. A  disposal to a charity at an undervalue for which relief is available under ITA 2007 s 431 or ICTA 1988 s 587B is not a substantial donor transaction, nor is a gift of charitable assets within TCGA 1992 s 257(2) under which it would be treated as a no gain/no loss transaction. ITA  2007 s  555 excludes transactions with companies owned by charities and housing associations, and s 556 treats the connected charity as part of a single charity. Various terms are defined by ITA 2007 s 557.

Approved charitable investments and loans 11.66

ITA 2007 s 558 lists the approved charitable investments. These are:

•

Type 1: securities within ITA 2007 s 559.

•

Type 2: an investment in a charity’s common investment fund.

•

Type 3: an investment in a charity’s common deposit fund.

•

Type 4: an investment in funds for charities established by statute.

•

Type 5: an interest in land held other than as security.

•

Type 6: Government bills, Certificates of Tax Deposit, Saving Certificates and Tax Reserve Certificates.

•

Type 7: Northern Ireland Treasury Bills.

•

Type 8: units in a recognised unit trust scheme.

•

Type 9: normal bank deposits.

•

Type 10: deposits with the National Savings Bank or a building society or credit union etc.

•

Type 11: certificates of deposit. 547

11.67  Charitable Trusts •

Type 12: loans approved by HMRC made for the benefit of the charitable trust and not for the avoidance of tax.

Securities which are approved charitable investments under ITA 2007 s 559 include securities issued or guaranteed by a government or international entity under Council Directive 2003/48/EC or securities issued by a building society, credit institution, open-ended investment company or issued by a company. Various terms are defined. Some of these securities have to meet additional conditions set out in ITA  2007 s  560; for example, if they are traded on a recognised investment exchange and are fully paid up within nine months of issue and, in the case of an unlisted company, it has total issued and paid-up share capital of at least £1,000,000 or the equivalent and has paid a dividend on all its shares in each of the previous five years. Approved charitable loans are those made by way of investment to another charity or a beneficiary of the charity or to a bank, or are otherwise in the opinion of HMRC made for the benefit of the charitable trust and not for the avoidance of tax.

Carry back of excess non-charitable expenditure 11.67 Under ITA 2007 s 562, if a charitable trust’s non-charitable expenditure for a tax year exceeds available income and gains for the tax year, the excess expenditure is carried back to earlier years. ‘Available income and gains’ is a defined term including the charitable trust’s total income for the tax year and chargeable gains, attributable income within ITA 2007 s 540 which is exempt from tax, and any other non-taxable sums received by the charitable trust in the tax year, such as donations, legacies or other sums of a similar nature. The attribution of excess expenditure allows a carry back of no more than six tax years ending before the year in which the excess expenditure arises, attributed on a last-in, first-out basis and limited to the charitable trust’s available income in excess of its non-charitable expenditure for the earlier year. The carry back takes account of any earlier attribution. ITA 2007 s 564 allows the necessary adjustments to be made for the purpose of the carry back of excess expenditure by way of making assessments or otherwise.

Capital gains tax relief 11.68 CGT relief is given to charities by providing that a gain shall not be a chargeable gain if it accrues to a charity and the proceeds are applicable to and applied for charitable purposes (TCGA 1992 s 256(1)). Where property held on charitable trust ceases to be so held, the trustees are treated as having disposed of and immediately reacquired the property at market value, any gain on the disposal being treated as not accruing to a charity and therefore chargeable to CGT. Any consideration received for the disposal of assets by trustees in these circumstances is treated as not having accrued to the charity. 548

Charitable Trusts 11.73 The CGT assessment may be made within three years of the end of the year of assessment in which the property ceases to be subject to charitable trusts (s 256(2)). Temporary loss of charitable status, where land ceases to be used for charitable purposes and reverts to the original donor, will not crystallise a charge under these provisions if it subsequently becomes again held on charitable trusts or the revertee is identified as a charity (ESC D47). 11.69 A capital payment by a non-UK resident trust to a UK charity, within TCGA 1992 s 87(4), is exempt from CGT under TCGA 1992 s 256(1) under RI 189 (Tax Bulletin, Issue 36, September 1998). 11.70 Community amateur sports clubs are exempt from tax on trading income under CTA  2010 ss  658–671 (FA  2002 Sch  18), and on interest and Gift Aid income and property income. They are also exempt from tax on chargeable gains. The exemption is reduced where the club incurs nonqualifying expenditure. 11.71 There may be a chargeable gain on the club ceasing to qualify, or ceasing to hold property for qualifying purposes. A  club must be registered with HMRC and provide appropriate information. It may appeal against nonregistration or termination of registration. There are interpretation provisions in and the Relief For Community Amateur Sports Clubs (Designation) Order 2002 (SI 2002/1966).

Value added tax 11.72 There is no general charitable relief for VAT, and charities or companies owned by charities will have to register in the normal way if carrying on a business with a turnover above the registration limits (ie £82,000 per annum from 1 April 2015). 11.73 There is no general relief from VAT for goods supplied to charities, nor is there any such relief for goods supplied by charities. There are, however, a number of exemptions which are particularly applicable to charities, such as zero rating in VATA 1994 Sch 8, which includes: in Group 4, talking books for the blind and handicapped and wireless sets for the blind; in Group 12, drugs, medicines, aids for the handicapped etc; and, in Group 15, charities etc, which includes the sale or hiring by a charity of goods donated to it, which extends to a similar sale or hire by a trading company which is a ‘profits-tocharity person’ in respect of the goods, ie it has a written agreement to pay over the profits to the charity as in the case of a charity’s wholly owned trading company (VATA 1994 Sch 8 Group 15 items 1 and 1A). This extends to the repair and maintenance of goods owned by a charity, the supply of advertising services, and the supply of medicinal products (Sch 8 Group 15 items 2–10 and Extra Statutory Concession 3.19 (C&E Notice 48, March 2003)). 549

11.74  Charitable Trusts 11.74 Fundraising activities of charities are exempt supplies under VATA 1994 Sch 9 Group 12, substituted by the Value Added Tax (Fund-Raising Events By Charities and Other Qualifying Bodies) Order 2000 (SI 2000/802) from 1 April 2002. 11.75 Fundraising bazaars etc would normally be exempt from income or corporation tax on the profits if within the VAT exemption in VATA 1994 Sch 9 Group 12, and the profits are transferred to charities or applied for charitable purposes under ESC C4.

CHARITY STRUCTURES Charitable companies 11.76 Charitable companies are companies, usually limited by guarantee where each member’s liability is limited to a purely nominal sum such as £1. They have limited liability and must disclose their charitable status. They are governed by Charities Act 2011 Part 10 ss  193–203 and regulated both as companies and by the Charity Commission, if their turnover exceeds £50,000. They are run by the directors, in the same way as a company limited by shares.

Trading subsidiary companies 11.77 Charities often raise funds by producing Christmas cards and other goods for sale. Their shares are held by a charity and the profits are donated to the charity under gift aid and used by the charity for charitable purposes. The distribution must be made within nine months of the company year end. The company is liable for VAT in the same way of any other business, apart from certain charitable fundraising events. The charity itself may carry out small trading activities with a turnover of up to £5,000 or, if higher up to 25% of the charity’s total income subject to an annual limit of £50,000. There is no limit where the activity is part of the purposes of the charity, such as a school or religious society. The sale of donated goods is not classified as trading and is usually zero related for VAT.

Charitable incorporated organisations (CIOs) 11.78 CIOs are governed by the Charities Act 2011 Part 11 ss 204–250. They are bodies corporate, but do not register with Companies House and must have a constitution, a principal office in England or Wales and one or more members who may be not be liable to contribute to the assets of the CIO if it is wound 550

Charitable Trusts 11.81 up or the liability is limited to a maximum amount each. The requirements of the constitution are specified in s 206 and it must have charity trustees which need not be members and vice versa. The formation and registration are dealt with in ss 207–210. The name and status as a CIO must be stated (ss 211–215). The CIO has wide powers, subject to its constitution to further its purpose. The powers of the CIO and its relationships with third parties and the duties of its members and charity trustees are specified in ss 216–223. Sections 224–227 allow amendments to the constitution of the CIO and ss 228–244 deal with the conversion of a charitable company or community interest company to a CIO and the amalgamation and transfer to another CIO. Regulations about winding up, insolvency and dissolution are dealt with in ss 245–250. These provisions are supplemented by The Charitable Incorporated Organisations (General) Regulations 2012 (SI 2012/3012), The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 (SI  2012/3013) and The Charitable Incorporated Organisations (Consequential Amendments) Order 2012 (SI 2012/3014). A CIO may be a Foundation CIO where the members and charity trustees are the same people, or an Association CIO where there are members who are not trustees.

Community interest companies (CICs) 11.79 These companies are governed by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005 and are businesses with primarily social objectives, with surpluses reinvested for the purpose of the business or in the community. They are regulated by the CIC Regulators and have to meet the community benefit test. They can be limited by guarantee or by shares, are not charitable and do not benefit from similar tax benefits. A charity can convert to a CIC with the consent of the Charity Commission but would lose charitable status and tax benefits. Existing companies can also convert to CIC status. CICs cannot be politically motivated or set up to serve an unduly restrictive group of people.

Industrial and provident societies 11.80 These societies are for cooperatives trading for the mutual benefit of their members and voluntary sector organisations, carrying on a trade or business for the benefit of the community.

Community benefit societies (CBSs) and cooperative societies (co-ops) 11.81 Co-ops and CBSs are registered with, but not regulated by, the Financial Conduct Authority. 551

11.82  Charitable Trusts

Unincorporated associations 11.82 Unincorporated associations are commonly community organisations ranging from small informal groups to large voluntary associations which may employ staff by individuals on behalf of the group. They have members and may be informal groups such as playgroups, members clubs, arts groups, campaigning groups, etc. An unincorporated association may be set up with charitable objectives and, if it has an income of more than £5,000 it must register with the Charity Commission as a charitable unincorporated association (CUA). If so registered it is necessary to keep accounts and prepare annual reports and have a formal constitution. A CUA is entitled to the tax benefits available to charities. However it has no limited liability and the members of the management committee are personally liable for debts and if the group were to be sued. A charitable unincorporated association has to comply with the Charity Commission guidelines for political and campaigning activities.

552

Chapter 12

Purpose and Heritage Trusts and Foundations

12.1 A purpose trust is one where the beneficiaries are not ascertainable individuals but where assets have been passed to trustees with the object of achieving a particular purpose. The most obvious form of purpose trust is a charitable trust as described in Chapter 11. This chapter considers the extent to which trusts can be validly set up to achieve particular purposes which are not specifically charitable. Under English law such trusts may be void for uncertainty or because they infringe against the rule against perpetuity or for uncertainty of beneficiary as in Grimond v Grimond [1905] AC 124 and Re MacDuff [1896] 2 Ch 451. One of the objections raised against general purpose trusts is that the absence of specific beneficiaries means that there may be no-one who has the power to enforce trustees to apply funds for the stated purpose. In Re Denley’s Trust Deed [1969] 3 All ER 65 it was stated that the objection is not that the trust is for a purpose or object per se but that there is no beneficiary. Therefore, in this case the trust was upheld because it related to the use of land for a specified period for use for the purposes of a recreational sports ground for the benefit of the employees of Martyn & Co Ltd, who had a right to apply to the court for enforcement. Time sharing trusts are, therefore, valid where a property is held on trust for enabling specified apartments to be used for a designated period each year by the purchaser of the timeshare or his nominee.

THE BENEFICIARY PRINCIPLE 12.2 There are exceptions to the general presumption that there must be a beneficiary, ie a physical or legal person, such as a company, able to enforce a non-charitable trust, which were reviewed in Re Endacott [1959] 3  All ER 562. Re Astor’s Settlement Trusts [1952] 1 All ER 1067 recognised that there had been a number of cases where purpose trusts had been allowed, but in Re Endacott, Harman LJ referred to decisions which are not satisfactorily classified other than as purpose trusts, but suggested that they should not be increased in number, or indeed followed, unless the circumstances are identical and that further cases should not be allowed to add to ‘those troublesome anomalous and aberrant cases’. Paul Baxendale-Walker in Purpose Trusts 553

12.3  Purpose and Heritage Trusts and Foundations (Butterworths, 1999) points out that a strict settlement is, in his view, no more than a purpose trust and that there is actually a substantial history of English law accepting purpose trusts, as in Garth v Coton (1753) 21 ER 239. 12.3 It is unanimously accepted, and indeed specifically approved in Re Endacott [1959] 3 All ER 562, that a valid purpose trust can be created for the purpose of erecting and maintaining a monument, even though there was no one to enforce the trustees’ obligations, provided that the trust was not contrary to the rule against perpetuities (Re Dean (1889) 41 Ch D 552). 12.4 Similarly, trusts, within the rule against perpetuities, to apply money for the upkeep of specified pet animals during their lives are perfectly valid purpose trusts (Pettingall v Pettingall (1842) 11  AJ CH  176). A  trust to promote fox hunting was upheld in Re Thompson [1934] Ch 342, and a gift for the welfare of cats and kittens was approved in Re Moss [1949] 1 All ER 495, apparently on the basis that this was a valid charitable trust. 12.5 If within the perpetuity period, a gift for the saying of masses in private was upheld in Bourne v Keane [1919] AC 815. Gifts for the saying of masses in public are charitable (Re Caus [1934] Ch 162). 12.6 A  purpose trust which is absolutely capricious, such as where trustees were to lock up the windows and doors of a house for 20 years before passing it to the beneficiary, was void in Brown v Burdett (1882) 21 Ch D 667. 12.7 It is argued by proponents of purpose trusts that Re Endacott [1959] 3 All ER 562 was itself wrongly decided, as purpose trusts had been approved by the House of Lords in cases such as Lord Conway v Duke of Buckingham (1711) 1  ER  349. Other cases quoted in support of purpose trusts under English law include Morice v Bishop of Durham (1805) 32  ER  947, James v Allen (1817) 36 ER 7, Earl of Bute v Stuart (1762) 1 ER 700, and Lombe v Stoughton (1841) 59  ER  11 48. If Paul Baxendale-Walker and others are right in their contention that the presumed prohibition of purpose trusts under English law is based on the wrongly decided case of Re Endacott [1959] 3 All ER 562 and that there is substantial authority going back hundreds of years to support the contention that there is no prohibition on purpose trusts per se, there is nevertheless a reluctance on the part of practitioners to use English law as the basis for a purpose trust, and many non-charitable organisations are structured as unincorporated associations rather than trusts, in particular sports and members’ clubs of all descriptions. Professor David Hayton, in The Law Relating to Trusts and Trustees (16th edn), suggests that a trust governed by English law should be valid if the trust instrument has expressly provided for an enforcer, the purposes are certain and workable, and it is limited to a valid perpetuity period of lives in being plus 21 years (ie  the common law period), as the Perpetuities and Accumulations Act 1964 does not apply to 554

Purpose and Heritage Trusts and Foundations 12.9 non-charitable purpose trusts. However, he also warns that the whole of the cases relating to trusts for the management of inanimate objects require to be reviewed by the House of Lords before any intelligible principle can be extracted from them. A purpose trust was considered by the Queen’s Bench of Alberta in the Canadian case of Ernst & Young v Central Guarantee Trust Company (No 2) (2004) 7 ITELR 69. A non-charitable purpose trust was held, in this instance, to be void, relying on Morice v Bishop of Durham (1804) 9 Ves 399.

FOREIGN PURPOSE TRUSTS 12.8 Jurisdictions other than that of England and Wales have, in a number of cases, introduced specific legislation approving purpose trusts. Suitable jurisdictions with specific legislation include Bermuda under the Trusts (Special Provisions) Act 1989, as amended by the Trusts (Special Provisions) Amendment Act 1998, which allows, but does not require, an enforcer and has no perpetuity period. Anguilla allows purpose trusts under the Trusts Ordinance 1994. The law requires the appointment of a protector who is the enforcer of the trust and the perpetuity rule is disapplied. Barbados introduced a specific regime for purpose trusts in the International Trusts Act 1995 but there is a potential problem in that although the protector is also the enforcer there are no specific enforcement powers, which could give rise to problems. Belize has a Trusts Act 1992, which allows a protector to enforce a purpose trust as does the British Virgin Islands under the Trustee (Amendment) Act (2003). The Commonwealth of Dominica has the International Exempt Trusts Act 1997 and the Cook Islands the International Trusts Act 1984, as amended; under these laws the trustees act as enforcer. 12.9 Cyprus in its International Trusts Law 1992 as amended allows purpose trusts and the trustee may act as the enforcer. The Isle of Man has specific legislation in the Purpose Trusts Act 1996, but has a perpetuities rule of 150 years (80 years for trust created before 2001). Jersey under its Trusts (Amendment No  3) (Jersey) Law 1996 allowed purpose trusts with a 100year accumulation and perpetuity period, and an amendment in October 2006 enables perpetual trusts to be created. Both jurisdictions require an independent enforcer. Labuan in its Offshore Trusts Act 1996 recognises a purpose trust with an enforcer and a 100-year perpetuity rule. Liechtenstein, although a civil law jurisdiction, has, under art  897 of the Civil Law, an Anglo-Saxon style trust which can be a purpose trust. Mauritius in the Trusts Act 2001 allows purpose trusts where the trustee is effectively the enforcer and there are no perpetuity rules. Nevis has an Internationally Exempt Trust ordinance of 1994 allowing purpose trusts with the protector acting as enforcer and no perpetuity rule. The Seychelles is another civil law jurisdiction that allows purpose trusts under its International Trusts Act 1994, under which the trustee can act as the enforcer. 555

12.10  Purpose and Heritage Trusts and Foundations 12.10 The Cayman Islands introduced a Special Trusts (Alternative Regime) Law in 1997 resulting in what are usually known as STAR trusts. These are purpose trusts which may or may not be charitable with a specific enforcer. There is no perpetuity period. The UK should recognise foreign purpose trusts under the Recognition of Trusts Act 1987 incorporating the Hague Convention. A  purpose trust may be used to hold the shares in a private trust company, which in turn acts as trustee of the family trusts of the very wealthy.

USES OF PURPOSE TRUSTS 12.11 One of the uses for a purpose trust may be to hold assets off-balance sheet under which a company establishes a purpose trust to acquire shares in another company to hold the shares and accumulate any income in the trust. However Enron and other cases have shown the dangers of undisclosed liabilities of entities held off-balance sheet and the propriety of holding assets through a purpose trust has to be looked at carefully. Commercial guarantee trusts may be used to provide support for guarantees, deposits etc and to manage the exchange risk that arises in international trading. Purpose trusts can also be used for philanthropic purposes which are not strictly charitable, debt subordination, the separation of voting control from economic control and the temporary avoidance of controlled foreign company rules. In the case of a family purpose trust, for the purposes of maintaining and safeguarding the assets of the family during the perpetuity period applicable to the trust, if correctly drafted, using a second purpose trust to accept any income as it arises, may give rise to the interesting situation that the trust is outside the inheritance tax settlement provisions so long as the settlor has retained no reservation of benefit. The transfer to the trust is a chargeable transfer of value under IHTA  1984 s  3; it is not potentially exempt under IHTA  1984 s  3A. Where the transfer to the trust is of shares in a private trading company the gift into settlement may qualify for business property or agricultural property relief under IHTA 1984 Part V. 12.12 For income tax purposes a UK resident purpose trust is a settlement, but not within ITTOIA 2005 ss 619–648 and, as the income is not accumulated ITA 2007 ss 479–482 do not apply, and any UK tax liability should be at the basic rate or the dividend ordinary rate. In the case of a foreign trust, the antiavoidance provisions in ITA  2007 ss  714–751 are likely to apply, and it is doubtful whether HMRC would accept a defence under ITA 2007 ss 736–742, on the grounds that there was no tax avoidance motive, the trust being set up overseas to avoid the uncertainty arising from Re Endacott [1959] 3  All ER 562. For capital gains tax purposes, it ought to be possible, when drafting a purpose trust, to ensure that no relevant benefits can be distributed to a relevant person such that TCGA 1992 ss 86 and 87 would not apply. However, if the trust is UK resident, it may be liable to capital gains tax at 18% under TCGA 1992 s 4. 556

Purpose and Heritage Trusts and Foundations 12.15 12.13 Where a company forms a trust not for the benefit of employees as a funded unapproved retirement benefit scheme (FURBS) or an employee benefit trust (EBT), it may be worth considering setting up a purpose trust in an appropriate jurisdiction for the purpose of looking after former employees during their retirement, in which case there should be no employment income charge unless any benefits are actually paid to a former employee. The potential application of the ‘disguised remuneration’ rules in ITEPA 2003 Part 7A may, however, potentially apply. Contributions to such purpose trusts may be disallowed under CTA  2009 s  1290. A  purpose trust may be particularly useful in establishing an effective pension fund for international employees moving between jurisdictions, which is particularly difficult to achieve in a tax-effective manner using a normal beneficiary trust. They may also have an application in asset protection trusts (see Chapter 14). 12.14 Purpose trusts are also useful where set up to promote, encourage or otherwise fund a public purpose benefit which is not itself charitable such as, for example, the abolition of religion. An offshore purpose trust in a suitable jurisdiction could have some, but not all, of the advantages available to a regular charity. However, in Attorney-General of the Cayman Islands v Wahr-Hansen (2000) 3  ITELR  72, a non-charitable purpose trust was void for perpetuity, even though it had been administered as a trust for 24 years, as it pre-dated the Cayman Islands Special Trusts (Alternative Regime) Law 1997, which did away with the perpetuity period for such trusts.

Foreign foundations 12.15 Jersey introduced the Foundations (Jersey) Law 2009 (FJL) from 17  July 2009. This is supplemented by the Foundations (Continuation) (Jersey) Regulations 2009, the Foundations (Mergers) (Jersey) Regulations 2009 and the Foundations (Winding up) (Jersey) Regulations 2009. Jersey recognises that most civil law jurisdictions have difficulty in dealing with trusts where there is a distinction between the legal ownership held by the trustees and the equitable rights of the beneficiaries. A  Jersey foundation has separate legal personality, like a company, and there is a public register of foundations (FJL arts 30, 31 and 40). It has a founder, who may be a professional adviser, who gives instructions for the formation of the foundation (FJL arts 1 and 18). The founder is not required to contribute funds to the foundation, and it is possible to set up a foundation without any initial fund. The founder may be an individual or company, and is only entitled to any rights as provided in the Charter and Regulations. Subsequent endowment of the foundation does not give the founder any rights, and the founder need not be named in the Charter. The Charter, which is a public document, must supply the name of the foundation and its objects, its initial funding, if any, and its term, if there is any finite term prescribed; otherwise, like a company, it has an indefinite life. An endowment must be specified in 557

12.16  Purpose and Heritage Trusts and Foundations the Charter, whenever made (FJL art 7). The detailed rules of the foundation are in Regulations, which are not a public document. The Regulations establish the Council which manages the foundation in accordance with the Regulations. These, therefore, provide how the Council is to take appropriate decisions (FJL arts 20–24). Regulations will also provide the appointment of the Council members and guardian, and record their retirement, removal, replacement and remuneration. 12.16 The objects set out in the Charter must be lawful. The foundation may have beneficiaries, who may be named individuals, or one or more classes of beneficiary and/or may be formed for a purpose, charitable or non-charitable. A foundation may have a mixture of objects. Amendments to the FJL in 2015 clarified that the purpose of a foundation may be contained either in the Charter or in its private regulations. Beneficiaries will be identified in accordance with the Regulations but do not have any automatic right to information, either to the Regulations or the accounts or minutes of the foundation (FJL arts 25 and 26). The Council is established in accordance with the Regulations but must contain a ‘qualified member’, who has to apply for the incorporation of the foundation and is approved by the Jersey Financial Services Commission under the Financial Services (Jersey) Law 1998 (FJL arts 2 and 23). The qualified member is responsible for making sure that the foundation is properly administered, has followed the approved anti-money laundering procedures and has taken reasonable steps to ensure that the foundation’s records are prepared accurately and properly. Other members of the Council may be resident in Jersey, but are not required to be, and can include the provider of funds to the foundation or member of his family. The foundation must have a guardian appointed in accordance with the Regulations, whose duty is to ensure that the Council carries out its functions and is answerable to the Royal Court in Jersey (FJL arts 13 and 14). The guardian may be the founder, or the qualifying member, or a third party who is not a member of the Council, and could be the provider of the funds. The guardian can hold an executive function, if the Regulations so provide, and may be a company or another foundation. A foundation may carry out limited trading in furtherance of its objects such as running a charitable shop, if it is a charitable foundation but would normally carry out any trading activities through a company owned by the foundation. Foundations established in other jurisdictions may migrate to Jersey, and Jersey foundations may migrate to other jurisdictions. A  Jersey foundation could be a beneficiary of a discretionary trust, which could be advantageous where there are beneficiaries resident in a civil law jurisdiction. A foundation is subject to Jersey law, and foreign forced heirship provisions or matrimonial orders may not be enforceable in Jersey. Beneficiaries of a Jersey foundation have no directly enforceable rights, and no fiduciary duties are owed to them by the founder, members of Council or guardian. If they have rights specified in the Regulations, the guardian has to ensure that those are respected, and application could be made to the Royal Court if this was not being done. 558

Purpose and Heritage Trusts and Foundations 12.20 12.17 A foundation could have advantages over a trust, for holding wasting or speculative or orphan assets, although a trust deed can normally cater for this by giving the trustees specific rights to hold such assets, which should overrule the trustees’ duty to diversify investments. Where the provider of the funds requires to have considerable influence over the investment and use of the assets, the foundation may have advantages over a trust, and would be considerably cheaper to run than a private trust company, which is normally structured by way of a purpose trust owning the shares in the trust company acting as trustee of the family trust or trusts. It could also be a viable alternative to an employee benefit trust, as an employee benefit foundation. A foundation can include the same rights as would be available under forced heirship or not, and could be made Shari’a compliant. A foundation could be the trustee of a trust etc, or the settlor of a trust, or own the shares of a corporate protector or enforcer of a purpose trust. Jersey law applies without reference to the law of any other jurisdiction (FJL art 32). The involvement of the person providing the endowment in the administration of the foundation will not invalidate it, unlike a trust (FJL art 33), provided it is not a sham (Rahman v Chase Bank (C.I.) Trust Co Ltd [1991] JLR 103). 12.18 A  Jersey foundation is something of a hybrid between a company limited by guarantee and a trust. Guernsey has introduced similar foundation legislation, as has the Isle of Man. 12.19 UK tax law does not currently refer directly to foundations, but it is likely to be regarded as an opaque entity for UK tax purposes. It is most unlikely to fall within the offshore fund legislation under the Offshore Funds (Tax) Regulations 2009 and TIOPA  2010 ss  360, 361. It would be liable to income tax at the basic rate, as any UK source income under ITA 2007 s 11. The trust rate or dividend trust rate under ITA 2007 s 479 should not apply to a foundation, as it is not property held in trust within ITA 2007 s 466(2). The person providing the endowment to a non-charitable foundation would probably be taxed as a settlor under the settlor interested settlement provisions in ITTOIA 2005 ss 619–648 if he, his spouse or his minor children could at any time benefit, or if he received a capital sum (ITTOIA 2005 ss 624, 629 and 633). Income accumulated within non-UK resident companies would not be caught under these settlement provisions. However, the transfer of assets abroad provisions in ITA 2007 ss 714–751 are more widely drawn, and could catch foundations unless established for commercial purposes with no tax avoidance motive, such as a special purpose vehicle to hold orphan assets held by companies within the EU, such as the Republic of Ireland, Cyprus or Malta, under the EU’s freedom of establishment rules in Articles  20, 30 and 48 or 63–66 and 75 of the EC Lisbon Treaty. 12.20 Distributions of relevant income to beneficiaries from a foundation would be taxed on them on the amounts received under ITA 2007 s 731 without any credit for any UK tax paid by the foundation, as an opaque entity (see 559

12.21  Purpose and Heritage Trusts and Foundations INTM180010 and 180020), and benefits would be charged under ITA  2007 s  735. Non-domiciliaries may be taxed on remittances under ITA  2007 ss 809A–809Z7 if they are eligible for the remittance basis. 12.21 As a non-UK resident entity, a foundation should not be liable to capital gains tax, except on UK assets used for carrying on a business in the UK. It is unlikely to be treated as an offshore company within TCGA 1992 s 3 (previously TCGA 1992 s 13 prior to 6 April 2019), in view of the foundation’s lack of shareholding or rights of beneficiaries, unless participators can be identified from its Regulations. Similarly, it appears that a UK resident provider of funds to a foundation would not be a settlor within TCGA 1992 s 86. However, a UK resident beneficiary in receipt of a capital gain distributed by a foundation would be caught by TCGA 1992 s 87 as from a non-UK trust, in view of the very wide definition of ‘settlement’ under TCGA 1992 s 97(7) which applies (ITTOIA 2005 s 620). 12.22 For inheritance tax purposes, the transfer of funds to a foundation would be a chargeable transfer, although the normal exemptions apply, such as business property relief or the nil rate band. A non-UK domiciliary would not be chargeable on the transfer of non-UK situs assets under IHTA  1984 s 6. In many cases, a transfer of assets to a foundation would have the same IHT consequences as a transfer to an offshore settlement, including a gift with reservation under FA 1986 ss 102–102C and Sch 20 if the provider of funds retained a possible interest, in view of the wide definitions of ‘settlement’ in IHTA 1984 s 43(2). It is possible, in some circumstances, that a transfer to a beneficiary by a foundation could give rise to an IHT charge if the foundation could be likened to a close company, based on the engrained rights of the beneficiaries under its Regulations, such that IHTA 1984 s 94 could apply.

Foundation residence 12.23 As a foundation is a corporate entity, it is likely that HMRC would seek to apply the corporate residence criteria to a foreign foundation. If, therefore, the central management and control were in the UK, the foundation itself would be tax resident in the UK (CTA  2009 ss  13–18; SP  1/90; De Beers Consolidated Mines Ltd v Howe (1906) 5  TC  198; Wood v Holden (2005)  STC  443; and Laerstate BV  v RCC  (2009) TC00162). It is thus essential that the foundation Council meets regularly in the intended country of residence and approves the activities of the foundation, not merely acting as a rubber stamp for decisions already made, other than those properly delegated and reviewed, such as investment decisions. The Council needs to consider properly the decisions to be taken and bring its collective mind to focus on the matters to be decided. Contemporary minutes of meetings of the Council should be made and kept. 560

Purpose and Heritage Trusts and Foundations 12.25

SPECIAL TRUSTS Newspaper trusts 12.24 Newspaper trusts within IHTA 1984 s 87 are settlements where the only or principal assets comprise shares in a newspaper publishing company, whose business consists wholly or mainly of the publication of newspapers in the UK or a newspaper holding company which has, as its principal asset, shares in a newspaper publishing company and has voting control of that company. The only other assets allowed are those reasonably required to secure the operation of the newspaper publishing company concerned (IHTA  1984 s  87(2), (3)). A newspaper trust, such as that controlling the Guardian until 2008, is taxed in the same way as an employee benefit trust under IHTA 1984 s 86 (IHTA 1984 s 87(1)) and is therefore not treated as an ordinary discretionary trust in view of IHTA  1984 s  58(1)(b). Thus, the normal discretionary trust ten-yearly charge or exit charge does not apply. There may, however, be an exit charge on property leaving a newspaper trust under IHTA 1984 s 72, calculated in the same way as for property leaving temporary charitable trusts under IHTA 1984 s 70 (see 11.45). Property coming out of an existing discretionary trust into a newspaper trust would not appear to fall within IHTA 1984 s 75, because the beneficiaries are the newspaper publishing companies not the employees thereof, and therefore the conditions referred to in IHTA 1984 s 75(2)(a) do not apply.

MAINTENANCE FUNDS FOR HISTORIC BUILDINGS 12.25 Maintenance funds for historic buildings have to meet the conditions set out in IHTA 1984 Sch 4 by virtue of IHTA 1984 s 27 where a direction has been given by HMRC under IHTA  1984 Sch  4 para  1. Transfers into such a maintenance fund are exempt transfers under IHTA 1984 s 27, on the appropriate claim being made within two years of the date of transfer or such longer time as HMRC may allow. Transfers to the fund have to be an absolute disposal of the donor’s entire interest into trust (IHTA 1984 s 27(2)). Such a maintenance fund is a favoured discretionary trust under IHTA 1984 s 58(1) (c), and the normal ten-year charge or exit charge under IHTA 1984 ss 64 and 65–69 does not apply, although there may be an exit charge similar to that applicable to charities under IHTA 1984 s 70 by virtue of IHTA 1984 Sch 4 paras 8–15. The availability of an HMRC direction under IHTA 1984 Sch 4 para 1 depends on the conditions in IHTA 1984 Sch 4 paras 2–4 being met. In Marquis of Hertford and Others v IRC [2005] STC (SCD) 177 the Special Commissioner held that business property relief applied to the whole of the stately home in question, even though part of it was let back to the family of the 9th Marquis of Hertford, as it was used wholly or mainly for the purpose of the business and therefore was not an excepted asset within IHTA 1984 s 112. 561

12.26  Purpose and Heritage Trusts and Foundations

Conditions 12.26 HMRC will approve a maintenance fund for historic buildings etc provided that the trustees are approved by HMRC and include one trustee being a trust corporation, solicitor or accountant. The trustees must be resident in the UK (ie  the general administration must be carried on and a majority of the trustees must be resident in the UK). An accountant for these purposes means a member of an incorporated society of accountants and a trust corporation must be incorporated under the law of the UK or another member state of the EU and be empowered to undertake trust business in England and Wales and to have an issued capital of at least £250,000, of which at least £100,000 has been paid up in cash or be incorporated by a special Act or Royal Charter (IHTA 1984 Sch 4 para 2). 12.27

Further requirements are:

(a) that, within the period of six years of becoming an approved trust, its funds must not be capable of being used for any purpose other than for the maintenance, repair or preservation of the historic buildings etc. This includes land which in the opinion of the Treasury is of outstanding scenic or historic or scientific interest, buildings of outstanding, historic or architectural interest and ancillary land and objects historically associated with such buildings (IHTA  1984 s  31). The property will qualify only where the requisite undertaking has been given to the Treasury for the preservation of the property, facilities for public access, etc and provided that such undertaking has not been breached. Funds may also be used for the maintenance, repair, preservation or improvement of the trust’s own property; (b) that, should any of the property cease to be held on the trusts within the six-year period or prior to the settlor’s death or former life tenant’s death after 16 March 1987, it can pass only to a national body such as a national museum or a qualifying charity which exists to maintain, repair or preserve historic buildings, etc; and (c)

that any income arising from trust property at any time and not applied for the maintenance, repair etc of the building must be applied for the benefit of national bodies or qualifying charities.

12.28 After the six-year period, income is still subject to these conditions, but the application of the trust capital is not, although if it left the maintenance fund there could be an exit charge under IHTA  1984 Sch  4 para  8 et seq. Property may be transferred between approved maintenance funds within the prescribed timescales without crystallising a tax charge. In such cases, the six-year period during which the property in the fund is restricted will run from the date of approval of the transferor fund (IHTA 1984 Sch 4 para 3). A maintenance fund which was exempt under the original provisions relating 562

Purpose and Heritage Trusts and Foundations 12.32 to such funds is deemed to be approved under para 3 by virtue of IHTA 1984 Sch 4 para 4. The Treasury may withdraw approval of a fund if it considers that its property or its administration ceases to warrant its continuance (IHTA 1984 Sch 4 para 5). 12.29 The Treasury has power to request the trustees to provide it with such accounts and other information as it may require relating to the maintenance fund, and it may also approve funds in advance of property being transferred to it, as otherwise there could be a liability to tax if a transfer were made to a fund which was subsequently not approved. 12.30 The Treasury has the rights and powers of a beneficiary with regard to the appointment, removal and retirement of trustees where a direction has been given under IHTA 1984 Sch 4 para 1 by virtue of para 7.

Property leaving maintenance funds for historic buildings etc 12.31 Where property ceases to be held on such maintenance fund or is applied other than for the prescribed purposes of the fund, either directly or by way of a depreciatory transaction, or an omission to exercise a right, except where there is no gratuitous intent, there may be an exit charge under IHTA  1984 Sch  4 para  8. The grant of tenancies of agricultural property under IHTA  1984 s  16 is excluded from the exit charge. The tax charge is calculated on the diminution in the value of the trust property as a result of the disposition, and this is grossed up where the tax is paid out of the trust fund. The rate of tax is that prescribed by IHTA  1984 Sch  4 paras 11–15; there are anti-avoidance provisions to prevent an interest under the settlement being acquired by a charity for consideration in money or money’s worth.

Exceptions from charge 12.32 Where property leaves an approved maintenance fund, there is no exit charge if the property is resettled within 30 days on another approved maintenance fund by way of a transfer exempt under IHTA 1984 s 27. This period is increased to two years where a charge arises on the death of a settlor. Any amount not resettled is subject to the exit charge (IHTA  1984 Sch  4 para 9). Where property leaves an approved maintenance fund by reverting to the settlor or his spouse or to a widow or widower within two years from the settlor’s death, the exit charge is limited to the excess, if any, of the property coming out of the fund over that reverting to the settlor etc (IHTA 1984 Sch 4 para 10). 563

12.33  Purpose and Heritage Trusts and Foundations

Rates of charge 12.33 The normal rate of exit charge applies where the property in the maintenance fund has been derived from a previous discretionary trust or where discretionary trust property has been distributed to an individual who has made an exempt transfer to the maintenance fund under IHTA 1984 s 27. The rate of tax charged depends upon the relevant period which commences at the latest of: (a) the date of the last ten-year anniversary of the settlement in which the property was comprised before it last ceased to be relevant property, in most cases on transfer to the maintenance fund or to an individual who then transferred it to the maintenance fund; (b) the date the property became, or last became, relevant property before it ceased to be such; and (c) 13 March 1975. 12.34 The relevant period ends on the day before the event giving rise to the exit charge. The rate of tax is the same as that on property leaving charitable trusts under IHTA  1984 s  40, ie  0.25% for each of the first 40 complete successive quarters in the relevant period, 0.20% for each of the next 40 quarters, 0.15% for each of the next 40 quarters, 0.10% for each of the next 40 quarters, and 0.05% for each of the next 40 quarters. The aggregate percentage, subject to a maximum of 30%, is applied to the amount on which the tax payable is calculated under IHTA  1984 Sch  4 para  8, as explained above (IHTA 1984 Sch 4 para 11). 12.35 In cases where the IHTA 1984 Sch 4 para 11 charge does not apply, the appropriate rate of tax under IHTA 1984 Sch 4 para 12 is calculated at the higher of the first rate, as calculated under IHTA 1984 Sch 4 para 13, and the second rate, as calculated under IHTA 1984 Sch 4 para 14. 12.36 The first rate is the aggregate of the quarterly percentages as for the IHTA  1984 Sch  4 para  11 rate of charge, but the relevant period commences with the date that the property became held by the approved maintenance fund and ends, as usual, on the day prior to the occasion of the charge. However, no period prior to a previous occasion of charge, under IHTA 1984 Sch 4 para 8, in respect of the same property, is included in the relevant period. 12.37 If the settlor is alive, the second rate is the effective rate which would be charged on a notional lifetime transfer by the settlor of the amount calculated under IHTA  1984 Sch  4 para  8, on the date of the occasion of charge. The subsequent death of the settlor does not affect the rate of tax on earlier lifetime charges so that any previous potentially exempt transfers 564

Purpose and Heritage Trusts and Foundations 12.40 made by the settlor after 17 March 1986 under IHTA 1984 s 3A are ignored for this purpose, even though they became chargeable transfers on his death within seven years. If the settlor is dead the second rate is the effective rate arrived at by including the chargeable amount calculated under para  8 as if it were the top slice of his estate, subject to a reduction under IHTA  1984 Sch 2 para 6 where there has been a reduction in the rate of inheritance tax between the date of death and the occasion of charge. Where the property has been comprised in more than one settlement, HMRC can select the settlor for purposes of calculation. The effective rate is the fraction found by expressing the tax chargeable as a percentage of the amount on which it is charged. 12.38 The new rules are deemed to apply even where the property first became held in a maintenance fund under the previous rules (IHTA 1984 Sch 4 para 15). Where the charge arises on property formerly held on an interest in possession trust, HMRC have the option to determine the applicable rate of tax based on the cumulative chargeable gifts of the former life tenant (IHTA 1984 Sch 4 para 15A). 12.39 Where property is transferred from a discretionary trust, it ceases to be relevant property on becoming comprised in a maintenance fund for historic buildings, etc, without giving rise to an exit charge under IHTA 1984 s 65, under IHTA 1984 Sch 4 paras 16–18. The exit charge exemption is not available where an interest under the settlement has previously been acquired by the trustees for a consideration in money or money’s worth or if they became entitled to the interest as a result of transactions directly or indirectly including a disposition for money or money’s worth. This would include an associated operation under IHTA 1984 s 268. There will, however, be a charge if there is a valuation difference, ie where the value of the transfer from the discretionary trust computed on the consequential loss basis without grossing up, and ignoring business and agricultural relief, exceeds the value of the property received by a maintenance fund, as reduced by any consideration given for the assets transferred. This could apply, for example, where a number of shares from a controlling holding were settled into the maintenance fund such that the reduction in value as a result of the transfer to the discretionary trust was greater than the value of the shares in isolation received by the maintenance fund. 12.40 Where an individual becomes entitled to trust property, there is normally an exit charge on the property ceasing to be relevant property, but this is avoided where the individual resettles the property within 30 days on an approved maintenance fund for historic buildings etc. The 30-day period is extended to two years where the settlor acquired the property on death. The relief is lost where the individual acquired an interest in the trust property for a consideration in money or money’s worth, or the reduction in value of the transferor’s estate is greater than the value received by the fund. 565

12.41  Purpose and Heritage Trusts and Foundations

Income tax on maintenance fund 12.41 The income tax provisions relating to maintenance funds for historic buildings etc are contained in ITA 2007 ss 507–516 and apply where there has been a direction under IHTA 1984 s 77 and Sch 4 para 1, by HMRC, that the fund qualifies as a maintenance fund for historic buildings, etc.

Settlor’s retained interest 12.42 In a large number of cases, a maintenance fund for historic buildings etc would inevitably include the settlor, as occupier, effectively retaining an interest in the maintenance trust fund, which means that the income would be deemed to be the settlor’s under ITTOIA 2005 ss 624, 625, or as a sum paid to the settlor otherwise than as income under ITTOIA 2005 ss 633–637. This would defeat the object of the exercise, and ITA 2007 s 508 allows the trustees of such a settlement to elect in writing by 31 January, 22 months after the end of a tax year, to have the trust income taxed separately on the trustees of the fund and not as if it were the settlor’s income. 12.43 Where such an election is not made and the income is therefore deemed to be that of the settlor, who is carrying on a trade or property investment business of running the historic building, any reimbursement of maintenance expenditure by the trustees to the settlor is not treated as income of the trade or business and does not reduce the expenditure deductible in computing the trading or property investment business profits. Where the trust fund is only partially exempt as a maintenance fund or ceases to be exempt, the non-exempt portion will be subject to tax on the settlor or trustees as appropriate under the normal taxation rules described in Chapters 6–10, as if it were income from a separate trust (ITA 2007 s 507(3)). 12.44 If any property comprised in a maintenance fund is applied otherwise than for the maintenance, repair or preservation of, or making provision for public access to, the property or the improvement thereof and is neither accumulated nor given to a qualifying charity, it is subject to tax under ITA 2007 ss 512–515. From 6 April 2010, the rate at which tax is charged is the additional rate of 45% less the trust rate (also 45%) and there will, effectively, be no charge under this section, as undistributed income will already have been charged at a rate equivalent to the higher rate. In any event the charge does not arise where the income is already taxable on the settlor, under, for example ITTOIA  2005 ss  625 or 629. The liability to tax, if any, is on the trustees. Where the transfer is to a qualifying charity or museum there is no charge to tax where the inheritance tax exemption under IHTA 1984 Sch 4 applies. However, where a transfer is for a consideration in money or money’s worth the transferor will lose the income tax exemption but the transferee will not. 566

Purpose and Heritage Trusts and Foundations 12.47 12.45 Where a person with an interest in possession in settled property, such as a life tenant, dies and the property passes into an approved maintenance fund for historic buildings etc under IHTA 1984 Sch 4, within two years, there is no inheritance tax charge on that property (IHTA 1984 s 57A). Where the person acquired the interest in possession after 22 March 2006, the interest must be one falling within IHTA 1984 s 57A(1A); in other words, an immediate post-death interest, a disabled person’s interest or a transitional serial interest. Where it is necessary to alter the terms of the original settlement and court approval was required in order to make the transfer to the maintenance fund, the time limit is extended to three years from the date of death under IHTA 1984 s 57A(3). The exemption will not apply if the disposition is conditional or defeasible, or if the property passing to the maintenance fund is itself settled property, or has been acquired for a consideration in money or money’s worth (IHTA 1984 s 57A(4)). If the value of the property transferred to the maintenance fund is less than the value at the date of death, the exemption only applies to the extent of the lower value (IHTA 1984 s 57A(5)).

Capital gains tax 12.46 A transfer to a maintenance fund for historic buildings, which is an exempt transfer by virtue of IHTA 1984 s 27 or 57A, qualifies for capital gains tax roll-over relief under TCGA  1992 s  260 by virtue of s  260(2)(b)(iii) or (c). The roll-over relief has to be claimed by the transferor under TCGA 1992 s 260(1)(c). Roll-over relief is also available on transfers from one maintenance fund for historic buildings etc to another, by virtue of TCGA 1992 s 260(2)(f).

GIFTS FOR APPROVED PURPOSES 12.47 Inheritance tax exemption is available for gifts to political parties by IHTA 1984 s 24(1). To qualify, a political party must have two members elected to the House of Commons or one member so elected and not less than 150,000 votes given to candidates who are members of that party (IHTA 1984 s 24(2)). This point was considered by the First-tier Tribunal in Banks v The Commissioners for HM Revenue & Customs [2018] UKFTT 617 (TC), where the appellant, Mr Banks, had made substantial donations to the UK Independence Party. At the time of the donations, UKIP had members elected to the House of Commons following by-elections rather than a general election. Mr Banks argued that the requirements of IHTA 1984 s 24 were not compatible with his rights under the European Convention of Human Rights. The First-tier Tribunal agreed that the provisions of s 24 were unfair and discriminatory, but that his rights were not enforceable. The gift, like a charitable gift, must be immediate, unconditional within 12 months, indefeasible and of the whole of the transferor’s interest in the property without any reservation of interest (IHTA 1984 ss 23(2)–(5), 24(3), (4)). Capital gains tax roll-over relief is available under TCGA 1992 s 260(2)(b)(i). 567

12.48  Purpose and Heritage Trusts and Foundations

HOUSING ASSOCIATIONS AND NATIONAL INSTITUTIONS, ETC 12.48 Transfers to housing associations within IHTA 1984 s 24A qualify for capital gains tax roll-over relief under TCGA 1992 s 259. Transfers to those national institutions listed in IHTA 1984 Sch 3 such as the National Gallery, the British Museum etc within IHTA 1984 s 25 are eligible for capital gains tax roll-over relief under TCGA 1992 s 257. Similar requirements for the gift to be immediate and absolute as apply to gifts to charities and political parties apply as a result of IHTA 1984 ss 25(2) and 24(4), except that the requirement that the whole of the donor’s interest must be transferred does not apply to property consisting of the benefit of an agreement restricting the use of land such as a restrictive covenant. 12.49 Gifts made on or before 16  March 1998 for the public benefit to a non-profit making organisation could, if the Treasury so directed, be treated as exempt transfers under IHTA  1984 s  26 but this relief was abolished by FA  1998 s  143. As directions were only given in respect of transfers to non-profit making bodies which were actually charities, the relief became unnecessary when the charitable gift restriction of £250,000 was removed with effect from 15 March 1983. 12.50 A potentially exempt transfer that becomes chargeable to tax on the death of the donor within seven years of the gift, which comprises property that either has been or could be designated by HMRC under IHTA 1984 s 31 as being of national, historic, artistic or scientific interest may be regarded as an exempt transfer under IHTA  1984 s  26A. Although the legislation in IHTA  1984 refers to the designation of heritage property by the Treasury, FA  1985 s  95 transferred the responsibility to HMRC without any change being made to the wording of IHTA 1984. The exemption applies where there has been a disposal of such property during the period beginning with the date of the original transfer and ending with the date of the transferor’s death, which is a transfer by way of sale by private treaty or gift to a national institution, as listed in IHTA 1984 Sch 3, or a disposal in satisfaction of tax under IHTA 1984 s 230. The inheritance tax that would otherwise arise on the death within the gift inter vivos period will therefore not apply to the donee if he subsequently transferred the heritage property in this manner (IHTA 1984 s 26A).

TRADE OR PROFESSIONAL COMPENSATION FUNDS 12.51 Trade or professional compensation funds, asbestos compensation settlements and decommissioning security settlements will normally be held by way of a discretionary trust, and IHTA  1984 s  58(1)(e)–(eb) disapplies the ten-year anniversary and exit charges which would otherwise apply under IHTA 1984 ss 64–69. 568

Purpose and Heritage Trusts and Foundations 12.54

WORKS OF ART 12.52 HMRC may designate any relevant object which appears to be preeminent for its national, scientific, historic or artistic interest either singly or as a group, any land which in the opinion of HMRC is of outstanding scenic or historic or scientific interest, any building for the preservation of which special steps should in the opinion of HMRC be taken by reason of its outstanding historic or architectural interest together with any land which is essential for the protection of the character and amenities of such a building and any object which is historically associated with such a building (IHTA 1984 s 31). Such property may be conditionally exempt from inheritance tax provided that the transferor or his spouse had between them been beneficially entitled to the property throughout the six years ending with the transfer or the asset was acquired on death when it was conditionally exempt or left out of account under the relevant estate duty rules. A claim for exemption for transfers after 16 March 1998 must be made within two years of the transfer or such longer time as HMRC may allow; such a transfer is exempt not potentially exempt and a claim can only be made after the transferor’s death. The exemption is conditional on an undertaking being given that the property will be kept permanently in the UK and will not leave it temporarily, except for a purpose and a period approved by HMRC, and appropriate steps, agreed between HMRC and the person giving the undertaking, will be taken for the preservation of the property and for securing reasonable access to the public (IHTA 1984 s  31(2)). In Re A’s Undertakings; Re B’s Undertakings [2005]  STC (SCD) 103, the respective owners of Grade 1 listed houses avoided having their inheritance tax public inspection undertakings under IHTA  1984 s  31(2)(b) extended under IHTA  1984 s  35A where it was not just and reasonable to do so. 12.53 Where the transfer is a potentially exempt transfer there is no point in claiming conditional exemption if the transfer is likely to be exempt anyway but if the transferor dies it is possible to make a claim within two years of the date of death (IHTA 1984 s 30(3A)–(3C)). A claim cannot be made where the transfer is already exempt as an inter-spouse transfer under IHTA 1984 s 18 or a gift to charity under IHTA 1984 s 23 (IHTA 1984 s 30(4)). It is not necessary to have owned heritage property for six years where it has been inherited on a death as a conditionally exempt transfer (IHTA 1984 s 30(3)). 12.54 Where a potentially exempt transfer becomes chargeable, whether it is eligible for designation as heritage property depends on the circumstances at the time of the transferor’s death triggering the gift inter vivos charge (IHTA  1984 s  31(1A)). HMRC may permit heritage objects to be treated as confidential in appropriate cases (IHTA  1984 s  31(3)), and land and property has to be maintained and its character preserved, buildings have to be maintained and repaired and associated property kept with it, as well as reasonable public access being made available (IHTA 1984 s 31(4)). The 569

12.55  Purpose and Heritage Trusts and Foundations undertaking is a written contractual agreement between HMRC and the person giving it. The terms of the agreement are set out in more detail in IHTA 1984 s 31(4A)–(4G). These include separate undertakings where land or buildings are in different ownership. Public access must not be confined to access only where a prior appointment has been made. The heritage property provisions were substantially modified by FA  1998 s  142 and Sch  25, which apply to undertakings given on or after 31 July 1998. Existing conditional exemption agreements at that date may be amended, either by agreement with the owner, or unilaterally by HMRC with the approval of an Upper Tax Tribunal judge, where agreement has not been reached with the owner within six months of HMRC’s proposal being put forward. A judge’s direction may be modified if there is agreement with the owner before the direction comes into force, which must be at least 60 days after the direction (IHTA 1984 s 35A). 12.55 A  conditionally exempt transfer becomes liable to inheritance tax on the happening of a chargeable event at the rate in force at that time. A chargeable event can happen when an undertaking has not been observed in a material respect or on death, sale, gift or other disposal unless the disposal is a sale to an approved institution under IHTA  1984 s  25 and Sch  3 or transferred to HMRC in satisfaction of inheritance tax under IHTA 1984 s 230. Guidance in HMRC’s publication ‘Capital Taxation and the National Heritage’ (formerly IR67) confirms that owners of conditionally exempt property will be offered the opportunity to remedy the first breach of an undertaking within a reasonable time. A death or gift is not a chargeable event if the transfer is itself a conditionally exempt transfer with the legatee or donee giving the appropriate undertakings to HMRC (see HC Written Answer 25 June 1980 Hansard Vol 987 Col 202) (IHTA 1984 s 32). As various people may be required to give heritage property undertakings, IHTA 1984 s 32A provides conditional exemption for associated properties; that is an historic building, its amenity land and objects historically associated with it. The death of the owner or the disposal of any of the associated properties is a chargeable event for inheritance tax, unless the personal representatives or trustees dispose of the property by private treaty to a museum or similar body listed in IHTA 1984 Sch 3, or the property is transferred in specie in settlement of tax under IHTA  1984 s  230, or the disposal qualifies as a potentially exempt transfer under IHTA 1984 s 3A. If there is a part disposal, the exemption does not extend to the remainder unless the appropriate revised undertaking is given over the remaining property. If the disposal occurs on death, and the appropriate revised undertaking is given, the transfer may continue to be conditionally exempt. If there is a partial disposal which is not itself exempt, it is regarded as the disposal of the whole property unless the appropriate undertaking is given for the remainder, where it continues to qualify under the heritage property rules. 12.56 Where inheritance tax becomes payable on a chargeable event it will be chargeable at the usual inheritance tax rates under IHTA 1984 s 7, at the full rate on death and half rate for a lifetime transfer, on a transfer of value equal 570

Purpose and Heritage Trusts and Foundations 12.60 to the value of the property at the time of the chargeable event as if it were the highest part of the transferor’s estate (IHTA 1984 s 33). The death of the relevant person after a lifetime chargeable event will not result in recomputation of the tax rate on the earlier event, which excludes the possibility of potentially exempt transfers prior to the chargeable event entering into the tax calculation should they become chargeable on the donor’s death within seven years. 12.57 A sale at an arm’s-length value not intended to confer any gratuitous benefit is deemed to take place at the sale price (IHTA 1984 s 33(3)). In Tyser v A-G  [1938] Ch  426 a similarly worded estate duty provision interpreted ‘proceeds of sale’ as meaning the net proceeds of sale after deducting expenses. 12.58 In computing the inheritance tax payable on a chargeable event, it is necessary to identify the relevant person who will be deemed to have made the transfer. However, IHTA 1984 s 33 is concerned only with chargeable events following transactions which have been conditionally exempt transfers or have occurred on conditionally exempt occasions under IHTA 1984 s 78. Where the last transaction, ie the latest transaction within the period of 30 years prior to the chargeable event, was a conditionally exempt transfer, the relevant person is the original transferor. However, where the last transaction is a conditionally exempt occasion under IHTA 1984 s 78, the relevant person is the settlor or, if there is more than one, such a person as HMRC may select. Where there has been more than one transaction within the 30-year period, HMRC may select the last transaction. Where there have been two or more transfers and the last was before, or only one of them was within, the period of 30 years ending with the chargeable event, the relevant person is the one who made the last of those transfers. 12.59 The chargeable event is treated as part of the cumulative total of the person who made the last conditionally exempt transfer before that event. This is not necessarily the relevant person designated under IHTA 1984 s 33. If he is alive, this affects subsequent chargeable transfers by him. If he is dead, the amount on which the tax becomes payable on the chargeable event is added to the value of the estate at his death. It is also provided that, if the property has been comprised in a settlement made less than 30 years before the chargeable event, a settlor who has made a conditionally exempt transfer of the property can stand in the shoes of the person who made the last conditionally exempt transfer before the chargeable event (IHTA 1984 s 34). 12.60 Where the owner died prior to 7 April 1976 and claims were made for conditional exemption for heritage property, the method of calculating the charge is modified by IHTA 1984 s 35 and Sch 5 where the original relief was given under FA 1975 ss 31–34 or FA 1930 s 40(2). The provisions relating to sales only apply to arm’s-length sales where there was no intention to confer gratuitous benefits. 571

12.61  Purpose and Heritage Trusts and Foundations

DISCRETIONARY SETTLEMENTS 12.61 A  transfer of heritage property by trustees shall not constitute an occasion on which inheritance tax is chargeable, for example, under the exit charge rules in IHTA 1984 s 65, by virtue of IHTA 1984 s 78, provided that the property has been comprised in the settlement throughout the six years ending with the transfer or event. Section 78(1) requires the property to be designated heritage property by HMRC under IHTA 1984 s 31 following a claim for the conditional exemption rules to apply. The required undertaking must have been given and a claim for conditional exemption on the transfer must be made (IHTA  1984 s  78(1), (1A)). A  conditionally exempt occasion is one where inheritance tax is held over or where capital transfer tax or estate duty were held over under earlier legislation (IHTA 1984 s 78(2)). 12.62 The conditional exemption provisions applying to individuals are applied also to discretionary settlements as if references to a conditionally exempt transfer included conditionally exempt occasions and references to a disposal other than on sale referred to any occasion on which tax is chargeable, other than the ten-yearly charge under IHTA  1984 s  64, which for heritage property is displaced by IHTA 1984 s 79 (see below). The most likely events will be a disposal of the asset either by transfer to a beneficiary or by way of sale or a breach in the undertaking. References to undertakings under IHTA 1984 s 30 include those under IHTA 1984 s 78(1). The relevant person deemed to have made a conditionally exempt transfer in respect of a conditionally exempt occasion is normally the settlor (IHTA 1984 s 78(3)). However, HMRC may elect to calculate the tax due by reference to the trustees making the actual transfer, under IHTA 1984 ss 78(3) and 33(5). The rate of tax due where the disposal is not conditionally exempt is, where the chargeable occasion occurred before the first ten-year anniversary, on the value of the property without grossing up; and, where the disposal is a sale not intended to incur any gratuitous benefit and at arm’s length between unconnected persons, or on similar terms, the amount chargeable is based on the net sale proceeds unless any capital gains tax is chargeable, as if it were added to the cumulative total of the settlor at the lifetime inheritance tax rates. The actual tax payable, however, is reduced to 30% of the amount that would otherwise be due and, if the occasion occurred between the first and second ten-year anniversaries, to 60% of the amount which would otherwise be due, and thereafter 100% (IHTA 1984 s 78(4)). 12.63 If the settlor died prior to 13 March 1975, the estate duty rates are applied (IHTA 1984 s 78(5)). Where the last conditionally exempt transaction before the chargeable event was a conditionally exempt occasion rather than a conditionally exempt transfer, the settlor’s cumulative total is not increased under IHTA 1984 s 34 by reason of IHTA 1984 s 78(6). The tax is due six months after the end of the month after which the chargeable event occurs (IHTA 1984 s  226(4)). Where property being transferred to a settlement is designated as heritage property following a claim for conditional exemption and the making of 572

Purpose and Heritage Trusts and Foundations 12.66 the appropriate undertaking, under IHTA 1984 s 31 or 78(1), there will be no tenyear charge under IHTA 1984 s 64 (IHTA 1984 s 79(1)). Nor will the ten-year charge arise where capital gains tax holdover relief on the gift into settlement has been claimed under IHTA 1984 s 258(4) (IHTA 1984 s 79(2)). A claim under IHTA 1984 s 79(3) for property to be designated as heritage property must currently be made before the first ten-year anniversary. F(No 2)A 2015 amended the time limit for a claim to two years from the date of the first periodic charge arising for chargeable events occurring on or after 18 November 2015. 12.64 Where, in other cases, the trustees have made a claim for conditional exemption in respect of heritage property and given the requisite undertaking, the ten-year charge may be disapplied under IHTA 1984 s 79(3). There will, however, be a charge under this subsection on the first occurrence of what would, in the case of an individual, have been a chargeable event, but there will not be a charge where there is a further conditional exempt occasion in respect of a property (IHTA 1984 s 79(4)). Tax is charged on an amount equal to the value of the property at the time of the event, ie there is no grossing up (IHTA 1984 s 79(5)). The rate of tax charged is as for property ceasing to be held on charitable trusts, ie 0.25% for each of the first 40 complete successive quarters, 0.20% for each of the next 40 quarters, 0.15% for each of the next 40 quarters, 0.10% for each of the next 40 quarters, and 0.05% for each of the next 40 quarters (IHTA 1984 s 79(6)). The relevant period is the period beginning with the latest of: (a)

the day on which the settlement commenced;

(b) the date of the last ten-year anniversary before the day on which the property became comprised in the settlement; and (c) 13 March 1975; and ending with the day before the event giving rise to a charge (IHTA 1984 s 79(7)). Quarter means a period of three months (IHTA 1984 s 63). 12.65 Although heritage property subject to a conditional exemption is itself exempt from the ten-year charge, the value of the consideration given for the property on its transfer to the settlement is taken into account when calculating the rate of tax on other non-exempt property in the settlement as if it were a previous chargeable transfer by the notional transferor under IHTA 1984 s 66(5) (b) (IHTA 1984 s 79(8), (9)). Conditionally exempt transfers include those for which estate duty relief is available under IHTA 1984 s 79(10) and Sch 5. 12.66 An undertaking may be varied in the same way as for an individual under IHTA 1984 s 35A, by agreement with HMRC and the person bound by the undertaking (IHTA 1984 s 79A(1)), or forcibly where a judge of the Upper Tax Tribunal accepts a proposal from HMRC as being just and reasonable in the circumstances. Where the variation proposed by HMRC is not accepted within six months, the coming into effect of the judge’s enforced variation 573

12.67  Purpose and Heritage Trusts and Foundations of the undertaking is deferred for 60 days in order to give a final chance at an agreed variation (IHTA  1984 s  79A(2)–(4)); see Application to vary the Undertaking of A, Re [2005] STC (SCD) 903). 12.67 The trustees have to deliver an account within six months of the end of the month in which the chargeable event occurs, at which date tax is payable (IHTA  1984 ss  216(7), 226(4)). Interest is chargeable on overdue tax in the normal way under IHTA 1984 s 233(1)(c). As well as the trustees, those liable for inheritance tax include any persons for whose benefit any of the former heritage property, or income from it, is applied, at or after the time of the event occasioning the charge (IHTA 1984 s 207(3)).

CAPITAL GAINS TAX 12.68 No capital gains tax is payable where an asset is disposed of to a museum etc included in IHTA 1984 Sch 3 or by way of donation to such a body (TCGA 1992 s 258(2)(a)), although obviously the amount which the museum etc would offer for the heritage article would be less than the open market value. It is recommended that the museum or gallery should in general offer the seller an amount equal to 25% of the benefit of the tax exemption (the douceur). Capital gains tax relief is also available where a heritage article is accepted in part satisfaction of inheritance tax due in accordance with IHTA  1984 s 230. Again, the article accepted will be vested in a public body and the tax exemption is taken into account by adding 25% of the value of the exemption to the estimated value of the object after payment of notional tax (the douceur) (TCGA 1992 s 258(2)(b)). In the case of land, the douceur is 10% (CG 73340). Where an asset which has been, or could be, designated as a heritage asset under IHTA 1984 s 31 is disposed of by way of a gift, including a gift into settlement, or is transferred to the beneficiary within IHTA 1984 s 71(1) or 73 (ie from a pre-22 March 2006 accumulation and maintenance settlement which continued to meet the detailed requirements of s  71, or pre-1978 protective trust), it is treated as a no-gain, no-loss disposal (TCGA 1992 s 258(3), (4)). It is necessary to give the appropriate undertaking under IHTA  1984 s  31. A disposal of settled property under IHTA 1984 s 54A(3)(b) at a special rate of charge excludes IHTA 1984 s 73 disposals which are already exempt under that section (see 8.27). 12.69 If the heritage asset is sold, or the undertaking is breached, capital gains tax is calculated on the sale proceeds or market value under TCGA 1992 s  258(5) and, if inheritance tax is also payable under IHTA  1984 s  32, the capital gains tax paid is deductible from the market value on which inheritance tax is chargeable under TCGA 1992 s 258(8). The undertaking applies until the person beneficially entitled to it dies or disposes of it otherwise than on sale and without a further undertaking being given in respect of it, in which case it is treated as a sale (TCGA 1992 s 258(6)). Where a heritage asset is treated 574

Purpose and Heritage Trusts and Foundations 12.73 as having been sold, any associated asset within IHTA 1984 s 31(1)(c), (d) or (e) is also deemed to have been disposed of at its market value, unless HMRC direct otherwise (TCGA 1992 s 258(7)). Inheritance tax undertakings include those under IHTA 1984 s 32, trustees’ undertakings under IHTA 1984 s 78, and estate duty undertakings under IHTA 1984 Sch 5 (TCGA 1992 s 258(9)). Undertakings varied for inheritance tax purposes under IHTA  1984 s  35A apply also for capital gains tax under TCGA 1992 s 258(8A). 12.70 A disposal of heritage property in respect of which undertakings had been given, other than to a beneficiary with an interest in possession, may qualify for capital gains tax roll-over relief, on appropriate claims by the transferor and transferee under TCGA 1992 s 260(2)(b)(iv). A transfer from a pre-22 March 2006 accumulation and maintenance trust which is not subject to inheritance tax, on a beneficiary becoming beneficially entitled to property on or before attaining a specified age or on death before attaining the specified age (IHTA 1984 s 71(4)), becomes eligible for roll-over relief for capital gains tax purposes under TCGA 1992 s 260(2)(d). Similarly, a transfer of heritage property on a conditionally exempt occasion under IHTA 1984 s 78(1) may be eligible for roll-over relief for capital gains tax under TCGA 1992 s 260(2)(e). Capital gains tax roll-over relief may also be available on a transfer of settled property to a maintenance fund for historic buildings etc under IHTA  1984 Sch 4 (TCGA 1992 s 260(2)(f)).

CULTURAL GIFTS SCHEME 12.71 Finance Act 2012 s  49 and Sch  14 established the Cultural Gifts Scheme for gifts of property such as art or historical objects of pre-eminent importance to the nation from 1 April 2012. The reliefs are available to both individuals and (where relevant) companies. ‘Pre-eminent property’ includes pictures, prints, books, manuscripts, works of art, scientific objects or other things that the relevant minister is satisfied is pre-eminent for its national, scientific, historic or artistic interest (FA  2012 Sch  14 para  22). ‘National interest’ includes interest within any part of the UK. Any object that is or has been kept in a building within IHTA  1984 s  230(3)(a) to (d) is pre-eminent property if it appears to the relevant minister desirable for the object to remain associated with the building. In determining whether an object, or a collection or group of objects, is pre-eminent, regard is to be had to any significant association of the object, collection or group with a particular place. 12.72 The relevant minister is the Secretary of State, or the appropriate equivalent in Scotland, Northern Ireland and Wales (FA 2012 Sch 14 para 23). 12.73 A  qualifying gift under the scheme is exempt from inheritance tax under IHTA  1984 s  25(3). A  potentially exempt transfer which would otherwise have proved to be a chargeable transfer because of the death of the 575

12.74  Purpose and Heritage Trusts and Foundations donor within seven years is also exempt if the property has been the subject of a gift under the Schedule before the death of the donor (IHTA 1984 s 26A). 12.74 The provisions of IHTA 1984 s 32 concerning conditionally exempt transfers of property apply to gifts made under the Cultural Gifts Scheme (FA 2012 Sch 14 paras 26–32), so that a chargeable event does not arise on a subsequent disposal or the subsequent death of the owner where the disposal is a gift to the nation under the scheme. The disposal must take place within three years of death, in the case of a chargeable event arising on death of the original owner. Any death or disposal taking place after a disposal above is not a chargeable event for the purpose of the conditional exemption rules unless there has been a further conditionally exempt transfer of it after that disposal. 12.75 Tax on a chargeable event in relation to conditionally exempt property is calculated under IHTA 1984 s 33 by reference to the rates that would have applied to a transfer by a ‘relevant person’, who is a person who made certain conditionally exempt transfers in the past. Conditionally exempt transfers of the property made before a gift under the cultural scheme are now to be left out of account. The same applies as regards the provisions in IHTA 1984 s 34 for the reinstatement on a chargeable event of the cumulative total of transfers of a person who made a conditionally exempt transfer. 12.76 A qualifying gift under FA 2012 Sch 14 might give rise to a charge under other provisions: either IHTA 1984 Sch 5 (IHT conditional exemption on deaths before 7  April 1976); or else FA  1930 s  40 or the Finance Act (Northern Ireland) 1931 s  2 (estate duty exemption for objects of national interest). In such a case the duty or tax arising is limited to A minus B, where A is the amount of duty or tax that would become chargeable in the absence of this paragraph and B is the amount that would be due if the effective rate at which the duty or tax was charged on that event was the highest rate of IHT (currently 40%). 12.77 Under IHTA  1984 s  33(7), where there is a chargeable transfer of property that has previously been the subject of a conditionally exempt transfer, any IHT charged on that transfer is allowed as a credit against the charge that arises on a chargeable event in relation to the conditionally exempt property, either as a result of the chargeable transfer or subsequently. Amount A in the previous paragraph is calculated before applying that credit, so that the credit remains available to set against the balance actually chargeable (ie A minus B). It cannot, however, give rise to a repayment of IHT. 12.78 Exemption from capital gains tax in respect of a qualifying gift under Sch 14 is given by FA 2012 Sch 14 para 34.

576

Chapter 13

Protective and Vulnerable Person Trusts

13.1 Protective trusts under TA 1925 s 33 are where the income is held on trust for the principal beneficiary for life, or a shorter period called the trust period, or until he does or attempts to do anything, or an event happens, which would deprive him of his right to receive the trust income, other than where an advance is made to another person under statutory or express powers in the trust. In such circumstances, the trust of the income in favour of the principal beneficiary fails or determines, and for the remainder of the trust period income is held upon trust to be applied as the trustees in their absolute discretion think fit for the maintenance, support or otherwise for the benefit of the principal beneficiary and his or her wife or husband, if any, and his or her children or more remote issue if any. If there is no spouse or issue of the principal beneficiary, the income will be held for the benefit of the principal beneficiary and those who would inherit on his death. The principal beneficiary, therefore, has an interest in possession in the whole or part of the trust property to begin with, and he and the trust are taxed accordingly. However, in the event of a terminating event, the trust becomes a discretionary trust and both the trustees and the principal beneficiary are taxed accordingly (Re Allsopp’s Marriage Settlement Trusts [1959] Ch 81). Where the principal beneficiary’s interest has been determined, the trustees can still exercise their discretion in his favour to provide what is needed for his maintenance and support (Re Ashby [1892] 1 QB 872). The interest of a discretionary beneficiary is a mere spes, a right to be considered by the trustees, not property passing to his trustee in bankruptcy. 13.2 In the absence of such protective provisions, a beneficiary with an absolute interest in a trust, such as an interest in possession or remainder, has an asset which would vest in his trustee in bankruptcy, under IA 1986 s 381, if he were to become bankrupt (Re Sanderson’s Trusts (1857) 3 K & J 497). It cannot be made inalienable (Re Dugdale (1888) 3 Ch D 285; Re Mabbett (1891) 1 Ch 707), nor made subject to a condition that it is not available to creditors (Brandon v Robinson (1811) 18 Ves 429). It may, however, be created as an interest which is terminable on bankruptcy or on an attempted alienation or charge of the interest (Morley v Rennaldson (1843) 2 Hare 570; Re Leach [1912] 2 Ch 422). 13.3 It is not possible for a person to settle property on himself until bankruptcy, as being contrary to public policy (Knight v Browne (1861) 7 Jur NS 894; Re Pearson (1876) 3 Ch D 807). 577

13.4  Protective and Vulnerable Person Trusts 13.4 Where a protective trust failed or was terminated before 12  April 1978 there is an IHT charge on the property ceasing to be held on protective trusts, other than by a payment out of the settled property for the benefit of the principal beneficiary, and tax is calculated in the same way as for property leaving a charitable trust under IHTA  1984 s  70 (IHTA  1984 s  73). SP E7 confirms that the trust has to follow closely the provisions of TA 1925 s 33, apart from minor variations or additional administrative duties or powers of the trustees. This does not include extension of the list of potential beneficiaries to siblings. Pre-1978 protective trusts are taken out of the IHT discretionary trust regime by IHTA 1984 s 58(1)(b). 13.5 Where IHTA  1984 s  73 does not apply, ie  where the trust had not failed or terminated prior to 12 April 1978 but the property is nonetheless held on protective trusts within TA 1925 s 33, the principal beneficiary is deemed to have retained his interest in possession following the failure or termination of the trust, as a result of which it is actually held on discretionary trusts for him under IHTA  1984 s  88(2), but from 22  March 2006 this only applies where the new interest in possession is an Immediate Post Death Interest (IPDI), a disabled person’s interest or a transitional serial interest (IHTA 1986 s 88(3)–(6)). The trust property remains in his estate for IHT purposes so that there is an IHT liability on death, but with no capital gains tax uplift as there is no corresponding CGT relief to IHTA 1984 s 88. A deed of advancement to a third party would crystallise an IHT charge as the termination of the interest in possession under IHTA  1984 ss  52 and 53 (Cholmondeley v IRC [1986] STC 384). 13.6 Protective trusts under TA  1925 s  33 are nowadays rare, the same effect being achieved by giving the trustees power to revoke a life interest in favour of a beneficiary who would otherwise have been the principal beneficiary, and hold the trust fund on trust for other beneficiaries to whom an interest in possession would be given, or to hold on discretionary trusts. In such cases the normal interest in possession and discretionary trust rules apply, as appropriate.

TRUSTS FOR A DISABLED PERSON 13.7 Property settled on discretionary trusts, before 10 March 1981, which secure that the settled property is applied during the disabled person’s life only or mainly for his benefit, are not treated as discretionary trusts for IHT purposes (IHTA 1984 ss 74(1) and 58(1)(b)). There is a charge to tax where the property ceases to be held for the benefit of the disabled person by way of an exit charge under IHTA 1984 s 70(3)–(10), in the same way as for property leaving a temporary charitable trust (s 74(2)–(4)). A disabled person is defined in IHTA 1984 s 74(4) as a person in receipt of certain state benefits or suffering from a mental disorder under the Mental Health Act 1983. 578

Protective and Vulnerable Person Trusts 13.11 13.8 Where property is transferred to a discretionary trust after 9 March 1981, for the benefit of a disabled person who does not have a life interest and for whose benefit not less than half of the settled property (which is applied during his life) is applied, for IHT purposes, the disabled person is treated as entitled to an interest in possession in the settled property. It is, therefore, treated as part of his estate (IHTA 1984 s 89(1)). Trustees’ powers of advancement under TA 1925 s 32 are ignored in considering the application of the settled property (IHTA 1984 s 89(2), (3)). ‘Disabled person’ is defined by FA 2005 Sch 1A (IHTA 1984 s 4) and means one disabled under the Mental Health Act 1983, or in receipt of attendance allowance or a qualifying disability living allowance, or a personal independence payment, an increased disablement pension, a constant attendance allowance or an armed forces independence payment (FA 2005 s 38 and Sch 1A). The disabled person continues to qualify even though undergoing treatment. A person who would otherwise be entitled to the above benefits, but for the fact that he or she is in hospital (or prison) or not UK resident, is regarded as a disabled person within the definition of FA 2005 Sch 1A. 13.9 Where a person transfers property into a settlement for himself on or after 22 March 2006, he can avoid the inheritance tax charge on creating a relevant interest settlement, if HMRC can be convinced that he had a condition likely to lead to disability (IHTA 1984 s 89A). There must be no interest in possession in the property during his life, and any distributions must be applied for his benefit. If the trust is brought to an end, it must go to him or another person absolutely, or a disabled person’s interest under IHTA 1984 ss 89B and 89C must subsist in the settled property. The person transferring property into a settlement is treated as having an interest in possession to which a disabled person is beneficially entitled. The definition of a disabled person is extended to include disabled persons living in paid accommodation or who live outside the UK. 13.10 For income tax purposes, a trust for the disabled is taxed as a discretionary trust, because a beneficiary is only treated as having a life interest for the purposes of IHT under IHTA 1984 s 89. There are no special rules for income tax. Where, however, a person is acting as a bare trustee, guardian, tutor, curator or committee of an incapacitated person, the trustee etc is taxed as if the income were that of the incapacitated person, although the trustee is made answerable for compliance with the Income Tax Acts, and has a right of indemnity in respect of any tax paid (TMA 1970 s 72). 13.11 For CGT purposes, the trust is treated as a discretionary trust and is subject to tax accordingly, except where it is a post-9  March 1981 disabled persons settlement within IHTA  1984 s  89, in which case the CGT annual exemption is the same as that applicable to an individual, not half the normal exempt amount or less depending on the number of associated trusts (TCGA 1992 Sch 1). 579

13.12  Protective and Vulnerable Person Trusts

VULNERABLE BENEFICIARIES Introduction 13.12 From 6 April 2004, a claim may be made for special tax treatment for trusts with vulnerable beneficiaries ie  disabled persons or a relevant minor, meaning a child under the age of 18 with at least one dead parent (FA  2005 ss  23, 45 and Sch  1). On the making of a claim, the vulnerable person is effectively treated as if they had a settlor interest in a settlor interested settlement, when they are in fact beneficiaries of a discretionary trust. The trustees have to be holding the property on qualifying trusts and have made a vulnerable person election. This treatment does not apply to what are already settlor interested trusts within ITTOIA 2005 ss 622–627 (FA 2005 ss 23–25 and 45). A vulnerable person election may be made jointly by the trustees and the beneficiary and takes effect from a date specified in the election (normally 6 April to coincide with the start of a tax year). The election must be in a form approved by HMRC (currently form Vulnerable Persons Election1, VPE1) and made within 12 months of 31 January following the tax year in which it is to have effect (FA 2005 s 37). Where there is more than one vulnerable beneficiary, an election must be made separately in respect of each one. HMRC is given wide-ranging information powers. Once made, the vulnerable person election is irrevocable and has effect until the beneficiary ceases to be a vulnerable person, or the trust ceases to be qualified or is terminated, in which case the trustees must so inform HMRC. A vulnerable person election applies to the income less proportionate trust management expenses for the appropriate tax year (or part of the year if the election is to have effect from a date other than 6 April) (FA 2005 s 29). 13.13 The trustees’ income tax liability is reduced by an amount equal to the difference between the liability in respect of the Trustees’ Qualifying Trust Income (TQTI), calculated in the usual way depending on whether the trust is a discretionary or interest in possession trust, and the tax that would be due if the vulnerable person was entitled to the Qualifying Trust’s Income (VQTI) instead of the trustees. The TQTI is reduced by the relevant proportion of trust expenses which relates to the trustees’ qualifying trust income, computed on a pro rata basis, where there is other income in the trust. 13.14 The VQTI is the total tax liability which the vulnerable person would have if he or she included in total income the qualifying trust’s income (Tax Liability of Vulnerable Person, or TLV1), less the vulnerable person’s actual total tax liability, excluding the qualifying trust’s income (TLV2). TLV1 is calculated as the total amount of income tax and capital gains tax of the vulnerable person, excluding any actual distributions from the trust and excluding any relief by way of an income tax reduction, such as income tax relief under the Enterprise Investment Scheme. TLV1 is therefore what TLV2 would be if the qualifying trust’s income were added to TLV2. 580

Protective and Vulnerable Person Trusts 13.18 13.15 A non-UK resident vulnerable person is deemed to be both resident and domiciled in the UK for income tax purposes and liable to capital gains tax on the actual or deemed gains, less losses and entrepreneurs’ relief imputed in accordance with FA 2005 Sch 1 para 3. Non-UK resident means not resident in the UK during any part of the tax year nor (prior to 6 April 2013), ordinarily resident, during the tax year, under FA 2005 s 41(2).

Qualifying trust gains: special capital gains tax treatment 13.16 Prior to 6  April 2008, gains arising to trustees of a qualifying vulnerable person’s trust were deemed to be those of the vulnerable person and taxed accordingly as if he were the settlor under TCGA  1992 ss  77–79 (FA 2005 s 31). This approach was modified following the repeal of the settlorinterested capital gains tax charge under TCGA 1992 s 77 from 6 April 2008. 13.17 Under the amended provisions, a similar mechanism to that operating for income tax applies to gains realised by trustees of a qualifying trust for the benefit of a vulnerable person. The trustees’ liability to capital gains tax is calculated in the normal way (TQTG, Trustees’ Qualifying Trust Gains) and reduced by VQTG (Vulnerable Person’s Qualifying Trust Gains), which is the difference between the liability which would have arisen to the vulnerable beneficiary had he made the trust’s gains personally (TLVB) and the trustee’s CGT liability (TLVA) before deducting any losses, ie  TQTG – VQTG = TQGT – (TLVA – TLVB). The result is that the trustees end up paying the same capital gains tax as the vulnerable beneficiary would have paid had the trustee’s investments been his own. A broadly similar formula applies to nonUK vulnerable beneficiaries.

Qualifying trusts 13.18 Property is held on trust for the benefit of disabled persons if the trust provides that property is held for the benefit of a disabled beneficiary who is entitled to all the income from that trust property, or that no part of such income is applied for the benefit of any other person during the lifetime of the disabled person or until the termination of the trust if this occurs before his death (FA 2005 s 34). A small amount of trust capital or income (£3,000 or 3% of the maximum value of the trust fund, whichever is lower) may be applied for the benefit of other non-vulnerable beneficiaries each tax year without causing the qualifying status of the trust to be withdrawn. Trusts are also qualifying trusts if held for a relevant minor, ie a person who has not yet attained the age of 18 and at least one of whose parents has died (FA 2005 s 39) where the trusts are set up on intestacy under Administration of Estates Act 1925 ss 46, 47 or set up under the will of a deceased parent or established under the Criminal Injuries Compensation Scheme (FA 2005 s 35). A number of conditions have 581

13.19  Protective and Vulnerable Person Trusts to be complied with; in particular, the child must become absolutely entitled to the property on obtaining the age of 18 including income and accumulations. Prior to obtaining majority, the income must be applied for the benefit of the relevant minor or accumulated. The statutory powers of advancement under TA 1925 s 32 are allowed and the Criminal Injuries Compensation Scheme is defined. Part of an asset can be held on a qualifying trust if that part of the asset and the income arising from it can be identified (FA 2005 s 36).

Power to make enquiries, etc 13.19 HMRC is given powers to make enquiries to determine whether the necessary requirements have been met and that the trust still qualifies as a vulnerable beneficiary trust (FA  2005 s  40). Information must be furnished within the time specified by HMRC, being not less than 60 days. HMRC may make a determination that the trust does not qualify, or has ceased to qualify, subject to appeal to the First-tier Tribunal within 30 days of the notice of determination. Appropriate adjustments to the tax payable are required. TMA  1970 s  98 is amended to include penalties under these provisions (FA 2005 s 43). Various terms are defined by FA 2005 s 41, including a UK resident if either resident in the UK during any part of the tax year or, prior to 6 April 2013, ordinarily resident during the year. Changes to the wording are made by FA 2005 s 42 to take account of the different trust law in Scotland. The tax pool provisions of ITA 2007 ss 493–498 include tax payable under these provisions in accordance with FA 2005 s 26. The linked borrowing provisions for TCGA 1992 Sch 4B exclude gains within FA 2005 s 31.

582

Chapter 14

Asset Protection Trusts

BACKGROUND 14.1 In a sense, any transfer of assets to trustees removes them from the legal ownership of the settlor, and therefore potentially from the claims of creditors. However, trusts are normally set up with the intention of benefiting people other than the settlor, and any protection from creditors is incidental to the main purpose. To place assets into trust specifically to defeat the claims of potential creditors first started to become popular in the USA where lawyers, medical practitioners and other professionals operating in a highly litigious society came to the view that they were not prepared to see their lifetime’s work negated by astronomical awards of damages for mistakes from which they were unable to protect themselves through affordable insurance. This led to a number of jurisdictions introducing laws to prohibit claims from creditors not made within a relatively short period, say two years, of transferring assets into a settlement for the benefit of the settlor and his family. Countries with specific asset protection laws include a number of offshore islands in the Caribbean, such as Anguilla, Bahamas, Bermuda, Cayman Islands, Nevis and Turks and Caicos Islands; they also include Pacific islands such as the Cook Islands and, in the Indian Ocean, Mauritius and the Seychelles; and, closer to the UK, there is Gibraltar and Cyprus in the Mediterranean and the Channel Islands of Jersey and Guernsey. The Isle of Man has no explicit asset protection legislation but its case law history demonstrates that a trust is not deemed void or voidable upon the insolvency of a settlor. 14.2 Trusts set up for asset protection may have flee clauses, under which the proper law of the trust changes to that of another jurisdiction if litigation is commenced against the trustees in the original jurisdiction. Often there are also provisions whereby any powers given to the settlor, such as the appointment of a protector or trustees, are disapplied if the settlor is acting under duress, such as a court order requiring him to use his powers in a certain way. In the US case of United States of America v Grant and Another (2005) 8 ITELR 339, trusts in Bermuda and Jersey contained a clause allowing the beneficiary ‘at any time to discharge an existing or acting trustee (including the trustee executing this agreement) and to appoint such other trustee in any jurisdiction throughout the world as he (or his said surviving spouse) may in his (or her) 583

14.3  Asset Protection Trusts sole and unreviewable discretion determine’. The US court had no hesitation in ordering the surviving beneficiary to exercise her power to appoint a new US trustee, following which the foreign law will no longer apply and no violation of foreign law will occur. In Barlow Clowes International Ltd (in liquidation) and Others v Eurotrust Ltd International and Others (2005) 8 ITELR 347, the directors of an Isle of Man trust company were liable for dishonest assistance for assisting the misappropriation of investors’ funds by the directors of Barlow Clowes, following Twinsectra Ltd v Yardley [2002] UKHL 12 and Royal Brunei Airlines v Tan [1995] 2 AC 378. 14.3 A  considerable amount of time, allied to not a little ingenuity, has gone into the creation of what might be termed ‘asset protection’ jurisdictions and they are also used to protect assets from the claims of spouses or former spouses in matrimonial proceedings, children and other relatives who would have a claim on the settlor’s estate, particularly in the case of forced heirship jurisdictions, or to avoid exchange controls, or in an attempt to reduce the impact of taxation. Where part of the structure consists of companies owned by the asset protection trust which are incorporated overseas it may be important, particularly for tax reasons, to ensure that they are actually managed and controlled abroad, although not necessarily in the country of incorporation, as, if the intermeddling of the settlor were such that the companies were in reality controlled in the UK, this could amount to conspiracy to cheat the Public Revenue (R v Allen [2001] STC 1537). 14.4 Trusts specifically set up with a view to protecting assets of the settlor from creditors are rather different from the protective trusts dealt with in Chapter 13, which are usually set up for a principal beneficiary, other than the settlor where the beneficiary’s interest is determinable on his insolvency. A  settlement determinable on the settlor’s bankruptcy is prohibited (Re Burroughs-Fowler [1916] 2 Ch 251). 14.5 It is obvious that an asset protection trust needs to contain assets which are intangible or readily moveable. If there are fixed assets such as real estate in a non-asset protection jurisdiction they would be vulnerable to litigation in the territory where the asset is situated, by creditors attempting to bypass the trust. 14.6 Whether asset protection trusts are appropriate for UK resident and domiciled settlors is open to considerable doubt, as the UK insolvency and tax laws are very different from those of the USA.

TRUST FORMATION 14.7 If contemplating setting up an asset protection trust, it is essential that the settlor is solvent, and would remain so following the transfer of assets to the trust, so that the legitimate claims of all known creditors, as opposed to merely 584

Asset Protection Trusts 14.12 potential creditors, can be met. Failure to heed this fundamental point could give rise to serious problems for both the settlor and his professional advisers, as it could amount to the common law offence of conspiracy to defraud under Criminal Law Act 1977 s 5(2) (Wai Yu-Tsang v R [1992] 1 AC 269). Criminal offences may also be committed under the Insolvency Act (IA) 1986, in particular s 357(1), where a bankrupt has made a transfer of property within five years prior to the commencement of bankruptcy, ie the day on which the bankruptcy order is made. The absence of intention to defraud creditors or to conceal the state of his affairs is a valid defence under IA 1986 s 352, but if found guilty the bankrupt is liable to imprisonment or a fine, or both, under IA 1986 s 350(6). 14.8 Professional advisers in such circumstances could be charged with conspiracy to defraud (R  v Dimsey [2001]  STC  1520; R  v Cunningham, Charlton, Wheeler and Kitchen [1996] STC 1418). 14.9 The settlor can also be guilty of an offence under the Theft Act 1968, as amended by the Theft Act 1978, or the Fraud Act 2006, and the professional adviser could be guilty of money laundering offences as described in Chapter 4, or be in breach of professional code of conduct or other regulatory offences. He could also lay himself open to an action for civil conspiracy (Lonrho Plc v Fayed [1991] BCC 641).

TRANSACTIONS AT AN UNDERVALUE AND FRAUDULENT PREFERENCES 14.10 A  transaction under which property is given away or sold at an undervalue or transferred in consideration of marriage within five years prior to the presentation of the bankruptcy petition on which the individual is adjudged bankrupt, is potentially a transaction at an undervalue under IA 1986 s 339, and may be set aside by the court on an application by the trustee in bankruptcy (National Bank of Kuwait v Menzies [1994] 2 BCLC 306; Royscot Spa Leasing v Lovett [1995] BCC 502). 14.11 A  fraudulent preference arises, in the bankruptcy not the criminal sense, if a creditor is put into a better position in the event of the individual’s bankruptcy than would otherwise have been the case (IA  1986 s  340). The preference must be given with that intention (IA 1986 s 340(4)), but such an intention is presumed where the preferee is an associate of the person who becomes bankrupt (IA  1986 ss  340(5), 435). Obviously, a gift into trust is likely to be a transaction at an undervalue. 14.12 A preference is only capable of being set aside if made within two years of the day of the presentation of the bankruptcy petition on which the 585

14.13  Asset Protection Trusts individual is adjudged bankrupt, if an associate of the individual, and within six months of that date if otherwise unconnected. 14.13 Transactions defrauding creditors may be attacked under IA  1986 s 423, which is the current re-enactment of the Fraudulent Conveyances Act 1571, better known as the Statute of Elizabeth. A  transaction defrauding creditors, in the insolvency sense, arises where it is a transaction at an undervalue which was entered into for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make (IA 1986 s 423(3)). 14.14 The main problem for an asset protection trust arises from the wording of ‘may at some time make a claim and in reaction to a claim which a person may make’. It was held in Re Butterworth (1882) 19 Ch 588, under the previous law (which became LPA 1925 s 172 until replaced by IA 1986 s 423), that a settlement intended to defeat future creditors could be set aside even when the settlor was solvent when the settlement was created, and the creditors who ultimately emerge were not in existence at the date the funds were settled. Bankruptcy Act 1914 s  42 allowed a settlement to be set aside by someone who was subsequently declared bankrupt within two years of the creation of the settlement or within 10 years of that date in some cases. In order to fall foul of IA 1986 s 423 the dominant purpose of the transaction must have been to remove assets from the reach of actual or potential creditors (Chohan v Saggar [1994] 1 BCLC 706; Lloyds Bank v Marcan [1973] 1 WLR 1387). However, the requirement for defrauding the creditors was held to apply if it was one of the purposes, not necessarily the dominant one, in IRC v Hashmi [2002] All ER (D) 71. 14.15 An action to set aside the relevant transaction must be made by the Official Receiver or trustee in bankruptcy, the supervisor of a voluntary arrangement or a victim of the transaction (IA 1986 s 424). The court may make an order restoring the position to what it would have been had the transaction not been entered into and protecting the interests of persons who are victims of the transaction (IA 1986 s 423(2); Re Paramount Airways Ltd [1993] Ch 223). The wide-ranging powers of a court to make the appropriate remedial orders are given by IA 1986 s 342 in the case of transactions at an undervalue and fraudulent preferences, and under IA 1986 s 425 in the case of transactions to defraud creditors. 14.16 It should be appreciated that the normal legal professional privilege which a lawyer has with his client would not prevail against a trustee in bankruptcy, who stands in the client’s shoes, and could also be lost if it related to advice on how to structure transactions at an undervalue, as being disclosable on discovery as a matter of public policy (Barclays Bank Plc v Eustice [1995] 1 WLR 1238). 586

Asset Protection Trusts 14.18

ENFORCEMENT 14.17 The order of an English court to set aside a settlement or the transfer of assets to it might be difficult to enforce if both the trustees and the assets themselves are outwith the court’s jurisdiction. However, assistance and cooperation internationally in insolvency proceedings may be invoked under Council Regulation (EC) 1346/2000, effective from 31 May 2002, or, in the case of a fraudulent transfer, by Council Regulation (EC) 44/2001, in force from 1 March 2002 (the Brussels Regulation). IA 1986 s 426 provides for crossborder co-operation and reciprocal enforcement of insolvency orders within the UK, with the Channel Islands or the Isle of Man or any designated country or territory including Anguilla, Australia, the Bahamas, Bermuda, Botswana, Brunei, Canada, the Cayman Islands, the Falkland Islands, Gibraltar, Hong Kong, Republic of Ireland, Malaysia, Montserrat, New Zealand, St Helena, Republic of South Africa, the Turks and Caicos Islands, Tuvalu and the British Virgin Islands. This list excludes many of the major trading partners such as the USA, France, Germany, Japan, China and many others, although it does include a number of territories which might otherwise have been considered as potential contenders for a suitable territory for an asset protection trust. However, in Rubin v Eurofinance SA  (2012)  UKSC  46 the Supreme Court held that there was no reason to class avoidance judgments under insolvency proceedings any differently from any other type of foreign judgment and they were not enforceable at common law in the UK. Rubin was acting on behalf of the New York court to seek aid, assistance and co-operation from the English courts. 14.18 In matrimonial situations, the transfer of assets to trustees in order to prevent or reduce the financial relief available to the other party to the marriage could be set aside under Matrimonial Causes Act 1973 s 37 (Kemmis v Kemmis [1988] 1 WLR 1307). Again, the question of the court’s jurisdiction is important in cases involving foreign asset protection trusts. Matrimonial Causes Act 1973 s 24(1)(c) empowers an English court to make an order varying, for the benefit of the parties to the marriage and of the children of the family or either or any of them, any ante-nuptial or post-nuptial settlement made on the parties to the marriage. Where it is a foreign trust, however, it may be necessary to take proceedings in the foreign jurisdiction to determine whether and, if so, to what extent, the judgment of the English court can be enforced. This was illustrated in re the B Trust (2006) 9 ITELR 783. In the event, the court decided to give substantial effect to the English order in the interests of comity, although it did not direct the appointment of a different trustee for the sub-fund ordered to be set up for the wife on the grounds that a trustee was a professional trustee subject to regulation of the Jersey Financial Services Commission and to the codes of practice issued by the Commission, and the court had no doubt that the trustee would conduct itself properly in the interests of the wife and would not be influenced in any way by its continuing but separate relationship with the husband. In this case, it was suggested that: 587

14.19  Asset Protection Trusts ‘it would in our view avoid sterile argument and expense to the parties if the English courts were in cases involving a Jersey trust, having calculated their award on the basis of the totality of the assets available to the parties, to exercise judicial restraint and refrain from invoking their jurisdiction under the Matrimonial Causes Act to vary the trust. Instead they should request (the Jersey) Court to be auxiliary to them … we can see no reason why the trustee or one or more of the parties for the English Court as the case might be should not be directed to make the appropriate application to (the Jersey) Court for assistance in the implementation of the English court order. It appears to us that this would be a more seemly and appropriate approach to matters where the Courts of two civilised and friendly countries have concurrent interests. It would further be more likely to avoid the risk of the delivery of inconsistent judgments.’ See also Re The H Trust [2007] JRC 187 and Re IMK Family Trust Mubarak v Mubarak and Others [2008] JRC 136.

PROFESSIONAL ADVISERS 14.19 The open-ended nature of the fraudulent transfer provisions in IA 1986 s 423, on the basis of Re Butterworth (1882) 19 Ch 588 and Mackay v Douglas (1872) LR 14 Eq 106, makes it extremely doubtful whether a straightforward asset protection trust can ever be appropriate for a UK resident and domiciled settlor, and a UK adviser may become a constructive trustee or liable to make restitution under the knowing assistance provisions or knowing receipt provisions. Knowing receipt requires the existence of a trust, the existence of a dishonest and fraudulent design on the part of the trustee, the assistance of the professional adviser and the fraudulent design and knowledge on the part of the adviser (Baden v Societe Generale [1998] 2 BCLC 97 and Royal Brunei Airlines v Tan [1995] 3 All ER 97). In Agip (Africa) Ltd v Jackson [1992] 4 All ER 451, not only the accountant who had been carrying out money laundering but also his partner were made liable under the knowing assistance provisions. 14.20 It was confirmed that liability for dishonest assistance requires a dishonest state of mind on the part of the person who assists in a breach of trust. Such a state of mind may consist of knowledge that the transaction is one in which he cannot honestly participate (eg  a misappropriation of other people’s money) or it may consist of suspicion combined with a conscious decision not to make enquiries which might result in knowledge (see Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] 1 All ER 743. Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. It was pointed out in the case that ‘Someone can know and can certainly suspect that he is assisting in a misappropriation of money without knowing that the money is held on trust or what a trust means’ (see Twinsectra Limited v Yardley [2002] 2 All ER 377). 588

Asset Protection Trusts 14.24 14.21 Knowing receipt of trust property transferred to a person in breach of trust is held as constructive trustee where he knew or subsequently discovered that the property had been wrongly transferred to him or misappropriated for his own benefit. A  claim may also be made in appropriate cases for money had and received, unless the recipient can show as a defence payment to his principal by an agent, or can mount a defence based on change of position. 14.22 The liability of trustees is not itself subject to any limitation, although the trustees may have a right of indemnity against the trust fund, the settlor and all the beneficiaries, depending on the circumstances, and may be protected by professional indemnity insurance. Nonetheless, many trustees of asset protection trusts are corporations with no material assets. Trustees always have to bear in mind the interests of the beneficiaries, and may therefore consider it imprudent to enter into warranties or indemnities on the sale of shares or business assets held by the trust without appropriate indemnities from other vendors. It also means that trustees should avoid acting in a personal capacity on behalf of the trust company, or seek an appropriate indemnity on retirement as trustees, and if entering into litigation should consider the appropriateness of a Beddoe application to enable them to apply for security for costs to be met out of the trust fund (Re Beddoe, Downes v Cottam [1893] 1 Ch 547), although this may not be approved (Alsop Wilkinson v Neary [1995] 1 All ER 431).

JURISDICTION 14.23 The domicile of a trust for the purpose of determining jurisdiction in cross-border disputes can become very complex. The UK situation is governed by the Civil Jurisdiction and Judgments Order 2001 (SI 2001/3929) Sch 1 para 12 which must be read and applied in accordance with the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985, imported into UK law by the Recognition of Trusts Act 1987 and, in particular, with Articles  7–10 and 22. The Brussels Regulation may also be applicable within the European Union and EFTA States.

TAXATION 14.24 The taxation consequences of transferring assets into an asset protection trust depend on the asset transferred and the jurisdictions governing the trust and trustees. An asset transferred by a UK resident and domiciled settlor to a discretionary trust would have the taxation consequences set out in Chapter 7. An interest in possession or accumulation and maintenance trust would be subject to tax as explained in Chapters 8 and 9. If, as would be normal in an asset protection trust, the settlement is overseas, the complex anti-avoidance provisions described in Chapter 10 would come into effect. Within the EU there is the Mutual Assistance Recovery Directive 2006/55/ 589

14.24  Asset Protection Trusts EC as implemented in the UK under FA  2002 s  134 and Schedule  39. The UK has a number of international Tax Information and Exchange Agreements, which may be reciprocal or non-reciprocal, and bilateral agreements for co-operation in tax matters through exchange of information. On 1  January 2013 the EU  Council Directive 2011/16 came into force to mandate the automatic exchange of information on tax-related matters within the EU. The US Foreign Account Tax Compliance Act (FATCA) is in force and supported by intergovernmental agreements, including with the UK.

590

Chapter 15

Wills, Trusts and Statutory Trusts

WILLS 15.1 In order to ensure that a person’s estate is dealt with after his death in accordance with his wishes, it is necessary to record these wishes in a valid will. The will must be in writing and must dispose of property either real or personal situated in England or Wales, or appoint an executor or executors and it must be executed in accordance with WA 1837 s 9 (as substituted by the Administration of Justice Act (AJA) 1982 s 17). Solicitors preparing a will owe a duty to the testator and beneficiaries for ensuring that it is properly executed (Humblestone v Martin Tolhurst Partnership [2004]  EWHC  151 (Ch)). Soldiers, sailors and airmen on actual military service, or seamen at sea, may rely on an informal or privileged will (Re Servoz-Gavin (dec’d), Ayling v Summers and Others [2009] WTLR 1657). 15.2 A  valid will must be proved following death by obtaining probate. This book is not intending to deal with administration of estates, and readers are referred to Tolley’s Administration of Estates produced with the Society of Trust and Estate Practitioners (STEP) who also produce the STEP Standard Provisions which are written by James Kessler QC and Toby Harris, or the Practitioner’s Guide to Executorship and Administration by John Thurston published by Bloomsbury. 15.3 A  will enables the testator to choose the executors and trustees he would like to look after his estate following his death and they may begin to act immediately after his death so that there is no hiatus, as there may be on intestacy until letters of administration are granted. The will may also appoint guardians of infant children and avoid their entitlement being subject to inflexible statutory trusts by enabling the terms of the will trusts to be tailored to the circumstances. The will is also used to give directions such as in relation to burial or cremation and often contains a clause stating what is believed to be the deceased’s domicile at the time of death, although this is merely a statement of belief and not determinative. Most importantly the will takes precedence over the rules of intestacy under the Administration of Estates Act 1925 s 46 (see Appendix 1). 591

15.4  Wills, Trusts and Statutory Trusts 15.4 Not all property which passes on death is necessarily dealt with by the will; for example, on the death of a life tenant in an interest in possession trust, the interest would pass under the trust deed to another beneficiary or the remainderman and would not be part of the testator’s estate; however, even though he may be deemed for IHT purposes to have owned the assets outright in which he actually held an interest in possession, there is an IHT liability payable by the trustees which would normally affect the rate of IHT falling upon the free estate. Property in which the deceased had an interest as a joint tenant, as opposed to as a tenant in common, would pass to the surviving joint tenants by survivorship, ie the property passes automatically by right of law and does not pass through the estate. The surviving joint tenant would be liable for the IHT, but the interest in the joint property would be taken into account when fixing the rate of IHT payable by the estate and by the surviving joint tenant (Lim Chen Yeow Kelvin v Goh Chin Peng (2008–09) 11 ITELR 895). A will is particularly important where a couple live together as if they were in a marriage or civil partnership but not legally in such an arrangement as the law does not recognise so-called common-law marriages or civil partnerships not registered as such. If a partner died intestate the other partner had no rights to any part of the deceased’s estate, unless an application was the Court after at least two years’ cohabitation. However, some changes have been made; see 15.10. 15.5 Property undisposed of by will which does not pass by survivorship is dealt with under the intestacy rules. It is therefore important to ensure that the will actually includes in the residue any property not otherwise dealt with. It is not uncommon to see a will where a particular asset is left to a beneficiary but, at the date of death, that asset is no longer held and the legacy adeems, even if the asset has been replaced by a similar asset which is not mentioned in the will. For example, Mr Bluebottle left to his son in his will his Morgan Plus Eight, but by the time he died he had traded this in for a Bentley Continental, so the son did not receive his legacy and the Bentley had to be sold to enable the proceeds to be divided among those entitled under the will or intestacy. It is, therefore, important to ensure that a will is carefully drafted. Fees saved on professional advice when drawing up a will are often spent many times over in sorting out the mess unwittingly created. 15.6 A will may dispose of the entire estate absolutely to the beneficiaries but, in any substantial estate, it used to be common to create, for example, one or more will trusts, leaving an amount equivalent to the nil rate band for IHT purposes into a discretionary trust, together with assets qualifying for the 100% business or agricultural property relief, as no IHT would be payable on such a transfer. The balance would then be left in a life interest trust in favour of the surviving spouse, perhaps with wide powers vested in the trustees to advance capital and/or make loans to the spouse or to terminate the life interest, which would enable the spouse to make potentially exempt transfers for IHT purposes. However, for deaths on or after 9 October 2007, IHTA 1984 ss 8A–8C allow the unused proportion of the nil rate band to be transferred 592

Wills, Trusts and Statutory Trusts 15.9 to the surviving spouse. Termination or partial termination of the surviving spouse’s interest in possession would itself be a potentially exempt transfer (PET). A disposal of a reversionary interest to a UK resident is exempt from CGT in a continuing trust under TCGA 1992 s 76. A right to occupy property may be an interest in possession (Sansom v Peay [1976] STC 494 Sp 10/1979). An executor must make the proper allocation between income and capital in accordance with the will or rules of intestacy. 15.7 A will is an ambulatory document and can be changed at any time simply by adding a properly signed and witnessed codicil to an existing will or executing another will and destroying the old will. It is the latest will which is proven on death and it is sensible to keep wills under review on a regular basis as both law and intentions change. For example the advice at the time of writing to leave business and agricultural property to a discretionary trust could be the wrong advice if, for example, the rate of business property relief was reduced to its former level of 50% instead of 100%.

PROVISION FOR FAMILY AND DEPENDANTS 15.8 The Inheritance (Provision for Family and Dependants) Act 1975 (IPFDA 1975) allows a wife or husband of a deceased person who has died domiciled in England and Wales, and certain other persons dependent upon him or her, to make a claim for reasonable financial provision from the estate. If the deceased is not so domiciled, a claim cannot be made under these provisions (Agulian and Another v Cyganik [2006] EWCA Civ 129). The Court of Appeal reviewed the application of these provisions in Cunliffe v Fielden and Another [2005] EWCA Civ 1508. 15.9 A husband or wife or civil partner who has, during the whole of the period of two years immediately before the date when the deceased died, been living in the same household as the deceased is entitled to reasonable financial provision, being such financial provision as it would be reasonable in all the circumstances of the case for a husband or wife or civil partner to receive, whether or not that provision is required for his or her maintenance (IPFDA 1975 s 1(1), (1A), (2)(a)). The Inheritance and Trustees’ Powers Act 2014 (ITPA 2014) came into force on 1 October 2014 and made some changes to the intestacy rules so that the surviving spouse or civil partner, where there is no issue, inherits one half of the residue absolutely instead of having a life interest. The definition of chattels is changed to cover all tangible moveable property except for money or security for money or property used solely or mainly for business purposes or which was held as an investment. For pre1 October 2014 wills the old definition of chattels may still apply. The statutory legacy remains at £250,000 but is now index-linked and carries interest at the Bank of England Rate at the date of death. Children do not lose their inheritance if they are adopted after the death of a parent. 593

15.10  Wills, Trusts and Statutory Trusts 15.10 In addition, following the Law Reform (Succession) Act 1995, any person (not being the wife, husband or civil partner of the deceased) who, immediately before the death of the deceased, was being maintained either wholly or in part by the deceased is entitled to such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his or her maintenance (IPFDA 1975 s 1(1)(e), (2)(b)). Under s  1(3), a person is treated as having been maintained by the deceased, either wholly or partly as the case may be, if the deceased, otherwise than for full, valuable consideration, was making a substantial contribution in money or money’s worth towards the reasonable needs of that person. The Law Commission produced a 271-page report No 331 ‘Intestacy and Family Provision Claims on Death’ published on 13 December 2011, which resulted in the Inheritance and Trustees’ Powers Act 2014, which abolished the divorce hypothesis in IPFDA 1975 (see 15.11). A child of the deceased is anyone who was treated as a child of the family where the deceased stood in the role of parent, irrespective of marriage. The ‘balance sheet test’ which could block the claim of a dependant in cases of mutual dependency is removed. The increase in value of severable shares of property held as joint tenants from the date of death to the date of the hearing can be taken into account, enacting Dingmar v Dingmar (2006) EWCA Civ 942. A claim for a share in a joint tenancy is no longer limited to six months after the grant of probate, the court is given discretion. In addition, the court is given power to vary trusts on which the deceased’s estate is held and it can take into account the effect of IHT following an order, to allow the whole of the net estate to be transferred to the applicant. ITPA 2014 amends TA 1925 s 31 to give the trustees unfettered discretion over maintenance trusts created or arising after 1 October 2014. For will trusts it is the date of death not execution which is relevant. Inter vivos trusts created after 1 October 2014 benefit from the new rules, as do pre-existing trusts as a result of the exercise of a power on or after that date. TA 1925 s 32 is amended to remove the limit on advancements of half the vested or pre-emptive share for post-1 October 2014 trusts. An advancement includes a transfer of assets, not merely cash, for all trusts. 15.11 The court has wide powers under IPFDA 1975 s 2 to order periodic payments, a lump sum, or to transfer property or set up a trust or require property to be transferred to the applicant or in trust for him or her, to vary any settlement, including one made by will made by the parties to a marriage where the deceased was one of the parties, in order to benefit the surviving party or any child of the marriage or person treated as a child of the family in relation to that marriage. The matters to which the court is to have regard, set out in s 3, include the financial resources of the applicant and any foreseeable future applicant, or beneficiary of the estate, taking into account the obligations and responsibilities of the deceased, the size and nature of the estate, any physical or mental disability of the applicant, or any other matter which the court may consider relevant. The court also has to take account of the age of the applicant and the duration of the marriage, and the contribution made by the applicant 594

Wills, Trusts and Statutory Trusts 15.14 to the welfare of the family of the deceased, including any contribution made by looking after the home or caring for the family and, in the case of a wife or husband or civil partner of the deceased, prior to 1  October 2014 the court should also have had regard to the provision which the applicant might reasonably have expected to receive if the marriage or civil partnership had been terminated by a decree of divorce, taking into account all the available facts and earning capacity and financial needs of any person. The court is given power, under s 9, to treat the deceased’s share of any joint tenancy as part of the estate if such be just in all the circumstances of the case. If the deceased dies within 12 months of a decree of divorce or nullity or dissolution of a civil partnership, the court may ignore the decree of divorce or nullity, dissolution or judicial separation under s 14. 15.12 HMRC’s IHT Manual (at IHTM35231) confirms that the Inheritance (Provision for Family and Dependants) (Northern Ireland) (Order) 1979, which contains corresponding provisions relating to Northern Ireland, and IHTA 1984 s 146 also allow recalculation of the inheritance tax payable on the deceased’s death as if the orders had been contained in the deceased’s will. There is no corresponding Act in Scotland. 15.13 Under the Children and Families Act 2014 a number of changes are made to the provisions relating to adoption and contact with adopted children, family justice including care, supervision and other family proceedings, children and young people with special educational needs or disabilities, childcare and the welfare of children. Other amendments include the appointment and responsibilities of the Children’s Commissioner, statutory rights to leave and pay, time off work for ante-natal care, etc the right to request flexible working and general provisions such as orders and regulations.

MUTUAL WILLS 15.14 Although a will is an ambulatory document, it is not unusual for parties to enter into an agreement amounting to a contract where two people make mutual wills, under which the survivor agrees that he will not revoke his will after the death of the other party, usually his spouse. Such an agreement is enforceable (Gray v Perpetual Trustee Co Ltd [1928] AC 391; Re Dale, Proctor v Dale [1994] Ch 31; Re Goodchild, Goodchild v Goodchild [1997] 3  All ER  63). Mutual wills leaving an interest in land are subject to the requirement for the contract to be in writing under Law of Property (Miscellaneous Provisions) Act 1989 s  2 (amending LPA  1925 s  40). In Healey v Brown [2002] EWHC 1405 (Ch), each party to the marriage entered into a mutual will leaving their interest in the property to the wife’s niece. After the wife’s death the husband did not modify the will, but transferred the matrimonial home to himself and his son as joint tenants so that it passed by survivorship to his son on his death. It was held that the mutual wills, in the 595

15.15  Wills, Trusts and Statutory Trusts absence of the appropriate written confirmation, did not amount to a contract (Re Goodchild, Goodchild v Goodchild [1997] 3  All ER  63), which meant that the husband’s share could validly be transferred to his son in spite of the agreement to the contrary. However, the half share of the property which he inherited from his wife, which passed to the son, together with his own share by survivorship, was held on a constructive trust for the late wife’s niece, which did not require evidence in writing in view of LP(MP)A 1989 s 2(5), following Yaxley v Gotts [2000] Ch  162, Lloyds Bank Plc v Rosset [1991] 1  AC  107 and Thomas & Agnes Carvel Foundation v Carvel and Another [2007] EWHC 1314 (Ch).

WILL TRUSTS 15.15 Where there is a desire to leave various items to a number of people, although precisely who gets what may change from time to time, the will can be drafted so that such items are left to a trusted individual, perhaps one of the executors, to distribute them among intended beneficiaries in accordance with the wishes communicated to that individual as named legatee during the testator’s lifetime. Such bequests are known as precatory legacies, and the named legatee is treated effectively as a bare trustee for those to whom he distributes the items in question, under IHTA  1984 s  143 (Harding and Another (executors of Loveday dec’d) v IRC [1997] STC (SCD) 321; Re Beatty [1990] 1 WLR 1503). The testator gives the named legatee a letter of wishes, which can easily be changed if circumstances change. 15.16 Another means of dealing with the situation where the testator is not sure who will actually be most in need of a portion of the estate at the time of his death is to take advantage of IHTA 1984 s 144, under which the assets are left on a discretionary trust. If the trustees make an appropriate distribution within two years of the death it is treated for IHT purposes as though made on death. IHT would be payable on the gift to the trustees, but if the distribution was to an exempt beneficiary such as a surviving spouse, the IHT overpaid could be recovered. Distributions within the three months following the testator’s death should have been avoided as this would lose the surviving spouse exemption under IHTA  1984 s  65(4) (Frankland v IRC  [1997]  STC  1450; Harding and Another (executors of Loveday dec’d) v IRC  [1997]  STC (SCD) 321). IHTA  1984 s  144 amended by the Finance (No  2) Act 2015 s  14, to refer to s  65(4) with effect from testators’ deaths occurring on or after 10 December 2014. An appointment may be made within three months of the date of death where the will left the property in trust in which there was no interest in possession, enabling the spouse or civil partner exemption to apply. Distributions to a surviving spouse, followed immediately afterwards by PETs to chargeable persons such as the children of the marriage, should be avoided in view of the associated operation provisions in IHTA 1984 s 268. The use of the discretionary trust in these circumstances could give rise 596

Wills, Trusts and Statutory Trusts 15.19 to a CGT charge, as holdover relief would not be available under TCGA 1992 s 260 and there is no chargeable transfer within TCGA 1992 s 260(2)A. There may, however, be an increase in value for CGT purposes during this period, in view of the automatic revaluation on death.

Inheritance tax and the main residence nil rate band 15.17 The government introduced in FA  2016 an additional nil rate band when a residence is passed on death to direct descendants. This is £100,000 in 2017–18, £125,000 in 2018–19, £150,000 in 2019–20, and £175,000 in 2020– 21. It will then increase in line with CPI from 2021–22 onwards. Any unused nil rate band will be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct descendants. This element will be the subject of a technical consultation. There will be a tapered withdrawal of the additional nil rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold. 15.18 It is sometimes worth considering a discretionary trust in favour of the children for the nil rate band, but this may leave the surviving spouse short of assets in a smaller estate where, perhaps, the house is the main asset. The whole or part of the nil rate band gift into settlement could be secured by a charge on the property in favour of the trustees and could be interest free and payable on demand; but, as with all trusts, it is important that the trustees actually act as such, and meet and make decisions to prevent the trust being regarded as a sham. However, the ability to transfer any unused percentage of the nil rate band on the first death to the surviving spouse or civil partner for use on the second death, under IHTA 1984 s 8A, may make the nil rate band discretionary trust unnecessary. 15.19 In order to take advantage of the maximum surviving spouse exemption under IHTA 1984 s 18, it may be useful to leave assets in trust for life to the surviving spouse, but with wide overriding powers of appointment given to the trustees. The surviving spouse has an interest in possession in an immediate post-death interest trust (IPDI) and will be deemed to make a PET if any part of the trust capital were appointed to other parties such as the children or grandchildren. Such a settlement may avoid a number of problems, such as a gift with reservation under FA 1986 s 102 and Sch 20, or an income tax charge under the pre-owned asset rules in FA 2004 Sch 15. It would also prevent the surviving spouse being the settlor of the trust, and therefore avoid falling within the settlor interested settlement provisions for income tax under ITTOIA 2005 ss 625, 626 (Jones v Garnett [2007] STC 1536), and for CGT under TCGA 1992 ss 77–79 until their repeal by FA 2008 Sch 2 paras 1, 5 from 6 April 2008, which become unnecessary with a single rate of capital gains 597

15.20  Wills, Trusts and Statutory Trusts tax applying to individuals and trusts. It should also avoid losing the holdover relief under the settlor interested settlement provisions of FA 2004 s 116 and Sch  21. In Holland v IRC  [2003]  STC (SCD) 43, it was held that the IHT exemption for transfers between spouses in IHTA 1984 s 18 did not apply to a man and woman living together as husband and wife for more than 30 years, as the lack of a legal marriage prevented the transferee from being the spouse of the transferor on his death. See, however, 15.8–15.12 above. 15.20 Another advantage of a surviving spouse trust, which might appeal to some testators, is that a gift in trust to the surviving spouse, and then to the testator’s children, might avoid a risk of the surviving spouse remarrying and leaving his or her estate to the new spouse or the new spouse’s family instead of the original testator’s family. This may become more of a factor as second and third marriages become more common. While the asset is in trust for the surviving spouse, the remaindermen have an excluded asset which can be transferred free of IHT. 15.21 An alternative escape route, if circumstances have changed or not been anticipated in the will, is a written variation under IHTA  1984 s  142 which contains a statement that it is intended to apply for IHT purposes. Such a variation may be made effective for IHT purposes, and a similar but separate election may be made for CGT purposes under TCGA 1992 s 62(6), which contains the appropriate statement under TCGA 1992 s 62(7) that it is intended to apply for CGT purposes. For income tax purposes, however, a deed of variation does not make the deceased the deemed settlor, so that the original legatees under the will become the donors to the new trust or in favour of the new beneficiaries, which may for example be caught under the settlement for minor children provisions in ITTOIA 2005 ss 629–632. 15.22 It is important that the will specifies who is to bear the tax on particular legacies and to avoid, where possible, leaving the residuary estate partly to an exempt beneficiary, such as a charity or surviving spouse, and partly to chargeable beneficiaries such as children. Depending on the precise wording used, the chargeable gifts may have to be grossed up following Re Benham’s Will Trust [1995] STC 210 or, which is usually more beneficial in IHT terms, the gross estate is divided and the chargeable beneficiaries bear the IHT on their share following Re Ratcliffe deceased, Holmes v McCullen [1999] STC 262. 15.23 Where land is held as tenants in common and it is desired to deal with each interest separately, it is normally a very simple matter to sever the joint tenancy, and each resulting tenant in common would have an interest in land that would form part of his or her estate. Each co-owner’s share would normally qualify for a discount compared with the pro rata proportion of the value of the property as a whole, which in cases of dispute would be subject to valuation by the First-tier Tribunal (IRC v Arkwright [2004] STC 1323). 598

Wills, Trusts and Statutory Trusts 15.27

ADMINISTRATION PERIOD 15.24 The personal representatives of the deceased are responsible for the payment of any tax chargeable on the deceased, to the extent of assets of the deceased out of which they may recover any payments made by them (TMA  1970 s  74). In order to enable the tax affairs of the deceased to be settled as quickly as possible, there is a fast-track procedure. The personal representatives may request HMRC to issue a tax return before the end of the year to which it relates, agree the liabilities quickly, and obtain from HMRC early written confirmation that they do not intend to enquire into the return, if that be the case (Inland Revenue Press Release 4  April 1996, Working Together, Issue 2 page 6). 15.25 During the administration period, the income of the estate is taxed on the personal representatives in their representative capacity, not the beneficiaries who will ultimately inherit. Income other than that received under deduction of tax is, in the first place, assessable on the personal representatives at the basic tax rate. The personal representatives are not entitled to personal reliefs in respect of the estate income, but otherwise the tax is calculated in the normal way after relief for losses etc. The assessment for any tax due would be made in the name of the personal representatives under FA 1989 s 151. As well as being liable to income tax on the income of the estate since the deceased’s death, and for any unpaid tax of the deceased, the trustees are liable for CGT in respect of chargeable gains accruing on the disposals of assets other than to legatees, who are deemed to have acquired the asset at the value at death under TCGA 1992 s 62(4). Any assessment may be made in the name of one or more of the relevant personal representatives acting during the year of assessment in which the chargeable gain accrues and any subsequent personal representatives who take over from them (TCGA 1992 s 65(1), (4)). 15.26 Although personal representatives are only taxed at the basic rate on income, capital gains were charged at the rate applicable to trusts as if the estate were a discretionary trust, under ITA 2007 ss 479–483, in view of TCGA 1992 s 4(1AA)(b), which meant that the effective rate was 34% for gains made up to 5 April 2004 and 40% up to 5 April 2008. From 6 April 2008, the general rate of capital gains tax at 18% applies under TCGA 1992 s 4, which was increased to 28% from 23 June 2010 (F(No 2)A 2010 s 2 and Sch 1). 15.27 The normal self-assessment rules apply to personal representatives as persons chargeable to income tax and CGT within TMA 1970 ss 7 and 8. The relevant form for estate income is SA  900 which would normally be issued by the district concerned. Personal representatives are in receipt of money or value, profits or gains belonging to another within TMA 1970 s 13 and may be required to submit a return under this section. CTA 2009 s 965 enables an Inspector to require a personal representative to furnish him, within a period of not less than 28 days, with such particulars as he considers necessary for 599

15.28  Wills, Trusts and Statutory Trusts determining the income tax liability arising from estates in the course of administration. Personal representatives are dealt with by the HMRC  Trusts Districts, although small estates where no trusts are involved may be dealt with in the district which dealt with the deceased’s tax affairs (see Tax Bulletin Issue 52 p 842). 15.28 Where beneficiaries have an absolute or limited interest in residue or overseas income, as a result of the trustees exercising a discretion, they are entitled to a written statement setting out the amounts paid or treated as paid as income for any year of assessment, from the personal representatives. The statement must also set out the amount of tax at the applicable rate which the income is deemed to have borne, distinguishing between non-savings income, non-savings income taxed at non-repayable basic rate, savings income and dividend income, dividend income taxed at non-payable dividend rate and foreign estate income. The net income and tax paid or credited is shown. It is normally given on Form R185 Estate Income under the authority of CTA 2009 s 967. 15.29 Form R185 Estate Income distinguishes between different rates of tax for underlying sources. Amounts paid are treated as net income after deduction of tax at the applicable rate and as having borne tax at that rate. The applicable rate is the basic or dividend rate depending on the nature of the underlying income. Payments are assumed to have been made first out of income bearing tax at the basic rate before income bearing tax at the dividend rate. The beneficiary will have a potential higher tax rate liability if his income exceeds the higher rate threshold. If tax has been over-deducted, the beneficiary is entitled to claim a refund of the tax deemed to have been deducted by the personal representatives unless the income is treated as having borne tax without actually having done so, such as stock dividends. ITTOIA  2005 ss  648–682 distinguish between persons who have a limited interest and those who have an absolute interest in residue. The residuary beneficiaries are ultimately liable to tax, although the basic rate liability has already been met by the personal representatives. A limited interest in residue is one where the legatee would, on completion of the administration, be entitled to receive all or part of the income but does not have an interest in capital, ie a life interest in residue (ITTOIA 2005 s 650(2)). An absolute interest is one where the legatee is entitled to both income and capital (ITTOIA 2005 s 650(1)). Legatees have the normal obligations to selfassess their income if it is not otherwise fully taxed.

STAMP DUTY LAND TAX 15.30 The occasions when nil rate band discretionary trusts and deeds of variation can give rise to a stamp duty land tax (SDLT) liability were explored in the (then) Inland Revenue’s Practitioners Newsletter Issue 4, published on 7 December 2004, which stated as follows. 600

Wills, Trusts and Statutory Trusts 15.30 ‘1.

We have received a number of enquiries about the interaction between SDLT and “nil-rate band discretionary trusts” (“NRB Trusts”). This note should enable taxpayers and their advisers to decide on the SDLT consequences of transactions with NRB  Trusts. This note does not cover any taxes other than SDLT. Neither does it cover the powers or fiduciary responsibilities of trustees of NRB Trusts, or of personal representatives, under general law. Trustees and personal representatives may wish to take independent legal advice on those aspects.

2.

An NRB Trust is commonly established under the Will of a deceased person. The typical form is a pecuniary legacy, not exceeding the nil-rate band for inheritance tax, to be held by the trustees of the NRB Trust (“the NRB trustees”) on discretionary trusts for a specified class of beneficiaries. The residue of the estate, often including the matrimonial home, commonly passes to the surviving spouse, although it may pass to residuary trustees.

3.

Where the personal representatives discharge the pecuniary legacy by payment of the specified sum to the trustees no SDLT issue arises. However in many cases the personal representatives satisfy the legacy otherwise than by payment of the specified sum. It is in those cases that an SDLT liability may arise on the transfer of the matrimonial home or other land to the surviving spouse or residuary trustees.

4.

The transfer of an interest in land, whether to a residuary beneficiary or to any other person, and whether in satisfaction of an entitlement under a Will or not, is a land transaction for SDLT purposes. The question is whether the transferee gives any chargeable consideration for the transfer. Very often a beneficiary gives no chargeable consideration for the transfer of land under a Will. However transactions in connection with NRB  Trusts may result in the beneficiary giving chargeable consideration.

5.

The commonest examples of such transactions, and their SDLT consequences are as follows: •

The NRB trustees accept the surviving spouse’s promise to pay in satisfaction of the pecuniary legacy and in consideration of that promise land is transferred to the surviving spouse. The promise to pay is chargeable consideration for SDLT purposes.

•

The NRB trustees accept the personal representatives’ promise to pay in satisfaction of the pecuniary legacy and land is transferred to the surviving spouse in consideration of the spouse accepting liability for the promise. The acceptance of liability for the promise is chargeable consideration for SDLT purposes. The amount of chargeable consideration is the amount promised (not exceeding the market value of the land transferred). 601

15.31  Wills, Trusts and Statutory Trusts

6.

•

Land is transferred to the surviving spouse and the spouse charges the property with payment of the amount of the pecuniary legacy. The NRB trustees accept this charge in satisfaction of the pecuniary legacy. The charge is money’s worth and so is chargeable consideration for SDLT purposes.

•

The personal representatives charge land with the payment of the pecuniary legacy. The personal representatives and NRB trustees also agree that the trustees have no right to enforce payment of the amount of the legacy personally against the owner of the land for the time being. The NRB trustees accept this charge in satisfaction of the legacy. The property is transferred to the surviving spouse subject to the charge. There is no chargeable consideration for SDLT purposes provided that there is no change in the rights or liabilities of any person in relation to the debt secured by the charge.

We have also been asked about the consequences for SDLT purposes of a Deed of Variation made by beneficiaries after the death of the deceased person. A Deed of Variation may effect a land transaction if it alters the beneficial interests in land, for example by settling land in trusts. However, placing a charge on land is not in itself a land transaction. In addition FA  2003 Sch  3 para  4 provides that under certain conditions a land transaction effected by a Deed of Variation is exempt from charge.’

This guidance does not appear to have been updated, probably because from 9 October 2007 the nil rate band is transferable to the surviving spouse which usually makes a nil rate band discretionary trust unnecessary.

TAXATION OF BENEFICIARIES 15.31 The rules relating to limited and absolute interests in residue in respect of estates where the administration was completed before 9 April 1995 were dealt with on a different and rather complex basis. The rules were simplified on the introduction of self-assessment, and income from deceased’s estates is taxable on legatees on a receipts basis. This means that personal representatives have to be careful on the timing of distributions to avoid accumulating income for a period and making large distributions which could bring legatees into the higher rate band. 15.32 The assessable income of a legatee is the gross equivalent of actual payments made as income distributions, grossed up at the appropriate rate for the type of income. Distributions are allocated among income taxed at the basic rate and income taxed at the dividend rate, in that order, under ITTOIA 2005 ss 663, 670 and 679. When the administration ends, any further 602

Wills, Trusts and Statutory Trusts 15.34 amounts payable to a beneficiary are taxed as income in the year of assessment in which the administration period ceases. Where a beneficiary’s interest ceases, for example on death before the end of the administration period, any final payment is deemed to be paid in the last year of assessment in which the beneficiary’s interest existed, ie the year of his death (ITTOIA 2005 s 654). 15.33 Where a beneficiary has an absolute interest, any payments to him are deemed to be income in the year of assessment in which it is actually paid and grossed up at the applicable rate, under ITTOIA 2005 s 656. Any payments in excess of the cumulative income to which the beneficiary would be entitled on an arising basis is excluded as a capital payment. The cumulative income to which the beneficiary would become entitled is the aggregate income entitlement, after income tax at the applicable rate for the year in which it arises (ITTOIA 2005 ss 660, 665, Tax Bulletin No 28 April 1997 p 421). Any undistributed income at the time of completion of the administration which is then distributed becomes income for the year of assessment in which the administration is completed (ie the cumulative total of such income, less the total amount paid out during the course of the administration, is taxed as income as if it were paid immediately before the end of the administration period, under ITTOIA 2005 ss 660, 665). If income has not been distributed regularly during the administration period, this could give rise to a bunching effect, to the possible detriment of beneficiaries. 15.34 The residuary income for the year of assessment used to determine the tax liability of a person with an absolute interest in residue is the aggregate income of the estate for the year less any interest, annuity or annual payments charged on residue, and less the management expenses of the personal representatives properly chargeable to income, and after deducting any specific entitlement which another beneficiary may have in the income (ITTOIA  2005 s  666). If, in any year, the expenses exceed the income, the deficit may be carried forward and treated as a deduction in the following year under ITTOIA 2005 s 666(2)(b). It is possible for the net benefits received by the beneficiary to be less than the aggregate residuary income, for example where debts are discovered at a late stage in the administration payable out of residue. The resultant deficiency can be deducted in the year of completion of the administration and carried back to previous years, if necessary, to give relief, under ITTOIA 2005 s 668. The carry-back is given against income in the latest years first. Example Mr Daniels died on 15 December 2013 and bequeathed the residue of his estate to his son, Jack, absolutely. The administration was completed on 19 March 2015. The residuary income of the estate, the tax thereon, and the payments in respect of Jack’s interest were as follows: 603

15.34  Wills, Trusts and Statutory Trusts Income of residue from 15.12.13 Gross

Tax

Net

Payments to Jack

2013/14

£

£

£

£

Interest

2,000

20%

1,600

1,400

Dividends

1,000

10%

900

Net rents

4,000

20%

3,200

Expenses of administration

(500)

(500)

6,500

5,200

— 3,200 4,600

2014/15 Interest

800

20%

640

—

Dividends

1,500

10%

1,350

—

Net rents

5,200

20%

4,160

3,000

Expenses of administration

(600)

(600)

6,900

5,550

3,000

March 2015 Assets transferred to Jack

600,000

The payments during the administration period which were treated as Jack’s income were as follows: Payment

Gross

Tax

Net

£

£

£

2013/14 Interest

1,750

20%

1,400

Other income

4,000

20%

3,200

5,750

4,600

2014/15 Other income

3,750

20%

3,750

3,000 3,000

Apportionment of final distribution of £600,000 Interest

1,050

20%

Dividends (less expenses)

1,278*

10%

1,150

Other income

1,450

20%

1,160

3,778 Capital

840

3,150

596,222 600,000

* (Net dividends (£900 + £1,350) less expenses (£500 + £600) grossed at 100/90

604

Wills, Trusts and Statutory Trusts 15.37

SUCCESSIVE INTERESTS IN RESIDUE 15.35 There may be successive interests in residue arising not on the death of a beneficiary but as a result of assignment or disclaimer of an interest or a time-limited interest coming to an end. Successive interests are deemed to be the single interest of the beneficiary to whom the income is paid, so that each beneficiary is taxed on what he actually receives, under ITTOIA  2005 ss  672–675. This also applies where an absolute interest follows a limited interest. The absolute interest is deemed always to have existed, and the payment to the limited interest beneficiary is treated as if it had been paid to the absolute interest beneficiary in calculating the taxable income element of any additional payment on completion of the administration. Obviously, any further tax liability of the limited interest beneficiary is payable by him under these provisions. A  similar assumption is made where there are successive absolute interests, where the change in beneficiary is ignored for the purposes of calculating the aggregate income entitlement. The first residuary legatee is, therefore, assessed on the grossed-up equivalent of the amount actually paid to him, and any subsequent adjustment on completion of the administration is the income of the subsequent beneficiary, so that each is taxed on the income actually received, under ITTOIA 2005 ss 667–676.

SPECIFIC LEGACIES 15.36 Any income arising from the subject matter of a specific bequest belongs to the beneficiary from the date of death. Where the personal representatives assent to the vesting of the specific property in the beneficiary, the transfer of title reflected in the assent is related back to the date of death. The income from this property is, therefore, treated as forming part of the total income of the beneficiary for the years in which it actually arose, even if received by the personal representatives in the first instance and then assigned to the beneficiary at some later date (IRC v Hawley (1927) 13 TC 327; Duncan v IRC (1932) 17 TC 1).

CIVIL PARTNERSHIPS 15.37 The Civil Partnership Act 2004, in s 71 and Sch 4, amends legislative provisions relating to wills, the administration of estates and family provisions so that civil partners receive the same treatment as married people. The tax consequences of the Civil Partnership Act are contained in FA 2005 s 103 and regulations made thereunder. The purpose of the Civil Partnership Act 2004 is to enable same-sex couples to obtain legal recognition of their relationship by forming a civil partnership. They may do so by registering as civil partners of each other, provided that they are of the same sex, they are not already in a civil partnership or lawfully married, they are not within the prohibited degrees 605

15.37  Wills, Trusts and Statutory Trusts of relationship, and they are both aged 16 or over. It does not apply to a man and woman living together who are not married (there is no such thing as a common law spouse (Holland v IRC [2003] STC (SCD) 43)), nor to same-sex couples living together outside a civil partnership. Tax credits, however, are based on the family unit, which includes a man and woman living together as if they were husband and wife, and this is extended to same-sex couples. The Marriage (Same Sex Couples) Act 2013 allows same sex couples to marry in England and Wales in a religious or civil ceremony in the same manner as heterosexual couples, although religious organisations or individuals are under no compulsion to participate. Such marriages have the same legal effect as a marriage between a man and a woman under the law of England and Wales.

606

Chapter 16

Employee Trusts

EMPLOYEE BENEFIT TRUSTS Inheritance tax 16.1 An employee benefit trust (EBT) is one set up by a company wholly and exclusively for the benefit of employees or former employees of the company, and their spouses and dependants. The term ‘employee benefit trust’ encompasses a variety of trust arrangements for employees, including share ownership trusts or plans, retirement benefit trusts, ‘warehouses’ for shares, as well as the more ‘traditional’ structure. Following the introduction of the disguised remuneration legislation and high-profile litigation against particular EBT loan structures, the popularity of EBTs has diminished significantly in recent years and to many, employee trust arrangements carry connotations of aggressive tax avoidance arrangements. This view is in large part unwarranted, and EBTs remain a useful tool in providing genuine benefits to employees. 16.2 The settlor company should be excluded from any benefit if the inheritance tax advantages described below are to apply. A  trust for the benefit of employees is defined as one which does not permit any of the settled property to be applied otherwise than for the benefit of persons of a class defined by reference to employment in a particular trade or profession or being employed by or holding an office with the body carrying on a trade, profession or undertaking, or persons of a class defined by reference to marriage or relationship to or dependence on persons of a class so defined (IHTA 1984 s 86(1)(a) and (b)). ‘Body’ would seem to exclude a sole trader or English partnership from setting up such a trust (Customs and Excise Comrs v Glassborow [1974] STC 142). Residuary charitable purposes are permitted and quite common (s 86(2)). It must extend to include all or most of the persons employed by, or holding office with, the company or the trust upon which the property is held must be an employee share incentive plan under ITEPA 2003 Sch 2 (IHTA 1984 s 86(3)). To accommodate the FA 2014 provisions regarding employee controlled companies, the settled property may also be ordinary share capital of a trading company (s 86(3)(d), (3A)). An interest in possession in any part of the trust is disregarded if it is less than 5% of the whole (s 86(4)). 607

Employee Trusts Transfers between employee benefit trusts within this definition are allowed (s  86(5)). If the trust does not comply with IHTA  1984 s  86 it could, as a discretionary trust, be subject to a ten-yearly charge and an exit charge under IHTA 1984 ss 64–69. 16.3 In The Advocate General for Scotland v Murray Group Holdings Limited [2015] CSIH 77 the Court of Session held in this case, involving Rangers Football Club, that, viewed realistically, the employees had practical control of the funds placed in the EBT sub-trusts as protector as well as beneficiary and therefore the payment by the employer to the Principal Trust and sub-trusts was a payment at enrolments or earnings, taxable on the employees and subject to PAYE deductions by the employer, overturning the decisions of the FTT and Upper Tribunal. This decision was appealed to the Supreme Court, where it was held that the sums paid to the trustees of EBT constituted earnings and was taxable accordingly (RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45). 16.4 EBTs are normally irrevocable discretionary trusts, but are excluded from the normal IHT ten-yearly and exit charges under IHTA  1984 s  58(1) (b), although there can be a special exit charge in certain circumstances under IHTA  1984 s  72 where, inter alia, property leaves the trust other than by a payment or disposition out of the settled property (s  72(2)(a) and (c)). Payment for this purpose includes a transfer of any asset (IHTA  1984 s  63), but such a transfer may not be a payment for other tax purposes (DTE  Financial Services Ltd v Wilson [2001]  STC  777), and could have corporation tax consequences, although a payment in kind could still be wholly and exclusively expended for the purposes of the paying company’s trade under CTA 2009 ss 53, 54. An exit charge also applies where a payment is made to a ‘settlor’ or person connected with the settlor who has settled more than £1,000 in any one year on the trust, or to an employee of a close company who is a participator owning 5% or more of any class of shares in the company or would be entitled to not less than 5% of the assets on a winding-up, or has bought his interest in the trust (s  72(3)(a)–(c)). There are exemptions for disposals in accordance with approved employee share ownership plans (s  72(4) and (4A)). There is also an exemption from the exit charge where settled property ceases to meet the trading or employeecontrolled requirements in s 86(3). The exit charge is calculated in the same way as for property leaving temporary charitable trusts under IHTA  1984 s 70 (s 72(5)). Various terms are defined in s 72(6). 16.5 It will be seen, therefore, that EBTs can include directors and minority shareholders holding less than 5%, but not substantial shareholders holding 5% or more, if an exit charge is to be avoided. However, accidental death in service cover could be provided through an EBT, which is not a relevant benefit for the purposes of ITEPA  2003 s  393B. If the trust is not wholly and exclusively for the benefit of the trade, the contributions would 608

Employee Trusts be disallowed for corporation tax purposes and could attract an IHT charge as a gift by a close company apportioned to its shareholders under IHTA 1984 s 94. It might be possible to avoid a charge under IHTA 1984 s 94 by having two EBTs. The first trust (EBT1) would exclude participators holding more than 5% of the shares from benefiting, except where the EBT had power to make a payment which is taxable as income within IHTA  1984 s  13(4), so that s 13(2) is complied with. The first trust would also settle a second EBT (EBT2) without a restriction for participators holding more than 5% of the shares, who could therefore benefit as there is no transfer from the company to EBT2 within IHTA 1984 s 94. The trustees should not be participators in view of IHTA 1984 s 99. 16.6 The IHT exemption for the creation of the EBTs contained in IHTA  1984 s  12(1) should apply where the contributions are deductible for income tax or corporation tax purposes in the year in which the contribution is made. There is also an exemption for dispositions by a close company within IHTA 1984 s 86 for the benefit of employees which may apply, although only where all participators and connected persons are excluded from benefiting from the EBT although income benefits are permissible (IHTA 1984 s 13(2)– (5)). The close company IHT provisions in IHTA 1994 s 94 would not require a transfer of value on contributions to the EBT to be apportioned among the participators, as it is a commercial transaction where the contributions are allowable for income tax or corporation tax under IHTA 1984 s 12(1). Property coming out of an existing discretionary trust into an EBT within IHTA 1984 s 86(1) may fall within IHTA 1984 s 75(1) and escape the exit charge under IHTA 1984 s 65, provided that the conditions in s 75(2) are complied with, ie  that the EBT is for the benefit of all or most of the employees and it is not for the benefit of the settlor or persons connected with him, and the same conditions apply as with exemption for transfers by an individual to an employee trust under IHTA 1984 s 28, mutatis mutandis. IHTA 1984 s 13(1) could prevent the EBT qualifying under these provisions where the fund is made for the sole benefit of the employees of a small subsidiary, unless the benefits are limited to income benefits within SP E11 (note that SP E11 is no longer produced in the most recent version of HMRC’s Manuals; however, reference to its continued application is made at IHTM42961). Section 28 of the 1984 Act applies to exempt transfers to an EBT where an individual makes a transfer of shares in a company to the trustees of an EBT which, as a result of the transfer or within a year thereafter, hold more than half of the ordinary shares in the company and have voting control (s 28(1) and (2)). The EBT must exclude, as beneficiaries, participator settlors holding 5% or more of any class of shares or assets on a winding-up (s 28(3)–(7)). This relief has very limited application. 16.7 HMRC’s view of the inheritance tax position was set out in HM Revenue & Customs Brief 18/11, replacing Brief 61/09 (now archived) as follows: 609

Employee Trusts ‘Employee Benefit Trusts: Inheritance Tax and Income Tax issues Introduction Employment Benefit Trusts are discretionary trusts which seek to reward employees by making payments that favour employees or their families. This brief sets out HM  Revenue & Customs’ (HMRC’s) current view on Inheritance Tax issues associated with Employee Benefit Trusts. It supersedes and amplifies Revenue & Customs Brief 61/09. It also includes material on various matters not previously addressed including ongoing Inheritance Tax liabilities of the trust and any sub-trusts it created and the taxation of income arising in offshore Employee Benefit Trusts. This brief is aimed at agents advising on the Inheritance Tax and trust taxation liabilities of Employee Benefit Trusts. Existing cases will be taken forward by HMRC on the basis of the views set out in this brief. All statutory references are to Inheritance Tax Act 1984 unless otherwise stated. Part 1 – Entry charges payable by a Close Company when it makes a contribution to a s86 Employee Benefit Trust 1.1 Employee Benefit Trust This part of the brief assumes that the Employee Benefit Trust qualifies as a s86 Employee Benefit Trust in that it is a trust where the funds are held at the trustees’ discretion to be applied for the benefit of “all or most of the persons employed or holding office with the body concerned” (s86(3)(a)). 1.2 Charge on participators (s94) Where a Close Company (s102(1)) makes a transfer of value (s3) to an Employee Benefit Trust an Inheritance Tax charge arises under s94 unless, broadly, the disposition: •

is not a transfer of value under sections 10, 12 or 13

•

is eligible for relief

1.3 Transfers of value Where there is a transfer of value it is apportioned between the individual participators according to their respective rights and interest in the company immediately before the contribution to the Employee Benefit Trust is made. There is an immediate charge of 20% on the value transferred (the contribution) in excess of the participator’s unused nil rate band. 610

Employee Trusts The liability for the charge to Inheritance Tax that arises under s94 is the company’s or, so far as the tax remains unpaid, the participator’s (s202). Inheritance Tax arising under s94 is due six months after the end of the month in which the contribution is made or at the end of April in the year following a contribution made between 6 April and 30 September inclusive. Interest is charged on any unpaid tax from the due date. 1.3.1 Dispositions not intended to confer gratuitous benefit (s10) A disposition is not a transfer of value when the terms of s10 are met. There is both a subjective test and an objective test; and both tests must be met to satisfy section 10. 1.3.1.1 Subjective test – no intention to confer gratuitous intent The test is not met if there is the slightest possibility of gratuitous intent at the date the contribution is made. 1.3.1.2 Objective test – arm’s length transaction To meet the terms of s10 the transaction must either: •

have been made at arm’s length between persons not connected with each other (as defined in s270)

•

was such as might be expected to be made in a transaction at arm’s length between persons not connected with each other

An Employee Benefit Trust is a discretionary trust and to satisfy the conditions of s86 the trustees’ discretion must remain unfettered. Given that the potential beneficiaries under an Employee Benefit Trust normally include the participators themselves; the employees or former employees; and/or the wives, husbands, civil partners, widows, widowers, surviving civil partners and children and step children under the age of 18 of such employees and former employees; it will normally be difficult to show that the conditions of s10 are met. 1.3.2 Dispositions allowable in computing profits for Corporation Tax (s12) 1.3.2.1 Overview A  disposition by a person is not a transfer of value when the terms of s12 are met: broadly, that the 611

Employee Trusts disposition is allowable for the purposes of calculating that person’s Corporation Tax. The relieving effect cannot be given provisionally while waiting to see whether the contribution will become allowable for Corporation Tax purposes; and is only available to the extent that a deduction is allowable to the company for the tax year in which the contribution is made. A deduction in the Corporation Tax accounts can be permanently disallowed by the following: •

capital expenditure disallowed by s74(1)(f) ICTA 1988/s53 CTA 2009

•

expenditure not wholly and exclusively incurred under s74(1)(a) ICTA 1988/s54 CTA 2009

Also the timing of a deduction can be deferred to a later period by the following: • generally accepted accounting practice (UITF32) which capitalises Employee Benefit Trust contributions by showing them as an asset on the company’s balance sheet until and to the extent that the assets transferred to the intermediary vest unconditionally in identified beneficiaries •

expenditure subject to s43 FA 1989 (the Dextra decision) – see below

•

post 27 November 2002 expenditure subject to Sch  24  FA  2003/s1290(2)(3)  CTA  2009 – see below

If expenditure is not allowable for any of these reasons then s12 does not apply. 1.3.2.2 Impact of MacDonald (HMIT) (2005) UKHL 47 (“Dextra”)

v

Dextra

The Dextra decision applies to contributions made before 27 November 2002. In that case, the trust deed gave the trustee wide discretion to pay money and other benefits to beneficiaries and power to lend them money. The potential beneficiaries of the trust included past, present and future employees and officers of the participating companies in the Dextra group and 612

Employee Trusts their close relatives and dependants. The trustee did not make payments of emoluments out of the funds in the Employee Benefit Trust during the periods concerned. Instead the trustee made loans to various individuals who were beneficiaries under the terms of the Employee Benefit Trust. The point at issue was whether the company’s contributions to the Employee Benefit Trust were “potential emoluments” within the meaning of s43(11) (a) FA 1989, being amounts “held by an intermediary with a view to their becoming relevant emoluments”. The House of Lords held that the contributions by the company to the Employee Benefit Trust were potential emoluments as there was a “realistic possibility” that the trustee would use the trust funds to pay emoluments. This meant that the company’s deductions were restricted. The company could only have a deduction for the amount of emoluments paid by the trustee within nine months of the end of the period of account for which the deduction would otherwise be due. Relief for the amount disallowed would be given in the period of accounting in which emoluments were paid. 1.3.2.3 Restriction of deductions for employee benefit contributions (Sch24 FA 2003) Section 143 and Schedule 24 to the Finance Act 2003 applies to contributions made after 27  November 2002 and prevents a deduction for Corporation Tax purposes until the contribution made for employee benefits is spent by a payment that has been subjected to both PAYE and National Insurance contributions. The position already established in Dextra is therefore effectively formalised by legislation for events on or after 27 November 2002. 1.3.3 Dispositions by Close Companies for benefit of employees (s13) A disposition is not a transfer of value when the terms of s13 are met. However, this exclusion does not apply where (amongst other things): •

the contributions by the Close Company are made to an Employee Benefit Trust that does not satisfy s86 613

Employee Trusts •

the participators (s102(1)) in the company and any person connected with them are not excluded from benefit under the terms of the Employee Benefit Trust and so s13(2) applies

1.4 Relief from Inheritance Tax – business property relief (s104) Usually, sections 10, 12 or 13 will not be met and the contribution by the Close Company will be a transfer of value as a result of a reduction in the value of its estate – the aggregate of the property beneficially owned by the company. Relief from Inheritance Tax may, however, be available where the value transferred is attributable to relevant business property (s105). The company’s estate is capable of being relevant business property if it is “property consisting of a business” (s105(1)(a)). However, the availability of business property relief is conditional on whether the transfer meets all the other requirements in Part V, Chapter 1. This means, in particular that: •

the business is not an excluded one, for example a company the business of which consists wholly or mainly of making or holding investments (s105(3))

•

the value of the relevant business property transferred is not attributable to any excepted assets (s112)

Business property relief will, therefore, not apply on a transfer of value made by a Close Company that is an investment company. Part 2 – Flat rate exit charge (s72) when property leaves a s86 Employee Benefit Trust This part describes charges to Inheritance Tax that can arise in any s86 Employee Benefit Trust; even where the original disposition into the trust was not made by a Close Company or individual. The charge arises where a payment is made from the Employee Benefit Trust into a sub-trust that is not itself a qualifying s86 Employee Benefit Trust (as outlined at 1.1 above). The charge is a flat rate charge and is dependant on the length of time the property was held subject to the terms of the s86 Employee Benefit Trust. Business property relief will not apply to the flat rate exit charge in these circumstances. In addition, where there is a non-commercial loan to a participator then an exit charge may arise under s72(2)(b). Part 3 – Ten year and exit charges in respect of any sub-trusts In general, sub-trusts are not s86 Employee Benefit Trusts and are, therefore, relevant property trusts for Inheritance Tax purposes (s58). (Full details of 614

Employee Trusts “relevant property trusts” can be found in the Inheritance Tax Manual at page IHTM 42001+.) Relevant property trusts pay Inheritance Tax on two key occasions: •

on the ten year anniversary of the commencement of the trust (s64) (and every subsequent ten year anniversary)

•

when property leaves the relevant property trust or when it ceases to be relevant property (s65)

For both of these occasions a calculation is required in order to establish the Inheritance Tax liability but this charge will not exceed 6% of the value of the trust assets concerned. For the purposes of the ten year anniversary charge, the anniversary is calculated from the date on which the property became settled (s81), that is, the date the s86 Employee Benefit Trust commenced. However, property can only be treated as relevant property when it leaves the qualifying Employee Benefit Trust. Where the trustees of a sub-trust decide to bring the trust to an end an exit charge will arise under s65. The basis of valuation for a charge arising under either s64 or s65 will be an open market value (s160) and will include the value of loans and any accrued interest. Part 4 – Payment of ongoing Inheritance Tax liabilities Section 201(1) (Settled Property) outlines the persons liable for Inheritance Tax on chargeable transfers arising in respect of trusts, including proportionate charges (s65) and ten year anniversary charges (s64) as well as the flat rate charge (s72) (property leaving employee trusts). Where the transfer is made during the life of the settlor and the trustees are not resident in the UK then the settlor is liable for the ongoing trust Inheritance Tax liabilities (s201(1)(d)). The settlor of an Employee Benefit Trust will usually be the company, whether or not it is a Close Company. In addition, where a participator has benefited then s201(1)(c) means that they are liable for the ongoing trust Inheritance Tax liabilities. Part 5 – Income Tax assessable under the transfer of asset (ToA) legislation on income arising in offshore Employee Benefit Trusts 5.1 Overview It is common for the trust vehicle used as the Employee Benefit Trust to be situated in an offshore jurisdiction and this will potentially give rise to additional liabilities where income arises within the trust. 615

Employee Trusts The ToA legislation was amended by FA  2006 and the legislation applicable following this amendment can be found at s714 ITA 2007, onwards. It came into effect from 6  April 2007. The pre-FA  2006 legislation is contained in s739  ICTA  1988, onwards. There are two potential charges that arise under the ToA legislation – the socalled “income charge” (s739  ICTA  1988/s720  ITA  2007) and the “benefits charge” (s740  ICTA  1988/s732  ITA  2007). Each of these are considered in turn. 5.1.1 Income charge The income charge provisions apply to prevent the avoidance of a liability to Income Tax by individuals who are ordinarily resident in the UK where the following conditions apply: •

there is a transfer of assets by virtue or in consequence of which, either alone or in conjunction with associated operations, income becomes payable to a person abroad

•

the transferor has the power to enjoy the income

For the income charge provisions to apply the individual on whom the charge arises must be the person who transfers the assets or procures the transfer. If the offshore Employee Benefit Trust is a normal commercial arrangement by a company to reward its employees, the transferor is the employer company; and in such circumstances the income charge is unlikely to be applicable as the transferor and beneficiaries are different people. However, it may be that the employee has transferred a right to receive a bonus into the offshore Employee Benefit Trust and is therefore the transferor. If this is the case the ToA legislation may apply and the employee will be liable to tax on any income arising in the trust. If the employer company is controlled by its shareholder/ directors and the offshore Employee Benefit Trust was formed solely for their benefit, the director/shareholders may have procured the transfer into the offshore Employee Benefit Trust and could be considered transferors for the purposes of the income charge. Whether or not the ToA income charge is then applied will depend on the facts of each case. 5.1.2 Benefit charge Where the company, not the employee is the transferor the benefit charge may apply. The benefit charge matches any income arising within the Employee Benefit Trust with any benefits received by the employee. The test is effectively the same as s739 ICTA 1988/s720 ITA 2007 in that where by virtue or in consequence of a transfer income becomes payable to a person 616

Employee Trusts abroad, s740(1)(b) ICTA 1988/s732(1)(d) ITA 2007 applies the charge to individuals not liable to tax under the income charge. If a person receives a benefit provided out of assets available for the purpose as a consequence of the transfer, and the trustees are in receipt of income, any benefit provided to a beneficiary is potentially chargeable. The amount of the benefit charged to tax is up to the maximum of either the income or benefit. The benefit charge could, therefore, catch any income arising in the offshore Employee Benefit Trust if it is not caught by the income charge and there are actual distributions by the trustees which are not otherwise chargeable to Income Tax. Part 6 – Income Tax in relation to UK source income of offshore Employment Benefit Trusts If an offshore Employment Benefit Trust receives UK source income then, subject to s811 ITA 2007, the income will be chargeable to tax in the UK and the trustees should make a return of this income to HMRC. Section 811 ITA 2007 limits the scope of the liability to Income Tax of a non-UK resident trust provided that none of the trust’s beneficiaries are resident in the UK. As Employee Benefit Trusts are discretionary trusts the trustees will be chargeable to tax at the trust rate under s479 ITA 2007. If the trustees make a discretionary payment out of the trust income to a beneficiary this is treated as untaxed income of the UK resident beneficiary. It does not matter that the trustees have suffered tax on the trust income. The beneficiary returns the income received and can claim relief under Extra Statutory Concession B18. The trustees of the offshore Employee Benefit Trust or sub-trusts may have advanced interest bearing loans to beneficiaries. If the beneficiaries are resident in the UK then depending on the particular circumstances of each beneficiary the interest will be UK source income in the hands of the trustees and should be reported as such. It is also likely that in such circumstances tax should be deducted at source by the beneficiary paying the interest under s874 ITA 2007. Where it is contended that the interest is not UK source income, the circumstances surrounding the payment of interest will be closely examined by HMRC. If the beneficiary does not pay the interest, but the interest is rolled up by the trustees, no immediate tax charge will arise; however, if the interest is subsequently paid or capitalised it is likely that an Income Tax charge will accrue on payment or capitalisation. Part 7 – Payment of ongoing trust Income Tax liabilities To the extent that income continues to arise within an offshore Employee Benefit Trust and is caught by the transfer of assets legislation the income charge and benefits charge will continue to apply. Likewise if the trustees 617

Employee Trusts continue to receive UK source income they will have an ongoing liability to Income Tax and should continue to complete Trust Returns. Part 8 – Contact details and legal references 8.1 Contact details If you wish to notify the Trusts and Estates business within HMRC of the existence of an Employee Benefit Trust; or, if you wish to discuss settlement of any Inheritance Tax and non-resident trust liabilities that have arisen in respect of an Employee Benefit Trust, then please contact HMRC  Trusts & Estates via this link ebtiht. [email protected]. Further information can be obtained by contacting the Helpline on Tel 0845 30 20 900. 8.2 Legal references Corporation Tax For accounting periods ending on or after 1 April 2009: •

references to Schedule 24 Finance Act 2003 should be taken to be references to Sections 1290 to 1297 Corporation Tax Act 2009

•

references to s74(1)(a) ICTA  1988 should be taken to be references to s54 Corporation Tax Act 2009

•

references to s74(1)(f) ICTA  1988 should be taken to be references to s53 Corporation Tax Act 2009

•

Income Tax

For tax years 2005–06 onwards: •

references to Schedule  24 Finance Act 2003 should be taken to be references to Section 38 to 44 Income Tax (Trading and Other Income) Act 2005

•

references to s74(1)(a) ICTA  1988 should be taken to be references to s34 Income Tax (Trading and Other Income) Act 2005

•

references to s74(1)(f) ICTA  1988 should be taken to be references to s33 Income Tax (Trading and Other Income) Act 2005

•

reference to s739 ICTA 1988 should be taken to be references to s720 ITA 2007

•

reference to s740 ICTA 1988 should be taken to be references to s731 ITA 20

Issued 4 April 2011’ 618

Employee Trusts And in HMRC Spotlight 5 published 5 August 2010: ‘PAYE and National Insurance contributions, Corporation Tax and Inheritance Tax: using trusts and similar entities to reward employees Customers, their advisers and promoters should be aware that HM Revenue and Customs (HMRC) consider this tax avoidance scheme to be ineffective. This means that HMRC will investigate tax returns where this scheme has been used and seek full settlement of the tax due, plus interest and penalties where appropriate. You should also be aware that some ineffective schemes may give rise to unexpected tax consequences. HMRC are aware that companies have been seeking to reward employees without operating PAYE (Pay As You Earn)/National Insurance contributions (NICs). This is done by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated. They also defer PAYE and NICs or avoid them altogether. HMRC believe that at the time the funds are allocated to the employee or their beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer. HMRC believe that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as: •

the receipt of a loan

•

a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company

Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings from the trust that may trigger a deduction to the company would not qualify for relief. Participants affected by this may need to self assess a liability to Inheritance Tax. There is also further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts. HMRC are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.’ 16.8 HMRC has delivered on both of elements of this final statement. The ‘legislative options’ referred to above included the enactment of the ‘disguised remuneration’ in ITEPA  2003 Pt  7A ss  554A–554Z21 in respect of ‘relevant steps’ taken on or after 6  April 2011 (see below). In addition, HMRC has pursued a number of cases before the courts, with varying degrees 619

Employee Trusts of success. In Aberdeen Asset Management v HMRC  [2010]  UKFTT  524, HMRC succeeded in its contention that an EBT arrangement was, on a realistic viewing of the facts, ‘a mechanism to pay cash bonuses’ to employees, and consequently income tax and national insurance contributions were due on cash comprised in underlying trusts. Following the decision in RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017]  UKSC  45, HMRC has enacted further legislation in F(No  2)A  2017 levying an income tax charge on the recipients of loans from EBTs which remained outstanding at 5 April 2019.

EBTs in action Restriction of deductions for employee benefit contributions 16.9 CTA 2009 ss 1290–1297 restrict the deductibility of contributions to an employee benefit trust. An employee benefit contribution is a payment by an employer to a third party to use to provide benefits under an employee benefit scheme, in particular a contribution to an employee benefit trust (EBT). Such a contribution, which would normally be allowed as a deduction under UK GAAP, is deferred and allowed only to the extent that a qualifying benefit or expense is made in the accounting period or within nine months from the end of it, and any amount so disallowed is deductible in a subsequent period in which a qualifying benefit is provided (CTA 2009 ss 1290 and 1291). 16.10 Prior to the enactment of CTA 2009 ss 1290–1297 and its predecessor, FA 2003 s 143 and Sch 24, the (then) Inland Revenue had argued that FA 1989 ss  42(11) and 43 could be interpreted to require payments to be made to employees to justify a deduction in the company making the contribution to the EBT, which was rejected by the Special Commissioners in Dextra Accessories Ltd v Macdonald [2002] STC (SCD) 413 and in the High Court, Macdonald v Dextra Accessories Ltd [2003]  EWHC  872 (Ch), [2003]  STC  749, although upheld in the Court of Appeal [2004] STC 339 and House of Lords [2005] STC 1111. Sempra Metals Ltd v RCC [2008] STC (SCD) 1062 was a Special Commissioners’ decision concerning an employee benefit trust and a family benefit trust (for the benefit of members of an employee’s family, excluding the employee). The Commissioners held: (1) that the payments made by the appellant were wholly and exclusively expended for the purposes of the appellant’s trade; and (2)

that the profits of the trade of the appellant were computed in accordance with generally accepted accountancy practice; but

(3) that the payments made by the appellant to the employee benefit trust were not deductible for the purposes of corporation tax having regard to the provisions of s 43 of the Finance Act 1989; and 620

Employee Trusts (4) that the payments made by the appellant to the family benefit trust were not deductible for the purposes of corporation tax having regard to s 143 of, and Sch 24 to, the Finance Act 2003; (5) that the payments made by the appellant to both trusts did not constitute the payment of emoluments or earnings to its employees and so did not give rise to an obligation to deduct income tax and pay it to the Revenue; and (6) that the payments made by the appellant to both trusts did not constitute earnings paid for the benefit of earners and so did not give rise to a liability on the appellant to pay national insurance contributions. Both the company and HMRC appealed the decision, but a compromise was agreed and the case was settled out of court. 16.11 A qualifying benefit is a payment of money (excluding a loan) or a transfer of ownership of an asset on which an income tax charge arises, and for which the employer has a liability to pay employer’s national insurance contributions (NICs). It also applies where the employee would have been charged to tax and the employer liable to NICs if the duties had been performed in the UK, or if made in connection with the termination of the recipient’s employment (CTA 2009 s 1292). Qualifying expenses may be paid out of the contributions, which include costs of a third party such as the EBT trustees in running the employee benefit scheme, other than capital expenditure (CTA 2009 s  1296). Qualifying benefits are treated as provided to employees up to the amount of the contributions to the EBT less benefits and expenses previously paid, ie ignoring any income earned by the EBT or other third party (CTA 2009 s 1294). Where an asset is transferred to an employee which has fallen in value since being acquired by the third party, the deduction is limited to the value at the time of the transfer which would be taxable on the employee, or would be taxable if he worked in the UK. Where a self-assessment tax return is filed by the company prior to the end of the nine-month period, only those qualifying benefits and expenses actually paid out may be deducted in the computation, although this may be adjusted if further amounts are paid out after filing but before the end of the period by making an amended self-assessment tax return (CTA 2009 ss 1293 and 1295). For contributions paid on or after 1 April 2017, a deduction is only allowed where the PAYE and NIC liability associated with the emoluments is paid within 12 months of the end of the period of account for which the deduction is allowed (CTA 2009 s 1290(2AA)). Where remuneration is unpaid within nine months of the accounting period end, the deduction is allowed in the period in which it is paid along with the associated PAYE and NIC liability. 16.12 CTA  2009 ss  1290–1297 does not apply to payments made by employers for goods or services, retirement benefits, accident benefits and 621

Employee Trusts share-related benefits for which relief is given elsewhere in the Taxes Acts (CTA 2009 s 1290).

Commencement and transitory provisions 16.13 CTA 2009 ss 1290–1297 (which replaced FA 2003 Sch 24) applies to deductions which would otherwise have been allowed for a period ending on or after 27 November 2002, when the restrictions were announced, in respect of employee benefit contributions made on or after that date. There is no antiforestalling provision for accounting periods shortened in order to end prior to 27  November 2002. References are made to the predecessor sections of ITEPA 2003 for periods prior to 6 April 2003, and the Schedule does not apply to employee share acquisitions within FA 2003 Sch 23 for periods beginning before 1 January 2003, in view of the House of Lords decision in Macdonald v Dextra Accessories Ltd [2005]  STC  1111. For the rules applying prior to 1 January 2003, reference should be made to earlier editions of this work. 16.14 Interest-free loans can still be made for personal reasons, such as the purchase of a property. The benefit-in-kind charge on loan interest under ITEPA 2003 s 173, as for a car loan, would apply, but tax on the benefit of the interest may be less than the full commercial mortgage interest. Loans to directors and persons connected with them may be prohibited or require the approval of members under CA 2006 ss 197–214, although it is usually possible to avoid an arrangement under s 330(7) of the Act. Such a loan may be preferable to additional remuneration or a dividend loan without an immediate corporation tax deduction for the contribution to the EBT. 16.15 In spite of the deferral of tax relief for contributions under CTA 2009 ss 1290–1297, an EBT may be funded to hold shares in the employing company, perhaps in conjunction with a share option scheme, so that an internal market for the shares is created, provided it is for the benefit of employee shareholders generally (Heather v PE Consulting Group Ltd (1973) 48 TC 293) and not for the benefit only of controlling shareholders (Mawsley Machinery Ltd v Robinson [1998]  STC (SCD) 236). The company may grant to employees options under the Enterprise Management Incentive (EMI) Scheme in ITEPA  2003 Sch  5, under which the effective rate of capital gains tax on the subsequent sale of shares following exercise of the option is 10% following changes to TCGA 1992 s 1961 by FA 2013 s 64 and Sch 24 with effect for disposals of EMI shares on or after 6 April 2013. The EBT could provide the liquidity to enable the shares to be sold. Alternatively, and subject to the application of the disguised remuneration rules (see 16.26 below), employees could be lent money (as for the purchase of a car or house, to allow them to buy shares), in which case the benefit in kind on the interest-free loan could be reduced to zero because the interest would be allowable under ITA 2007 s 392 or s 396, provided that individual has worked for the greater part of his time in the actual 622

Employee Trusts management or conduct of the company or of an associated company of the company (ITA 2007 s 385), and provided that the anti-avoidance provisions are not breached and the company is close, or where the individual has a material interest of 5% of the ordinary share capital (ITA 2007 ss 393–395). 16.16 The actual ownership of the shares enables the employee to claim entrepreneurs’ relief after one year in the case of a trading company, and he can then sell the shares to the EBT, which might still be attractive even without a current deduction for the company’s contributions to the EBT. 16.17 EBTs can also acquire holiday homes for the use of employees, who would be subject to a benefit-in-kind charge on the value of the accommodation they occupied, although the company would not be able to claim a deduction for the contributions to the EBT unless the asset was transferred to the employee, or was otherwise taxable as income. 16.18 An EBT is sometimes used to acquire investment property in the UK or abroad which is let commercially. The trust can borrow to acquire such a property and will be taxable as property income or foreign income under ITTOIA 2005 Part 3 or 8 on the net rents. EBTs can be set up either in the UK or abroad; if a foreign EBT is used, it would normally register under the nonresident landlord scheme to self-assess income tax on the rents. From 6 April 2015, an offshore EBT holding UK residential property will fall within the non-resident CGT regime and profits arising on a disposal will be subject to capital gains tax at 28%, although the pre-5 April 2015 element of the gain will remain uncharged. For 2019/20 and later years, an offshore EBT will be liable to capital gains tax on both residential and non-residential property located in the UK. Rebasing will apply to property held at 5 April 2019 which was not previously within scope, ie commercial property (TCGA 1992 Sch 1A). Such investments are sometimes structured through an underlying non-UK resident company, but the effect of the anti-avoidance provisions in TCGA 1992 s 13 – and, in particular, where an EBT is involved (s 13(10)) – must be considered. These apportion a capital gain made by the company to non-resident trustees and therefore, potentially, to beneficiaries in receipt of non-taxable benefits under TCGA  1992 s  87, if applicable. From 6  April 2019, property-rich companies also fall within the scope of UK capital gains tax. It is not therefore possible for trustees to avoid a charge under TCGA 1992 Sch 1A by making a disposal of the underlying property holding company. 16.19 An EBT, whether resident in the UK or not, should not be a settlement as defined by ITTOIA 2005 s 620(1), because it is a commercial arrangement made by the company with no element of bounty (IRC v Plummer [1979]  STC  793; IRC  v Levy [1982]  STC  442), which means that the antiavoidance settlement provisions in ITTOIA  2005 Part 5 Chapter 5 do not apply and the income is not deemed to be that of the employing company under ITTOIA  2005 ss  622–627. In the anti-avoidance provisions for CGT 623

Employee Trusts in TCGA 1992 s 86, there is a requirement that the settlement is a qualifying settlement, under s 86(1)(a), which excludes property provided to a settlement by way of a transaction entered into at arm’s length (TCGA  1992 Sch  5 para 9(3)(a)). For the attribution of gains to beneficiaries under TCGA 1992 s 87, the definition of a settlement is the income tax definition in ITTOIA 2005 s  620(1) by reason of TCGA  1992 s  97(7). Similarly, the offshore trusts anti-avoidance provisions in ITA  2007 ss  714–751 are subject to ITA  2007 ss  736–742, which exempt bona fide commercial transactions not designed for the purpose of avoiding liability to taxation. The anti-avoidance provisions in ITA  2007 ss  731–735 mean that distributions and benefits provided by an offshore EBT could be taxed on the value of the benefit, if they are not already subject to income tax, as would normally be the case (Billingham v Cooper [2001]  STC  1177). However, the loss of corporation tax relief for contributions, or its postponement, possibly for a long period, considerably reduces the attractiveness of EBTs, and consideration might be given to buying into established trusts, which would not be an employee benefit contribution within CTA 2009 s 1291, provided that no contributions were made to the EBT following its purchase.

Taxation of employees 16.20 If a distribution is made to an employee from an EBT, it is likely that the trust would be an intermediary under ITEPA 2003 s 687. Most EBT trust deeds will allow trustees to pay taxes, whether enforceable or not; so, on making a distribution to an employee, the trustees would withhold income tax and national insurance under PAYE as appropriate and may pay it to HMRC under a PAYE scheme, thereby taking on the liability under ITEPA  2003 s 687(2). Alternatively, it may be more convenient for the trustees to reimburse the company, which in turn will deduct tax on payment to the employee under its usual PAYE scheme. The company is, in any event, liable to the tax and national insurance under ITEPA  2003 s  687(1) and the employee to tax as employment income, which would enable the contributions to be claimed under FA 2003 Sch 24 (Brumby v Milner; Day v Quick [1976] STC 534). Where the trustees have suffered UK tax on investment income which is distributed and taxed on the recipient as employment income, the trustee may recover part of the trust income tax paid and reduce the tax pool under ITA 2007 ss 493–498, by claiming relief under ITA 2007 s 496B (ESC A68 prior to enactment by SI 2010/157 for 2010/11 and later years). 16.21 It is not uncommon for the trustees of an EBT to transfer assets to a sub-trust for a particular employee and his family, including persons other than those in his immediate family or household, ie spouse, sons and daughters and their spouses, parents, servants, dependants and guests. This could include, say, grandchildren which would take the beneficiaries outside ITEPA  2003 s  721(5) and prevent the transfer to the sub-trust being treated as a benefit 624

Employee Trusts to the employee under ITEPA  2003 s  71(2). Sub-trusts may also be created for a group of employees, say those employees employed in a particular period, which may have accounting implications or to acquire an asset such as a holiday villa for a particular group of employees. The appointment to sub-trusts would normally be revocable and the assets would be held at the trustees’ discretion. This type of arrangement was approved in Macdonald v Dextra Accessories Ltd [2003] EWHC 872 (Ch), [2003] STC 749, but relief for contributions was subsequently denied and the disguised remunerations provisions of ITEPA 2003 Pt 7A have further restricted these arrangements. 16.22 It is important to ensure that the contribution by the employer to the EBT is not itself a benefit in kind as a non-approved pension arrangement taxable under ITEPA 2003 s 393(1). It is therefore normal for such trusts to exclude specifically the provision of relevant benefits as defined by ITEPA 2003 s  393B, ie  pensions, lump sums, gratuities given on retirement or death or in anticipation thereof, other than benefits afforded solely by reason of the disablement by accident of an employee or of his death by accident. Normal EBT distributions to retiring employees should be outside ITEPA 2003 s 393.

Deductibility of contributions 16.23 The key to an employment benefit trust is to make sure that it is genuinely set up and used for the benefit of employees, as it is only on this basis that the trust could obtain a tax deduction for contributions, on the basis that the expenditure is incurred wholly and exclusively for the purposes of the trade under CTA 2009 ss 54 and 1290–1297. A deduction is obtained in the accounting period in which the employee receives benefits on which he is subject to income tax and national insurance contributions. A leading case on EBTs is Heather v PE Consulting Group Ltd (1972) 48 TC 293. PE Consulting Group Ltd was a company of consulting engineers, and the senior professional staff were concerned about the possibility of control of the company passing to outside shareholders with no professional qualifications. An EBT was set up to assist the staff in acquiring shares in the company, which undertook to pay 10% of its annual profits (subject to a minimum of £5,000) to the trust. The company’s articles were changed to ensure that shares available for transfer had to be offered to trustees in the first instance. In this case, the group pension scheme already owned 41% of the shares and it was intended that the EBT would acquire up to 40% of the shares, which would ultimately be distributed to the employees. 16.24 Although the court confirmed that the distinction between capital and revenue expenditure for tax purposes was a matter of law, accountancy evidence was given and accepted to the effect that the cost of securing and retaining the services of employees is normal revenue expenditure. The commitment to transfer funds to the EBT was open ended and not limited to a specific sum, and 625

Employee Trusts support was found from IRC v Carron Co (1968) 45 TC 18 and Anglo-Persian Oil Co v Dale (1931) 16 TC 253, where the costs of changes to a company’s internal organisation were held to be revenue matters. The (then) Revenue argued that relief for EBT contributions should be deferred until paid to employees, under FA 1989 s 43, a view subsequently upheld by the House of Lords in Macdonald v Dextra Accessories Ltd [2005] STC 1111. However, the law was amended for contributions made on or after 27 November 2002 to ensure such a deferral of relief in FA 2003 Sch 24 (now CTA 2009 ss 1290–1297). 16.25 Heather v PE  Consulting Group Ltd (1972) 48  TC  293 has to be contrasted with Atherton v British Insulated and Helsby Cables Ltd (1925) 10 TC 155, which set up a pension fund for its staff at a time when there was no statutory deduction for such payments, and the House of Lords held that, although the payment was wholly and exclusively for trading purposes, it was a capital payment not a revenue payment and therefore not deductible. The reason was that it brought into existence a pension fund and, in the words of Viscount Cave, ‘that expenditure was made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade’. The fact that there was now a pension fund where there was not one previously was sufficient to bring such a benefit into existence. Because of this decision, an EBT is normally started with a contribution sufficient to cover the trustees’ costs of bringing the trust into existence, which is treated as a capital expense. Further contributions should then be treated as a revenue expense under Heather v PE Consulting Group Ltd (1972) 48 TC 293, and allowed for tax purposes when paid as taxable remuneration (CTA 2009 ss 1290–1297). 16.26 In Jeffs v Ringtons Ltd [1985] STC 809 a company set up an EBT to invest contributions from the company in shares in itself, and distribute assets to the employees at its discretion. It was envisaged that the company would contribute 5% of its profits to the fund and it made a series of payments. The High Court upheld the Commissioners’ decision that the contributions were allowable deductions, as each payment was one of a series and not a once and for all payment or an instalment of a larger amount. Although there was an advantage to the company in setting up the fund, the payment in question had not created or acquired an asset of a capital nature for the enduring benefit of the company. In E Bott Ltd v Price [1987] STC 100 the employees were concerned that the shares were held by two elderly directors and their wives, and the company therefore set up an EBT and made contributions to it which enabled it to acquire 5% of the share capital from the directors. It was held that, on the evidence, the payments had been incurred wholly and exclusively for the purposes of the company’s trade and had not brought an enduring asset into being. 16.27 However, in Rutter v Charles Sharp & Co Ltd [1979] STC 711, the EBT was set up to acquire shares in the company, the dividends of which were to be paid to the employees. However, the shares themselves were to be held for the ultimate benefit of the company and therefore each payment used to 626

Employee Trusts buy the shares brought into being a capital asset and was not allowed as a revenue deduction. In Mawsley Machinery Ltd v Robinson [1998] STC (SCD) 236 the company set up an EBT with the specific purpose of building up a fund to which the controlling director’s shares could be sold on his retirement. The contributions were therefore not laid out wholly and exclusively for the purpose of the company’s trade, in order to provide a smooth succession on the controlling director’s retirement, but so that he could sell his shares without trouble when he retired. 16.28 The case of Scotts Atlantic Management Limited v Revenue and Customs Comrs [2015]  UKUT  66 and related appeals concerned option arrangements designed to transfer value to an EBT without a payment or other transfer of assets. A deduction from taxable profits was claimed in respect of the value transferred. It was contended that the restriction under FA 2003 Sch 24 did not apply; however, the Upper Tribunal denied a deduction on the grounds that the shifting of value was part of a set of pre-planned actions constituting as a whole an employee benefit contribution. Further, the obtaining of a tax advantage was one of the main purposes of the transaction, such that the ‘wholly and exclusively’ requirement of (then) ICTA 1988 s 74 was not met. 16.29 By contrast, the Upper Tribunal in Tower Radio and Total Property Support Services v HMRC  [2015]  UKUT  60 concluded that a scheme to pay bonuses without the deduction of income tax and national insurance contributions was effective. The scheme relied upon the provisions in ITEPA  2003 Part 7 regarding the acquisition of shares (in this case, in subsidiaries) in connection with employment. The Tribunal held that the employees should properly be regarded as having acquired shares (rather than cash) on the grounds that the employees were de facto shareholders in the subsidiaries, and notwithstanding that the scheme had no commercial purpose, the application of ITEPA  2003 Pt  7 was not overridden (applying Mayes v Revenue & Customs Comrs [2011] EWCA Civ 407.

Disguised remuneration (ITEPA 2003 Pt 7A) 16.30 The ‘disguised remuneration’ provisions were inserted by Finance Act 2011 s  26, Sch  2 into ITEPA  2003 Part 7A with effect from 6  April 2011. Transitional provisions apply from 9  December 2010. The provisions were a response to HMRC’s relative lack of success before the courts in imposing income tax and national insurance charges in respect of what it regarded as abusive EBT arrangements. The stated purpose of the legislation is ‘to tackle arrangements involving trusts or other vehicles used to reward employees which seek to avoid or defer the payment of income tax or national insurance contributions … including to provide a tax-advantaged alternative to saving beyond the annual and lifetime allowances available in a registered pension scheme’. 627

Employee Trusts 16.31 The rules provide for a charge to income tax and national insurance contributions where there is an arrangement whereby a third person (include the trustees of an EBT) takes a ‘relevant step’ in respect of the provision of rewards, recognition or loans to a current, former or prospective employee or ‘linked’ person, and it is reasonable to suppose that the relevant step is taken in pursuance of the arrangement or there is a direct or indirect connection between the step and the arrangement (ITEPA  2003 s  554A). The scope of arrangements under ITEPA 2003 s 554A was clarified by FA 2018 s 11 and Sch 11 for relevant steps taken on or after 22 November 2017, so that it is not possible to argue that the disguised remuneration provisions are not applicable where an employment income tax charged has previously been triggered (ITEPA 2003 s 554A(5A)–(5C)). 16.32 From 6 April 2010, a relevant step is taken when a person ‘earmarks’, however informally, a sum of money or an asset with a view to a subsequent relevant step being taken. It does not matter that the details of the later relevant step have not been worked out (eg details of the sum of money or asset which will or may be the subject of the step, or details of how or when or by whom or in whose favour the step will or may be taken) (s 554B(2)). It also does not matter if the later step is conditional upon an event which may not happen, or if the employee (or linked person) has no legal right to have a relevant step taken in relation to any sum or asset which is the subject of the earmarking. A linked person is broadly someone connected with the employee (or former or prospective employee) and certain close companies (ITEPA 2003 s 554Z). 16.33 Where earmarking takes place, the effect is to accelerate the time at which income tax and national insurance deductions must be accounted for to HMRC to the date of earmarking, rather than the date the sum of money or asset are actually provided to the employee (or linked person). Where a charge to tax arises following an earmarking of a sum of money, but the individual does not actually receive the sum (eg because payment was conditional upon an event which did not take place), a claim for repayment of tax may be made within four years of the relevant event (ITEPA 2003 s 554Z12). Whether or not earmarking has taken place is a question of fact. HMRC guidance (EIM45110) gives the following examples: ‘So, if it is not (yet) possible for anyone to pick out A, then there has not (yet) been any earmarking. Example: no particular employee Suppose the following facts. •

B has contributed a sum of money to a discretionary trust.

•

The terms of the trust specify a number of potential beneficiaries.

•

The trustees have not yet taken any action of any kind towards benefiting a particular beneficiary or particular beneficiaries and no 628

Employee Trusts sum or asset has started to be held with a view to a later step in favour of a particular beneficiary or particular beneficiaries. In this case, it will not be possible to pick out A and therefore the trustees will not yet have earmarked any of the sum. Example: no particular employee yet Suppose the following facts. •

B has contributed sums of money and assets to an EBT.

•

B sets up an incentive plan for its salespeople. The salesperson who brings in the most sales revenue during the current accounting period of B will receive a bonus of £100,000.

•

When the incentive plan is set up, the EBT puts £100,000 on shortterm deposit to pay the future bonus.

Has the EBT earmarked £100,000 in favour of a particular employee, namely the salesperson who will bring in the most sales revenue? The answer is No. At the time when the EBT puts £100,000 aside, there is not yet any individual who satisfies the description “the salesperson bringing in the most sales revenue”. So, it is not (yet) possible for anyone to pick out A  and the EBT has not yet taken a relevant step within Section 554B. When it has been established which salesperson has brought in the most sales revenue, it will be possible to pick out this individual. At that point, the EBT will take a relevant step within Section 554B.’ 16.34 A relevant step also takes place where a person pays a sum of money (including by way of loan) or transfers an asset to an employee, a linked person, or another person at the employee’s behest or direction on or after 9 December 2010. It does not matter if the person has no legal right to the sum of money or asset or actually derives no benefit from it (ITEPA 2003 s 554C). A loan made before 9  December 2010 will be outside the disguised remuneration rules provide that the terms of the loan are not subsequently varied, however, such a loan will fall within the scope of the loan charge introduced by F(No 2)A 2017 from 5 April 2019. 16.35 The making available of an asset to an employee without a transfer is a relevant step under ITEPA 2003 s 554D. Informal arrangements are included, and again it is not relevant that the employee has no legal right to benefit from the asset or does not in fact derive such a benefit. 16.36 For relevant steps taken on or after 6  April 2018, specific rules apply to payments from close companies (or companies which would be close if they were UK resident). A  charge to income tax and national 629

Employee Trusts insurance contributions arises where there is an arrangement whereby a close company enters into a ‘relevant transaction’, a third person takes a ‘relevant step’ in respect of the provision of rewards, recognition or loans to a current, former or prospective employee or ‘linked’ person, and it is reasonable to suppose that the relevant step is taken in pursuance of the arrangement or there is a direct or indirect connection between the step and the arrangement (ITEPA 2003 s 554AA inserted by FA 2018 Sch 1). A ‘relevant transaction’ is defined in ITEPA  2003 s  554AB and includes a payment of money, a transfer of assets, the write-off or release of a debt and the grant of a long lease. 16.37 There are numerous exclusions from the charge to tax under ITEPA  2003 Pt  7A. These include exclusions for steps taken under HMRC approved share schemes (s  554E); commercial transactions (s  554F); unapproved share arrangements and phantom shares schemes where the vesting date is ten years or less from the award date (s 554J–554M); certain car ownership schemes (s  554O); certain transactions in connection with employee benefit packages available to a substantial proportion of employees of similar status (s 554G); earmarking deferred remuneration where, amongst other requirements, the vesting date is not more than five years after the award date (s  554H); amounts which are specifically exempt under other employment income provisions (s 554P), a step which gives rise to a liability under specified provisions in the employee-related securities legislation or under other specified charging provisions (s 554N); employee car ownership schemes (s 554O); transfers of an employment-related loan of below £10,000 on or after 6  April 2017 (s  554OA); repayment of certain loans (s  554RA). There are also exemptions for steps taken in relation to pension arrangements, including the receipt of income on earmarked funds and the reinvestment of the proceeds of the sale of assets where an income tax charge has already arisen in relation to the funds represented by the investment as the result of an earlier relevant step (s  554S); steps involving money or assets deriving from contributions made by the employee on or after 6  April 2011 to an unapproved pension scheme (s  554T); money or assets which have arisen from, or are derived from, pre-6  April 2006 employer contributions to an employer-financed retirement benefit scheme where the employee was taxed on the contributions (s  554U); the purchase of an annuity contract in connection with an employee’s rights to receive an annuity where the rights accrued before 6 April 2011 (s 554V); the payment of a lump sum under an employer-financed retirement benefits scheme where the employee’s rights accrued before 6 April 2011 (s 554W); and transfers between certain foreign pension schemes (s 554X). The payment of a ‘relevant liability’ to HMRC in respect of inheritance tax or corporation tax is not a relevant step on or after 6 April 2017. A similar exclusion applied to payments of income tax between 6 April 2017 and 20 July 2017 (s 554XA). The Treasury has the power to exclude other relevant steps. 630

Employee Trusts 16.38 Where a relevant step is taken, the value of the step is brought into account as employment income of the employee in the tax year in which the relevant step is taken, or the year in which the employee’s employment commences if the relevant step is taken before that time. Where the relevant step involves a sum of money, the amount to be treated as employment income is that sum. In other cases, the value of the relevant step is the market value of the asset which is the subject of the step or the cost of the relevant step, if higher. The cost of the relevant step does not apply to options, and is calculated as the expense incurred, apportioned where necessary, by the person at whose cost the relevant step is taken. In the case of employment related securities, value is calculated in accordance with ITEPA 2003 ss 437, 452. Market value is defined by TCGA 1992 ss 272–274 (ITEPA 2003 ss 554Z2, 554Z3). Where the relevant step is the advance of a loan, the value to be charged to tax as employment income is the amount of the loan. Further, the repayment of the loan will not trigger a refund of the tax charged. Where a charge arises under the close company rules in ITEPA 2003 s 554AA for 2018/19 and later years, and an amount would otherwise be treated as a distribution of income, the usual rule giving precedence to the distribution rules applies only where HMRC agrees not to invoke the disguised remuneration rules (ITEPA 2003 s 554Z2A). 16.39 There are provisions to ensure that a double charge to income tax does not arise in relation to the same sum of money or asset. For relevant steps taken on or after 6 April 2017, the earlier charge takes precedence if it has been paid or is not yet due. For relevant steps taken before 6 April 2017, where there was an earlier relevant step relating to the same employment and there is an overlap between the sum or asset which is the subject of the relevant steps, a reduction in the value of the relevant step is made. The reduction is the value of the earlier relevant step, apportioned on a just and reasonable basis where there is a partial overlap (ITEPA 2003 s 554Z5 as amended by F(No 2)A 2017 s 15 Sch 6). The earmarking of a sum in favour of a beneficiary of an EBT followed by a subsequent distribution of those funds to the beneficiary will not therefore give rise to a double charge to income tax. 16.40 If a relevant step gives rise to relevant earnings that have already been taxed, the value of the relevant step is reduced by the value of that income, but not below nil (ITEPA 2003 s 554Z6). The value of a relevant step is also reduced if the employee (or a person linked with him) gives consideration for the value of the relevant step otherwise than as part of a tax avoidance arrangement. The value of the relevant step cannot be reduced below nil (ITEPA 2003 s 554Z8). 16.41 Where there is an overlap, the relevant step is treated as general earnings under ITEPA  2003 ss  16–17 rather than being taxed under the benefits code. Similarly, ITEPA 2003 Pt 7A takes priority where income would otherwise be treated as a dividend. The remittance basis applies where certain conditions are met (ITEPA 2003 ss 554Z9–554Z11). 631

Employee Trusts 16.42 The value of a relevant step is reduced where an employee is not resident in the UK during the tax year in which the relevant step is taken. The value of the step is reduced so far as it is not in respect of duties performed in the UK, apportioned on a just and reasonable basis where required. 16.43 On the death of the employee, if a relevant step is taken after death, the employee’s personal representatives may be liable for tax (ITEPA  2003 s  554Z12). Alternatively, liability may arise on a person linked with the employee, the person taking the relevant step or the employer. 16.44 In RFC  2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45, HMRC successfully argued that loans made to employees represented taxable emoluments. Following the Supreme Court’s decision, HMRC issued Spotlight 41 on 29 September 2017, which stated: ‘HMRC’s view is that this principle applies to a wide range of disguised remuneration tax avoidance schemes, no matter what type of third party is used. This includes: •

EBTs – including variants within these schemes where no loans are made from the EBT but instead the funds remain in, or are invested by, the trust

•

disguised remuneration routed through employer-funded retirement benefit trusts

•

a range of contractor loans schemes

The facts of each case will determine where the earnings point arises based on decided case law. What could happen if you use one of these schemes? HMRC intends to use this decision to take action against many of the disguised remuneration schemes using the full range of our available tools. This will include HMRC considering, in appropriate cases, whether to issue follower notices and, if relevant, associated accelerated payment notices. It will also include accelerating litigation where users choose to continue challenging HMRC on their scheme.’ 16.45 On 7 November 2017, HMRC published guidance offering those who had used EBT arrangements the opportunity to settle outstanding tax liabilities on favourable terms, including time to pay over five or seven years if necessary. Those taking the opportunity to settle with HMRC would avoid the loan charge which came into effect on 5 April 2019. Guidance on the settlement terms offered by HMRC is available on the website at www.gov.uk/guidance/ disguised-remuneration-settling-your-tax-affairs. 632

Employee Trusts 16.46 F(No  2)A  2017 Sch  11 introduces a tax charge for taxpayers who have received loans under what HMRC refers to as ‘disguised remuneration arrangements’. This will include many EBT arrangements where loans have been made to former and current employees, notwithstanding that at the time the loan was put in place, the legislation regarding disguised remuneration may not have been in place. The loan charge rules provide that a person is treated as taking a relevant step for the purposes of the disguised remuneration provisions where any part of a loan made on or after 6  April 1999 remains outstanding at 5  April 2019 (Sch  11 paras 1–3). The taxable amount is the total of all loans (including any form of credit) and quasi-loans made by P, normally the trustees of the EBT, less any repayments. This amount is treated as taxable earnings for 2018/19. Special rules apply where the loan is made in a currency other than sterling (Sch 11 para 6). The loan charge does not apply to an ‘approved fixed term loan’, meaning a loan made before 9  December 2010 with a term of less than ten years approved as such by HMRC. The loan must be on commercial terms and repayments have been made on the loan at intervals not exceeding 53 weeks (Sch 11 paras 20–22). Approval by HMRC must be applied for by 31 December 2018, however, late applications may be accepted where HMRC considers it reasonable having regard to all the circumstances. 16.47 The loan charge may be postponed where an accelerated payment notice or partner payment notice has been issued by HMRC in respect of the loan and settled in full by the taxpayer. Application for postponement was required by 31 December 2018 unless HMRC accept that a later application is reasonable (Sch 11 paras 23, 24). 16.48 A person within the scope of the loan charge is required to provide information to their employer to enable them to account for PAYE on the amount treated as earnings. Where the employer is based overseas or no longer exists, the requirement to operate PAYE does not apply and HMRC will seek payment of all outstanding income tax and NIC liabilities from the employee. 16.49 The imposition of the loan charge has proved highly controversial and various challenges to the legislation have been made (and continue to be made at the time of writing) by MPs as well as tax professionals and pressure groups. A measure of the level of controversy surrounding the loan charge is given by the requirement contained in FA 2019 s 95 for the (then) Chancellor to report to the House of Commons on the loan charge. The Chancellor’s report ‘Section 95 of the Finance Act 2019: report on time limits and the charge on disguised remuneration loans’ was published on 26 March 2019 and concluded that the loan charge legislation is not retrospective as it applies a charge at 5  April 2019 and does not change the tax position of earlier years. Notwithstanding this conclusion, at the time of writing pressure continues to mount both within parliament and the wider media for the loan charge to be reviewed. 633

Employee Trusts

Accounting issues 16.50 A  company’s taxable profits are normally based on the accounting profits, as adjusted for specific tax disallowables such as depreciation or entertaining expenses (Odeon Associated Theatres Ltd v Jones (1971) 48 TC 257; Herbert Smith v Honour [1999] STC 173; Jenners Princes Street Edinburgh Ltd v IRC [1998] STC (SCD) 196; Johnston v Britannia Airways Ltd [1994] STC 763). The accounting profit itself, however, has to be calculated on generally accepted accounting principles (Threlfall v Jones [1993] STC 537) which means compliance with the Companies Acts and financial reporting standards etc from the Accounting Standards Board and latterly its successor, the Financial Reporting Council (FRC). This requirement is given statutory authority by CTA 2009 s 46 or ITTOIA 2005 s 25, which requires the profits of a trade, profession or vocation to be computed subject to any adjustments required or authorised in law, in computing profits for tax purposes. The Companies Act requirement for a company to produce accounts on a true and fair basis arises from CA 2006 s 396. The HMRC view on the calculation of profits for tax purposes is given in its Business Income Manual at BIM31000 et seq. The Companies Acts give statutory recognition to accounting standards (CA 2006 ss 395 and 464). Mary Arden, in her opinion dated 21 April 1993, included as an appendix to the foreword to the then accounting standards, confirms the authority of the standards, including the pronouncements of the Urgent Issues Task Force (UITF) then in issue, and is consistent with the decision in Lloyd Cheyham v Littlejohn [1987] BCLC 303. 16.51 The former standards governing the treatment of employee trusts (UITF  Abstract 38 (‘Accounting for ESOP trusts’), UITF  Abstract 32 (‘Employee benefit trusts and other intermediate payments’) and FRS  5) were superseded by Financial Reporting Standard 102 for accounting periods beginning on or after 1  January 2015. FRS  102 paras 9.33–9.38 broadly replicate the guidance previously contained within UITF Abstract 32. Para 9.33 provides: ‘Although the trustees of an intermediary must act at all times in accordance with the interests of the beneficiaries of the intermediary, most intermediaries (particularly those established as a means of remunerating employees) are specifically designed so as to serve the purposes of the Sponsoring entity, and to ensure that there will be minimal risk of any conflict arising between the duties of the trustees of the intermediary and the interest of the Sponsoring entity, such that there is nothing to encumber implementation of the wishes of the Sponsoring entity in practice. Where this is the case, the Sponsoring entity has de facto control.’ 16.52 Where this is so, the sponsoring company has de facto control, as there will be nothing to encumber implementation of its wishes in practice. The consequence of this accounting treatment is to defer the corporation tax 634

Employee Trusts relief until the EBT assets are distributed to the beneficiaries. It also requires the company to include in its balance sheet assets the EBT assets as a deduction from shareholder funds, not as an asset. 16.53 FRS 102 also follows UITF Abstract 38 in deeming the commercial effect of an employee benefit trust arrangement to be that the sponsoring company is, for all practical purposes, in the same position as if it had purchased the shares held by the EBT directly and that it should account for them as a deduction from shareholder funds. Interestingly, the shares are not deemed to be cancelled, as would happen if there was an actual purchase by the company of its own shares. 16.54 Whilst UITF  32 has been superseded by FRS  102, its history is relevant to an understanding of the current position. UITF  32 was preceded by a discussion document in UITF  Information Sheet 48, which led to substantial changes between the draft abstract and UITF 32. It was apparent that the overriding objective of the Accounting Standards Board in producing UITF 32 was to prevent companies obtaining a current-year deduction for large contributions to an EBT where these were, in substance, designed to defray employee costs for future years. There was no intention to deny deduction for liabilities relating to employee costs properly referable to a company’s currentyear operation or past performance. If, therefore, the company used the EBT to produce a bonus pool for employees for services rendered in the current year, such that this created a constructive obligation under FRS  12, there would be a proper charge to the company’s profit and loss account for the period, which should be deductible for corporation tax in the company’s accounts in the year in which the provision is made, irrespective of when cash payments were actually made to the EBT. 16.55 Deductibility by reference to a constructive obligation within FRS 12 was confirmed by UITF 32, in particular para 5, relating to the accruals basis; para 6, which confirms that the payment date is irrelevant; and para 7, which confirms that UITF  32 only applied where the constructive liability is not provided for under FRS 12. FRS 12 is now also replaced by FRS 102 (para 21) and therefore the distinction is now redundant. Aside from disclosure and recognition of future operating losses, the provisions remain broadly unchanged. Therefore, in order to bring a provision for a liability under FRS 102, it must relate to a past event which has resulted in a present obligation on the part of the company to transfer economic benefits to settle the obligation, and the amount of the obligation can be reliably estimated. It is sufficient that the obligation is a constructive obligation, namely that the company has indicated that it will accept responsibility for it and has created a valid expectation on the part of its employees that it will discharge its responsibilities. 16.56 In order to achieve this, it is necessary to ensure that amounts transferred into the EBT benefit the current workforce for work already done, 635

Employee Trusts not for work to be done in the future or for future employees. This is often done by the directors resolving, when making a contribution to a company’s EBT, that the contribution is in respect of the employees for the current year, and the trustees of the EBT will then allocate this to a specific sub-trust for those employees, who can, of course, be identified. The directors, in order to create the necessary valid expectation, will inform the workforce of their decision to make a contribution to the EBT in recognition of the employees’ services during that period. This should be a provision for a constructive liability within FRS 102 and accordingly constitutes a deductible expense for accounting purposes. It should also qualify as wholly and exclusively incurred for the purpose of the company’s trade for tax purposes and be immediately deductible. The provision for the contribution will be discharged by subsequent payment. A deduction will be deferred if the contribution is linked to access to future economic benefits and the company has control of the contributions. In the absence of these requirements, the contribution would be immediately deductible for accounting and therefore for tax purposes. 16.57 Where funds are distributed by the trustees to a sub-trust for an individual employee and his family, there would normally be a revocable appointment on discretionary trusts so that the employment income charge on the employee is deferred until distributions are made to him or members of his family or household (ITEPA 2003 ss 6, 7, 10, 70 and 721(5)). Clearly, the beneficiaries have to include persons outside this definition, such as grandchildren, siblings, nephews and nieces. The employment income charge now applies to former employees, overruling Bray v Best [1989] STC 159 (ITEPA 2003 ss 17 and 30). 16.58 Where there is a group structure, a parent company will typically set up the EBT for the benefit of its own employees and those of all the other members of the group, and the other group companies pay a management charge which includes payment for the provision of an EBT to their employees. As far as each of the individual subsidiaries is concerned, this management charge is wholly and exclusively for the purposes of the trade. However, so far as the parent is concerned, if the funds remain in the EBT and are not allocated out to sub-trusts, so that the parent company is deemed to have access to future economic benefit, and therefore control under FRS 102, it includes the assets of the trust in its balance sheet. The subsidiaries, however, pay up management charges which are wholly and exclusively incurred for the purpose of the trade, as they have no control over the EBT which the parent company has set up for all the group employees. A  tax deduction may therefore be obtained at subsidiary level, while the asset is still on the parent company balance sheet. The true and fair override in CA 2006 ss 394–403 and CA 1985 Sch 8 para 15 may preclude the inclusion in the parent company balance sheet of assets which actually belong to the EBT. 16.59 In another form of group arrangement, the parent company offers to extend participation in the group’s share option arrangements to employees 636

Employee Trusts of a subsidiary, provided that the subsidiary agrees to meet the costs of any option gains. In such cases, the trustees would be requested to grant options to the subsidiary’s employees under the terms of the parent company’s share option arrangements. The parent company grants a call option to the trustees, allowing them to subscribe for the shares needed to satisfy the exercise of the share options, at a price equal to the market value of the shares at the date of exercise. 16.60 When the employees of the subsidiary exercise their options, they will pay the exercise price to the trustees. The subsidiary pays to the trustees, as agreed, a contribution equal to the difference between the market value and the exercise price of the option shares, to enable the trustees to take up their call option with the parent company, acquire the shares and transfer them to the employees exercising their options. The subsidiary’s contribution to the EBT should be allowable for corporation tax purposes as a trading expense, under CTA 2009 ss 1290–1297. In the parent company accounts, the shares issued to the trustees are credited to share capital and the share premium account but, on consolidation, the EBT contribution is set against the share premium account, under FRS 5, and there is therefore no charge to the consolidated profit and loss account. These arrangements need to be set in place prior to the grant of the options to the subsidiary’s employees, to avoid unlawful financial assistance problems. The subsidiary will be liable to the employer’s national insurance contributions on the market value of the shares at the time of exercise, less the exercise price, unless employer and employees had jointly elected for this liability to be borne by the employees (ITEPA 2003 s 481 and SSCBA 1992 Sch 1).

Offshore EBTs 16.61 Contributions by the company to the EBT are treated as a capital addition to the settled fund and are not, as such, taxable in the hands of the trustees. When these funds are invested, however, the income may be liable to tax and this may depend where the trust is located. A UK resident trust would be liable to income tax and CGT at the usual rate applicable to trusts, which for 2013/14 and later years is 45%. 16.62 However, the purpose of the EBT is to benefit the employees and, if distributions are made to employees in a taxable form, that is subject to tax as employment income in the hands of the employees. To the extent that this represents income on which the trustees have paid tax, there is a double charge. This is partially relieved by ITA 2007 s 496B (enacting former ESC A68 for 2010/11 and later years), which enables the trustees to reclaim tax on income which has been taxed in the hands of the beneficiaries. A double charge to CGT could also arise from a capital profit made by the trustees which is distributed to the employee beneficiaries and taxed as employment income. 637

Employee Trusts 16.63 TCGA 1992 s 239ZA (former ESC D35) exempts the trustees from CGT on the deemed disposal at market value, provided that the employee is taxable on the earnings on that value only in respect of assets transferred in specie. Relief does not apply where the employee is an ‘excluded person’, meaning a participator entitled to 5% or more of any class of shares, or 5% or more of the assets on a winding-up. The exemption under TCGA  1992 s  239ZA does not apply in the common situation where the assets are sold by the trustees and cash distributed to the employees. If an employing close company, as defined by CTA 2010 ss 438–454, transfers a chargeable asset in specie to an EBT and it is not a transfer of value because of IHTA 1984 s 13, or an exempt transfer is made by an individual under IHTA s  28, it will be deemed to be made on a no gain/no loss basis for chargeable gains purposes, where the disposal is a gift or a sale of no more than the CGT base value (TCGA 1992 s 239(1)–(3)). This relief also applies to disposals to an EBT not at arm’s length which is within IHTA 1984 s 86 if participators are excluded (TCGA 1992 s 239(4)–(7)). Where a transfer of assets to an employee trust is made on a no gain/no loss basis under s 239, relief is automatic and does not have to be claimed. Therefore, the relief applies in priority to gifts holdover relief (HMRC Capital Gains Manual CG36000–36101). 16.64 If TCGA 1992 s 239 does not apply, the transfer would be at deemed market value under TCGA  1992 ss  17 and 18. Close company includes a company which would be close if it were UK resident (TCGA 1992 ss 239(8) and 288). Because of the taxation problems and potential double charges arising for a UK-based EBT, many such trusts are formed overseas in suitable trust jurisdictions such as the Channel Islands, the Isle of Man, Cyprus, Gibraltar or other tax havens with suitable trust legislation. Provided that the trust has been properly set up as a genuine EBT, wholly and exclusively for the purpose of the company’s trade, with no element of bounty, and with the intention of rewarding employees, not avoiding tax, the main anti-avoidance provisions should not apply. 16.65 Under TCGA 1992 s 125, where a close company transfers an asset otherwise than by way of a bargain made at arm’s length or for a consideration of an amount or value less than the market value of the asset, an amount equal to the difference should be apportioned among the issued shares of the company (s  125(1)). The amount so apportioned is deducted from the shareholders’ base value of the shares (s  125(2)). Sub-apportionment is possible but the provisions do not apply to intragroup transfers (s  125(3) and (4)). This could apply to a transfer of an asset at undervalue by a close company to an employee trust. Where the asset transfer is within TCGA 1992 s 239(3), the figure to be apportioned among the shareholders under s 125(1) is the lower of the difference in the consideration paid by the trust and the company’s allowable acquisition cost or the market value of the asset (CG57125). These complications are avoided where contributions to the EBT are made in cash. 638

Employee Trusts 16.66 Where the contributions are wholly and exclusively for the purpose of the trade and allowed for corporation tax, there is no element of bounty and therefore the settlor retained interest provisions should not apply (CG35020– 35022).

APPROVED SHARE OPTION SCHEMES 16.67 Approved share option schemes, including savings-related share option schemes, Save As You Earn (SAYE) option schemes and other Company Share Option Plans (CSOPs) governed by ITEPA 2003 ss 516–526 and Schs 3 and 4 and Employee Management Incentive (EMI) arrangements under ITEPA 2003 ss 527–541 and Sch 5 do not involve a trust, although they are sometimes operated in conjunction with an EBT (eg ITEPA 2003 Sch 4 para 13), and are therefore outside the scope of this book. A  further tax advantaged share arrangement was introduced from 1  September 2013. The ‘employee shareholder status’ provisions in ITEPA  2003 ss  226A–226D inserted by FA 2013 s 55 allow companies to issue shares to employees in exchange for the surrender of certain employment rights. The arrangements do not require a trust to be established, although as for CSOPs and SAYE schemes, they may be operated in conjunction with an EBT. The capital gains tax advantages of the employee shareholder status arrangement, representing its primary attraction, were withdrawn for 2016/17 and later tax years. It continues to be possible for an employer company to issue employee shareholder status shares, however, such an issue will not attract any particular tax reliefs.

SHARE INCENTIVE PLANS (SIPS) 16.68 Share incentive plans replaced the former employee share ownership trust provisions which applied until 31 December 2002. A share incentive plan established under ITEPA 2003 ss 488–515 and Sch 2 requires the establishment of a trust, and the trustees’ rights and duties are specified in ITEPA 2003 Sch 2 Part 9 paras 70–80. A  SIP is one which provides for free shares which are appropriated to employees without payment (but which may be augmented by partnership shares, which may be paid for out of gross salary), and matching shares provided proportionately to the partnership shares but without payment. A plan is established by a parent company, which may extend to participating companies in a group. Shares are awarded to employees on appropriation as free or matching shares or as partnership shares paid for by a participant. A  self-certification system has applied from 6  April 2014, replacing the former HMRC approval process, and notification must be made to HMRC that the requirements of ITEPA  2003 Sch  2 are met and an annual return filed electronically by 6 July following the end of the tax year (ITEPA Sch 2 para 81A). A plan meeting the requirements is referred to as ‘a Schedule 2 SIP’. Penalties apply for failure to file a return. HMRC may enquire into the return, 639

Employee Trusts and may issue a direction withdrawing SIP status from a date specified in the enquiry closure notice. For less serious breaches of the SIP rules, a period of 90 days may be allowed for the company to remedy the failures identified. HMRC may then issue a ‘default notice’ withdrawing SIP status if the company does not take the necessary steps to comply with the requirements of ITEPA 2003 Sch  2 (ITEPA  2003 Sch  2 paras 81B–81J). Appeals against the levying of penalties, the issue of a default notice or withdrawal of tax approved status are made to the First-tier Tax Tribunal (ITEPA 2003 Sch 2 para 81K). 16.69 A  SIP needs to meet various general requirements, in that it is only allowed to provide for benefits to employees through the acquisition of shares, and must be available for all eligible employees taxable on worldwide employment income, although it may be extended to other employees. Employees must be invited to participate on the same terms, although these may vary by reference to remuneration, length of service, hours worked etc. The benefits must not be confined to directors or senior employees, and additional conditions and loan arrangements are prohibited (ITEPA 2003 Sch 2 paras 6–12). A  SIP can only be made available to eligible employees who may participate in free shares, and matching shares where they have acquired partnership shares. An employee may only belong to one SIP at a time. The employees must be employees of the company or a participating company in a group plan, and there may be a qualifying period of up to 18 months before they become eligible. 16.70 The ‘no material interest requirement’ was abolished from 17  July 2013. Prior to that date, employees with a material interest in the company, defined as direct or indirect beneficial ownership of 25% of the share capital, or the right to receive 25% of the assets on a distribution, were not allowed to join a plan. Option shares were included in determining a material interest, but shares held under an approved profit sharing scheme under ITEPA 2003 Sch 3 were disregarded where they had not yet been appropriated to or acquired by an individual employee. The interests of associates were included in determining a material interest, although these did not include the trustees of an EBT, nor a normal beneficiary of a discretionary trust (ITEPA 2003 Sch 2 paras 14–24 prior to repeal by FA 2013 Sch 2). 16.71 Free shares must be limited to those having an initial market value at the day of appropriation not exceeding £3,600 (£3,000 for 2013/14 and earlier years), ignoring any restrictions or risks of forfeiture. It is possible to set performance targets in order to qualify for free shares, but all eligible employees must be able to take part in any performance assessment which must be fair and objective. No more than one performance-related award can be made per employee. Employees must be notified of the targets and measures which will determine their allocation of free shares, except where that information is confidential. At least 20% of the free shares must be allocated without reference to performance, and no more than four times this number 640

Employee Trusts may be allocated under the performance-related criteria. Alternatively, some or all of the free shares may be allocated on the basis of performance within each performance unit. The shares acquired must be held in trust for between three and five years, during which time the beneficial interest cannot be assigned, charged or otherwise disposed of. This holding period comes to an end on the employee leaving the employment. The existence of the holding period does not prevent the trustees from participating in a takeover (ITEPA 2003 Sch 2 paras 34–43). 16.72 Partnership shares must be issued in accordance with the plan by way of purchase, through a deduction of the cost price from the employee’s salary under the partnership share agreement. The maximum deduction is £1,800 (£1,500 for 2013/14 and earlier years) or 10% of the employee’s salary for each tax year, whichever is lower. A minimum of up to £10 may be specified, and the employee must be notified of the possible effect on state benefit entitlements of the reduction in salary. The amount withheld from salary has to be paid over to the trustees and is used for the acquisition of partnership shares within 30 days or 12 months, if the plan so provides (ITEPA 2003 Sch 2 paras 43–50). 16.73 Partnership money not immediately used to purchase shares is to be held on deposit, and any money so held must be paid over to an employee on leaving, as soon as possible. The plan may authorise a maximum number of shares to be awarded as partnership shares. An employee may give notice to stop the deductions from his salary and may restart them at a later date, but not make up the difference. An employee may withdraw from the partnership share agreement by giving notice, and any monies held on his behalf must be returned as soon as possible. If approval of the plan is withdrawn or terminated, partnership share monies must be returned to employees within 60 days. An employee may withdraw all or any of his partnership shares, subject to a possible tax charge under ITEPA 2003 s 506. Salary includes emoluments paid under deduction of tax under PAYE, excluding expenses and benefits in kind (ITEPA 2003 Sch 2 paras 51–57). 16.74 Matching shares must be of the same class and carry the same rights as the partnership shares to which they relate and must be rewarded on the same day and on the same basis. The partnership share agreement specifies the matching ratio, which must not exceed two matching shares for each partnership share. Similar holding periods to those for free shares apply (ITEPA 2003 Sch 2 paras 58–61). 16.75 The plan may also provide for dividends to be reinvested without limit. A dividend in any tax year may be used to acquire further shares, with any excess being paid to the employee. Dividend shares must be of the same class as those on which the dividends were paid, and dividend shares must be acquired within 30 days of receipt of the cash dividend at the market value. 641

Employee Trusts Participants must be treated fairly and equally. The five-year holding period provisions apply to dividend shares as if they were acquired when the shares out of the dividends on which they were paid for were acquired (ITEPA 2003 Sch  2 paras 62–69). Eligible shares must be ordinary share capital of the company to which the scheme relates, or its holding company or consortium company. The shares must be in a parent company, a listed company or a subsidiary of a listed company. The shares must be fully paid and not redeemable and must not be subject to restrictions other than being non-voting or having limited voting rights, or be subject to forfeiture, other than as a bad leaver, or on pre-emption, except where it applies to all employees and other shareholders of the same class of share. Shares in an employer company, the business of which is substantially the provision of the services of its employees to persons controlling the company or associated businesses, are not eligible shares (ITEPA 2003 Sch 2 paras 25–33). 16.76 The trustees of a SIP must be required by the plan to acquire free or matching shares and appropriate them to employees and to apply partnership share money or dividend share monies in acquiring shares in accordance with the plan. Trustees must be regulated by the plan trust which is constituted under the law of a part of the UK and which complies with ITEPA 2003 Sch 2 paras 70–80 and does not contain any terms which are neither essential nor reasonably incidental to complying with these provisions (ITEPA 2003 Sch 2 para 71). The trustees must retain records of participants who have participated in other SIPs established by the company or a connected company (ITEPA 2003 Sch 2 para 71A, as allowed by para 18A). 16.77 The trustees have power to borrow to acquire shares, or as specified in the trust instrument (ITEPA 2003 Sch 2 para 76). The trust instrument must provide that the trustees give notice of the award of free or matching shares to an employee as soon as practicable, specifying the number and description of the shares, the market value at the date of the award and the holding period. Similar notices must be given in respect of partnership or dividend shares and the allocation of the money used to acquire them (ITEPA 2003 Sch 2 para 75). 16.78 The SIP trust deed must require the trustees to dispose of a participant’s plan shares in accordance with the participant’s instructions, subject to meeting any PAYE obligations. Trustees must not dispose of shares during the holding period unless the participant leaves the employment, except in the case of a takeover or to subscribe for shares under a rights issue or to meet PAYE obligations or on termination of the plan. Monies due to employees must be handed over as soon as practicable (ITEPA 2003 Sch 2 paras 72–74). 16.79 Trustees may sell shares in order to subscribe for further shares under a rights issue subject to the participants’ directions to the contrary (ITEPA  2003 Sch  2 para  77). Trustees must meet any PAYE obligations in respect of the participants’ plan shares ceasing to be subject to the plan, and 642

Employee Trusts may dispose of the participants’ plan shares as necessary. A PAYE obligation arises under ITEPA 2003 ss 510–514, and further tax liabilities may arise on the disposal of the participants’ plan shares under ITEPA  2003 ss  497–508. The disposal of a participant’s beneficial interest in any of his shares, other than on insolvency, is treated as a disposal by the trustees, and tax calculated accordingly (TCGA  1992 s  238A and Sch  7D). The trust instrument must require the trustees to maintain records necessary for the calculation of their own and the employing company’s PAYE obligations in connection with the SIP, and must inform the participant if he becomes liable to tax, and provide him with the information to compute his liabilities (ITEPA 2003 Sch 2 para 80). Where there is a qualifying transfer of shares to the trustees, those shares must be included in any free or matching shares and not sold as partnership shares. A  qualifying transfer of shares refers to shares purchased for money in an ESOT immediately before 21 March 2000 under FA 1989 s 69(3AA). 16.80 Employees under a SIP may be subject to tax as employment income in certain cases. There is no charge on shares being appropriated to the employee or acquired on his behalf under the plan. There is an income tax charge where a participant receives a capital receipt within five years of receiving a free matching or partnership share or within three years of receiving a dividend share. Capital receipt does not include the proceeds of disposal of the shares or receipts arising on a company reconstruction, rights issue, or after the death of the employee (ITEPA 2003 ss 489–502). There is no income tax charge on removal of a forfeiture or restriction or at the end of a holding period or an increase in value of plan shares which could otherwise arise under ITEPA 2003 ss 422–432. There is, however, an income tax charge where free and matching shares cease to be subject to the plan on a withdrawal within three years. Income tax is charged on the market value of the shares at the time of withdrawal. A withdrawal with between three and five entitlement years is on the lesser of the market value of the shares when awarded and the market value on withdrawal, less any tax on capital receipts. Shares withdrawn after being held in the plan for five or more years are not normally liable to income tax. There could also be an income tax charge on a participant breaching the holding period, which is calculated on the market value of the shares at the time of the withdrawal, less any tax paid on capital receipts. Partnership share money comes out of pre-tax income, so, effectively, tax relief is given on the purchase, but does not reduce the employee’s income for calculating pension and annuity contribution limits. 16.81 Partnership share money paid to an employee is normally taxable as employment income, as is any money paid on cancelling his partnership share agreement (ITEPA  2003 ss  497–508). There is an income tax charge on an employee withdrawing partnership shares within three years, based on the market value of the shares at the time of withdrawal. If the withdrawal is between three and five years, income tax is calculated on the lesser of the amount used to buy the shares and their value on withdrawal. There is no 643

Employee Trusts charge after five years. An employee leaving within five years is not subject to income tax if he is leaving because of injury, disability, redundancy, takeover of the company or retirement on reaching normal retirement age of at least 50, or on death (ITEPA 2003 ss 498 and 506). 16.82 Dividends received by the trustees are exempt from the dividend trust rate provided that the shares brought from the dividends are appropriated to a participant within two years, or where the shares are not readily convertible assets within five years, identified on a first in, first out basis. There is no tax on cash dividends reinvested in dividend shares, but the employee is not entitled to a tax credit unless the shares are withdrawn from the plan within three years, in which case the employee is subject to tax with a tax credit. Excess cash dividends which cannot be used to acquire dividend shares which are held in bare trusts for the employees, who must be informed of the amount so received. Dividends retained for reinvestment by the trustees are not treated as income unless taken out from the plan early or paid over in cash from unreinvested cash dividends received (ITEPA 2003 ss 493 and 496). Employees are subject to income tax on shares ceasing to be part of the plan as if they were tradeable assets. The employee must either reimburse the company, or the trustees must do so or pay over the PAYE deducted from payments to the employee direct to HMRC. This also applies to PAYE on capital receipts (ITEPA 2003 ss 509–514). 16.83 No CGT is payable by trustees on shares awarded to employees within two years of acquisition, or five years if they are not readily convertible assets. Awards are made on a first in, first out basis. A participant is treated as absolutely entitled, as against the trustees, to any shares awarded to him in accordance with the plan. Shares acquired under the SIP are treated as a different class of share from those acquired in any other way, as are any shares acquired from an ESOT. When the shares are no longer subject to the plan, they are deemed to have been disposed of and immediately reacquired at market value by the employee, but there is no chargeable gain on the deemed disposal. This also applies to forfeited shares. Shares acquired by trustees from approved profit-sharing schemes are acquired on a no gain/no loss transfer for CGT purposes, and are deemed to have been acquired at the date they were acquired under the profit sharing scheme. Trustees are not liable to CGT on the sale of rights where these are sold to produce the cash necessary to take up the remaining rights (TCGA 1992 Sch 7D). 16.84 The issuing company may claim a corporation tax deduction equal to the market value of free or matching shares awarded to employees at the time they were acquired by the trustees. In the case of a group plan, the market value of the total number of shares awarded is divided among the participating companies in proportion to the number of shares awarded to the employees of each company. Tax relief is also available for the excess of the market value of partnership shares over the amount paid for them by the participants. No deduction is available where shares are awarded to an individual not chargeable 644

Employee Trusts to income tax, or the shares are transferred from another plan or trust in respect of which a corporation tax deduction has already been claimed, or where the shares are liable to depreciate substantially for reasons unconnected with the shares in the company generally. There is no corporation tax deduction for dividend shares or where forfeited shares are awarded to other employees. The costs of establishing a SIP are deductible when incurred, provided that approval to the plan is given within nine months of the end of the accounting period, and, if not, relief is given in the accounting period in which the plan is approved. Deduction is allowed for the expenses of running a SIP, but these deductions will be withdrawn if approval to the plan itself is withdrawn. In the case of investment companies, relief is given as a management expense CTA 2009 s 485(3). 16.85 Rollover is allowed on company reconstructions except where redeemable shares or securities are issued, stock dividends are paid or bonus shares issued following a repayment of share capital. Shares acquired in a rights issue are normally treated as plan shares (ITEPA 2003 Sch 2 paras 86– 88). HMRC has power to require information in connection with a SIP and may withdraw approval subject to an appeal to the Special Commissioners (ITEPA 2003 Sch 2 paras 42, 83–85, 89 and 90). The company may terminate a plan and notify HMRC, the trustees, the participants and those who have entered into a partnership share agreement. Thereafter, no further shares may be appropriated or acquired on behalf of the participants. The market value of plan shares is determined as for CGT under TCGA 1992 ss 272 and 273. Various terms are defined by ITEPA 2003 Sch 2 paras 91–100. 16.86 The CGT rollover relief for transfers to trustees of SIPs, under TCGA  1992 s  236A and Sch  7C, requires the plan to be a Schedule  2  SIP, the shares to be unquoted and satisfying the requirements of the SIP under ITEPA  2003 ss  488–515 and Sch  2. The SIP must hold at least 10% of the ordinary share capital of the company, including shares held in the plan already awarded to individuals, and there must be no unauthorised provisions enabling the claimant of rollover relief or anyone connected with him to acquire shares from the SIP (TCGA  1992 Sch  7C paras 1 and 2). The replacement assets into which the gain on the disposal of the shares to the SIP is rolled over do not include shares or debentures in the founding company or any company in the group. 16.87 At least 10% of the ordinary shares must be held within one year of the disposal of shares to the SIP, by the claimant, and the rollover period for reinvestment is six months from the date of the disposal, or when the 10% entitlement is fulfilled, if later (TCGA 1992 Sch 7C paras 3 and 4). Rollover relief must be claimed within two years of the acquisition of the replacement asset and, as with other forms of rollover relief, the disposal is treated as taking place at an amount that would give rise to no gain or loss, with the base value of the replacement asset being reduced by the gain which would otherwise have 645

Employee Trusts arisen. Where only part of the proceeds are reinvested, the non-reinvested part remains chargeable to CGT (TCGA  1992 Sch  7C para  5). Dwelling-houses which become a principal private residence are not eligible for rollover, nor are shares under which Enterprise Investment Scheme (EIS) relief has been claimed under ITA  2007 ss  156–257 (TCGA  1992 Sch  7C paras 6 and 7). A chargeable asset is defined as one which would give rise to a chargeable gain on a disposal, and requires the vendor to be resident in the UK, or chargeable on a gain as a non-UK resident carrying on a trade through a UK branch or agency (TCGA 1992 Sch 7C para 8).

ENTERPRISE MANAGEMENT INCENTIVES 16.88 Enterprise management incentives (EMIs) are qualifying options in qualifying companies carrying on qualifying trades, available to eligible employees, and are aimed at small, higher risk trading companies. A scheme does not involve any trust being set up and is therefore outside the scope of this book (ITEPA 2003 ss 527–541 and Sch 5). However, shares held by EBTs for the benefit of employees are disregarded, if for the benefit of employees generally, under ITEPA 2003 Sch 5 para 32, in determining whether eligible employees have a material interest in the company.

Employee ownership trusts 16.89 Largely in response to the publication of ‘Sharing success: the Nuttall Review of Employee Ownership’ on 4 July 2012, FA 2014 Sch 37 introduced two new reliefs relating to employee ownership: a capital gains tax exemption for shares disposed of to an employee ownership trust (TCGA 1992 s 236H); and an exemption from income tax on employee bonuses up to £3,600 per annum (ITEPA 2003 Pt 4 Ch 10A). These reliefs apply to a company a controlling interest in which is acquired within a single tax year by an employee ownership trust meeting certain conditions.

Capital gains tax exemption 16.90 A  person other than a company disposing of any ordinary share capital of a company to the trustees of a settlement established for the benefit of employees on or after 6  April 2014 may claim relief from capital gains tax under TCGA  1992 s  236H, provided certain conditions are met. Where the relief applies, TCGA 1992 s 17 does not apply but the disposal, and the acquisition by the trustees, are treated as being made for such a consideration as to secure that neither a gain nor a loss accrues on the disposal. The company must be a trading company or holding company of a trading group. A trading company and trading group are defined as those not carrying on to a substantial 646

Employee Trusts extent non-trading activities (TCGA  1992 s  236I). The wording adopted by s 236I echoes that of the entrepreneurs’ relief rules in TCGA 1992 s 169I et seq, and presumably HMRC intends to construe ‘substantial’ non-trading activities in the same way (CG64090). Intragroup activities are ignored, and a business carried on by a company in partnership with one or more other persons is to be treated as not being a trading activity or a trading group activity. The trading requirement must be met at the time of the disposal and throughout the remainder of the tax year in which the disposal takes place. 16.91 A controlling interest in the trading company/group must be acquired by trustees of the settlement during the tax year, with no such controlling interest having been held immediately before the beginning of the tax year in which the disposal is made (TCGA 1992 s 236M). A ‘controlling interest’ means an interest where: (a) the trustees hold more than 50% of the ordinary share capital of the company, and have powers of voting on all questions affecting the company as a whole that, if exercised, would yield a majority of the votes capable of being exercised on them; (b) the trustees are entitled to more than 50% of the profits available for distribution to the equity holders of the company; (c)

the trustees would be entitled, on a winding up of the company, to more than 50% of the assets of company C available for distribution to equity holders; and

(d) there are no provisions in any agreement or instrument affecting the company’s constitution or management, or its shares or securities, whereby the condition in para (a), (b) or (c) above can cease to be satisfied without the consent of the trustees. 16.92 The settlement must meet the ‘all-employee benefit’ requirement (TCGA 1992 ss 236J–236L), both at the time of the disposal and throughout the remainder of the tax year in which the disposal takes place. The allemployee benefit requirement is met if the trust(s) does not permit any of the settled property (or any income arising from it) to be applied, at any time, otherwise than for the benefit of all the eligible employees on the same terms (the ‘equality requirement’), and does not permit the trustees at any time to apply any of the settled property or any income arising from it by creating a trust, or by transferring property to the trustees of any settlement other than by an ‘authorised transfer’. The trustees are also not permitted at any time to make loans to beneficiaries of the trusts or to amend the trust(s) in such a way that the amended trust(s) would not comply with the above. 16.93 An eligible employee is one employed by the trading company or group as appropriate. A person continues to be an eligible employee where the company or group ceases to meet the trading requirement and/or the trustees 647

Employee Trusts cease to hold shares in the company, and the individual was an eligible employee at any time during the period of two years ending immediately before that event (or, where both have occurred, the earlier of them). Certain participators are excluded from being eligible employees. An excluded participator is one falling within the definition in IHTA 1984 s 102 in relation to the trading company or group company, or any other person who is a participator in any close company that has made a disposition whereby property became comprised in the same settlement, being a disposition which would have been a transfer of value for IHT purposes but for IHTA  1984 s  13 or s  13A. There are also look-back provisions which exclude a person who has been a participator at any time after the first day of the period of ten years ending with the later of 10 December 2013 or the day on which property first became comprised in the settlement. Persons connected with a participator are also excluded. Participators with an interest of less than 5% of the company share capital or assets on a winding up are not excluded (TCGA 1992 s 236J). 16.94 The equality requirement in TCGA 1992 s 236K is met notwithstanding the trusts of the settlement: (a)

permit the settled property (including any income arising from it) to be applied, where an eligible employee has died, as if a surviving spouse, civil partner or dependant of the deceased person were the eligible employee (and continued to be employed) for a period of 12 months from the time of death (or a shorter period provided by the trusts);

(b) prevent the settled property being applied for the benefit of persons who have not been eligible employees for a continuous period of 12 months or such shorter period as the trusts may provide; (c) permit the trustees to comply with a written request from a person that the trustees do not apply any of the settled property for the benefit of that person; (d) prevent the settled property being applied for the benefit of all persons who are eligible employees by reason only that they are office-holders; or (e)

in addition to requiring the settled property to be applied for the benefit of all the eligible employees on the same terms, also permit it to be applied for charitable purposes.

16.95 Subject to the above, the equality requirement is infringed by the trusts if they permit the settled property to be applied by reference to factors other than an eligible employee’s remuneration, length of service or hours worked, provided every qualifying eligible employee receives some benefit. 16.96 Where a settlement was created before 10 December 2013 (when the legislation that became FA 2014 Sch 37 was published in draft) and would not 648

Employee Trusts otherwise meet the all-employee benefit requirement in TCGA  1992 s  236J at any time, it is treated as meeting it at that time if two conditions are met. The first is that on 10 December 2013 IHTA 1984 s 86 applied to the settled property, the trustees held an interest of 10% or more in the share capital, voting power and assets on a winding up of the company; and the settlement did not otherwise meet the all-employee benefit requirement. The second condition is that the trustees of the settlement do not, during the 12 months ending with the time in question, apply any of the settled property otherwise than for the benefit of all eligible employees on the same terms; make loans to beneficiaries of the settlement; apply any of the settled property by creating a trust or transfer property to the trustees of any settlement other than by an authorised transfer. There are provisions permitting the trustees to: (a) apply the settled property for a person other than an eligible employee in restricted circumstances, such as where the employee has died and provision is made to a surviving spouse, partner or dependant within 12 months after death; (b) exclude any eligible employee from benefit who has made a written request to be so excluded; (c) apply property only to those who have been eligible employees for at least 12 months (or a shorter period specified by the trustees); (d) exclude office holders; (e)

apply property for charitable purposes.

16.97 The behaviour requirement permits the application of trust property on terms that differentiate between eligible employees according to certain factors, namely levels of remuneration, length of service or hours worked, provided that, in the event of any such application of trust property, every qualifying eligible employee receives some benefit (TCGA 1992 s 236L). 16.98 Following the disposal, the disponor must not breach the ‘limited participation requirement’. This is met if: (a) condition A: there was no time in the period of 12 months ending immediately after the disposal mentioned when the disponor was a participator (as defined in CTA  2010 s  454) in the company and the ‘participator fraction’ exceeded two-fifths; and (b) condition B: the ‘participator fraction’ does not exceed two-fifths at any time in the period beginning with that disposal and ending at the end of the tax year in which it occurs. 16.99 There is a grace period during which the two-fifths fraction may be exceeded, provided that period lasts no longer than six months and the fraction exceeded two-fifths during that period by reason of events outside 649

Employee Trusts the reasonable control of the trustees. According to the explanatory notes accompanying Finance Bill 2014, this is to take account of unexpected commercial circumstances. 16.100 The participator fraction means: NP NE NP for this purpose is the sum of: (a)

the number of persons who at the time in question are both (i) participators in the company, and (ii) employees or office holders of the company; and

(b) the number of other persons who at that time are both (i) employees or office holders of the company or (if the company is the principal company of a trading group) employees or office holders of any member of the group, and (ii) connected with persons within para (a). An extended definition of ‘connected’ applies (TCGA 1992 s 236U). NE for this purpose is the number of persons who at that time are employees of C or (if C is the principal company of a trading group) employees of any member of the group. 16.101 Participators are excluded if they are entitled to less than 5% of the company’s share capital or assets on winding up. 16.102 For disposals on or after 26 June 2014, capital gains tax relief is not available under TCGA 1992 s 236H where a disqualifying event takes place in the tax year following the transfer. A disqualifying event includes the trading condition, the all-employee condition or the controlling interest condition ceasing to be met, or the two-fifths participator fraction being breached. A  disqualifying event also takes place if the trustees act outside of their permitted parameters (TCGA 1992 s 236O). 16.103 The trustees are treated as having made a disposal and reacquisition of shares acquired by a transfer upon which relief under s 236H has been claimed immediately before a disqualifying event where the event takes place after the end of the tax year following the tax year in which the acquisition occurs. The disposal and reacquisition are each treated as having taken place at market value (TCGA 1992 s 236P). 16.104 Where a deemed disposal arises by reason of a beneficiary becoming absolutely entitled as against the trustees to settled property, and the settled property consists of ordinary share capital in the company, the trustees may make a claim for relief from capital gains tax in respect of the gain arising. The requirements of TCGA  1992 s  236H must be met in relation to the trading status of the company, etc. Where the relief applies, TCGA  1992 s  17 is disapplied and the deemed disposal and acquisition by the transferring trustee under s  71(1) are treated as being made for such 650

Employee Trusts a consideration as to secure that neither a gain nor a loss accrues on the disposal (TCGA 1992 s 236Q). 16.105 Matching rules apply as set out in TCGA 1992 s 236S where shares are held by the trustees comprise both those to which relief under s 236H or s 236Q has applied and other shares of the same class. 16.106 Relief is denied where one or more disqualifying events occur in relation to the disposal in the tax year following that in which the deemed disposal arises. In such a case no claim for relief under s 236Q may be made in respect of the disposal on or after the day on which the disqualifying event (or, if more than one, the first of them) occurs. Any claim made before that day is revoked, and the chargeable gains and allowable losses of any person for any chargeable period are to be calculated as if that claim has never been made (TCGA 1992 s 236R).

Income Tax Exemption for Qualifying Bonus Payments 16.107 The second element of the relief introduced by FA 2014 Sch 37 inserts ITEPA 2003 s 312A, which provides that no liability to income tax arises in respect of ‘qualifying bonus payments’ made in a tax year by an employer company to an employee (or former employee if the payment is made in the 12 months following cessation of employment) to the extent that the total chargeable amount in respect of those payments to that individual does not exceed £3,600. The relief applies to payments made on or after 1 October 2014. Payments made by service companies are excluded (ITEPA 2003 s 312G). 16.108 If qualifying bonus payments are made to the same person by two or more employers in the tax year, the £3,600 limit applies separately in relation to the total payments made by each employer unless they are members of the same group at the time each of them first makes a qualifying bonus payment to the employee or former employee in the tax year. In such a case the limit applies to all the payments made by the companies to the individual in question, taken together. 16.109 A  payment is a qualifying bonus payment if it does not consist of regular salary or wages and is awarded under a scheme that meets various requirements as to participation and equality of treatment. The employer must also meet the trading status and indirect all-employee ownership requirement in the qualifying period, meaning the period of 12 months ending with the day on which the payment is made. The trading status requirement in ITEPA 2003 s 312D requires that the employer company is either a trading company or a member of a trading group. The usual definition of trading company applies, ie  the company must not carry on to a substantial extent activities that are not trading. 651

Employee Trusts 16.110 There is also a condition relating to office holders which must be met on the requisite number of days in the qualifying period. The ‘requisite number of days’ means: (a)

if the qualifying period is 12 months, the number of days in that period reduced by 90; and

(b)

if the qualifying period is a shorter period (as above) the number of days in that period reduced by the corresponding fraction of 90 days.

16.111 Under the ‘participation requirement’, all persons in relevant employment when the award is determined must be eligible to participate in that and any other award under the scheme. A person is in relevant employment if: (a)

where E is a member of a group, the person is employed by any company that is a member of the group; and

(b) in any other case, the person is employed by E. 16.112 By way of exception, the participation requirement is not infringed: (a) by reason of a person in relevant employment being excluded from participating in an award because, at the time the award is determined, the person has less than a minimum period, not exceeding 12 months, of continuous service in relevant employment that is required by E; (b) by reason of a person being excluded from participating in an award where (i) disciplinary proceedings have been taken against him by E that have resulted in a finding of gross misconduct against him, and (ii) that finding was made in the period of 12 months immediately before the time the award is determined; (c)

in a case where a person is at the time of the award subject to disciplinary proceedings taken by E, by reason of his eligibility to participate in an award being conditional upon those proceedings being concluded and no finding of gross misconduct being made against that person; or

(d) by a person being treated as never having been eligible to participate in an award where, after the award was made but before the payment is made (i) a finding of gross misconduct is made against that person in disciplinary proceedings taken by E after the award was made, or (ii) that person is summarily dismissed from the employment. 16.113 The equality requirement is that every employee or former employee who participates in an award under the scheme must do so on the same terms. 16.114 The equality requirement is infringed if the amount of an award to an employee or former employee under the scheme is determined by reference to factors other than the following (and accordingly it is not infringed by reason of the amount of an award being determined by reference to those factors): 652

Employee Trusts (a)

an employee’s or former employee’s remuneration;

(b) an employee’s or former employee’s length of service; or (c)

hours worked by an employee or former employee.

However, the equality requirement is infringed if an award is made on terms such that some (but not all) of the employees or former employees participating in the award receive nothing. 16.115 If the amount of an award is determined by reference to more than one of the factors mentioned in paras (a)–(c) immediately above, the equality requirement is infringed unless: (a) each factor gives rise to a separate entitlement related to the level of remuneration, length of service or (as the case may be) hours worked; and (b) the total entitlement is the sum of those separate entitlements. 16.116 Subject to the provision above allowing the amount of an award to vary by reference to remuneration, length of service or hours worked, the equality requirement is infringed if any feature of the scheme has, or is likely to have, the effect of conferring benefits wholly or mainly on those individuals participating in the award who are: (a)

directors or former directors;

(b) employees receiving (or former employees who received) the higher or highest levels of remuneration; or (c) employees or former employees who (i) are (or were) employed in a particular part of the business carried on by E or, if E is a member of a group, by the group, or (ii) carry on (or carried on) particular kinds of activities. 16.117 The company must be controlled by an all employee benefit settlement, or if the company is a member of a trading group other than the principal company, the principal company must be controlled by such a settlement, as defined by TCGA 1992 s 236M and ss 236J–236K (or s 236L where the settlement would not otherwise meet the all-employee benefit requirement at any time during the qualifying period, unless the all-employee benefit requirement has previously been met at any time in the period beginning with 10 December 2013 and ending immediately before the time at which the question falls to be determined (ITEPA 2003 s 312E)). 16.118 A  company meets the ‘office-holder requirement’ for the purposes of s  312B if the ‘appropriate fraction’ does not exceed two-fifths, and the appropriate fraction is: ND where: NE 653

Employee Trusts (a)

ND is the number of persons who are one or both of (i) a director or other office-holder of the company or (ii) an employee of the company who is connected with a director or other office-holder of the company; and

(b) NE is the number of persons who are employees or office-holders of the company. 16.119 The income tax exemption in ITEPA  2003 s  312A does not apply to ‘excluded’ payments (ITEPA 2003 s 312H), meaning arrangements under which: (a)

the employee gives up the right to receive an amount of general earnings or specific employment income in return for the provision of the payment; or

(b) the employee and employer agree that the employee is to receive the payment rather than receive some other description of employment income.

654

Chapter 17

Trusts of Land

17.1 Land settled prior to 1 January 1997 may continue to be held under Settled Land Act 1925 settlements, but new settlements cannot be created after 31  December 1996 (see 2.36). Land formerly held on trusts for sale under LPA 1925 is, from 1 January 1997, treated as a trust of land under Trusts of Land and Appointments of Trustees Act (TLATA) 1996 s 4, as is land acquired by trustees since that date.

INCOME FROM LAND 17.2 Trustees may hold an interest in land directly as an asset of the trust or indirectly through a company, in which case the asset held by the trustees consists of shares in the company and income is received by way of dividend and, hopefully, capital profits are obtained through the sale of the shares or by liquidating the company. There is, however, a potential double charge on capital gains where the property is sold by a company, as the profit would be liable to corporation tax and would again be charged on the trustees if distributed by way of income as a dividend or as a capital gain on a profit on the sale of the shares or liquidation of the company. Even where the underlying property has not been sold, a purchaser of the shares would take into account the potential corporation tax on any difference between the cost price of the company’s real estate and its current market value. Trustees therefore frequently hold interests in real estate directly and, where the land is in the UK, tax is charged as property income, on the annual profits arising from a deemed business carried on for the exploitation of the land as if it were profits from a single business (ITTOIA  2005 ss  263–267). Income from foreign real estate is taxable as foreign income, under ITTOIA  2005 ss 261(a), 265. 17.3 Income tax is chargeable on the trustees in respect of income arising in the fiscal year ended 5 April, under ITTOIA 2005 Part 3 ss 260–364. Receipts taxable as property income include: (a)

payments in respect of a licence to occupy or otherwise use land or the exercise of any right over land (ITTOIA 2005 s 266(3)(a)); 655

17.4  Trusts of Land (b) rent charges, ground annuals, feu duties and other annual payments received in respect of or charged on or issuing out of the land (ITTOIA 2005 s 266(3)(c)); (c) income from furnished lettings including furnished holiday lettings (ITTOIA 2005 s 308(1)–(3)); (d) income from caravans or house boats including any amounts for the use of any furniture where the use is confined to one location in the UK (ITTOIA 2005 ss 266, 875, 878); and (e)

all sporting rights income less expenses (ITTOIA 2005 s 266(3)(b)).

17.4 Income is excluded if it is taxable as a trading profit, as farming and market gardening, under ITTOIA  2005 ss  9–11, 267, or from mining, quarrying and similar activities under ITTOIA  2005 s  12, or tied premises under ITTOIA 2005 s 19, rent from mines, quarries etc under ITTOIA 2005 ss 262, 335–337 or wayleaves under ITTOIA 2005 ss 262, 345, 346. It also excludes furnished lettings which amount to a trade such as a guest-house under ITTOIA 2005 s 308(2). 17.5 Furnished holiday lettings, although charged as property income, are treated as a notional trade for many tax purposes including loss relief, pretrading expenditure etc (ITTOIA 2005 ss 322–334; ITA 2007 s 127). Furnished holiday letting rules were to have been abolished from 6 April 2010, but will now be retained in some form. 17.6 Certain capital receipts from the grant of a lease at a premium are taxed as income under ITTOIA  2005 ss  277–281. The amount brought into charge for income tax purposes is the premium paid on the grant of a lease of less than 50 years, less a deduction of 2% for every year of the term of the lease, other than the first, which is deemed to be a property income receipt for the year in which it is received. Where the trustees are intermediate landlords and have paid the premium to a head landlord, the premium paid may be treated as an allowable expense over the period of the lease (ITTOIA 2005 ss 291–294). There may also be a property income charge on the assignment of a lease for less than 50 years granted at an undervalue, where the grantor could have charged a premium, and is taxed as if he had charged such a premium under ITTOIA 2005 s 282. Land that is sold with a right to reconveyance to the vendor or a connected person is taxed as income under ITTOIA  2005 ss  284–286. Appeals against determinations under these provisions in ITTOIA 2005 Part 3 Chapter 4 may be made within 30 days, under ss 302A–302C. 17.7 In the case of a strict settlement under the Settled Land Act 1925, rental income would normally be received by the life tenant and taxable on him and not on the settled land trustees. 656

Trusts of Land 17.13 17.8 As trustees are deemed to be carrying on a property business, under ITTOIA 2005 s 264, the profits are computed in the same way as the profits of a trade (ITTOIA  2005 s  272). This means that profits are computed in accordance with generally accepted accounting practice (UK GAAP) under ITTOIA  2005 s  25, which in turn means that the profit is calculated on an accruals basis on the profit arising in the fiscal year, including a debtor where rent is received in arrears, but excluding rent received in advance. Expenses are deductible as if the property business were a trade, and therefore expenses wholly and exclusively incurred for the purposes of the deemed trade are deductible, unless specifically excluded under ITTOIA 2005 ss 33–35, 51, 68, 106, such as capital expenditure or private expenditure. 17.9 From 6 April 2005, ITTOIA 2005 ss 349–356 and ITA 2007 s 127 set out the post-cessation receipts rules for a property business. 17.10 Repair expenditure on property acquired in need of repair and redecoration should be deductible under the principles of Odeon Theatres Ltd v Jones (1971) 48  TC  257 but refurbishment of uninhabitable property would probably be capital following Law Shipping Co Ltd v IRC  (1923) 12 TC 621.

PROPERTY LET AT AN UNDERVALUE 17.11 Property let at an undervalue is taxed on the net rent with no adjustment for the undervalue to bring it up to a market rent. However, if a deficiency arises on property let at an undervalue, it may be possible for HMRC to argue that the additional expenditure is not incurred wholly and exclusively for the purpose of the deemed trade and, therefore, it would fail the duality of purpose test in ITTOIA 2005 s 34. 17.12 Interest should be deductible if incurred for the purpose of the deemed business as in a trade, provided that it is incurred wholly and exclusively for the property business. This is irrespective of the time when the loan was made and whether or not the property is let throughout the year of assessment, and includes interest paid on an overdraft as well as a loan. This will include interest to fund repairs and improvements and the acquisition of new properties (ITTOIA 2005 s 29). 17.13 HMRC has confirmed that, where an investment rate hedging contract such as a swap or cap is taken to hedge interest payments which are deductible in deducing the profits or losses of the property business for income tax purposes, the profits or losses on that contract will normally be taxed or relieved as receipts or deductions of that business, computed on an accruals basis in accordance with UK GAAP (Tax Bulletin No  25  October 1996 p 349). 657

17.14  Trusts of Land 17.14 Interest which is deductible as a property expense cannot also be claimed as a charge on income under ITTOIA 2005 ss 272, 52. Interest paid to a non-resident is non-deductible to the extent that it exceeds a reasonable commercial rate under ITTOIA 2005 s 34(2). 17.15 Because property profits are computed on trading income lines, capital allowances are deductible as a business expense, and any balancing charges are treated as business receipts. Industrial buildings allowances and agricultural buildings allowances under CAA  2001 Part 3 and Part 4 were repealed by FA 2008 s 84 for expenditure incurred in chargeable periods beginning on or after 1 April 2011 for corporation tax purposes and 6 April 2011 for income tax purposes. 17.16 Plant and machinery allowances under CAA 2001 Chapter 2 include fixtures and buildings under CAA 2001 Chapter 14. Plant which is let for use in a dwelling-house is not eligible for allowances, except where the letting is a furnished holiday letting (CAA 2001 ss 15–17). Where a dwelling-house is let furnished as a holiday letting, a wear-and-tear allowance may be claimed under ITT01A 2005 ss  308A–308C for income tax and CTA  2009 ss  248A–248C inserted by SI 2011/1037. This is calculated at 10% of the net rent for the year, namely the rent due less any amount included in the rent towards council tax, water rates or any services normally borne by the tenant.

LOSSES 17.17 Property income tax loss relief provisions in ITA 2007 ss 117–127C apply to trust losses from property. Property losses are carried forward against future profits from the property business indefinitely. Only to the extent that the losses arise from excess capital allowances and agricultural expenses may sideways relief be claimed against other income under ITA 2007 ss 120–124. Losses from furnished holiday lettings on a commercial basis may be relieved sideways or backwards for one year against general income under ITA 2007 s 127 (Walls v Livesey [1995] STC (SCD) 12). 17.18 Rent a room relief under ITTOIA 2005 ss 784–802 is under 785(1) restricted to individuals and is therefore not available to trustees. Various terms in relation to property income are defined by ITTOIA  2005 ss  306, 307. When property is sold and receipts or outgoings apportioned, these are included as property income or expenses of the apportionees under ITTOIA 2005 s 320. 17.19 Although property business profits for income tax purposes are computed on the same basis as a trade, the CGT reliefs for disposals of business assets, such as roll-over relief on reinvestment under TCGA 1992 ss 152–153, and roll-over relief on gifts under TCGA 1992 s 165, are not available except 658

Trusts of Land 17.23 for gains attributable to profits used for furnished holiday lettings in the UK or EEA which are treated as a trade under TCGA 1992 ss 241 and 241A.

NON-RESIDENTS 17.20 Non-resident trustees may elect to self-assess under the Nonresident Landlord Scheme in order to avoid withholding taxes under ITA 2007 ss 971, 972. 17.21 Income from foreign real estate is assessable on UK resident trustees as property income (ITTOIA 2005 s 269(2)) in the same way as UK property, except that the furnished holiday letting rules are now accepted as applying to overseas property within the European Economic Area but not elsewhere. The overseas travel rules in ITTOIA 2005 ss 92–94 do not apply (ITTOIA 2005 s 272(2)). 17.22 Where, as often happens, overseas properties are held by overseas companies of which the shareholders are directors or shadow directors, there could be an employment income benefit in kind (R v Allen [2001] STC 1537; Secretary of State for Trade and Industry v Deverell [2000] 2  All ER  365). Where the company shares are owned by a discretionary trust, which has no other assets and no income, non-director occupiers living rent free under a licence may escape such a charge. If there were any income in the trust or company, there could be a benefit chargeable under ITA 2007 s 732 or, for a settlor beneficiary under ITA 2007 s 720, on the trust income. The actual or shadow director problem could apply to the occupier of a UK property owned by a company where the shares are held by trustees. See 17.41 below for the Annual Tax on Enveloped Dwellings.

FLAT MANAGEMENT COMPANIES 17.23 The Landlord and Tenant Act 1987 (LTA 1987) s 42 provides that, in certain cases, contributions to variable service charge funds and sinking funds in respect of residential property should be paid into a trust fund. Investment income arising to the trust fund is chargeable on the trustees at the trust rate or the dividend trust rate, as there is an implied power to accumulate income under LTA  1987 s  42. In some cases, however, management expenses and service charges are handled through a flat management company outwith LTA 1987 s 42, which only applies where tenants of two or more apartments are required under the terms of their lease to contribute to variable service charges for the repairs, maintenance etc of the property under LTA  1985 s  18(1) where the landlord is not an exempt landlord under LTA 1987 s 58(1). Exempt landlords include registered social landlords, district councils, and certain development corporations under LTA 1987 s 58. 659

17.24  Trusts of Land 17.24 Where LTA  1987 does not apply, funds held by a flat management company will be held as bare nominees for the tenants, in which case they will be taxable on the income, unless the company is carrying on a business to supply services in return for service charges, and the company would then be taxable on its trading profits. An unincorporated association, such as a residents’ association, holding funds, would be liable to corporation tax unless it was acting as a trustee. Similarly, an individual might hold the funds on behalf of the residents and could be carrying on a trade, or holding as nominee, or on a more formal trust for the residents. Most informal trusts would, in practice, allow accumulation of income and would therefore be taxed as discretionary trusts. Where the flat management company acts as trustee and has no income of its own, it may be treated as dormant.

TRANSACTIONS IN LAND 17.25 ITA  2007 ss  752–772 were widely drawn anti-avoidance sections which applied where a gain of a capital nature was realised on the disposal of land or property deriving its value from land and were repealed by FA 2016 s 79(5) with effect for disposals on or after 5 July 2016, as amended by F(No 2) A 2017 s 39. 17.26 The acquisition of land with the intention to develop is likely to be a trading venture (Kirkham v Williams (1991) STC 533.

SALE AND LEASEBACK TRANSACTIONS 17.27 If the trustees sell land and lease it back, a deduction for the rent payable can only be claimed to the extent that it does not exceed a commercial rent for the premises under CTA 2010 ss 834–848 and ITA 2007 ss  681A–681DP, payments connected with transferred land. This limitation applies for the purposes of property, trading and other income, management expenses claims etc. Where a short lease having no more than 50 years to run is sold and leased back for a term not exceeding 15 years, part of the sale consideration is treated as taxable income under CTA 2010 ss 849–862 and ITA  2007 ss  681B–681BM. That part is given by the formula (16 – n/15), where ‘n’ is the term of the new lease. If the sale and leaseback is of trading premises, the assessable amount is a trading profit, otherwise it is taxable as miscellaneous income. The relevant period of the new lease is deemed to cease at the time of the first rent review under which the rent payable is reduced, to prevent avoidance by concentrating income into the early period. The period may also end at the date when either the lessor or lessee has power under the lease to determine it or vary his obligations thereunder. There are anti-avoidance rules to prevent a sale by one party and a leaseback by an associated party. 660

Trusts of Land 17.29

CAPITAL GAINS TAX 17.28 Although a lease is a capital asset under TCGA 1992 Sch 8, a lease with less than 50 years to run is a wasting asset. However, instead of being deemed to depreciate on a straight-line basis over its life under TCGA 1992 s 46, it is deemed to depreciate on a curved-line basis in accordance with the statutory table set out in TCGA 1992 Sch 8 para 1. The cost of the lease is diminished by multiplying it by the fraction P(1) – P(3)/P(1) where P(1) is the table figure for the duration of the lease at acquisition, and P(3) is the table figure for the duration of the lease at disposal. Similar calculations are made in respect of any additional expenditure. One-twelfth of the difference between consecutive figures is added for each month of the duration of the lease over and above an exact number of years, with 14 days or more counting as another month. In the following formula, P(2) is the time when any additional expenditure is first reflected in the value of the property, and P(3) is the duration of the lease at the time of disposal. In the case of additional expenditure, the formula becomes P(2) – P(3)/P(2) for each main item of expenditure. It will be appreciated that, because of the wasting asset rules applicable to leases, a sale at less than cost but more than the depreciated value gives rise to a chargeable gain, and if a lease expires and is replaced with a new lease, then a subsequent disposal will be entirely chargeable to capital gains tax, even though it may have been disposed of at less than the cost of the original lease, subject to any taper relief or any capital sum paid for the new lease.

PRIVATE RESIDENCES 17.29 Capital gains tax relief in respect of any gain arising on the disposal of a private residence by an individual is given by TCGA 1992 ss 222–224. The relief is extended to trustees of a settlement under TCGA 1992 s 225 where a dwelling-house owned by the trust is sold, where it has been occupied by a beneficiary of the trust under the terms of the settlement and the gain chargeable on the trustees, if any, is calculated on the same figure as would have applied if the individual had owned the property (Sansom v Peay [1976]  STC  494). Similar relief is available to personal representatives under s  225A, and on divorce, in connection with certain employment, adult placement-carers and disabled persons or those in care homes under ss 225B–255E, who dispose of a house which, before and after the deceased’s death, had been used as their 661

17.30  Trusts of Land only or main residence by individuals who under the will or intestacy or other relevant circumstances are entitled to the whole or substantially the whole (at least 75%) of the proceeds of the house either absolutely or for life.

PART DISPOSALS 17.30 Where less than the total interest owned in an asset is disposed of, it becomes a part disposal within TCGA 1992 s 42, giving rise to an apportionment of the allowable expenditure which is reduced to the fraction A/A + B where A is the consideration for the disposal, and B is the market value of the property not disposed of. The part disposal formula is not applied to expenditure which can be properly identified with a part disposed of or retained. Each share in an unquoted company is a separate asset, and a disposal of part of the shareholding is not a part disposal. With land, a sale out of a larger estate can usually be treated, at the taxpayer’s option, either as a part disposal or as a disposal of a part and the gain computed separately in accordance with the facts (SP/D1).

STAMP DUTY LAND TAX 17.31 Stamp duty land tax (SDLT) was introduced by FA 2003 ss 42–124 and Schs 2A–20. The disclosure of stamp duty land tax avoidance schemes provisions were introduced by FA  2004 ss  306–319, and the rules relating to alternative finance investment bonds were introduced by FA 2009 Sch 61. From 1 April 2015 SDLT in Scotland is replaced by the Land and Buildings Transaction Tax, which is outside the scope of this book. 17.32 SDLT was introduced to replace stamp duty on transactions involving land and buildings in the UK. It applies whether or not there is an instrument effecting the transaction, and whether or not it is executed in the UK or the parties to the transaction are resident in the UK. It is a charge on transactions and can extend to uncompleted contracts; it differs from stamp duty, which was a charge on documents and in many cases was easily avoided by leaving the transaction incomplete and resting on contract. SDLT is self-assessed, and the usual HMRC enforcement, enquiry and appeal procedures apply. It only applies to land in the UK and extends to variations of chargeable interests in the land. Exchanges of land usually require both transactions to be subject to stamp duty land tax. There are special rules for certain Islamic financing transactions which are structured as sales and reacquisitions to avoid creating loan interest. SDLT applies to the acquisition of a chargeable interest in land and is payable when the transaction is substantially performed, whether or not the transfer is formally completed. 662

Trusts of Land 17.36 17.33 Stamp duty land tax is chargeable on the consideration relating to options and pre-emptions rights and exchanges of land. FA 2003 s 49 and Sch 3 exempt transactions which are not for chargeable consideration, as defined by FA 2003 s 50 and Sch 4, which means that land which is given away or settled on trust is normally exempt. Also exempt are certain leases granted by registered social landlords, and transactions which are part of a divorce settlement or the dissolution or annulment of a civil partnership or where the land passes under a will or intestacy. Transactions within two years of a death, as a result of a variation of the testamentary disposition, where the consideration in money or money’s worth is a corresponding variation affecting another party, are also exempt. The chargeable consideration includes any value added tax under FA 2003 Sch 4 para 2. There is no discount for deferred consideration. 17.34 Where land is transferred to a connected company, SDLT is charged at market value under FA 2003 s 53. This prevents a landholder transferring land for no consideration to a company and then selling the shares in the company, when the stamp duty would be either zero if it were a non-resident company or 0.5% if it were a UK company. There are exceptions from this deemed market value rule under FA 2003 s 54 where the transfer is, for example, to a trust company in the course of a business of trust management, in certain cases, or it is a distribution in specie by a company by way of dividend or distribution on winding up. 17.35 The rates of stamp duty land tax are prescribed by FA 2003 s 55 as follows:

Table A: Residential – up to 3 December 2014 Relevant consideration

Percentage

Not more than £125,000

0%

More than £125,000 but not more than £250,000

1%

More than £250,000 but not more than £500,000

3%

More than £500,000 but not more than £1,000,000

4%

More than £1,000,000 but not more than £2,000,000

5%

More than £2,000,000

7%

Table B: Residential from 4 December 2014 17.36 From 4  December 2014 the rates of SDLT are applied on a slice basis under the Stamp Duty Land Tax Act 2015 s  1 instead of the previous slab system which caused bunching at the margins. The revised rates from 4 December 2014 are: 663

17.37  Trusts of Land Residential properties •

Nothing on the first £125,000 of the property price

•

2% on the next £125,000

•

5% on the next £675,000

•

10% on the next £575,000

•

12% on the rest (above £1.5 million)

Corporate bodies, including partnerships including companies and collective investment schemes SDLT is charged at 15% on residential properties costing more than £500,000 Residential leases If the residential lease premium plus the net present value of the rent payable over the life of the lease is more than £125,000, 1% SDLT is charged on the amount above the £125,000 threshold, under FA 2003 s 56 and Sch 5.

Table C: Non-residential or mixed 17.37

The slab system applies to these properties.

Non-residential and mixed-use properties, ie  commercial property such as shops and offices, agricultural land, woodlands, land or property not used as a dwelling and six or more residential properties bought in a single transaction •

Nothing on the property price, premium or value up to £150,000 (where the annual rent is less than £1,000)

•

1% on properties up to £150,000 (where the annual rent is £1,000 or more)

•

1% on properties between £150,001 and £250,000

•

3% on properties between £250,001 and £500,000

•

4% on properties over £500,000

17.38 Prior to 4 December 2014 the tax payable on the grant of a lease is set out by FA 2003 s 56 and Sch 5. The SDLT payable was based on any premium and the net present value of the rental payable over the term of the lease, using the formula in FA 2003 Sch 5 para 3. The resultant figure was charged at 0% in the case of residential property where the rental value did not exceed £125,000 or, in the case of non-residential property, where the value does not exceed £150,000. Above these limits, SDLT was charged at 1%. 664

Trusts of Land 17.40 17.39 There are a number of SDLT reliefs where the property is in a disadvantaged area (FA 2003 s 57 and Sch 6). Relief for sale and leaseback arrangements is included in FA  2003 s  57A, first-time buyers in s  57AA, relief for zero-carbon homes in ss  58B and 58C and transfers involving multiple dwellings in s  58D and Sch  6B. Property traders may claim relief for certain acquisitions of residential property in a transaction to facilitate the purchase of another property by virtue of FA 2003 s 58A. There are also reliefs for zero-carbon homes, compulsory purchases, and compliance with planning permission. FA  2003 s  62 and Sch  7 provide for group relief and reconstruction or acquisition relief to companies. Relief on the incorporation of limited liability partnerships is given by FA  2003 s  65. A  general antiavoidance rule is applied under FA  2003 ss  75A–75C. Relief for charities is given by FA  2003 s  68 and Sch  8 as amended by FA  2014 s  113 and Sch 23. SDLT is a self-assessed tax and the administrative provisions are set out in FA 2003 ss 76–92. HMRC has powers to obtain information, inspect premises and charge penalties where taxpayers fail to self-assess correctly. FA 2003 ss 100–124 define various terms and introduce special rules relating to partnerships at s  104 and Sch  15, and for trustees at s  105 and Sch  16. The anti-tax avoidance scheme rules in FA 2014 Parts 4–7 relating to follower notices and accelerated payments extend to SDLT, as do the provisions relating to promoters.

SDLT TRUSTS AND POWERS 17.40 FA 2003 Sch 16 para 1 defines settlement, bare trust and nominee. A settlement is simply defined as a trust which is not a bare trust. Beneficiaries in Scotland or territories outside the UK are treated as having an equitable interest in trust property if they would have one under English law (para 2). The acquisition of a chargeable interest as bare trustee is treated for SDLT purposes as the interest of the person for whom the bare trustee acts, subject to anti-avoidance provisions. Trustees acquiring an interest in land or an interest in a partnership as purchasers are treated as acquiring the whole interest under para 4. Where SDLT becomes due, under para 5 the responsible trustees are required to pay the tax, interest or penalty. Paragraph 6 provides that the return in respect of a land transaction may be given by any one or more of the responsible trustees, but the declaration that a return is correct and complete must be made by all the relevant trustees. If HMRC gives notice of an enquiry into the return, that must also be given to each of the relevant trustees, as must a discovery assessment or HMRC determination. An appeal may be brought by any of the relevant trustees but, if settled by agreement, all the relevant trustees must agree. 665

17.41  Trusts of Land The purchase of a beneficial interest in a trust, followed by a distribution of a chargeable interest in land, is treated as the acquisition of an interest in land for the amount paid (para 7). Paragraph  8 provides that, where a beneficiary consents to a cessation of interest in one trust property and the acquisition of an interest in another, that consent does not, of itself, trigger a charge to SDLT. The intricacies of stamp duty land tax are far from simple, and readers are referred to MHA MacIntyre Hudson’s Orange Tax Guide for a more detailed commentary.

ANNUAL TAX ON ENVELOPED DWELLINGS (ATED) 17.41 The holding of residential property in the UK through a corporate vehicle or private unit trust has been a common device for a variety of reasons, and whilst some structures may be motivated by tax considerations, commercial factors have frequently been the driving force behind the choice of ownership vehicle. HMRC has long been suspicious of what it refers to as ‘enveloping’ structures and announced in Budget 2012 the intention to introduce a range of measures targeting arrangements used to hold ‘high value’ residential property. A consultation document, ‘Ensuring the fair taxation of residential property transactions’, was issued on 1 May 2012 setting out the government’s proposals for an annual tax charge on residential property held by ‘non-natural persons’ and an extension to the scope of capital gains tax charge on the disposal of property attracting the annual charge, irrespective of the territory of residence of the non-natural person. A  third measure – a 15% rate of stamp duty land tax – was introduced from 21 March 2012 for a non-natural person acquiring high-value residential property on or after that date, and this higher rate has applied to acquisitions of property over the threshold. Both the ATED charge and capital gains tax levy came into effect on 1  April 2013. The legislation is contained in FA  2013 Part 3 ss  94–174. It should be emphasised that the ATED provisions, capital gains charge and increased rate of SDLT apply only to residential property: the holding of commercial property by a non-natural person seemingly does not offend HMRC’s principles of fair taxation. Residential property outside the UK is also excluded from the ATED charge. The government has decided to abolish ATED-related capital gains tax and expand the non-resident CGT regime with effect from 6 April 2019. HMRC has published technical guidance on the ATED scheme at www.gov.uk/ government/publications/annual-tax-on-enveloped-dwellings-technical-guidance.

666

Trusts of Land 17.44

Charge to tax 17.42 A  charge under the ATED provisions arises where a ‘non-natural person’ has a ‘chargeable interest’ in a ‘single dwelling interest’ for one or more days in a ‘chargeable period’, and the taxable value of the interest is in excess of the ‘threshold amount’. A non-natural person means a company, certain collective investment schemes and a partnership if a corporate partner has an entitlement to the interest in the residential property (FA 2013 s 94(4)). Persons within the scope of the charge include both UK residents and those resident or established overseas. The definition of a non-natural person does not include interests held by trustees, personal representatives or beneficiaries, but given that it would be relatively unusual for trustees to hold UK property directly, trust structures involving the ownership of residential property through an underlying company will potentially be within scope of the ATED rules. Charitable companies, public bodies and bodies established for national purposes are exempt from the charge. Dwellings conditionally exempt from inheritance tax under IHTA 1984 s 31 are also exempt until there is a chargeable event. 17.43 The threshold amount was £2 million for 2013/14 and 2014/15, reducing to £1 million for 2015/16 and £500,000 for 2016/17. This amount is tested on the valuation date, meaning 1 April 2012 and each 1 April falling five years or multiple of five years after that date. A valuation date also falls on the date of an acquisition of a chargeable interest in the dwelling, or the date of a part disposal. A disposal of part of a dwelling for this purpose includes the grant of a chargeable interest such as a lease but not the grant of an option. In the absence of a disposal or acquisition of a chargeable interest, for property held at 1 April 2012 the next valuation date will be 1 April 2017, applying for chargeable periods from 1 April 2018. 17.44 A ‘chargeable interest’ means an estate, interest, right or power over land in the UK (other than Scotland), or the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power. The interest must be a ‘single dwelling’ interest. A dwelling means a building or part of a building at any time when it is used or suitable for use as a single dwelling, or is in the process of being constructed or converted for use as such (FA 2013 s 110(1)), together with surrounding gardens, grounds or land subsisting for the benefit of the dwelling. Whether a building or part of a building is suitable for use as a dwelling is a question of fact, but any temporary period of unsuitability for use as a dwelling is ignored (FA  2013 s  112(6)). Guidance in HMRC’s SDLT Manual (SDLTM20076) suggests that it is current use which is the critical factor, rather than past or intended future use. However, HMRC’s guidance also refers to the manner in which a property is marketed as being a relevant indicator of residential or non-residential use, seemingly contradicting this point. Certain properties, such as halls of residence, hotels, hospitals and prisons are excluded from the definition of a residential dwelling (FA 2013 s 112(4)). 667

17.45  Trusts of Land 17.45 A single dwelling is one which is distinct from an interest in another dwelling, even if they stand successively on the same land (FA 1013 s 108(6)). The person chargeable to ATED is the person having the chargeable interest (FA  2013 s  96), and where persons are jointly entitled to an interest, those persons are liable jointly and severally for the ATED charge (FA 2013 s 97). 17.46 The first chargeable period for the ATED charge began on 1 April 2013 and ended on 31 March 2014. Each subsequent 12-month period commencing on 1 April is a chargeable period. A pro-rata charge applies where property moves in or out of the ATED regime part way through the year. The annual charge is as follows: Value of property

2013/14 2014/15 2015/16

2016/17

2017/18

2018/19

£500,001 to £1,000,000

nil

nil

nil

£3,500

£3,600

£3,650

£1,000,001 to £2,000,000

nil

nil

£7,000

£7,000 + CPI

£7,250 + CPI

£7,400 + CPI

£2,000,001 to £5,000,000

£15,000 £15,400 £23,350 £23,350 + CPI £24,250 + CPI £24,800 + CPI

£5,000,001 to £10,000,000

£35,000 £35,900 £54,450 £54,450 + CPI £56,550 + CPI £57,900 + CPI

£10,000,001to £20,000,000 Over £20,000,001

£70,000 £70,860 £109,050 £109,050 + CPI £113,400 + CPI £116,100 + CPI £140,000 £143,350 £218,200 £218,200 + CPI £226,950 + CPI £232,500 + CPI

The charge is increased each year in line with the Consumer Price Index (CPI) of the previous September. Where the CPI is negative, there will be no increase in the charge for the following year, but also no decrease. Unlike the ATED charge, the bands themselves will not be increased in line with inflation.

Valuation 17.47 The valuation of a property interest within the ATED charge requires a specific valuation, rather than a range. Although there is no formal requirement to obtain a professional valuation, there is the risk of penalties being levied in the event that the valuation adopted in the ATED return is significantly understated, or that no effort has been made to verify that properties with a value close to the starting threshold are within or outside the ATED charge. 17.48 HMRC offers a ‘pre-banding check’ service where it is reasonable to believe that the property’s valuation falls within 10% of a banding threshold; see www.gov.uk/annual-tax-on-enveloped-dwellings-pre-return-bandingchecks. A  pre-banding check confirms HMRC’s agreement or otherwise to the banding proposed, it is not an agreement to the valuation of a particular property. Once a property has been banded in line with the above value ranges, the relevant ATED charge will apply for that year and the following five years (unless there is an acquisition or disposal of a chargeable interest in the interim, which will trigger a new valuation date and potentially a new banding).

668

Trusts of Land 17.52

Reliefs 17.49 There are a number of reliefs available from the ATED charge, and for each day that a relief applies (a ‘relievable day’) in a chargeable period, the charge is reduced accordingly. The principal reliefs cover property rental, development and trading businesses and property used by employees closely connected with the chargeable person. Relief is also available for dwellings open to the public for at least 28 days a year and run as a business, farmhouses occupied by a working farmer, providers of social housing and financial institutions acquiring dwellings in the course of a lending business. 17.50 For relief to apply to a dwelling let as part of a property rental business (as defined in CTA 2009 Pt 4), the business must be conducted on a commercial basis with a view to the realisation of profit. The property need not actually be let throughout the chargeable period, provided it is held with the intention of being let and steps are taken to secure that it will be let without delay except where a delay is commercially justified or otherwise unavoidable (FA 2013 s 133(1)). The property must be let to third parties, as any day on which the property is actually occupied or intended to be occupied by a nonqualifying individual will not be a relievable day. A non-qualifying person is an individual entitled to the interest in the property, persons connected with that individual, including a relevant settlor where the trustee is connected with the person entitled to the interest. Certain persons connected with such a settlor are also within the definition (FA 2013 s 136). 17.51 There are also ‘look forward’ and ‘look back’ provisions which provide that subsequent days in the chargeable period of occupation will also be non-relievable days, as will all days in the next three chargeable periods, and an earlier day in the chargeable period of occupation will also not be a relievable day unless there has been a relievable day, ie a letting to a third party, in the interim. These penal provisions mean that a single day’s occupation or even planned occupation by a non-qualifying person forfeits relief from the ATED charge for at least three tax years. 17.52 A  property held for the purposes of a development trade will qualify for relief, provided that the business is run on a commercial basis with a view to the realisation of profit. The definition of a property development trade makes it clear that there must be an intention to sell the property once development is complete (FA  2013 s  138). Property which is let prior to sale will, however, not jeopardise relief provided that it is let as part of a qualifying rental business. Similarly, property held as trading stock will qualify for relief provided that the business of buying and selling dwellings is carried on on a commercial basis with a view to the realisation of profit (FA  2013 s  141). As with a property rental business, occupation by a non-qualifying person jeopardises relief from the ATED charge for property developers and traders. 669

17.53  Trusts of Land

Administration 17.53 A person within the scope of the ATED regime must self-assess their liability and complete an ATED return for each period in which the required interest in a dwelling valued above the threshold amount is held by the chargeable person (FA 2013 s 161). Returns are due on 30 April each year, ie the return for the period 1 April 2015 to 31 March 2016 was due by 30 April 2015. Payment of the ATED charge is due on the same date. There was an exception in the first year of charge, where the ATED return and tax were due on 1 October 2013 where the person held the interest in the property at 1 April 2013, otherwise the return was due within 30 days commencing on the first date the ATED charge applied. The tax was due on 31 October 2013, or the filing date of the ATED return if later (FA 2013 Sch 35). The format and the contents of the return is prescribed by FA 2013 Sch 33. Returns may be filed electronically at https://online.hmrc.gov.uk/shortforms/form/ATED20142?dept-name=&sub-dept-name=&location=41&origin=http://www.hmrc.gov. uk or sent in paper format to: ATED Processing Team 3rd Floor Crown House Birch Street Wolverhampton West Midlands WC1 4JX 17.54 As the ATED return is required to be filed before the end of the chargeable period, any change in circumstance, such as a relief becoming available part way through the period, needs to be dealt with through the filing of an amended return. An amended return must be filed within 12 months of the end of the chargeable period, or three months from the filing date where the original ATED return was filed on or after 1 January following the end of the chargeable period to which the amendment relates. 17.55 A return of adjusted chargeable amount or further return (as distinct from an amended return) will be required where an event takes place in the chargeable period leading to an increase in tax due, and the increase is not as a result of a claim to relief in the earlier return. In that case, the further return must be filed within 30 days of the start of the next chargeable period (normally 30 April). A further return is also due where interim relief has been claimed, and an event occurs after the end of the chargeable period which gives rise to an additional tax liability. In that case, the further return must be filed within 30 days of the date on which the event giving rise to the additional tax liability took place. 17.56 The collection and recovery of ATED plus associated penalties and interest is subject to the same rules governing SDLT under FA 2003 Sch 12. 670

Trusts of Land 17.60 17.57 The ATED form as it stands at the time of writing requires a valuation for the property to be included on the form, even if a relief is being claimed. It also requires a form to be completed for each property that is caught under the ATED rules. However, to reduce the administrative burden on those within the ATED regime, HMRC has introduced a new, shorter relief return. The shorter form return can be used where property is eligible for relief and no ATED charge arises. A separate return is required for each relief being claimed. The filing date for the new relief return was 1 October 2015 for the year commencing 1 April 2015.  17.58 Powers to enquire into an ATED return, amended return or return of adjusted chargeable amount are contained in FA 2013 Sch 33, along with HMRC’s right to issue a determination in the absence of a return. The penalty provisions in FA  2007 Sch  24 apply to ATED, as do the information and inspection powers of FA 2008 Sch 36 (FA 2013 Sch 34).

Capital gains tax charge 17.59 The charge to capital gains tax was extended from 6 April 2013 to include gains arising on disposals by persons who have been within the charge to ATED in relation to the property interest disposed of. Individuals, trustees and personal representatives are excluded from the charge (TCGA 1992 s 2B). Both UK and non-UK resident companies are therefore subject to the charge, however, the usual rate of corporation tax is disapplied and ATED-related chargeable gains are taxed at the rate of 28%. Where the dwelling was acquired prior to 6 April 2013, tax is charged only on the post-6 April 2013 element. 17.60 For the ATED-related capital gains tax charge to apply, four conditions must be met: there must be a disposal (or part disposal) of a chargeable interest, as defined in FA 2013 s 107, the interest must have formed part of single dwelling interest during the relevant ownership period, the person making the disposal must have been with the charge to ATED in respect of that single dwelling interest on one or more days during that period and the amount or value of consideration for the disposal must exceed the threshold amount. Unless the taxpayer elects otherwise in respect of property held at 5 April 2013, the relevant period of ownership is the period commencing on 6 April 2013 or the date of the acquisition of the chargeable interest, if later. To avoid double taxation on gains realised by offshore companies, ATED-related gains are outside the scope of TCGA 1992 s 13 by virtue of s 13(1A) inserted by FA 2013.

671

Chapter 18

Pension Funds

18.1 The introduction of the registered pensions schemes legislation under FA  2004 from 6  April 2006 (known as ‘A  Day’) was designed to simplify the legislative framework of pension schemes, which had become increasingly fragmented over the preceding 30 years. Prior to A  Day, there were eight pension tax regimes current at that time. These consisted of approved pension schemes and unapproved schemes: of the approved schemes, four were occupational schemes, identified as Old Code (pre-1970) schemes, post-1970 (but pre-1987) schemes, 1987 schemes, and 1989 schemes; the other approved pension schemes related to personal pensions, and were segregated into retirement annuity contracts and personal pension schemes; the two remaining unapproved schemes were funded unapproved retirement benefit schemes (FURBS) and unfunded unapproved retirement benefit schemes (UURBS). The registered pension regime is enshrined in Finance Act 2004 Part 4 Chapter 12, as amended, and has been supplemented by successive Pensions Acts in 2007, 2008 and 2014. 18.2 The Taxation of Pensions Act 2014 represents a further overhaul of the system of pensions, and permits increased flexibility over how individuals receive pension benefits from 6 April 2015. HMRC has published a short guide summarising the changes: HMRC  Notice, ‘Pension flexibility—new options from 6 April 2015’. 18.3 Pension schemes within HMRC are dealt with by Pension Scheme Services, HM Revenue and Customs, BX9 1GH, tel 0300 123 1079. HMRC guidance is published in the Pensions Tax Manual (PTM).

PRE-1970 SCHEMES 18.4 Pre-1970 scheme rules applied to people who joined a pension scheme before 1970 under which there were different rules for pensions paid from trust funds as opposed to pension funds. There was no limit on tax-exempt employer contributions and the employee was entitled to tax relief on contributions of up to 15% of his remuneration. Pension benefits of up to two-thirds of final remuneration after 20 or more years of service were allowed. Commutation was not available for trust fund pensions but there was a limited right of 673

18.5  Pension Funds commutation within pension funds. Most of these schemes became registered pension schemes from 6  April 2006, subject to transitional provisions in FA 2004 Sch 36.

POST-1970 (PRE-1987) SCHEMES 18.5 Schemes set up after 1970 allowed a pension of up to two-thirds of uncapped final remuneration after 10 years of service. They also allowed commutation as a tax-free lump sum of 1.5 times uncapped final remuneration for 20 years of service, with a pro rata reduction for reduced periods of service. There were also special rules for early leavers, for early and late retirement, and for retained benefit rules in connection with benefits available from pension rights from previous employments. These provisions applied to occupational pension schemes approved before 23 July 1987 and to members joining such a scheme before 17  March 1987. Most of these schemes became registered pension schemes from 6  April 2006, subject to transitional provisions in FA 2004 Sch 36.

1987 SCHEMES 18.6 Occupational pension schemes approved before 23  July 1987 were dealt with in ICTA 1988 Sch 23 para 1, with transitional provisions effective from 17 March 1987, under the Occupational Pension Schemes (Transitional Provisions) Regulations 1988 (SI 1988/1436). 18.7 Where an employee became a member of an occupational pension scheme on or after 17  March 1987, the maximum pension allowed was one-thirtieth of relevant annual remuneration for each year of service, up to a maximum of 20 years giving the limit of two-thirds of final salary, under the accelerated accrual provisions. Most of these schemes became registered pension schemes from 6  April 2006, subject to transitional provisions in FA 2004 Sch 36.

1989 SCHEMES 18.8 These were introduced by FA 1989 s 75, and Sch 6 Part 1 paras 1–17 amended ICTA  1988 Part XIV  Chapter 1, and transitional provisions were made in Sch 6 Part 2 paras 19–30. They applied to employees who joined a scheme, which was in existence at 14 March 1989, on or after 1 June 1989, and to all members of a scheme which came into existence on or after 14 March 1989 (FA  1989 Sch  6 para  20). Most of these schemes became registered pension schemes from 6  April 2006, subject to transitional provisions in FA 2004 Sch 36. 674

Pension Funds 18.13

Occupational schemes – mandatory approval – 1989 schemes 18.9 Occupational pensions were dealt with under the heading of retirement benefit schemes in ICTA 1988 Part XIV Chapter 1, as amended. The conditions for mandatory approval of retirement pension schemes, in ICTA 1988 s 590, applied to 1989 and later occupational pensions schemes which met all the conditions in the section. A  scheme had to be a bona fide pension scheme recognised by the employer and the employee. Most occupational schemes were within the discretionary approval regulations in ICTA 1988 s 591 rather than the statutory approval under s 590. In practice, statutory approval under ICTA 1988 s 590 was normally confined to investment companies. However, even under a mandatory scheme within s 590, HMRC had the right to refuse or withdraw approval. 18.10 A mandatory approved scheme had to provide benefits at a specified retirement age of between 60 and 75 (ICTA 1988 s 590(3)(a)). The pension should not exceed one-sixtieth of the employee’s final remuneration for each year of service up to a maximum of 40, ie  a two-thirds pension after 40 years’ service, and could not exceed the pension obtainable by reference to the earnings cap in ICTA 1988 s 590C. A widow’s or widower’s pension could not exceed two-thirds of the employee’s pension, ie four-ninths of final remuneration. No other benefits were allowed except for partial commutation on employment of three-eightieths of final remuneration for each year of service, up to a maximum of 40, ie maximum commutation of 1.5 times final remuneration ignoring that in excess of the earnings cap. 18.11 Pension splitting on divorce or annulment was provided for in FA 1999 Sch 10 with effect from 10 May 2000 (SI 2000/1093). The lump sum permitted for people splitting under a pension sharing order was not to exceed 2.25 times the amount of the pension for the first year in which it was payable (ICTA 1988 s 590(3)(da)). 18.12 The earnings cap, which placed a maximum on the employee’s final remuneration for the purposes of exempt approved schemes, was given by ICTA 1988 s 590C. It was index-linked under ICTA 1988 s 590C(5), (5A) and (6) and confirmed by statutory instrument. The earnings cap became largely redundant after 6 April 2006, but HMRC agreed to publish details of a notional earnings cap each year until 2011. The notional figure in 2009/10 was £123,600.

Discretionary approval 18.13 HMRC could, and usually would, approve an occupational pension scheme under ICTA 1988 s 591 which provided for a two-thirds pension after 20 years’ full-time service as an employee of a company carrying on a trade or business. It would also provide for a widow’s or dependant’s pension on death 675

18.14  Pension Funds before retirement and a lump sum death in service life cover of four times final remuneration, plus a return of contributions. Tax-free commutation at normal retirement age of 1.5 times final remuneration after 40 years’ service, or 2.25 times the initial pension payable if greater, was allowed under ICTA  1988 s 590(3)(da)(i) and FA 1989 Sch 6 para 23. Retirement could be allowed at age 50 (ICTA 1988 s 591(2)(d)) or on earlier incapacity; and, in special cases, retirement at earlier ages, say 35 for sportsmen such as professional footballers, was allowed, with reduced benefits. The return of an employee’s contributions was allowed, and the scheme could be set up by a non-resident employer in respect of a trade or undertaking carried on only partly in the UK. The HMRC guidelines for approving an occupational pension scheme were contained in booklet IR12.

Withdrawal of approval 18.14 HMRC could withdraw approval retrospectively if the conditions were not met under ICTA 1988 s 591B. If a scheme was altered, approval was lost unless the alteration was approved by HMRC. Cases in which approval was withdrawn include R v IRC ex p Roux Waterside Inn Ltd [1997] STC 781 and R  (on the application of Mander) v IRC  [2002]  STC  631. These two schemes involved unsuccessful attempts to unlock funds held within approved pension schemes. A dishonest scheme to achieve the same effect resulted in the prosecution and imprisonment of Anil Kumar, a tax consultant and one of the partners perpetrating such schemes (Tax Bulletin June 2004, Issue 71 p 1127). HMRC also withdrew approval for a Small Self Administered Scheme (SSAS) where it was left without a pensioneer trustee (Lambert (Administrators of the CID  Pension Fund) v Glover [2001]  STC (SCD) 250). The problem arising from the withdrawal of approval was a tax charge under ICTA 1988 s 591C.

STATUTORY SCHEMES 18.15 Certain pre-14  March 1989 schemes set up by statute, for example the National Health Service Acts, allowed a deduction for contributions of up to 15% of capped earnings under ICTA  1988 ss  594, 590C. These schemes became registered pension schemes from 6 April 2006, subject to transitional provisions in FA 2004 Sch 36. Extra statutory concession A9 allowed further contributions by doctors and dentists in respect of additional contributions paid to retirement annuity policies under ICTA 1988 ss 619–624.

RETIREMENT ANNUITY POLICIES 18.16 Retirement annuity policies (RAPs) are deferred annuities used to provide a lump sum on retirement and a pension, which were replaced by 676

Pension Funds 18.19 personal pension schemes with effect from 1 July 1988. No new RAPs could be set up after that date but existing schemes continue both to accept premiums and to pay out benefits (ICTA 1988 s 618). Qualifying premiums paid under a RAP, also known as a self-employed deferred annuity, were deductible for tax purposes up to a percentage of uncapped net relevant earnings. The percentage was 17.5% for people under 50, increasing to 27.5% for those aged 61 or more (ICTA  1988 s  626). As part of the premium paid, up to 5% of net relevant earnings could be allocated to provide family income cover or whole life cover in respect of death before retirement, which had to be before age 75. On death before retirement, an annuity can only be payable to a spouse or dependant, but the lump sum payable on death can be paid to anyone at the discretion of the pension provider (ICTA  1988 ss  619, 621). Retirement annuities are either contractual arrangements under which the scheme provider enters into a contract to provide the agreed benefits, or trust arrangements. In either case, the benefits of the policy can be written in trust. Retirement annuities became registered pension schemes from 6 April 2006, subject to transitional provisions in FA 2004 Sch 36. 18.17 As with other pension schemes, the amount payable on death is free from inheritance tax, under IHTA  1984 s  151, which includes a commuted widow’s pension under a cash option arrangement (IHTA  1984 s  152). Qualifying premiums are those paid by an individual under a deferred annuity arrangement approved by HMRC, which will provide a pension for the life of the annuitant and his widow and dependants, although it is possible to have a guaranteed pension for up to ten years. Such a pension must normally commence between the ages of 60 and 75. On death before retirement, the policy may provide for a return of premiums, normally with interest, or, in the case of a unitised scheme which is invested in tax-free unit trusts, the death benefit may equal the value of the units acquired by the premiums paid in respect of the policy. A pension may be taken prior to the age of 60 in cases of ill-health or as a result of the nature of the profession, eg sportsmen with a limited active career (ICTA 1988 s 620). It is possible for an annuity contract to be replaced by a substitute policy under ICTA 1988 s 622. 18.18 Relevant earnings for retirement annuity schemes are those from nonpensionable employment or immediately derived from the exercise of a trade, profession or vocation. There is an exception for doctors and dentists who are members of a statutory retirement benefit scheme under the National Health Service Acts, as they may also make further contributions into retirement annuity policies under extra-statutory concession A9 (ICTA  1988 s  623). There is a limited right to carry forward unused relief to pay premiums in a subsequent year under ICTA 1988 s 625. 18.19 The maximum commutation under a retirement annuity scheme is such a sum as does not exceed three times the annual amount of the remaining part of the annuity left after the commutation (ICTA 1988 s 620(3)(a)). This 677

18.20  Pension Funds is otherwise uncapped, except for schemes entered into on or after 17 March 1987, where the lump sum is capped at £150,000 under ICTA 1988 s 618(2). Benefits taken under a RAP, apart from lump sum commutations, are subject to tax in the same way as earnings under ITEPA 2003 ss 605–608.

PERSONAL PENSION SCHEMES 18.20 Personal pensions were introduced with effect from 1 July 1988, to replace retirement annuity schemes, and no new retirement annuities could be taken out on or after 1 July 1988. Personal pensions are either contractual schemes with approved pension providers under the Financial Services and Markets Act 2000 (ICTA  1988 s  632(1)) or established under a trust under ICTA 1988 s 632(1A). Approval of the scheme was by HMRC in accordance with ICTA  1988 s  631 which included conversion from formerly approved retirement benefit schemes under ICTA 1988 s 631A. Various terms are defined by ICTA 1988 s 630. These schemes became registered pension schemes from 6 April 2006, subject to transitional provisions in FA 2004 Sch 36. 18.21 Under ICTA  1988 s  632B(1)(e), contributions to personal pensions were limited according to age (up to age 35, the limit was 17.5% of relevant gross earnings). 18.22 From April 2001, personal pension legislation included stakeholder pensions, and therefore the eligibility to make contributions applied to someone who had actual net relevant earnings (ICTA 1988 s 632A(1)–(4)) or was not in a relevant superannuation scheme and was resident and ordinarily resident in the UK, or had been within the previous three years when the pension arrangements were made, or who was a Crown servant deemed to work in the UK, or a spouse of such a person (ICTA 1988 s 632A(5)–(9)). 18.23 Anyone eligible to make contributions could make a contribution up to the stakeholder pension limit, ie the earnings threshold of £3,600. Employees who were not controlling directors and whose earnings did not exceed £30,000 could also make contributions within these limits, in addition to any existing schemes to which they belonged, so that they could be members of both schemes concurrently (ICTA 1988 s 632B(2)–(9)). The benefits that could be provided under a personal pension scheme are the payment of an annuity or the withdrawal of income as a pension, the payment of a lump sum on retirement, the payment of a widow’s or dependant’s pension, the payment of a lump sum on death, or a return of contributions on death (ICTA 1988 s 633). 18.24 Under the annuity provisions, subject to the registered pension provisions explained below, the annuity had to commence between the ages of 50 and 75, and had to be payable for the life of the member, but may be guaranteed for a period not exceeding ten years. The annuity could not be 678

Pension Funds 18.27 capable of assignment or surrender, except that a guaranteed annuity could be disposed of by will or on intestacy, and an annuity could be assigned to give effect to a pension sharing order or provision (ICTA 1988 s 634). If a member elected to defer the purchase of an annuity, income withdrawals had to be made but not before age 50 (with certain exceptions) or beyond age 75, at which point an annuity had to be bought under ICTA 1988 s 634A. The withdrawal had to be between 35% and 100% of the purchasable annuity, which had to be recalculated every three years ICTA 1988 s 634A). 18.25 The lump sum is payable only if the member so elects on or before his pension date, which is when the lump sum becomes payable. It must not exceed one quarter of the fund, reduced by non-commutable rights protected by social security legislation. The lump sum must not be capable of assignment or surrender, except for the purposes of giving effect to a pension sharing order or provision (ICTA 1988 s 635).

FUNDED UNAPPROVED RETIREMENT BENEFIT SCHEMES (FURBS) 18.26 If, prior to 6  April 2006, the employer paid a sum of money to trustees in accordance with a non-approved retirement benefit scheme with a view to providing relevant benefits for, or in respect of, an employee, the amount paid was regarded as employment income of the employee for the relevant tax year in which it was paid, unless it was otherwise chargeable to tax (ITEPA 2003 s 386). Relevant benefit means any pension, lump sum, gratuity or other like benefit given, or to be given, on retirement or on death (ICTA 1988 s 612(1)). Relief was available if no benefits were actually paid, or ceased to become payable, under ITEPA 2003 s 392. The benefit rules did not apply to life assurance premiums paid by the employer under ICTA 1988 s 266A. A retirement benefit scheme was, under ICTA 1988 s 611, a scheme providing relevant benefits which was not approved under ICTA 1988 s 612(1), or a relevant statutory scheme within ICTA 1988 s 611A. 18.27 When the benefit is paid to the employee, the amount of the benefit is treated as employment income for the year in which the benefit is provided, under ITEPA 2003 ss 393, 394. However, where the employer’s contribution has been taxed as income, under ITEPA 2003 s 386 or its predecessor ICTA 1988 s 595 and all the income and gains accruing to the scheme have been charged to tax, there is no further charge on a lump sum distribution to an employee, in view of ITEPA 2003 s 396. This would apply in the case of a UK resident FURBS which would have suffered tax at the dividend ordinary rate on dividends and at the savings or basic rate on other income, as the rate applicable to trusts under ICTA  1988 s  686 was disapplied for retirement benefit schemes, including FURBS, by ICTA 1988 s 686(2)(c)(i). However, for capital gains, it is the rate applicable to trusts which applies under TCGA 1992 s 4(1)(a). 679

18.28  Pension Funds 18.28 Onshore FURBS were popular as a means of accumulating income without any higher rate tax charge, or tax payable at the rate applicable to trusts, which could then be paid out tax free as a lump sum under ITEPA 2003 s 396. However, from 6 April 2006, FURBS were subject to tax at the rate applicable to trusts, and as this has been increased to equate with the higher rate of tax by FA 2004 s 29, FURBS ceased to have any tax benefit from that date (Simplifying the Taxation of Pensions para A150), as they are not registered pension schemes. They do, however, retain their inheritance tax exemption as conferring retirement benefits under IHTA  1984 s  12 for contributions paid prior to 6  April 2006 (Simplifying the Taxation of Pensions para A151). Most FURBS still in existence have become paid-up funds, as contributions to FURBS from 6 April 2006 do not attract tax relief for the employer, as it is not a registered pension scheme, and to transfer the funds to such a scheme would involve double taxation. 18.29 Where the income and gains of the FURBS have not been subject to tax, because, for example, the FURBS is resident offshore, there is a tax charge on lump sums received in excess of the amount of the employer’s contribution charged as income under ITEPA 2003 s 386, under ITEPA 2003 s 397. The valuation of benefits in kind from a FURBS are dealt with under ITEPA 2003 s 398 and a double charge on employment related loans is avoided by ITEPA 2003 s 399. Various terms are defined by ITEPA 2003 s 400.

UNFUNDED UNAPPROVED RETIREMENT BENEFIT SCHEMES (UURBS) 18.30 An UURBS is no more than a contractual arrangement between an employer and an employee under which the employer will continue to pay the employee a sum after retirement, as a pension or lump sum, taxable as income of the recipient. It is, therefore, hardly a scheme in the conventional sense. The pension remains deductible for the employer, as being wholly and exclusively laid out or expended for the purposes of the trade within ITTOIA 2005 s 34, or as expenses of management of an investment company under CTA 2009 ss 1219 et seq or of an insurance company under ICTA 1988 s 76 (Smith v Incorporated Council of Law Reporting for England and Wales (1914) 6 TC 477; Hancock v General Reversionary and Insurance Company Ltd (1918) 7 TC 358). A UURBS can apply to become a registered pension scheme if the relevant conditions are satisfied.

EMPLOYER FINANCED RETIREMENT BENEFIT SCHEMES (EFRBS) 18.31 After 6 April 2006, benefits from unapproved pension schemes such as FURBS and UURBS come under the EFRBS rules in ITEPA 2003 ss 393– 400, and are not registered pension schemes. 680

Pension Funds 18.37 18.32 ‘Relevant benefits’ are defined by ITEPA 2003 s 393B as ‘any lump sum, gratuity or other benefit (including a non-cash benefit) provided in anticipation of, or on, retirement, on death, or on a change in the nature of service of an employee or former employee’. Benefits under a pension sharing order or provision are also included. It is provided that benefits charged to tax under ITEPA  2003 Part 9 (pension income) and excluded benefits are not relevant benefits. Excluded benefits are benefits in respect of ill-health or disablement, death by accident, under a relevant life policy and benefits, prescribed by regulations made by HMRC. 18.33 Relief is available where an employee has contributed to the scheme. In this case, the amount of the employee’s contributions is allowed as a deduction from the lump sum. This deduction may only be claimed once in respect of the same contribution and, in order to obtain the deduction, evidence must be provided that contributions have been made. Consequential changes are made to ITEPA 2003 s 399 with the effect that ‘responsible person’ is substituted for ‘administrator’. 18.34 ‘Relevant life policy’ and ‘pension sharing order’ are defined. There is an exemption where the total amount of benefits provided in a tax year does not exceed £100. Various minor amendments are made. 18.35 Regulations in respect of employer-financed retirement benefit schemes may have retrospective effect (see the Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2007, SI 2007/3537), as amended. 18.36 The amount of the benefit chargeable on an individual is taxed as employment income in the year in which it arises (ITEPA 2003 s 394) on the amount received or the cash equivalent of a non-cash benefit, under ITEPA 2003 s 398; see Barclays Bank Plc and Another v RCC [2006] STC (SCD) 100, in which the benefit was not taxable, and Moffat v RCC [2006] STC (SCD 380), where it was taxable.

REGISTERED PENSION SCHEMES – THE STATUTORY FRAMEWORK 18.37 Registered pensions were introduced with effect from 6 April 2006 by the Pensions Act 2004 (PA 2004). The Pensions Regulator was established under ss 1–3 of this Act as a non-departmental public body which replaces the Occupational Pensions Regulatory Authority (OPRA). The Pensions Regulator took over the duties of OPRA under PA 2004 s 7. It also has other regulatory functions set out in PA 2004 ss 4–6. The powers and duties of the Regulator are set out in PA 2004 ss 11–58. The Pensions Regulator has established a register of occupational and personal pension schemes under PA 2004 s 59, and the Regulator’s powers in respect of such registration are set out in ss 60–88. 681

18.38  Pension Funds 18.38 The Regulator publishes reports, establishes codes of practice, and exercises its functions in accordance with PA  2004 ss  90–101. A  Pensions Regulator Tribunal has been established in accordance with PA 2004 ss 102– 106. PA 2004 ss 107–125 establish the Board of the Pension Protection Fund. The way that pension protection operates is covered by ss  125–172. This involves the establishment of a Pension Protection Fund under PA 2004 s 173 which comprises assets and rights transferred from schemes which have been transferred to the Board, usually as a result of the insolvency of the underlying employer. There is a levy on defined benefit and hybrid pension funds to pay for the Pension Protection Fund, and the Fund has powers to borrow and invest its funds, and should therefore have investment income and may be able to recover overpayments of benefits. The total fund is used to pay compensation to individuals under the pension compensation provisions set out in PA 2004 Sch 7, as amended by PA 2007 s 122 and Sch 8, and to meet liabilities incurred by the scheme prior to its transfer to the Pension Protection Fund. The fund may have to pay interest on borrowings, make loans to trustees or managers to enable them to meet their liability, and make payments to individuals who have been short-changed. PA 2004 s 174 specifies an initial levy on setting up the scheme and annual pension protection levies thereafter under ss 175–181. 18.39 PA 2004 also provides for a fraud compensation regime in ss 182– 187, and establishes a Fraud Compensation Fund under PA  2004 s  188 to be financed by a fraud compensation levy on eligible pension schemes under PA 2004 s 189. FA 2005 s 102 provides for regulations to be made to exempt from taxation the Pension Protection Fund, the Fraud Compensation Fund and the Board of the Pension Protection Fund and to charge pensions payable under these schemes to tax on the recipient. 18.40 The powers of the Boards of the Pension Protection Fund and the Fraud Compensation Fund to collect and disseminate information are set out in PA 2004 ss 190–205. The reviews, appeals and the establishment of a Pension Protection Fund Ombudsman are dealt with in PA 2004 ss 206–218. The Board is given power to backdate the winding up of eligible schemes to take effect from the date of the insolvency of the employer under PA 2004 s 219. Pension sharing is dealt with by regulations under PA  2004 s  220. PA  2004 Sch  7 defines the level of Pension Protection Fund compensation that can be paid to existing members of the scheme. Those members over normal pension age and normal benefit age at assessment date will be entitled to 100% Pension Protection Fund compensation, together with those already in receipt of a pension on grounds of ill-health or as a surviving spouse or dependant. Those under pension age at the assessment date will be entitled to 90% of Pension Protection Fund compensation, and surviving spouses 50% of the deceased’s entitlement. A  compensation cap of £36,401 in 2015/16, for those who first become entitled to compensation at age 65, is provided for by regulations made under PA 2004 Sch 7 para 26, which is increased in line with earnings under para 27. Pension escalation is provided for at the lower of the increase in the 682

Pension Funds 18.45 general index of retail prices and 2.5% per annum, by PA 2004 Sch 7 para 28. PA 2004 Sch 7 paras 25B–25F allow for terminal illness lump sum payments. 18.41 The scheme funding provisions are provided for in PA 2004 ss 221– 233, which provide for funding objectives, a statement of funding principles, actuarial valuations and reports etc. Interestingly, the Department for Work and Pensions is given powers to promote and facilitate planning for retirement and obtain the information to do so in PA 2004 ss 234–238. 18.42 The rules which apply to occupational and personal pension scheme trustees are set out in PA  2004 ss  239–285, and PA  2004 s  286 provides for regulations to create a Financial Assistance Scheme to help qualifying members of underfunded and insolvent defined benefit schemes. Cross-border activities within the European Union are dealt with in PA 2004 ss 287–295. The interaction with State pensions is in PA 2004 ss 296–299. The remaining miscellaneous and supplementary provisions are in PA 2004 ss 300–325. The first four Schedules deal with the Pensions Regulator and its activities, Schs 5–9 deal with the Pension Protection Fund, and Schs 9–13 with information gathering and dissemination, deferral of retirement pensions, and minor and consequential amendments and repeals. 18.43 The Pensions Act 2007 (PA 2007) received Royal Assent on 26 July 2007 and the majority of provisions came into effect two months later. PA 2007 s 14 allows guaranteed minimum pensions (GMPs) to be converted to main scheme benefits which are at least actuarially equivalent, with no reduction of a pension payment and a minimum 50% spouse pension and no conversion into defined contribution (money purchase) benefits. PA  2007 reduces the State pension qualification period to 30 years and provides for increases in line with earnings by 2012, subject to affordability. There are weekly credits for carers and people looking after children. The State second pension (S2P) rules are amended. 18.44 PA 2004 makes changes to the Financial Assistance Scheme (FAS) compensation. The State pension age will, however, increase from age 65 to 68 between 2024 and 2046. There are also changes, in PA 2007 s 16, to the internal dispute resolution procedure and, in s 15, abolishing contracting out for defined contribution pension schemes. 18.45 PA  2007 also created a new non-departmental public body, the Personal Accounts Delivery Authority (PADA), to help implement the reforms introduced in both PA 2007 and, subsequently, the Pensions Act 2008 (PA 2008). PADA was established to be responsible for designing and introducing the infrastructure of the new State pension scheme, initially known as ‘Personal Accounts’. The permanent name of the new scheme was announced in January 2010, the ‘National Employment Savings Trust (NEST)’, designed to provide minimum pensions for all employees, to be phased in from October 2012. 683

18.46  Pension Funds PADA was wound down in July 2010 and the NEST  Corporation set up to oversee the establishment of the infrastructure and processes relating to autoenrolment and the NEST scheme. 18.46 PA 2008 received Royal Assent on 26 November 2008 and introduced NEST. All employees, called jobholders, aged over 22, and earning more than £5,035 per annum (in 2007 terms), will be automatically enrolled into NEST, unless they are members of a qualifying workplace pension scheme (QWPS). Individual employees can opt out and take up a private pension scheme, or merely opt out and do nothing. The employer will be obliged to automatically re-enrol any opt-outs on a three-year cycle. Employers will have to tell the Pensions Regulator how they will meet their obligations in relation to auto-enrolment. The Pensions Regulator has power, including criminal sanctions, to force employers to comply. 18.47 Auto-enrolment started to come into effect in October 2012. Once fully implemented, auto-enrolment will requires employees to contribute a minimum of 5% of total earnings, including basic rate tax relief (in a band between £5,824 and £42,385 for 2015/16). The employer will contribute a minimum of 3% of banded earnings. Whether employees and employers will be able to afford the scheme remains to be seen. The interaction with the pension credits scheme (or universal credit, from October 2017) could mean that low-paid employees will get no benefit from their contributions, as their pension would reduce these means-tested benefits. 18.48 Minimum contribution levels are being phased in from October 2012 as follows: Employee*

Employer

Total

To September 2017

1%

1%

2%

To September 2018

3%

2%

5%

From October 2018

5%

3%

8%

* Includes basic rate tax relief Auto enrolment is being phased in for employers, based on employee numbers, starting with employers of over 120,000 staff in October 2012, and tapering down to employers of less than 50 staff in August 2014. Absolutely all employers, even if there is only one employee, will need to be auto-enrolling by September 2016. Where a company has a sole director, or more than one director but none of whom have an employment contract with the company, auto-enrolment will not apply. Similarly, a company in liquidation has no obligations under the auto-enrolment regime. 684

Pension Funds 18.53 18.49 Changes have been made to simplify the State second pension (S2P) and to the Pension Protection Fund to enable compensation to be shared on divorce etc and to allow the terminally ill to commute their entitlement into a lump sum. 18.50 The Deregulatory Review of Private Pensions (last updated in September 2009) has led to a number of amendments to the private pension legislation. The Pensions Act 1995 was also amended to cater for civil partnerships. Changes were also made to the Financial Assistance Scheme to relax some of the requirements and to increase the Pensions Regulator’s powers. Data sharing is allowed between the Department for Work and Pensions and energy suppliers, to provide targeted assistance to pension credit recipients. 18.51 In March 2014, the government announced further fundamental reform to the pension regime. From April 2015, restrictions over how pension benefits are taken have been largely removed. Whilst it is still possible to choose to purchase an annuity or draw down income, the previous restrictions on the amount of income which can be drawn down each year (based on the Government Actuary’s Department tables) have been removed. Changes are also made to the rules on death benefits from 6 April 2015 enabling those aged under 75 who die before taking their pension to pass on their pension benefits (whether as a lump sum or income) to beneficiaries free of income tax. For those aged over 75 at death, the beneficiary will suffer income tax at either 45% or their marginal rate, depending on whether they choose to take a lump sum or income.

REGISTERED PENSION SCHEME CONSTITUTION 18.52 Although a number of public service pension schemes are unfunded, with pensions being made to past employees out of current revenue, the vast majority of private sector pension schemes are established under irrevocable trusts (which was a prerequisite of exempt approved status, and the tax exemption of investment income and gains which goes with it, under ICTA 1988 s 592(1)(a)). It is technically possible to provide for pensions on a contractual basis by entering into a contract with, for example, an insurance company to provide a pension in due course, and retirement annuity policies and personal pension schemes for individuals were usually done on this basis. 18.53 In the case of defined contribution (money purchase) schemes, the employer and the employees agree their respective contributions as a proportion of current salaries which they will pay into the fund, and there is no requirement on either party to increase contributions should the investment performance of the fund mean that an employee’s likely pension falls below that which was originally anticipated. In the case of defined benefit schemes, which are usually related to the employee’s final salary, PA 1995 s 51 requires annual increases in pensions in payment by up to 5% per annum, reduced to 685

18.54  Pension Funds 2.5% by PA 2008, to allow for inflation. A defined benefit scheme is subject to the requirements of Part 3 of PA 2004 in relation to scheme-specific funding requirements and the provisions of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (SI  2005/3377). The move away from defined benefit schemes has been caused by a combination of factors, all outside the control of employers, such as the Government’s decision to withdraw payable tax credits on dividends, under FA 1997 s 30, with effect from 6 April 1999, coupled with a significant increase in predicted longevity and low investment returns. The number of employers offering defined benefit pension schemes has dwindled to a handful and it is likely that the trend to move away from funded defined benefit schemes will continue for the foreseeable future (see Aon Trust Corporation Ltd v KPMG [2005] 1 WLR 995). 18.54 The advantage of requiring pension schemes to be held in trust is to ensure that the fund is only available to employees and past employees, not to creditors generally, should the sponsoring employer become insolvent. However, the existing rules require the trustees of the fund to use the fund resources to pay pensions already being drawn down, and this severely disadvantages those who have contributed to the fund for many years but have not actually retired when the sponsoring employer becomes insolvent. If the fund is, at that stage, in deficit, no further contributions from the employer will be forthcoming, and as the fund must be applied first for the benefit of existing pensioners, those about to retire find themselves having contributed to a fund which is no longer able to pay them a pension. This is recognised as being unfair, and the solution is the Pension Protection Fund introduced by Pensions Act 2004 ss 135–143. However, the Pension Protection Fund is financed by a levy on other defined benefit and hybrid schemes (ie a scheme designed to combine the features of both defined benefit and defined contribution plan designs), which will be yet another reason for employers to move away from defined benefit schemes. 18.55 Pension schemes written in trust are not established as an act of bounty by the employer, as scheme contributions by the employer form part of the consideration for the services of the employee (McDonald v Horn [1995] 1 All ER 961). The initial contribution to set up a pension fund was held to be capital expenditure, for which no tax relief was available, in Atherton v British Insulated and Helsby Cables Ltd (1925) 10 TC 155 and, as a result, pension funds are normally established with a minimum amount of capital, and then contributions are made by the employer or employee as agreed. There is frequently an in-built conflict of interest for pension fund trustees, as they are often directors or employees of the sponsoring company and therefore hardly disinterested in any decisions taken. However, the general trust law provisions relating to the trustee’s duty to act in the best interests of all the beneficiaries is preserved (Cowan v Scargill [1984] 2  All ER  750). Sections 241–243 of PA  2004 set out the current requirements for most occupational pension schemes to have member-nominated trustees. This means that at least one-third of the total number of trustees are to be member-nominated. Further details 686

Pension Funds 18.59 (including exceptions to this requirement) are set out in the Occupational Pension Schemes (Member-Nominated Trustees and Directors) Regulations 2006/714. The National Employment Savings Trust is also exempt from the Member-Nominated Trustees requirements. 18.56 In the days when pension funds were in surplus, there were a number of attempts by employers to get control of the surplus, and this was held to be improper in Re Courage Group’s Pension Schemes [1987] 1 All ER 528, where it was confirmed that members of a pension scheme had a reasonable expectation that the trustees would exercise their powers in a manner that was fair and equitable in all the circumstances. A similar conclusion was reached in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 2 All ER 597 which also confirmed the employer’s implied obligation of good faith in relation to the pension scheme. The position of the employer in Mettoy Pension Trustees Ltd v Evans [1991] 2  All ER  513 was held to be fiduciary, and its right to a part of the surplus was not available to creditors generally when the employer became insolvent. In such circumstances, PA 1995 now requires that an independent trustee be appointed to exercise any fiduciary powers of the employer and discretionary powers of the trustees under ss 22–25. In order to prevent massive over-funding, a solvent company has a requirement to reduce any actuarial surplus over a period, which is normally accomplished by a reduction in the employer’s contributions in a defined benefit scheme, which is obviously the converse of the requirement to increase contributions where the fund is in deficit. This does not mean that any surplus at any time belongs either to the employer or to the members of the pension scheme, their rights being to ensure that the scheme is properly administered. Where a company merely ceased to trade, with the fund in surplus, the surplus was somewhat surprisingly regarded as belonging to the company in Davis v Richards and Wallington Industries Ltd [1991] 2 All ER 563. 18.57 The investment of pension funds by way of loans to the scheme employer were normally limited to 5% of the fund’s resources under the Pension Schemes Act 1993, although these rules are amended in the case of small self-administered schemes. 18.58 Beneficiaries are entitled to information in relation to the scheme under PA 1995 s 41 and Occupational Pension Schemes (Disclosure of Information) Regulations 1996 (SI  1996/1655). The Pensions Act 2004 strengthens the regulation of pension schemes for all registered schemes.

SMALL SELF-ADMINISTERED PENSION SCHEME (SSAS) 18.59 Prior to 6 April 2006, Part 20 of the Occupational Pension Schemes Practice Notes on the Approval of Occupational Pension Schemes IR12 (2001) set out the provisions in relation to small self-administered schemes. This 687

18.60  Pension Funds referred to the Retirement Benefit Schemes (Restrictions on Discretion to Approve) (Small Self-administered Schemes) Regulations 1991 (SI 1991/1614) as amended, normally referred to as the SSAS Regulations. These regulations defined a small self-administered scheme as a self-administered pension scheme with fewer than 12 scheme members, where at least one of those members is connected with another member or with a trustee or an employer in relation to the scheme. HMRC could require a scheme with 12 or more members to be treated as an SSAS to prevent the avoidance of the restrictions applicable to such schemes by including a number of low paid, low benefit members who would otherwise take the scheme over the membership limit for a SSAS. 18.60 There were special rules for a SSAS because HMRC did not want to give tax relief and then find that the pension scheme was distributed to the members, which might happen in some cases under Saunders v Vautier (1841) 4 Beav 115. They also wanted to make sure that the fund did not become unable to meet its liabilities by somebody dying early or investing too much in the employing company. Historically, a SSAS required a professional trustee known as a pensioneer trustee. Since 6 April 2006, this requirement has been removed. 18.61 A  member’s benefits could not be secured against particular trust assets, although they could be linked on a notional basis for the calculation of benefits. An employing company could only have one SSAS, although each employer in a group of companies could have its own SSAS or all the companies in the group could be centralised through a single SSAS. Death benefits could be distributable at the trustees’ or administrator’s discretion among a wide class of beneficiaries. 18.62 A  SSAS was required to obtain an actuarial valuation of its assets and liabilities at least triennially, a copy of which had to be submitted to HMRC (IR12 paras 20.34, 20.35). Contributions had to be justified by the actuarial report (IR12 para 20.36) and death benefits which exceeded the value of the member’s interest in the fund, based on his accrued pension and other retirement benefits, had to be insured (IR12 para 20.37). Pensions from a SSAS are for life, and should normally be secured by the purchase of an annuity from an insurance company which must be non-commutable and non-assignable. An annuity to secure a widow or widower’s or dependant’s pension may be acquired but is not mandatory (IR12 para 20.38). In line with changes applying to other registered pension schemes, a compulsory annuity was not be required for pensioners who reach the age of 75 on or after 6 April 2006 (IR12 paras 20.39–20.44). A SSAS is now a registered pension scheme, and new schemes can still be set up. 18.63 A SSAS, where all decisions are made unanimously or which has an independent trustee, does not require a member-nominated trustee. The internal 688

Pension Funds 18.66 disputes resolution procedure in PA 2004 does not apply if every member of the scheme is a trustee. Trustees are exempt from the trustee’s knowledge and understanding requirements of PA 2004. A SSAS is an investment regulated pension scheme.

Self-invested personal pension (SIPP) 18.64 A SIPP is a personal registered pension plan in which the planholder provides for a tax-free lump sum and a pension, which can be taken at any age between 55 (50 prior to 6 April 2010) and 75. The planholder can choose the investments from a large number of tax-free pension fund investments available through a variety of providers. The SIPP is a tax-efficient wrapper for the fund investments, so the choice of investments is much wider than those available through an insurance company personal or stakeholder pension. These include a range of collective investment funds such as unit trusts, investment trusts, open ended investment companies (OEICs), as well as insurance company managed funds, direct investments in stocks and shares in the UK and overseas, gilt-edged securities, loans and bonds, futures and options, bank deposits, commercial property etc. Chattels and residential property, other than through a property fund, are not permitted investments. 18.65 Contributions to SIPPs are treated as tax deductible by the payer, by extending his basic rate band by the amount of the premium, which gives higher rate tax relief, subject to the limits discussed below. The basic rate relief is available through the SIPP provider recovering, from HMRC, 20 pence for every 80 pence contributed by the planholder. The fund itself is free of income tax, apart from the tax credit on taxable dividends which is no longer recoverable and capital gains tax. The pension which is ultimately taken is taxable in full as income. Prior to 6  April 2015, from retirement age a taxfree lump sum, usually of up to 25% of the fund value, could be taken by the planholder. Following the pension reforms included in Pensions Act 2014, as with other forms of pension scheme, a planholder is able to withdraw amounts from the plan without limit and suffer tax at his marginal rate on amounts withdrawn over 25%. On death, the remaining fund can be used to provide a lump sum or pension for nominated beneficiaries. A SIPP is an investment regulated pension scheme.

Investment regulated pension schemes 18.66 An investment regulated pension scheme, for a non-occupational pension scheme such as a SIPP, is one where one or more of its members or a person related to a member is able (directly or indirectly) to influence or advise on the manner of investment held by the scheme for that member, under FA 2004 Sch 29A paras 1, 3–5. 689

18.67  Pension Funds 18.67 An investment regulated pension scheme, for an occupational pension scheme such as a SSAS, is one where there are 50 or fewer members or persons related to a member, one or more of whom is or has been able (directly or indirectly) to direct, influence or advise on the manner of investment of any of the funds held for the purposes of the scheme, under FA  2004 Sch  29A paras 2, 3–5. 18.68 These anti-avoidance provisions are widely drafted to prevent large schemes from setting up sub-funds to allow particular classes of members to direct their funds to be invested in taxable assets. ‘Taxable property’ under PTM  125000 et seq means residential property or tangible movable property, which is widely defined to include, for example, a hotel or beach hut as residential property. ‘Tangible moveable property’ includes works of art, antiques, jewellery, fine wine, boats, cars, stamp collections and rare books, but not investment-grade gold bullion (FA  2004 Sch  29A paras 6–11). What constitutes the acquisition and the holding of tangible property is defined in FA 2004 Sch 29A paras 12–30. 18.69 Job-related residential property is not taxable property if occupied by an unconnected non-member of the pension scheme, such as a caretaker, or shopkeeper living in a flat over a shop held by the scheme as an investment (PTM  125200). If non-taxable property becomes taxable, for example on a change of occupier, it is taxable as acquired at that date (PTM 125300). 18.70 Taxable property held by an investment regulated pension scheme may result in an unauthorised payment to a member of a pension scheme, taxable under FA 2004 ss 174, 174A. The amount, timing and apportionment of such unauthorised payment is calculated in accordance with FA 2004 Sch 29A paras 31–45. The member is charged at 40% of the relevant unauthorised payment value, and the scheme administrator is subject to a scheme sanction charge of 15% of the value (PTM  134100 and PTM  135100 respectively). Taxable property held as an authorised scheme investment at 5  April 2006 may continue to be held without penalty so long as it is not subsequently improved (PTM125500), unless contracted for prior to 6 April 2006. In some cases, the relevant date is that of the Pre-Budget Report on 5 December 2005 (PTM 125500).

Taxation of registered pension funds 18.71 FA 2004 Part 4 (ss 149–284) and Schs 28–36 (as amended by FA 2005 s 101 and Sch 10, FA 2006 ss 158–161 and Schs 21–23, FA 2007 ss 68–70 and Schs 18–20, FA 2008 ss 90–92 and Schs 28–29, FA 2009 ss 72–75 and Sch 35, FA 2010 and the Pensions Act 2014), and regulations made thereunder, introduced the tax regime for registered pensions which replaced the eight tax 690

Pension Funds 18.74 regimes previously available and considered earlier in this chapter, with effect from 6 April 2006 (A-Day). A number of the main concepts, such as pension scheme members and arrangements, are defined by FA 2004 ss 150–152. 18.72 While these rules can hardly be described as simple, they were initially an improvement on the complex rules that they replaced. Instead of requiring advance approval, new schemes are registered with HMRC and are subject to audit to see that they comply with the new tax rules (FA 2004 ss 153–156). Existing approved schemes were automatically registered unless they opted out of the new scheme (FA 2004 s 153), in which case they suffered a 40% deregistration tax charge on assets held at 6  April 2005 (FA  2004 s 242). HMRC has power to deregister schemes (FA 2004 ss 157, 158), subject to appeal (FA  2004 s  159). Registered pension funds attract a similar tax exemption to exempt approved funds in relation to income and gains within the scheme (FA 2004 ss 186, 187). 18.73 Contributions to a registered pension scheme may be made by or on behalf of the scheme member or by his employer. Instead of the earnings cap, the maximum pension contribution by individuals is the greater of £3,600 gross and 100% of relevant UK earnings from employment or income from a trade, profession or vocation or Crown employees working overseas taxable in the UK under ITEPA 2003 s 28. A limited form of carry-back and carryforward of contributions was introduced by Finance Act 2011 Sch 17, inserting new FA 2004 s 228A. Section 228A permits unused annual allowance of a tax year to be carried forward for up to three tax years. The unused allowance of earlier years is utilised in priority to that of later years. For carry-forward to be available, an individual must be a member of a pension scheme for the tax year. It is therefore not possible for unused allowance to be brought forward for the previous three years before an individual joins a pension scheme. Section 228A applies for 2011/12 and later tax years; however, a notional £50,000 annual allowance is deemed to apply for prior years in calculating the brought forward unused allowance at 6 April 2011. The reduction in the annual allowance from 6 April 2015 to £40,000 affects only the allowance for that year, in other words the carry forward amount for 2011/12 to 2013/14 is based on the £50,000 limit applicable for those tax years. 18.74 Contributions are allowable in the year of payment (FA  2004 ss  188–195). Members’ contributions are normally paid net of basic rate tax under the relief at source rules, with the pension fund reclaiming the tax from HMRC. Occupational pension schemes are able to operate net pay arrangements, under which the employer deducts the contributions from the employees’ gross pay and calculates the tax due under PAYE on the net income. With personal pension and stakeholder pension plans, the employer deducts the employee contributions from net pay, ie  net of basic rate income tax. Any entitlement to higher or additional rate tax relief in respect of members’ personal pension or stakeholder contributions is claimed 691

18.75  Pension Funds through the self-assessment tax return. Premiums paid to retirement annuity schemes continue to be paid gross. There are provisions for transfers between registered schemes (FA 2004 ss 169, 170). 18.75 If the actual or deemed contributions (total pension input amounts) exceed the annual allowance specified under FA 2004 s 228, there is an annual allowance charge of 50% (40% prior to 5 April 2010) under FA 2004 s 227. The annual allowance is: Tax year

Annual allowance

2006/07

£215,000

2007/08

£225,000

2008/09

£235,000

2009/10

£245,000

2010/11

£255,000

2011/12

£50,000

2012/13

£50,000

2013/14

£50,000

2014/15

£40,000

2015/16

£40,000

The Finance (No  2) Act 2015 reduced the annual allowance further for individuals earning over £150,000 from 6 April 2016. The allowance is reduced by £1 for every £2 an individual earns above £150,000. The annual allowance would therefore be: Earnings

Annual allowance

Up to £150,000

£40,000

£170,000

£30,000

£190,000

£20,000

£210,000 or above

£10,000

Before 5 April 2015, there is no annual allowance in the year of vesting and subsequent years. However, following the wide-ranging reform of the pension system announced in 2014, a defined contribution pension scheme will become a ‘flexi-access drawdown’ fund on 6 April 2015, and an individual member of the scheme will be entitled to a ‘money purchase annual allowance’ for 2015/16 and subsequent years. The allowance of £40,000 will apply with tax relief limited to £10,000 for defined contribution scheme savings for the tax year 2016/17 and £4,000 for the tax year 2017/18 and subsequent tax years. 692

Pension Funds 18.80 18.76 FA  2009 s  72 and Sch  35 paras 1 and 2 provide for an individual special annual allowance charge, where an individual’s relevant income for any of the tax years 2007/08 to 2010/11 is £150,000, or in some cases £130,000, or more. If such an individual made pension contributions in excess of their special annual allowance, they became liable to a new income tax: the special annual allowance tax charge. The special annual allowance charge and the antiforestalling rules were designed to prevent an individual increasing pension contributions before 22 April 2009, in the expectation that higher rate tax relief would be reduced thereafter. It had been anticipated that higher rate relief for pensions contributions would be gradually withdrawn, so that, for those earning £180,000 and over, relief would only be available at the basic rate for all pension contributions. 18.77 For the purposes of the anti-forestalling rules, an individual’s relevant income was the total taxable income for the tax year, less reliefs such as losses or Gift Aid donations, and less personal pension contributions up to a limit of £20,000. 18.78 If the relevant income did not exceed £150,000 in 2009/10, it was assumed to be £150,000 if the relevant income for 2007/08 or 2008/09 was £150,000 or more. If the individual entered into a tax avoidance scheme, a main purpose of which was to reduce his relevant income to less than £150,000, it is assumed to be £150,000. Artificial methods of reducing salary, such as salary sacrifice, did not have the effect of reducing salary for the purposes of this test. 18.79 From April 2011, it was proposed that the definition of income for these purposes be extended to include the value of employer pension contributions. However, an income floor would be introduced so that, if an individual’s income, before employer pension contributions, was less than £130,000, they would not be affected by the new rules. 18.80 The transitional arrangements were amended with immediate effect in the Pre-Budget Report of 8  December 2009, so that anyone with income in excess of £130,000 (previously £150,000) became subject to the antiforestalling rules if they varied: •

their normal contribution pattern, or

•

the normal way in which their pension benefits are accrued,

but only if the total pension contributions were in excess of the special annual allowance, which was normally £20,000, but could be up to £30,000 in certain circumstances. However, a different approach to restricting the cost of pension relief was taken, and Finance Act 2010 provided for the annual allowance to be reduced from £255,000 in 2010/11 to £50,000 from 6 April 2011, with no change made to the 693

18.81  Pension Funds rate of tax relief applying to pensions contributions. The complex provisions set out above were therefore largely redundant and repealed (Finance Act 2009, Schedule 35 (Special Annual Allowance Charge) (Cessation of Effect) Order (SI 2010/2939)). 18.81 The total adjusted pension input allowance is defined by FA  2004 ss  229–238 as the aggregate of the pension input amounts for an individual under all his registered pension schemes. Pension input amounts include direct contributions to a pension scheme under FA 2004 s 233 and increases in the value of an individual’s rights (FA 2004 ss 230–238). In the case of a defined benefit scheme, the pension input amount is measured by the increase in value of the individual’s rights under the scheme over the pension period (FA 2004 ss 234–236). Hybrid arrangements are dealt with under FA 2004 s 237. 18.82 Contributions to registered pension schemes may also be effectively limited by the lifetime allowance charge under FA  2004 ss  214–226. The lifetime allowance is: Tax year

Lifetime allowance

2006/07

£1,500,000

2007/08

£1,600,000

2008/09

£1,650,000

2009/10

£1,750,000

2010/11

£1,800,000

2011/12

£1,800,000

2012/13

£1,500,000

2013/14

£1,500,000

2014/15

£1,250,000

2015/16

£1,250,000

2016/17

£1,000,000

2017/18

£1,000,000

2018/19

£1,030,000

2019/20

£1,055,000

18.83 The standard lifetime allowance may be increased by lifetime allowance enhancement factors (LAEF) at the time of a benefit crystallisation event. The following provisions in FA 2004 provide for LAEFs: •

s 220 (pension credits from previously crystallised rights),

•

ss 221–223 (individuals who are not always relevant UK individuals),

•

ss 224–226 (transfers from recognised overseas pension schemes), 694

Pension Funds 18.87 •

Sch  36 paras 7–11 (‘primary protection’ of pre-commencement funds above £1,500,000), and

•

Sch 36 paras 12–17 (‘enhanced protection’).

Claims for primary protection and enhanced protection had to be made by 5 April 2009. Under primary protection, the value of the retirement benefits at 6 April 2006 was calculated as a percentage of the then lifetime allowance of £1,500,000, which allowed further contributions so long as the fund did not exceed the same percentage of the current limit. Enhanced protection allowed the fund built up at 5 April 2006 to remain exempt, but prevented further contributions. 18.84 Finance Act 2011 reduced the lifetime allowance from £1,800,000 to £1,500,000 from 6  April 2012 (FA  2004 s  218 as amended by FA  2011 Sch  18 para  2). Those with existing primary or enhanced protection were unaffected by the change, however, where previously unprotected pension savings were already at or above the £1,500,000 threshold, ‘fixed protection’ could be claimed by 5 April 2012. Fixed protection enabled pension savings up to £1,800,000 to be preserved provided no further contributions were made. Finance Act 2013 contained provisions enabling the fixed protection rules to be amended in certain circumstances. Changes were introduced by the Registered Pension Schemes and Relieved Non-UK  Pension Schemes (Lifetime Allowance Transitional Protection) Notification Regulations 2013 (SI  2013/1741) to prevent individuals’ pension savings inadvertently losing fixed protection status through, for example, an increase in the earnings cap leading to additional pension benefit accrual. 18.85 A  further reduction in the lifetime allowance to £1,250,000 was introduced by Finance Act 2013, alongside further protection schemes. Schedule 22 of FA 2013 introduces ‘fixed protection 2014’, entitling individuals with pension savings of £1,400,000 or above at 6  April 2014 to secure a lifetime allowance of £1,500,000 provided no new pension contributions are made. A claim must be made by 5 April 2014. 18.86 In addition, it was announced at Budget 2013 that a more flexible form of protection would be introduced and legislation was included in Sch 6 of FA 2014 in the form of ‘individual protection 2014’. Individual protection 2014 enables an individual to protect accrued pension savings to date up to £1,500,000, but unlike under previous protection regimes, the individual is able to continue contributing to one or more pension schemes until that overall maximum is reached. A  claim for individual protection must be made by 5 April 2017. Claims may be made for both fixed protection and individual protection if the appropriate criteria are met. 18.87 Pre-commencement pension credits are dealt with in FA 2004 Sch 36 para 18. Schedule 36 para 19 makes provisions for the reduction of what would 695

18.88  Pension Funds otherwise be the individual’s lifetime allowance, in certain cases, where the individual is permitted to take a pension before the minimum pension age. 18.88 Where more than one benefit crystallisation event occurs by reason of the payment of lump sum death benefits, these events are to be treated as all occurring immediately before the individual’s death. This provision ensures that all the recipients of the lump sum death benefit are treated equally, regardless of the dates the benefits are actually paid. 18.89 Employers’ contributions are allowed as a tax deduction for tax purposes (FA 2004 ss 196–201). Very large, non-regular contributions by the employer will be spread, for tax relief purposes, over up to four accounting periods, and there is an annual maximum that can be paid into a pension fund for an individual.

Taxation of Benefits to Members – to 5 April 2015 18.90 When benefits are taken from the scheme, they have to be checked against the lifetime allowance and, where this has been exceeded, the excess fund is subject to a 25% tax charge (FA 2004 ss 214–226, Sch 32). If the excess is withdrawn by the member, it would be subject to tax in his hands at 40%, giving an effective 55% tax charge, arrived at by the following formula: 25% + (40% × 75%) This is designed to reflect the tax relief within the pension fund and the fact that pension withdrawals are taxable as income. In applying the annual allowance benefit to defined benefit schemes, the capitalisation factor is 20 times the member’s benefit, except where benefits are in payment prior to 6 April 2006 when the capitalisation factor is 25 times the benefit, to reflect the fact that commutation would normally have been taken. HMRC contributions to schemes for members contracted out of the State second pension are covered by FA 2004 s 202. Tax relief and tax charges in relation to overseas pension schemes may apply under FA 2004 ss 243–245 and Schs 33, 34. 18.91 The minimum retirement age increased from 50 to 55 from 6 April 2010, although existing arrangements for early retirement for those in special occupations, such as sportsmen, will continue so that such people may qualify for an earlier retirement age, but with a corresponding reduction of 2.5% per annum in the lifetime allowance limit for each year that they are below the State pension age at the time the pension is taken. The consultation document ‘Freedom and Choice in Pensions’ published in March 2014 put forward a further increase in the pension age to 57 from 2028 (the year in which the minimum pension age for state pension entitlement will increase to 67). 696

Pension Funds 18.95 18.92 On reaching retirement age, a pension may be taken (FA 2004 ss 164, 165 and Sch 28 Part 1). This may be in the form of a scheme pension, which is the only option available to members of a defined benefit scheme, or by way of a lifetime annuity from an insurance company, or by way of drawdown (referred to as ‘unsecured income’ before 6 April 2011). Upon reaching age 75, the member was obliged to purchase an annuity, although this age limit was extended until 77 whilst further proposals for the reform of pension benefits was being considered. The maximum drawdown was 120% of the relevant annuity, based on the Government Actuary Department (GAD) published tables. The maximum drawdown had to be reviewed at least every five years and could be drawn annually or more frequently, such as monthly. 18.93 From the age of 75, the purchase of an annuity is no longer compulsory and it was possible to opt for an ‘alternatively secured pension’, which allows a maximum income drawdown of 90% of a relevant annuity. The income could be drawn down annually or more frequently and, interestingly, was based on the relevant annuity for a person aged 74 and 364 days, irrespective of the age of the pensioner. The object was to try and ensure that the fund is not depleted which would result in the annuitant being left to the tender mercies of the State benefit system. There was no minimum drawdown. 18.94 From 6 April 2011, the requirement to purchase an annuity or enter into an alternatively secured pension arrangement at any age was withdrawn. The alternatively secured pension rules were also repealed from 6 April 2011. The maximum permitted income that could be withdrawn from a scheme (known as ‘capped drawdown’) was reduced to 100% of the GAD rate, although this was revised to 120% from March 2013 and to 150% from March 2014. The maximum amount which could be withdrawn had to be determined at least every three years prior to the individual reaching age 75, and annually thereafter. An individual with at least £20,000 (£12,000 from March 2014) secure lifetime pension income was also able to access funds remaining within their pension scheme without limit (so-called ‘flexible drawdown’). Withdrawals in excess of the permitted limits attracted an unauthorised member payment charge at 55% (FA 2004 ss 214–226, Sch 32).

Taxation of pension benefits to members – from 6 April 2015 18.95 Major changes were announced to the pension system in Budget 2014, and in March 2014 a consultation document entitled ‘Freedom and Choice in Pensions’ was published. This document set out the government’s proposal to allow members of defined contribution schemes to access their pension savings in a much more flexible manner on reaching retirement age. Broadly, the new rules permit taxpayers to make withdrawals from their pension funds without limit and suffer income tax only at their marginal rate, rather than the 55% charge applying under the previous regime. An ‘override’ is included within 697

18.96  Pension Funds FA 2004 s 273B (incorporated into Part 5, para 79 of Sch 1 to the Taxation of Pensions Act 2014) to enable pension scheme trustees to make payments to members under the new rules without the requirement to first amend the scheme rules, although there is no obligation on pension providers to adopt the new flexible pension payment arrangements if they choose not to do so. 18.96

From 6 April 2015, a member aged over 55 has the following options:

•

purchase an annuity or receive a scheme pension in the usual way. Where an annuity is purchased, from 6 April 2015 the annual rate of the lifetime annuity is permitted to go down as well as up. Further, the scheme member no longer need be given the opportunity to select the insurance company providing the annuity. Finally, the ten-year maximum period for payment of income from the annuity following death is removed and the annuity will be paid for the whole period specified in the annuity contract;

•

draw down funds under ‘flexi-access’, which enables the member to choose the amount of funds withdrawn and the period over which benefits are taken; or

•

withdraw uncrystallised funds in a lump sum (or series of lump sums); see below.

18.97 The first 25% of uncrystallised lump sums continues to be tax free, with the excess being taxed at the member’s marginal rate. For a payment to be treated as an uncrystallised lump-sum payment, the payment cannot exceed the lifetime allowance remaining (or, if paid to a member aged over 75, there must be some lifetime allowance remaining at the time of the payment). The money purchase annual allowance rules will apply from the date of the payment, so that additional pension savings over £10,000 (£4,000 for the tax year 2017/18 and subsequent tax years) will not be eligible for tax relief. 18.98 The withdrawal of a flexible access payment on or after 6 April 2015 will trigger the annual money purchase allowance rules limiting the amount of tax relief available on further contributions to a money purchase scheme. An individual who has already taken pension benefits prior to 6 April 2015 will not be subject to the money purchase annual allowance rules until benefits are taken under the new rules. 18.99 Schemes in flexible drawdown at 5 April 2015 converted automatically to a flexi-access drawdown fund on 6 April 2015. Any new funds contributed to the scheme will be added to the flexi-access drawdown fund. Schemes paying capped drawdown may continue unchanged, or be converted to flexi-access drawdown. New funds contributed to the arrangement will be added to the existing capped drawdown fund unless the funds are converted into a flexiaccess drawdown fund before new contributions are made. 698

Pension Funds 18.101

Managed and Registered Pension Schemes 18.100 This scheme for the digital registration and administration platform is designed to improve the service for pension scheme administrators, the first stage of which commenced on 8 May 2018. Initially the service can be used to register pension schemes with HMRC. HMRC continued to add to the service during 2018/19 to enable online scheme reporting by completing form APSS  153 and sending it to Pension Schemes Services, HMRC, BX9 1GH, UK. On registering, HMRC will send an 11-character reference to be quoted on all correspondence with HMRC unless there is a Pension Scheme Tax Reference. Retirement Annuity Contracts (RACs) and Deferred Annuity Contracts (DACs) can use the Pension Scheme Online Service. In phase one it will be possible to amend the pension scheme and administration details and in phase two, commencing in 2019, HMRC introduced pension scheme reporting on the electronic service which will include penalties and assessments and negotiate existing pension schemes to the new service. Phase two will migrate existing pension schemes to the new electronic service and enable scheme practitioners to log in and use the service as an authorised practitioner. Additional features to the Manage and Register Pension Schemes Service during 2019 and 2020 to include all reporting, including the Accounting For Tax (AFT) return and the Pension Scheme Return (PSR). As well as issuing notices and certificates online, assessments and managing appeals will be included, and in April 2020 it will be possible to compile and submit end-of-year event responses electronically. The Pension Scheme Online Service should be used to update details and HMRC will continue to develop the Manage and Register Pension Scheme Service.

Commutation and unauthorised payments 18.101 Under the rules applying prior to 5  April 2015, provided that the fund did not exceed the lifetime allowance, a tax-free cash sum may be withdrawn on reaching retirement age equivalent to 25% of the value of the fund (FA  2004 s  166, Sch  29 Part 1) or such higher amount which would have been payable under the pre-6 April 2006 pension scheme rules. Where the lump sum was not taken in a single amount, the applicable amount of commutation is one-third of the cost of providing the scheme pension. To prevent ‘turbo charging’, FA 2004 Sch 29 para 3A was introduced to prevent the commuted lump sum being used to pay further contributions. However, other payments, loans or borrowing may be authorised (FA 2004 ss 160–163, 171, 175–180, Sch 30) or unauthorised (FA 2004 ss 172–174A, 181, 182–185). Tax may be charged on authorised as well as unauthorised payments under FA 2004 ss 204–213, Sch 31. There could also be a scheme sanction charge on the scheme administrator under FA 2004 ss 239–241. 699

18.102  Pension Funds

Death benefits before 5 April 2015 18.102 Where death occurs before pension benefits have crystallised, death in service benefits may allow a lump sum to be paid up to the amount of the lifetime allowance in accordance with FA 2004 Sch 29 Part 2 para 15(4), any excess being subject to tax in the same way as any other excess drawdown, ie  25% tax in the fund and 40% in the hands of the recipient, making an effective 55% rate of tax (FA 2004 ss 167, 168, Sch 28 Part 2, Sch 29 Part 2). The fund may also be used to provide a dependant’s pension which does not count towards the lifetime allowance. The pension is taxed as earned income in the hands of the recipient in the usual way. Inheritance tax exemption under IHTA 1984 ss 12, 58, 151 and 152 is provided by FA 2004 s 203. 18.103 In the event of the death of a person in full drawdown or alternatively secured pension, the surviving spouse would have a choice of doing any of the following with the remaining fund: purchasing an annuity; taking the whole amount as tax-free cash, which would be subject to a 35% tax charge; or to take over the alternatively secured pension income if over 75, as they would with the unsecured pension if they were under 75, and continue to receive the income that their spouse was receiving. From 6 April 2015, there is also the option of taking flexi-access drawdown. 18.104 Where the member has taken secured income, ie  purchased an annuity, if this is guaranteed for up to ten years, the balance of the annuity will continue to be paid and taxable. If the member was in a defined benefit scheme and had elected for pension protection, or was in a defined contribution scheme and had elected for annuity protection, a lump sum may be payable on death before the age of 75, which would be taxed at 35%. Instead of withdrawing the protection element as a lump sum, a pension could be provided for the member’s dependants. 18.105 Where the member has not opted for an annuity or pension protection within the fund and is drawing an alternatively secured pension, any residual funds within the scheme must be used to provide a dependant’s pension. The balance of the fund could have been transferred to other scheme members nominated by the deceased member as a transfer of lump sum death benefit under FA 2004 Sch 29 para 19. This in turn meant that, where the fund included, say, the children of members, an inter-generational transfer of surplus funds could have become possible, but paragraph 19 was repealed by FA 2007 with effect from 6 April 2007.

Death benefits after 5 April 2015 18.106 The position after 6  April 2015 is very different from the previous regime, and offers beneficiaries a much more favourable tax treatment. As for 700

Pension Funds 18.110 the rules applying up to 5 April 2015, the new regime distinguishes between death occurring before or after the scheme member reaches age 75. 18.107 The basic principle is that both crystallised and uncrystallised pension funds may be passed to beneficiaries (not just dependants) without incurring a 55% tax charge. The inheritance tax exemption in IHTA 1984 s 58 is also preserved. Where death occurs before the pension scheme member reaches age 75, the beneficiary can choose to take the benefit as a tax-free lump sum or drawdown amounts from the fund as and when required under flexi-access drawdown. The tax-free amount which may be taken is limited to the lifetime allowance applicable at the time of death. Alternatively, the beneficiary could choose to buy an annuity. Income received is free of income tax. Tax-free lump sum payments must be made within two years of the pension scheme administrator being notified of the member’s death. Payments made outside of this window are no longer treated as unauthorised payments subject to a 55% tax charge, but will instead suffer income tax at 45% in 2015/16. This rate is expected to be aligned with the individual’s marginal rate in future years. 18.108 Where death occurs after age 75, income tax at the beneficiary’s marginal rate is suffered on withdrawals from the fund. A lump sum may be taken and this is charged to income tax at the 45% (for 2015/16). The Summer Budget 2015 confirmed this rate will be aligned with the individual’s marginal rate in future tax years. However, it appears that if a beneficiary chooses to take benefits in two or more instalments (ie he chooses flexi-access drawdown), the tax charge will be at the beneficiary’s marginal rate rather than 45%. 18.109 The new death benefit rules apply to deaths taking place before 6 April 2015 if the taking of benefits is deferred until after that date. The tax position of the beneficiary may be summarised as follows: Crystallised funds

Uncrystallised funds

Death before age 75

Tax free lump sum or drawdown pension payable to beneficiary

Tax free lump sum or drawdown pension payable to beneficiary (subject to lifetime allowance)

Death after age 75

Any beneficiary can draw down on it at their marginal rate or 45% charge if paid as a lump sum (marginal rate from 2016/17)

Any beneficiary can draw down on it at their marginal rate or 45% charge if paid as a lump sum (marginal rate from 2016/17)

Dependants’ pensions before 6 April 2015 18.110 Where a member is in a defined contribution scheme, benefits can be paid as an annuity, ie  a drawdown pension (previously referred to as an unsecured pension or alternatively secured pension), or as a scheme pension. 701

18.111  Pension Funds A  dependant is a former spouse or co-habitee within a mutually dependent financial relationship, or a child aged under 23 at the member’s date of death, or who was financially dependent on the member as a result of a physical or mental disability (FA 2004 Sch 28 para 15). A dependant’s pension must usually be for the life of the dependant or until he ceases to be financially dependent on the deceased member. From 6  April 2011, a dependant’s drawdown pension may be paid using a dependant’s short-term annuity, through income withdrawal (either capped drawdown or flexible drawdown), or a combination of the two. 18.111 Pension sharing on divorce will allow any pension credits of the exspouse to be set against his or her lifetime allowance, which therefore allows the divorced member to make further contributions, if he can afford them, to rebuild his lifetime allowance. 18.112 Where a member leaves an occupational pension scheme and is able to take a withdrawal of contributions, a refund of up to £20,000 will be taxed at 20%, with any excess taxable at 50% (prior to 2009, £10,800 was taxed at 20%, and any excess taxable at 40%).

Dependants’ pensions after 6 April 2015 18.113 For annuities purchased after 6  April 2015, there is no longer a requirement for the member or dependant to have been given the opportunity to choose the insurance company providing the annuity, and annual rates of a dependant’s annuity will be able to go down as well as up. These changes mirror those introduced for members taking an annuity during lifetime. 18.114 Similarly, for dependants taking pensions from the deceased member’s fund, changes applying from 6  April 2015 are in line with those made to members. This means that an existing dependant’s drawdown pension funds in flexible drawdown was converted automatically to a dependant’s flexiaccess fund on 6 April 2015, and any new funds added will increase the flexiaccess drawdown fund. Where a dependant previously had a capped drawdown pension, then they have the option of converting this to a dependant’s flexiaccess fund. New funds contributed to the arrangement will be added to the existing capped drawdown fund unless the funds are converted into a flexiaccess drawdown fund before new contributions are made.

Borrowing 18.115 Registered schemes are given fairly wide investment opportunities, although there are limits on the holdings of shares in, and loans to, the 702

Pension Funds 18.117 sponsoring employer, and borrowing by the scheme is limited to 50% of the scheme assets. In the case of small self-administered funds, the rules allow a higher level of gearing for borrowings by the fund, and the investments approved under the pre-6  April 2006 rules can be retained under the post6 April 2006 provisions, set out in RPSM07103060 and RPSM07103050: 1.

The loan must be secured as a first charge on an asset of equal value.

2.

The loan must have a commercial interest rate (at least 1% above High Street bank rates).

3.

The repayment period must not be longer than five years.

4.

The amount loaned must not be more than half the value of the scheme’s funds.

5.

Repayment of the loan must be in equal annual instalments.

Where any of the five tests are not met, the employer will be liable to an unauthorised payments tax charge. However, if any loans are made to the member or a connected party, they will be subject to a tax charge.

Administration 18.116 The rights and duties of the scheme administrator are set out in FA 2004 ss 270–274. Other compliance matters, such as the provision of information (FA  2004 ss  250–253), accounting and assessment (FA  2004 ss  254–255), registration regulations (FA 2004 s 256), penalties (FA 2004 ss 257–266), and relief for scheme administrators acting in good faith (FA 2004 ss 267–269), are contained in FA 2004 Part 4 Chapter 7. FA 2004 Chapter 8 (ss 275–284) deals with supplementary matters such as market value (in accordance with the capital gains tax rules in TCGA 1992 s 272 (FA 2004 s 278)) and valuation assumptions.

FURBS ETC 18.117 Funded and unfunded unapproved retirement benefit schemes (FURBS and UURBS) and pre-6  April 2006 schemes which opted out of deemed registration under FA 2004 Sch 36 para 2 ceased to attract any taxation benefits from 6 April 2006, apart from the fact that contributions by the employer will not be liable to national insurance contributions, but conversely no tax relief will be available until benefits are received by and taxed on the employee (FA 2004 ss 245–249). Such schemes are now referred to as ‘Employer Funded Retirement Benefit Schemes’ or EFRBS. IHT relief no longer applies, as this is restricted to registered schemes under FA 2004 s 203. 703

18.118  Pension Funds 18.118 The government has long been mistrustful of unapproved retirement benefit schemes and, in HMRC’s view at least, these arrangements were being ‘abused’ through the making of tax-efficient loans to members rather than funding ‘true’ retirement benefits. At least partly in response to EFRB arrangements, Finance Act 2011 introduced complex legislation targeted at ‘disguised remuneration’ into ITEPA  2003. The legislation applies from 6 April 2011, although anti-forestalling provisions apply from the date the new rules were announced, 9 December 2010. 18.119 Broadly, the disguised remuneration rules provide for an income tax charge where a third party such as a trustee puts in place arrangements for providing an employee with a reward related to the employment, and then takes a relevant step in relation to that arrangement. A ‘relevant step’ includes the making of a payment or provision of an asset, or the earmarking of funds with a view to taking a later relevant step (ITEPA  2003 Part 7A). A  third party can include the employer where the employer is acting in the capacity of trustee. There is an exclusion from the disguised remuneration rules for steps taken in relation to a registered pension scheme (ITEPA 2003 s 554E). Further exclusions apply to pension income chargeable under ITEPA 2003 Part 9 (s 554S), the purchase of annuities out of pension scheme rights (s 554V), certain retirement benefits (s  554W) and transfers between certain foreign pension schemes (s 554X). The Employment Income Provided Through Third Parties (Excluded Relevant Steps) Regulations (SI 2011/2696) provide further exceptions from the disguised remuneration rules where amounts are subject to a relevant step are derived from a UK tax-relieved fund of a relevant nonUK pension scheme, or a relevant transfer fund created by a transfer from a registered pension scheme or an unauthorised payment made by a registered pension scheme. 18.120 The disguised remuneration rules need to be taken into account when considering where, on or after 6 April 2011, the employer (or another party) undertakes to make an amount available to the employee in future, and then provides or ‘earmarks’ money or assets to enable that undertaking to be met. An unfunded undertaking is therefore outside the scope of the rules.

Qualifying recognised overseas pension scheme (QROPS) 18.121 If an individual has accumulated UK pension benefits and has or intends to become non-UK tax resident, he may set up a QROPS to accept the UK accrued pension benefits without incurring an unauthorised payment charge. A  QROPS has considerable flexibility in the investments it makes and can even make loans to members. Benefits taken from a QROPS may be flexible, and the ability to take a 25% tax-free lump sum on retirement applies as for a UK fund. There is, however, no requirement to purchase an annuity on retirement, and death benefits may be paid to nominated beneficiaries, with 704

Pension Funds 18.124 possible inheritance tax savings. A number of offshore jurisdictions have the appropriate expertise and infrastructure to enable QROPS to be established there. A  QROPS has to be regulated as a pension scheme in the country in which it is established, and benefits and payments must be subject to taxation. HMRC publish a list of most of the schemes which have QROPS approval and will generally approve a new scheme which meets their requirements. A  transfer to a QROPS is a benefit crystallisation event for the purpose of the member’s lifetime allowance and, if that is exceeded, it is subject to tax at 25%. The QROPS are governed by the Pension Schemes (Information Requirements – Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations 2006 (SI  2006/208) and FA  2004 s  169 and the Pension Schemes (Categories of Country and the Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 (SI 2006/206) (PTM 112010– PTM 112800). A QROPS has reporting requirements to HMRC if the member to whom the payment is made has been resident in the UK in any of the five tax years immediately preceding the tax year in which the payment is made (PTM  112700). A  new ten-year reporting requirement was introduced from 6 April 2012, applying to payments from a QROPS made on or after that date. The reporting requirement applies irrespective of when the transfer to the QROPS took place. 18.122 Further changes to FA 2004 Part 4 were introduced by Finance Act 2013. The changes enhanced HMRC’s administrative powers and included new exclusions from QROPS status. In particular, the penalty provisions of FA  2008 Sch  36 were extended to a failure by a former QROPS to provide information in accordance with the new requirements. Under FA 2013 s 53, a pension scheme may be excluded from being a QROPS if: •

there has been a failure to comply with a relevant requirement and the failure is significant;

•

any information given pursuant to a relevant requirement is incorrect in a material respect;

•

any declaration given pursuant to a relevant requirement is false in a material respect;

•

there is no scheme manager.

18.123 A ‘relevant requirement’ means a requirement imposed by the Pension Schemes (Information Requirements – Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations 2006 (SI 2006/208), or FA 2008 Sch 36. 18.124 The Finance Act 2017 introduced further changes to QROPS. In particular, it introduced an overseas transfer charge equal to 25% of the member’s transfer value at the date the transfer payment is made from a UK705

18.125  Pension Funds registered pension scheme to a QROPS. Such charge must be deducted by the scheme administrator and paid to HMRC. The transfer charge will not normally apply if the member is not tax resident in the UK. If a UK tax resident is a member of a QROPS and becomes non-UK tax resident within five years of the transfer payment being made, a refund of the total transfer charge may be paid.

Qualifying non-UK pension schemes (QNUPS) 18.125 Whilst UK-registered pension schemes are exempt from exit charges and periodic charges imposed by IHTA ss 58,151–153, these exemptions did not extend to QROPS. The Inheritance Tax (Qualifying Non-UK  Pension Schemes) Regulations (SI  2010/51) rectifies this position and provides for exemption from inheritance tax in respect of UK situs assets held by a QNUPS, contributions by a UK domiciled individual to a QNUPS and UK tax-relieved funds that have been transferred to a QNUPS. A pension scheme qualifying as a QROPS will generally meet the definition of a QNUPS, although there is no requirement for a QNUPS to be registered with HMRC. The reporting obligations outlined above in connection with a QROPS do not therefore apply to a QNUPS.

Master Trusts 18.126 The Pension Schemes Act 2017 (PSA 2017) introduced new legislation relating to the authorisation and supervision of Master Trusts. That is an occupational pension scheme which is funded on a defined contribution basis and is intended to be used by two or more employers. Under the PSA 2017 such trusts must be authorised by the Pensions Regulator. The detailed requirements relating to such authorisation and the associated administration charges are also set out in PSA 2017.

706

Chapter 19

Trust Tax Returns

ESTABLISHING CONTACT WITH HMRC 19.1 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692), came into force on 26 June 2017, implementing the EU Fourth Anti-Money Laundering Directive (EU 2015/849). To comply with requirements under the regulations to collect data regarding trusts, HMRC established the Trust Register Service (TRS). This is an online service which trustees are required to use to notify liability to a ‘relevant tax’, meaning Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Land and Buildings Transaction Tax (Scotland) and Land Transaction Tax (Wales). For the year of introduction, 2016/17, trustees of an express trust were required to register the trust under TRS within a set timescale, depending upon whether the trust was already registered for self-assessment. Trusts in existence and within scope of self-assessment were required to complete their registration with HMRC by 5 March 2018. Other trusts, such as those with no previous liability to income tax or capital gains tax prior to 2016/17, were subject to a separate deadline of 5 October 2017, however, this was extended to 31 January 2018 following delays in making the TRS service available to tax agents. For 2017/18 and later years, a trust which has not previously registered for selfassessment and has a liability to income tax or capital gains tax for the first time will need to register under TRS by 5  October after the end of the tax year, ie the same date by which notification is required under TMA 1970 s 7. If the trust is not registered for self-assessment and has incurred a liability to a relevant tax other than income tax or capital gains tax, the registration must be completed by no later than 31 January following the end of the tax year. Changes to the Trust Register must be notified to HMRC by 31 January following the end of the tax year in which the change takes place. At present, it is not possible to use the online TRS service to notify HMRC of changes and changes must be notified to HMRC in writing to: Trusts HM Revenue & Customs BX9 1EL 707

19.2  Trust Tax Returns Following the introduction of the TRS service, paper form 41G(Trust) has been withdrawn, and registration online is now the only means of obtaining a unique taxpayer reference for a trust. There are exceptions to the requirement to register, for example in relation to bare trusts. The trustees of a trust which has not yet incurred a liability to a relevant tax are not required to register until such a liability arises. Non-UK trusts which do not have any UK assets or sources of income in the UK are not required to register if they incur a liability to Inheritance Tax, Stamp Duty, Stamp Duty Land Tax or the Scottish and Welsh equivalents. The data required to register a trust under TRS includes details of trust assets, including addresses of UK properties, a market valuation of assets at the date they were settled and the identity of the settlor, trustees and beneficiaries (or class of beneficiaries where these cannot be separately identified or have yet to be determined). For individuals, the data required includes name, date of birth, address and National Insurance number unless the individual is under 16 years of age. In the absence of a National Insurance number for non-UK residents, an address and passport or ID number must be provided. 19.2 If the trust is established by a will or intestacy, registering the trust under TRS will require the full name and last address of the deceased, the date of the death, the Tax Office dealing with the deceased’s last tax return or with the estate, together with a reference number or the deceased’s National Insurance number. If the administration period has ended, the date on which it ended is required, and if the will has been altered by a deed of variation or family arrangement, the date of the deed is requested. Details of who will be the settlor for Income Tax purposes, ie every person who took less under the deed than they would have done under the will, is requested, as is whether the deed created a new trust, additional to that established under the will or intestacy, in which case registration is required for each trust. 19.3 HMRC also requires information regarding the form of the trust, such as whether it is in favour of a vulnerable beneficiary, whether any of the beneficiaries has an interest in possession, such that the income is treated as theirs ab initio for tax purposes, or whether the trust gives the trustees power to accumulate or gives them a discretion over income, in which case the trust would be subject to tax at the trust rate. The EU  Fifth Anti-Money Laundering Directive (5AMLD) came into force in June 2018. HMRC issued a consultation document on 15  April 2019, ‘The Transposition of the Fifth Money Laundering Directive: consultation’ setting out its proposed approach to the new obligations imposed by 5AMLD, including expansion of requirements under TRS. Under 5AMLD, all express trusts will be required to register, rather than only those trusts which have a liability to tax. Non-EU resident trusts owning land or property in the UK with 708

Trust Tax Returns 19.6 an ‘obliged entity’ such as banks, will also be required to register. In addition, whilst information on the register is currently available to law enforcement agencies, under 5AMLD access to the register will be extended to any person expressing a ‘legitimate interest’ in reviewing the information held. The consultation document proposes that the definition of ‘legitimate interest’ is linked to anti-money laundering or counter-terrorist financing activities, in line with the underlying purpose of 5AMLD. Time limits for registering trusts will also be changed and the current deadline of 31 January following the tax year end will no longer apply, not least because the requirement to register will not be linked to a liability to tax. The consultation document proposes that new trusts created on or after 1  April 2020 should be registered within 30 days of their creation. Changes to TRS data would also need to be made within 30 days. Trusts in existence at 31  March 2020 which have not previously needed to register will be required to do so by 31 March 2021. A more detailed technical consultation will be published by HMRC later in 2019. 19.4 The TRS does not replace the agent authorisation process, and where an agent is acting on behalf of the trustees, it will be necessary for the trustees to authorise the agent to deal with HMRC on their behalf by completing the form 64–8, signed by one or more of the trustees. 19.5 An agent of trustees of a non-resident trust may have the requirement to provide information to HMRC under IHTA 1984 s 218 (see Chapter 10). IHT is payable on the creation of a settlement unless it is a potentially exempt transfer as a gift into an ‘Age 18 to 25 Trust’, an Immediate Post-Death Interest trust, a Trust for Bereaved Minors or a Disabled Trust, within IHTA 1984 s 3A(1)(c). All trusts established on or after 22 March 2006 are relevant property trusts except for those specifically excluded. This means that transfers into any trusts (unless specifically exempt) are liable to an IHT charge on the transfer at half lifetime rates of IHT. If a trust receives property which is outside the nil rate band, the trustees will have to submit a form IHT100 to the HMRC Capital Taxes Office. This requires details of the agent or trustee who will be dealing with HMRC, the date of the transfer, the type of transfer, details of the transferor, ie the settlor, and the transferees, who will be the trustees, and details of the assets transferred. Interestingly, the CTO does not call for copies of the trust deeds. 19.6 Further details of the transfer and any deductions are requested, together with any exemptions or reliefs claimed, such as Agricultural or Business Property Relief, or any other relief such as, for example, gifts in consideration on marriage, together with the annual and any other exemption claimed. There are questions on form IHT100 relating to the payment of the tax, and who is to bear the tax, and whether there have been any other transfers of value. The trustees have to sign the account, which is then submitted to the Revenue in accordance with the statutory requirements in IHTA 1984 s 216. If anything is returned incorrectly, a corrected account may be made under s 217. The form of the account, ie form IHT100, is contained in IHTA 1984 ss 256–261. 709

19.7  Trust Tax Returns

ANNUAL TRUST RETURNS 19.7 The annual trust tax return is a self-assessment tax return, on form SA900, issued under the authority of TMA  1970 s 8A, which is due for submission by 31  October (paper returns), or 31  January (for returns filed electronically) following the end of the year of assessment, or within three months if issued by HMRC after 31 October following the end of the year of assessment (TMA  1970 s 8A(1B)). The normal self-assessment rules apply in that the trust return has to include a self-assessment under TMA  1970 s 9, although in fact HMRC will calculate the tax if the return is submitted by 30  September following the fiscal year end. An example of a completed form SA900 is set out at the end of this chapter. Where HMRC has requested a trust return in circumstances where the trustees have no liability, the trustees may request for the notice to deliver a trust return to be withdrawn (TMA 1970 s 8B). For tax years 2016/17, 2017/18 and 2018/19, HMRC has confirmed that no return is required where the trustees’ sole source of income is interest and the tax liability is under £100. 19.8 The trustees’ return may be amended within 12 months of the filing date under TMA 1970 s 9ZA, and obvious errors or omissions in the return may be corrected by the Revenue under s 9ZB. Information about chargeable gains is included via TMA 1970 s 8A. The first step in completing the trust return is to determine to what extent it needs to be completed. Where there is a bare trust, or an interest in possession trust, with the income mandated to the beneficiaries or subject to tax at source, and a number of other conditions are met, it is only necessary to complete questions 17, 18, 19, 20, 21 and 22, ie the trustees’ telephone number or the agent’s name, address and telephone number, the names and addresses of the trustees and whether the trust has terminated, or whether there have been any tax refunds, disclosable tax avoidance schemes or provisional figures, and the trustees’ declaration. All references relate to the 2018/19 Trust and Estate Tax Return and associated supplementary pages. 19.9 The first eight questions on the return enquire whether the trustees had trust and estate trading income, income from a partnership, income from land and property, foreign income, capital gains, are claiming non-residence or charitable status, or for pension trustees, whether there are any tax charges or taxable lump sums. If the answer to any of these questions is in the affirmative, then supplementary pages are needed. 19.10 A  number of questions are asked at question 8 about the status of the trust, to determine whether it is liable to the trust rate or the dividend trust rate on any of its income, whether any of its income or gains should be assessed on the settlor or whether there is a vulnerable beneficiary. The 710

Trust Tax Returns 19.11 main trust return begins at question 9 with interest, dividends, gains on UK life insurance policies and other income. The amount of standard rate band available is established by question 9A. If no entry is made in this box, HMRC will assume that the minimum standard rate band of £200 applies. Question 10A enquires about annual payments and other reliefs; question 10B concerns the amount of income tax relief claimed in respect of trusts in favour of vulnerable beneficiaries and question 10C relates to payments made by an employee benefit trust. Question 11 enquires whether any annual payments were made out of capital or income not brought into charge to income tax. Question 12 enquires whether any assets or funds have been added to the trust during the tax year. Question 13 deals with trust income not liable to tax at the trust rate or the dividend trust rate, for example where it is used in payment of trust management expenses, and question 13A concerns income treated as that of the settlor. Question 14 enquires about discretionary payments of income made to beneficiaries. Question 15 requires details of any capital payments made for the benefit of minor unmarried children of the settlor during the settlor’s lifetime and of capital transactions between trustees and the settlors. Question 15A enquires about capital transactions between the trustees and the settlor(s). Question 16 deals with trusts which have been at any time non-resident; question 17 deals with the calculation of tax where HMRC has not been requested to calculate this. Question 18 deals with the destination of any repayment of tax. Question 19 asks for a daytime telephone number to be provided for the trustees or their agent. Question 20 relates to the Trust Register and asks whether any changes or additions have been made and requests confirmation that the Trust Register has been updated. In the Trust & Estates Newsletter: August 2018, HMRC has issued guidance stating that Question 20 should be left blank pending the next phase of TRS implementation enabling online notification of changes. Question 21 asks for any other information and whether any figures are provisional, and applicable DOTAS scheme reference. Note that the ‘Additional Information’ box 21.9 cannot be used for notifying HMRC of any changes in trustee, beneficiaries etc. The Trust and Estate return guide (SA950) for 2018/19 extends to 28 pages. 19.11 The Trust and Estate Trade supplementary pages (form SA901) are very similar to those applicable to individuals, requesting details of the business, capital allowances and balancing charges, total income and expenses where the three-line account applies, ie  where annual turnover is below £30,000, and more detailed income and expenses where the turnover limit is exceeded, when the standard accounts information is required. Tax adjustments to the net profit or loss are dealt with in order to arrive at the taxable profits of the business. Tax paid at source is returned and there is a request for a summary balance sheet where one is available. There are seven pages of notes. There are separate pages for the fairly unusual case where the trust or, more likely, the estate of a deceased underwriter, has income or losses from Lloyd’s (form SA901L), with seven pages of notes. 711

19.12  Trust Tax Returns The Trust and Estate Partnership return (form SA902) mirrors the normal self-assessment individual partners’ pages, with details of the partnership and the share of the partnerships trading or professional income. The six pages of notes on Trust and Estate Partnership income include instructions on transferring figures from the partnership statement to the partnership pages in the trust return. 19.12 The Trust and Estate UK  Property pages (form SA903) and nine pages of notes mirror those of an individual self-assessment return, requiring details of income from furnished holiday lettings in the UK and other property income including chargeable premiums, ie  premiums on the grant of leases for less than 50 years, partly taxed as income under ITTOIA 2005 s 277. The Trust and Estate Foreign pages (form SA904) and 15 pages of notes deal with the foreign income of UK trusts, including interest and other savings income, dividends, income assessed on a remittance basis, ie where a beneficiary has an absolute interest in income and is resident in the UK but not domiciled or, from 6 April 2017, deemed domiciled in the UK. The country from which the income is sourced has to be disclosed, together with the income before tax, the foreign tax paid and the amount chargeable which will normally be the amount before tax, where the foreign tax is claimed as a credit or that amount less the foreign tax where it is treated as an expense under TIOPA 2010 ss 112–115. It is normally preferable to claim the foreign tax as a credit where possible. Income reported elsewhere on the return such as on the supplementary pages for trade or partnership income which has suffered foreign tax has to be crossreferred to the foreign supplementary pages in order to claim relief for the foreign tax paid. This also applies to chargeable gains, see Return TF3 and Guidance Notes TFN 4 to 9. 19.13 Other income which might require to be returned includes holdings in offshore funds, gains on foreign life insurance policies, which may or may not have a credit for tax treated as paid. Further details of income and expenses in respect of land and property abroad is required on pages TF4 and TF5, which will normally be required for each overseas property unless all the overseas let properties are in the same country, and all the income is remittable, or they are in different countries but there has been no foreign tax deducted from any of the income and all of it is remittable. 19.14 The eight supplementary pages for Trust and Estate Capital Gains (form SA905) require particulars of chargeable gains and allowable losses, including those brought forward from earlier years. The basis of the form closely follows that of the personal self-assessment capital gains forms, although there are boxes for where a life tenant has died, where a person has become absolutely entitled to any part of the property during the year, where the trustees have ceased to become UK resident, or become dual resident, or where chargeable gains are chargeable on the settlor or if entrepreneurs’ relief is being claimed for that year. Further information is required for each 712

Trust Tax Returns 19.19 transaction where the gains arise from the sale of unlisted shares or securities, land and property or other assets such as goodwill or chattels. There are 17 pages of notes. The Trust and Estate Non-residence pages (SA906) are used to determine the residence status of the trust for income tax purposes, and separately for CGT purposes in accordance with the residence rules for trustees, as explained in Chapter 5. 19.15 There are also supplementary pages for charitable trusts (SA907), which specify the basis of the claim to exemption, the return period, the payments claimed or being claimed, the income for which exemption is claimed and the expenses and assets, as included in the charity accounts, together with the formal claim for exemption. 19.16 The final supplementary pages are for Estate Pension Charges etc, specifying certain payments the estate has received from registered pension schemes and certain overseas pension schemes (SA  923). The three-page guidance asks for estate pension charges etc details, the pension payments received by the estate that need to be included on the supplementary pages. State pensions (state second pensions) should not be included on these pages. 19.17 There is also a Trust and Estate Tax Calculation Guide (form SA951) for those trustees who wish to calculate the tax payable. As with all the selfassessment tax calculation guides, it is extremely complex, with more than 160 boxes in the 16-page guide. 19.18 As for individuals and partnerships, HMRC publishes a very useful reference guide for HMRC staff and tax practitioners entitled The Trust and Estate Tax Return Guide, which is available to agents from the SelfAssessment Orderline: tel: 0300 2003610, fax: 0300 2003611. Forms may also be downloaded from HMRC’s website at www.gov.uk/self-assessmentforms-and-helpsheets. HMRC sometimes issues a tax return and request for information form 50 (FS) to non-UK resident trustees where there is a UK connection, for example, where distributions are made or benefits provided to a UK resident beneficiary. This is a non-statutory form and completion is voluntary. 19.19 In Tax Bulletin, Issue 27, February 1997, p 395, HMRC confirmed that trustees of bare trusts would not be required to complete trust tax returns, but in Issue 32, December 1997, p 407 (available through the National Archives), it was accepted that trustees were entitled to make a self-assessment return of income, but not of capital gains, and account for tax at the basic rate which is sometimes convenient, for example, if a property is jointly owned. This position is confirmed on page four of the Trust and Estate Tax Return Guide. Trustees of bare trusts, in such circumstances, may inform the Trust District that they intend to self-assess on a regular and consistent basis. 713

19.20  Trust Tax Returns

PROVISIONAL FIGURES AND ESTIMATES 19.20 The statutory authority for self-assessment tax returns is TMA 1970 s 8 and, in the case of trust returns, TMA  1970 s 8A. HMRC has always accepted that it may be necessary in self-assessment returns in certain circumstances to complete the return with provisional figures, or estimates on the authority of Dunk v Havant Comrs [1976] STC 460. HMRC practice originally was to send back the return where it was not satisfied that there was sufficient justification for the use of a provisional or estimated figure, but it no longer does so, although that information will be a factor taken into account in deciding whether to open an enquiry into the return under TMA 1970 s 9A. HMRC will no longer reject returns containing estimated or provisional figures (Tax Bulletin, Issue 57, February 2002, p 916, and Self Assessment Manual SAM123170). 19.21 Where provisional figures are concerned, if the date on which final figures become available is known or can be anticipated with reasonable accuracy, it should be inserted in the white space for additional information on the tax return, as this may avoid an enquiry being commenced.

VALUATIONS 19.22 Where a CGT computation includes valuations, the basis of valuations should be disclosed and professional valuations obtained where necessary. These valuations can be submitted with the trust return in support of the computation or may be submitted to HMRC for a post-transaction valuation check after a disposal has taken place together but before the filing deadline. The application is made using form CG34 (available to download on the gov. uk website), which will enable the valuation agreement procedure with the Shares and Assets Valuation team or the District Valuer. HMRC suggests that taxpayers allow at least three months, and CG16611 states that requests for a post-transaction check received within two months of the filing date will not be processed. The trustees should enclose a capital gains computation for the disposal with an estimate of the CGT liability for the year in respect of which the disposal was made, details of any reliefs due to be claimed with respect to the disposal, a copy of any valuation report obtained if available, the cost and date of acquisition of the assets and details of any improvements made. In the case of share valuations, accounts for the three years up to the valuation should be enclosed, and in the case of land which is let, a copy of the lease or tenancy agreement or a plan showing the location of the land if the valuation is of undeveloped land, together with any other relevant information. 19.23 The CG34 procedure may enable the valuation to be agreed prior to the due date for the submission of the return and avoid HMRC having to open an enquiry in order to agree the valuation. 714

Trust Tax Returns 19.26

CLAIMS AND ELECTIONS 19.24 The self-assessment system is designed for claims for reliefs to be included in the relevant tax return for the period to which they relate under TMA 1970 s 42, which requires the claim to be quantified. However, the selfassessment system is designed so that each year, once any HMRC enquiry has been completed, it becomes final and events happening in future years should not lead to the reopening of a closed year. It is therefore possible to make claims outside the tax return under TMA 1970 Sch 1A and, where claims involve relief for two or more years, under Sch 1B. 19.25 Claims made outside the tax return may be amended by the trustees or corrected by HMRC in the same way as if the claim had been included in the return (TMA 1970 Sch 1A para 3). Time limits for claims and elections are as follows: •

fourth anniversary of 31  January following the end of the tax year (income tax), or

•

four years from the end of the accounting period (corporation tax purposes).

Before 1  April 2010, these time limits were five years from 31  January following the end of the tax year (income tax) and six years from the end of the accounting period (corporation tax).

Time limits for claims 19.26 The main claims periods under the Taxation of Chargeable Gains Act 1992 are: (a)

Section 24 (Asset of negligible value) – two years.

(b) Section 152 (Rollover relief of business assets) – four years. (c)

Section 161 (Appropriations to and from stock) – one year ten months.

(d) Section 165 (Gifts of business assets) – four years. (e)

Section 169M (Entrepreneurs’ Relief) – one year ten months.

(f)

Section 242 (Small part disposals) – one year ten months.

(g) Section 243 (Part disposal to authority with compulsory powers) – one year ten months. (h) Section 244 (Part disposal: consideration exceeding allowable expenditure) – one year ten months. 715

19.27  Trust Tax Returns (i)

Section 253 (Debts – relief for loans to traders) – four years.

(j)

Section 260 (Holdover relief on gifts chargeable to inheritance tax) – four years.

(k) Section 279 (Foreign assets: delayed remittances) – four years. 19.27

The main claims periods under the Capital Allowances Act 2001 are:

(a)

Section 85 (Short-life assets – election for certain machinery or plant to be treated as short-life assets) – one year ten months.

(b)

Section 129 (Ships: exclusion of CAA 2001 s 127) – one year ten months.

(c)

Section 130 (Ships – first-year and writing-down allowances) – one year ten months.

(d) Section 177 (Fixtures expenditure incurred by equipment lessor) – one year ten months. (e)

Section 198 – (Fixtures) – two years.

(f)

Section 382 (Agriculture – balancing events) – one year ten months.

19.28 The main claims periods under the Income Tax (Trading and Other Income) Act 2005 are: (a)

ss 214–218 (Change of basis period – conditions for such a change) – tax return filing date (ie ten months).

(b) ss 107–110 (Gifts to educational establishments) – one year ten months. (c)

ss 182–185 (Valuation of work in progress at discontinuance of profession or vocation) – one year ten months.

(d)

ss 323–326, Sch 1 para 197 (Letting of furnished holiday accommodation treated as a trade: supplementary provisions) – one year ten months.

(e) ss 587–596 (Taxation of receipts from sale of patent rights) – one year ten months. (f) s  682 (Estate of deceased persons in course of administration – adjustments and information) – three years ten months. (g) ss  137–440 (Exclusions of certain expenditure relating to films, tapes and discs) – one year ten months. (h) ss 136–137 (Films – relief for preliminary expenditure) – one year ten months. 19.29 (a)

The main claims periods under the Income Tax Act 2007 are:

s 124 (Property losses) – one year ten months.

(b) s 64 (Trading losses) – one year ten months. 716

Trust Tax Returns 19.32 (c) s  152 (Miscellaneous losses) – four years from end of the tax year in which the loss arose. (d) s 508 (Maintenance funds for historic buildings – certain income not to be income of settlor) – one year ten months. (e) s 1026 (Double taxation relief – relief against income tax in respect of income arising in years of commencement) – four years. 19.30 The main claims periods under the Taxation (International and Other) Provisions Act 2010 are: (a) ss 19, 77, 80 (Double taxation relief – time limit for claims etc) – four years (b) Sch 4 para 5 (Assets leased to traders and others) – four years.

OVERPAYMENT RELIEF 19.31 The ‘overpayment relief’ provisions replaced claims for error or mistake relief for income tax, capital gains tax and corporation tax from 1 April 2010 (TMA 197 Sch 1AB). The time limit for claiming overpayment relief is four years after the end of the tax year. 19.32 Self Assessment Claims Manual SACM12150 provides a brief explanation of the overpaid relief provisions and how claims should be made (see extract below): ‘The person applying for overpayment relief must make a claim to HMRC for repayment or discharge of the amount of tax which they believe they should not have paid, or should not be due. Any existing self-assessment should be left unchanged. A  person cannot make an overpayment relief claim by including it in an individual, trust, partnership or company tax return. Claims should not be accepted if they are made on an SA return form (SA100) or equivalent, such as the Trust and Estate Tax Return SA900. Overpayment relief claims must be made by the person who is due the relief except for overpayment relief claims arising from mistakes in partnership returns – see SACM12045. Overpayment relief claims must be made in writing and •

must clearly state that the person is making a claim for overpayment relief

•

identify the tax year or accounting period for which the overpayment or excessive assessment has been made 717

19.33  Trust Tax Returns •

state the grounds on which the person considers that the overpayment or excessive assessment has occurred

•

state whether the person has previously made an appeal in connection with the payment or the assessment

•

if the claim is for repayment of tax, you must have documentary proof of the tax deducted or suffered in some other way as you may be required to provide this at a later date – see SACM3015

•

include a declaration signed by the claimant stating that the particulars given in the claim are correct and complete to the best of their knowledge and belief

•

state the amount that the person believes they have overpaid.’

19.33 On receiving the claim, HMRC has to examine it and, where appropriate, make a just and reasonable repayment. No relief, however, is available where the return was made on the basis of, or in accordance with, the practice generally prevailing at the time when it was made. However, following the decision of the Court of Appeal in the Franked Investment Income Group Litigation (Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2010] All ER (D) 261 (Feb), paras 255–264), HMRC has confirmed that, if a claim for error or mistake relief or overpayment relief relates to taxes paid in breach of EU law, HMRC will not seek to disallow it on the basis that the tax liability was calculated in accordance with the prevailing practice (see Revenue and Customs Brief 22/10 ‘Overpayment relief and practice generally prevailing’). Following an amendment made by Finance Act 2013, for claims made six months or more after 17 July 2013 the ‘generally prevailing practice’ for cases involving an error in calculating an income tax (including under PAYE), capital gains tax or corporation tax liability (cases G and H in TMA 1970 Sch 1AB para 2) is removed if the tax overpaid was contrary to EU law. 19.34 The requirement that the overpayment of tax results from an error or mistake in the return, a feature of the former ICTA 1988 s 33 provisions applying prior to 1 April 2010, is removed under the overpayment relief rules. A claim under the new provisions will only be possible if there are no other statutory steps available and the taxpayer has exhausted any available rights of appeal. Where there is an ‘overpayment of tax’ in a partnership return, any partner, including trustees where appropriate, may make a claim under TMA  1970 Sch 1AB para 5. This includes consequential amendments to each partner’s own return, which would include the trust return where trustees are partners.

ENQUIRIES 19.35 For tax returns submitted on or after 1 April 2008, the time limit for HMRC to open an enquiry runs for 12 months from the date the tax return 718

Trust Tax Returns 19.38 is delivered. Prior to this date, the enquiry window was 12 months from the 31  January filing deadline. For example, if a return is delivered on 18  July 2018, the enquiry window will run to 18  July 2019, ie  12 months after the return was delivered (TMA  1970 s 9A(2A)). This gives HMRC sufficient time to collate information received from third parties and consider whether the return requires further investigation. HMRC has to give the trustees notice of the intention to enquire into the return, including any amendments or claims which have been made. If HMRC considers that there is likely to be a loss to the Crown it may amend the self-assessment by making a jeopardy assessment under s  9C during the course of the enquiry. Most enquiries are settled by agreement either by amending an existing self-assessment or by way of a contract settlement. The Inspector will issue a closure notice following HMRC’s enquiries, which must either confirm that no amendment of the return is required or make the amendments of the return required to give effect to the Officer’s conclusions at the end of his enquiry under TMA 1970 s 28A. 19.36 Enquiries into partnership returns, which could have a knock-on effect on a trustee partner, are similarly handled under TMA  1970 s 28B, and where no return has been delivered HMRC may make a determination of the amount that should have been included in the self-assessment under s  28C. The trustees’ right of appeal is defined in s  31 of the 1970 Act and technical disputes may be referred to the tribunal during the enquiry under ss 28ZA–28ZE. 19.37 HMRC may, in the course of an enquiry, include an enquiry into a partnership where the trust is a partner (TMA 1970 s 12AC). These powers, contained in FA 2008 s 113 and Sch 36 and FA 2009 ss 95–97 and Schs 47– 49, may require the production of information within the time specified in the notice, which must be at least 30 days. HMRC has more formal informationgathering powers under TMA 1970 s 20D and FA 2008 Schs 36 and 47–49. HMRC may also obtain information from third parties under TMA  1970 ss 13–19, 23–26 and FA 2008 Sch 36. Under TMA 1970 s 27, HMRC may, by notice in writing, require any person who is party to a trust to provide information within a specified period of not less than 28 days. It may also require a person liable to tax on chargeable gains from a non-resident company under TCGA  1992 s 13 to provide appropriate information under FA  2008 Sch 36. 19.38 Although, under the self-assessment rules, HMRC is entitled to make a random enquiry into any self-assessment return, the vast majority of enquiries are targeted enquiries as a result of an HMRC risk assessment of the tax at stake and the likelihood of errors. The majority of such focused enquiries are aspect enquiries into a particular entry or entries on the tax return, rather than a full enquiry looking closely into the books and records. 719

19.39  Trust Tax Returns

DISCOVERY 19.39 Where the time limit for opening an enquiry has expired and HMRC becomes aware of a suspected defect in the trustees’ self-assessment, it may seek to make a discovery under TMA 1970 s 29 in order to make good a loss of tax. No discovery is possible if the return was made in accordance with practice generally prevailing at that time, unless the underpayment is attributable to careless or deliberate conduct. This terminology replaced the previous wording of ‘fraudulent or negligent conduct’ from 1 April 2010. The former provisions have been considered in cases such as Hancock v IRC [1999] STC (SCD) 287; King v Walden [2000]  STC (SCD) 179 and [2001]  STC  822; Last Viceroy Restaurant (a firm) v Jackson [2000] STC 1093; and Hall v Conch [2009] STC (SCP) 353. 19.40 An action is ‘careless’ if there was no knowledge of an error at the time a document was submitted, but the error was later discovered and reasonable steps were not taken to inform HMRC. ‘Deliberate’ behaviour was considered by the Upper Tribunal in a non-tax context in Amir Khan v Financial Services Authority (FS/2013/002), where the Tribunal held that for an action to be ‘deliberate’ the person must have acted ‘dishonestly’. See also Auxilium Project Management Limited v HMRC  [2016]  UKFTT  0249 and Patrick Cannon v HMRC [2017] UKFTT 0859, where it was held that ‘a deliberate error in a tax return requires that the taxpayer knew about the error and intended to misrepresent the true position’. From 1  April 2010, the time limits for HMRC to open earlier tax returns under a discovery assessment have changed. Ordinarily, HMRC can raise an assessment no later than four years after the end of the year to which the assessment relates. For carelessly omitting to report a gain or income that should have been taxed in the UK, HMRC is entitled to go back no more than six years. However, if the omission was deliberate, then they are entitled to go back no more than 20 years. Following Finance Act 2019, the time limit under which HMRC may raise an assessment to income tax, capital gains tax or inheritance tax where there is offshore tax non-compliance involving non-deliberate behaviour is to be extended to 12 years (TMA 1970 s 36A, inserted by FA 2019 s 80). Where there is deliberate behaviour, the existing time limit of 20 years for both onshore and offshore matters remains unchanged. The extended time limit applies generally from 6 April 2015, but for loss of tax brought about by careless behaviour, the commencement date is 2013/14. 19.41 Alternatively, a discovery may be made if the Officer, at the time he ceased to be entitled to raise an enquiry into a return, could not reasonably be expected to be aware of the tax deficiency on the basis of the information available to him (TMA 1970 s 29(5), and see Langham (Inspector of Taxes) v 720

Trust Tax Returns 19.42 Veltema [2004] EWCA Civ 193, [2004] STC 544). Information is treated as having been made available if it is contained in the taxpayer’s last tax return or in any accounts, statements or documents accompanying the return, or amended return, for the chargeable period and the two immediately preceding periods, or produced during an enquiry, or which could reasonably be expected to be inferred by the Officer from such information or which is notified to him in writing (TMA 1970 s 29(6) and (7)). HMRC accepts that documents sent within one month of a return ‘accompany’ it (see SP  1/97 ‘The Electronic Lodgement Service’). Enquiries can be raised into claims outside the return in the same way as for the return itself, and there are similar powers to call for documents and procedures on completion of enquiries into claims under TMA 1970 Sch 1A paras 5–9.

Guidance and discovery 19.42 On 24  December 2004, HMRC published guidance on discovery following the Court of Appeal decision in Langham v Veltema [2004] STC 544: ‘Discovery following the Veltema judgment Self Assessment tax returns are usually issued to taxpayers in April, shortly after the end of the tax year. The Return has to be completed and sent in by the following 31  January. The Revenue can open an enquiry into that return within twelve months of 31 January to check that the self assessment returns the right amount of tax. If it is incorrect the self assessment can be corrected. There are some circumstances in which the tax inspector can assess further tax after the twelve month enquiry period. This usually happens when tax was under-assessed because of fraud or negligence by the taxpayer but it can also happen if the taxpayer doesn’t provide enough information for the inspector to realise within the enquiry period that the self assessment was insufficient. The Court of Appeal judgment in a recent case, the Veltema case, was concerned with how much information the taxpayer needs to provide to remove the possibility of the inspector making a further assessment, known as a discovery assessment. This note provides some guidance on what taxpayers can do to reduce or remove the risk of a discovery assessment in some fairly common circumstances. Valuation cases Some entries on tax returns depend on the valuation of an asset. For example, if a company transfers a property to a director. There is no obligation on the taxpayer to do any more than enter the resulting benefit in the relevant box on the Return. The Help Sheet IR213 shows how to work out the benefit from the market value of the asset. Doing no more than that cannot give the 721

19.42  Trust Tax Returns inspector the level of information that the Court of Appeal says is necessary to prevent a later discovery assessment. However, most taxpayers who state in the Additional Information space at the end of the Return that a valuation has been used, by whom it has been carried out, and that it was carried out by a named independent and suitably qualified valuer if that was the case, on the appropriate basis, will be able, for all practical purposes, to rely on protection from a later discovery assessment, provided those statements are true. The main exception will be those, like the example of the property transferred to a director, where the same transaction is the subject of an agreed valuation in a later related tax return, that of the company. It may then be possible that the earlier director’s return was insufficient. It is also likely that the insufficiency can also be quantified without further enquiry and a discovery assessment raised. For this purpose, a related tax return is that of another party to the same transaction, rather than another transaction involving a similar or identical asset. The latter could include several parties disposing of a jointly owned asset or shareholders disposing of the shares in the same company at the same time in similar circumstances, usually the sale of a whole company. The return of capital gains requires an entry to indicate that a valuation has been used and asks for a copy of any valuation received. If these provide the information mentioned above the taxpayer can rely on protection from later discovery assessment. Other Judgmental Issues There are many items such as reserves, provisions and stock valuation that are routinely included in accounts as well as some exceptional items such as capital/revenue expenditure in repairs that require an element of judgement on the part of the taxpayer or representative. It has been customary to provide details of such items in the accounts or computations and many taxpayers have continued to do so. It is difficult to see how an inspector might come to the conclusion that an assessment is insufficient because of one of these items without making any enquiry. There will be instances in which it becomes clear from an inyear enquiry that previous years’ figures were incorrect. The decision in the Veltema case does not alter that situation. It may be possible to gain finality with the more exceptional items. An example might be a deduction in the accounts under Repairs. If an entry in the Additional Information space points out that a programme of work has been carried out that included repairs, improvements and new building work and that the total cost has been allocated to revenue and capital on a particular basis, the inspector should not enquire after the closure of the enquiry period unless he becomes aware that the statement 722

Trust Tax Returns 19.42 was patently untrue or the basis of allocation was so unreasonable as to be negligent. Taking a Different View It is open to a taxpayer properly advised to adopt a different view of the law from that published as the Revenue’s view. To protect against a discovery assessment after the enquiry period the Return would have to indicate that a different view had been adopted. This might be done by entering in the Additional Information space comments to the effect that they have not followed Revenue guidance on the issue or that no adjustment has been made to take account of it. This would offer an opportunity to the Revenue to take up the return for enquiry. In the Revenue’s view it is not necessary for the taxpayer to provide with the Return enough information for the inspector to be able to quantify any resulting under assessment of tax. A  current example of this is the Revenue’s guidance on Settlements Legislation in s 660A. The guidance on discovery is that taxpayers should enter in the Additional Information space comments to the effect that they have not followed the Revenue guidance in respect of S660A. As indicated above, protection can be achieved by noting that “Revenue guidance indicates that s 660A may apply. No adjustment has been made.” The Veltema judgment does not require the provision of enough information to quantify the effect on the self assessment. Provided the point at issue is clearly identified and the stance adopted is not wholly unreasonable, the existence of an under-assessment or insufficiency is demonstrated by the statement that a different view of the law was followed. It is not necessary to provide all the documentation that the inspector might need to quantify that insufficiency if he chose to enquire into the Return. In these circumstances the taxpayer achieves finality if no enquiry is opened within the twelve month time limit. Background Notes The impetus for guidance on the impact of the Veltema decision is the concern expressed by professional representatives and representative bodies. Those concerns are: (1)

the lack of finality for the taxpayer at the close of the enquiry window, indeed the perceived extension of the enquiry window from twelve months to five years;

(2) the inherent difficulty of complying with the law as expounded by Auld LJ in particular circumstances such as valuations, legislative interpretation (eg  s 660A issues) and judgmental issues (eg  capital/ revenue expenditure issues). 723

19.42  Trust Tax Returns The Inland Revenue would be concerned if the response to those concerns might adversely affect taxpayer filing behaviour, for example by the submission of much more documentation. Consultation Meetings have been held with representative bodies through a subcommittee of the Operational Consultative Committee. The objective has been to provide guidance for taxpayers completing their returns before the filing deadline of 31 January 2005. The Revenue are in discussion with practitioners as to the application of this guidance to Stamp Duty Land Tax on residential transactions. In seeking a solution we have sought to balance the desire of taxpayers for certainty of their position twelve months after the filing date and the need of the Revenue to be able to properly risk assess returns for potential loss of duty. The legislation at TMA 1970 s 29 is set out at appendix 1. The Self Assessment Legal Framework issued in 1995 explained that the redrafting of TMA 1970 s 29 was to ensure “that a taxpayer who has made a full disclosure in the return has absolute finality twelve months after the filing date. This will be the case if the return is subsequently found to be incorrect, unless it was incorrect because of fraudulent or negligent conduct. In any case where there was incomplete disclosure or fraudulent or negligent conduct the Revenue will still have the power to remedy any loss of tax.” There was clearly an intention to offer finality but also a recognition that there would be circumstances, even without neglect or fraud, that could still result in a discovery assessment. The nub of the issue is what constitutes disclosure that is incomplete. In the Court of Appeal judgment Auld LJ said that the information, as encompassed by TMA 1970 s 29(6), must make the inspector aware of “an actual insufficiency” in the self assessment. So, if the taxpayer provides sufficient information for the inspector to be aware that the self assessment is insufficient the disclosure is not incomplete and s 29(5) cannot apply. The Revenue’s Position As Discussed With The Representative Bodies (1) The Perceived Extension of the Enquiry Period We have considered the perception that the impact of the Auld LJ judgment is to extend the enquiry period. We believe that the circumstances in which a discovery assessment can be raised in the absence of fraud or neglect are limited by the legislation. Within twelve months of the filing date the inspector may open an enquiry into the return under s 9A and has available the relevant information powers. After twelve months those powers are not available. 724

Trust Tax Returns 19.42 In the absence of fraud or neglect the ability of the inspector to “enquire” after the twelve months window has closed is very much more limited and the actions of the inspector very quickly fall under the purview of the General Commissioners and any unreasonable enquiry action curtailed. If the inspector suspects, after twelve months, that a self assessment is insufficient, but there is no fraud or neglect, he has two options. He can seek to use TMA 1970 s 20 information powers to establish whether the self assessment is insufficient and his grounds for doing so will come under the scrutiny of the Commissioner who considers signing the notice. As there is no reason to suspect fraud, the taxpayer will be aware of the s 20 application and will have an opportunity to make representations to be put before the Commissioner. The inspector’s second option is to raise an assessment under TMA 1970 s 29(1) supported by TMA 1970 s 29(5). The taxpayer can appeal on the grounds that neither of the two conditions required for the making of an assessment has been met, because the inspector only suspects that the self assessment may be insufficient whereas TMA  1970 s 29(1) requires the inspector to discover that an assessment to tax is insufficient. The Commissioners should therefore only allow their information powers to be used to quantify an insufficiency, not to uncover one. The Revenue can introduce guidance for inspectors to ensure that action is considered only in circumstances that were non-contentious prior to SA and prior to Veltema. (3) Providing Sufficient Information Against a background of the restricted opportunity for enquiry by the inspector we have considered how the taxpayer can achieve the level of disclosure that satisfies the Auld test – sufficient to show that there is an insufficiency. There is no suggestion in the Auld judgment that the disclosure has to be sufficient to quantify that insufficiency. There is no power to restrict taxpayers from submitting documents with returns. Taxpayers for whom certainty is paramount will always have available the option of providing all the relevant documentation but will have to take care that the salient information is not hidden in a mass of superfluous paperwork. The Revenue do not want this to be the fall back position for most taxpayers. We want to emphasise the rarity of those cases where we will feel it necessary to revisit a closed return. There are three main areas where concern has been expressed. (i) Valuation cases The valuation of an asset is a matter of opinion. The Revenue’s concern is for the taxpayer to make a return that is correct and complete. That generally means that valuations should be made by properly qualified 725

19.42  Trust Tax Returns and experienced valuers and on the correct basis. It is the Revenue’s responsibility to ensure that higher risk valuation cases are recognised and risk assessed. We should not seek to go back to enquire into a closed return simply because we suspect that the self assessment may be insufficient as a result of a valuation issue. It is significant that in the Veltema case itself the basis for the discovery assessment was an agreed valuation arrived at in the course of an enquiry on the company return within the enquiry window. In most cases we want the taxpayer who notes the Additional Information space to the effect that a valuation has been used, by whom it has been carried out, and that it was carried out by a named independent and suitably qualified valuer if this was the case, on the appropriate basis, to be able to rely on finality, provided those statements are true. The main exception to “most cases” will be those like Veltema where an agreed valuation is arrived at in another related tax return so that it is clear not only that there is an insufficiency but it can also be quantified. For this purpose, a related tax return is that of another party to the same transaction, rather than another transaction involving a similar or identical asset. The latter could include several parties disposing of a jointly owned asset or shareholders disposing of the shares in the same company at the same time in similar circumstances, usually the sale of a whole company. (ii) Other Judgmental Issues Concerns have been expressed about items such as reserves, provisions and stock valuation that are routinely included in accounts and exceptional items such as capital/revenue expenditure in repairs. It has been customary to provide detail of such items in the accounts or computations. There will be instances in which it becomes clear from an in-year enquiry that previous years’ figures were incorrect. That is no different from the position pre Veltema and pre SA and should not be contentious. The more exceptional items may be more difficult. An example might be a deduction in the accounts under Repairs. If the Additional Information space points out that a programme of work has been carried out that included repairs, improvements and new building work and that the total cost has been allocated to revenue and capital on a particular basis, the Revenue would not enquire after the closure of the enquiry window unless we became aware that the statement was patently untrue or the basis of allocation was so unreasonable as to be negligent. There might again be instances where it becomes clear from a later return that the repair debit was incorrect. This is synonymous with the “valuation in another return” situation encountered in Veltema and would be open to discovery under the Auld judgment. Again, that is no different from the pre Veltema and pre SA position. 726

Trust Tax Returns 19.43 (iii) Taking a Different View It is always open to a taxpayer on advice to adopt a different view of the law from that published as the Revenue’s view. To protect against discovery the return would have to indicate that a different view had been adopted. This would offer an opportunity to the Revenue to take up the return for enquiry. The current example of this is the Revenue’s guidance on Settlements Legislation in s 660A. The guidance on discovery is to the effect that taxpayers should enter in the white space comments to the effect that they have not followed the Revenue guidance in respect of s 660A. As indicated above, protection can be achieved by noting that “Revenue guidance indicates that s 660A may apply. No adjustment has been made.” The Veltema judgment does not require the provision of enough information to quantify the effect on the self assessment. Provided the point at issue is clearly identified and the stance adopted is not wholly unreasonable the existence of an insufficiency can be assumed. It is not necessary to provide all the documentation that the inspector might need to quantify that insufficiency if he chose to enquire into the return. In these circumstances the taxpayer achieves finality if no enquiry is opened within the twelve month time limit. The Legislation TMA 1970 s 29 (not reproduced)’ This note has now been supplemented by a formal Statement of Practice, SP 1/06 setting out the circumstances where HMRC considers that insufficient information is included in a return to make it aware of an under-statement of tax. Subsequent cases have established that inclusion of a DOTAS scheme reference number is generally adequate to alert HMRC to a potential insufficiency in the return (Dr M Charlton v HMRC [2012] UKUT 770 and related appeals), but mere disclosure of participation in a scheme seeking to create a capital loss or avoid tax is not (see Corbally-Stourton v Revenue and Customs Comrs [2008] STC (SCD) 907 and Sanderson v HMRC [2013] UKUT 623 (TCC)).

TAX PAYMENT DATES Income tax 19.43 The balance of income tax due for a tax year, being the tax payable less interim payments on account, is payable on 31 January following the end of the tax year. The first instalment of income tax for the current year, being half the income tax for the preceding year, is also due for payment on 31 January following the end of the tax year, together with a similar amount on 31 July following the end of the year of assessment (TMA 1970 ss 59A and 59B) 727

19.44  Trust Tax Returns

Capital gains tax UK residents 19.44 CGT is generally due for payment on 31 January following the end of the tax year in which the disposal takes place, although special rules apply to non-residents making disposals of UK property. From 6 April 2020, the timescale for payment is modified and a separate return is required for disposals of UK residential property (FA 2019 Sch 2 para 1(1) (b)). A return in respect of such a disposal must be delivered to HMRC within 30 days following completion of the disposal, and a payment on account of the CGT due made by the same deadline (Sch 2 paras 3, 6). The taxpayer is required to make a self-assessment of the CGT due, taking into account any available capital losses and annual exemption, and make payment accordingly. No return is required where the gain is not chargeable to CGT, for example where private residence relief applies (Sch 2 paras 4, 5). These rules will apply to both UK and non-UK residents making a disposal of UK residential property on or after 6 April 2020.

Non-residents 19.45 The ‘non-resident capital gains tax’ (NRCGT) regime applied between 6  April 2015 and 5  April 2019 and required non-UK resident individuals, trustees and ‘close’ companies to pay CGT on the disposal of UK residential property within 30 days of completion of the disposal (the same date on which the NRCGT return must be filed) (TMA 1970 s 59AA, inserted by FA 2015 Sch 7 paras 43, 51), unless the taxpayer is registered for self assessment. From 6  April 2019, the scope of CGT for non-UK residents is extended to apply to gains arising on direct and indirect disposals of interests in UK land, whether residential or commercial. Non-UK resident individuals and trustees are required to file a return and pay any CGT due on the disposal within 30 days of the disposal. This applies to both residential and commercial property (FA 2019 Sch 2 para 1(1)(a), 3)).

Interest and surcharges 19.46 If tax remains unpaid on the day following the expiry of 28 days from the due date, the trustees may be liable for a surcharge of 5% of the unpaid tax and a further 5% surcharge where any tax remains unpaid following the expiry of six months from the due date, ie 31 July following the end of the next fiscal year (FA 2009 Sch 56). The surcharge applies from the due date, which means the date on which the tax becomes due and payable (FA 2009 Sch 56 para 4), 728

Trust Tax Returns 19.49 which does not extend to the payments on account required under s 59A(2). Payments on account may be reduced on making a claim under s  59A(3)– (6). An appeal may be lodged against the imposition of a surcharge where the taxpayer had a reasonable excuse other than shortage of money (s  59C(7)– (11)). Unpaid tax, including a surcharge, will also be subject to interest at the rate applicable under FA 1989 s 178 and TMA 1970 s 86.

LIABILITY AND COLLECTION 19.47 In the case of a trust, the trustees are made responsible for the tax affairs of the trust under TMA 1970 s 30AA, and recovery of the tax, interest surcharge or penalties may be recovered from relevant trustees under TMA 1970 s 107A. Relevant trustees are the trustees of the settlement at the time when the income or gains arose, and any subsequent trustees (TMA 1970 s 118(1), (7)). Trustees are liable for the IHT on settled property on a chargeable transfer, as are beneficiaries entitled to an interest in possession or who have obtained benefits under the trust, or in the case of non-resident trustees, the settlor (IHTA  1984 s 201). A  trustee’s liability is limited to the property he has actually received, or should have received, but for his own neglect or default (section 204(2)). The payment rules for IHT are set out in IHTA 1984 s 226, with the primary liability being six months after the end of the month in which the chargeable transfer is made, or, in the case of a transfer made after 5 April and before 1 October in any year, otherwise than on death, at the end of April in the following year. 19.48 The HMRC powers for collection and recovery of unpaid tax, interest, surcharges or penalties are set out in TMA 1970 ss 60–70. The date of payment by cheque is normally the day on which the cheque is received by HMRC under s 70A. A trustee who has authorised the receipt of profits arising from trust property by a person entitled to them, or their agent, is only required to make a return of their name, address and the amount of the profits under s 76, except in the case of chargeable gains which are normally assessable on the trustees (s 77). 19.49 In the case of IHT, interest on unpaid tax is charged by IHTA 1984 s 233 and on unpaid instalments, where the instalment basis applies under IHTA 1984 s 227 (s 234). Interest on overpaid tax is payable to the taxpayer under s 235. The interest provisions may be modified in special cases where, for example, there is an order under the Inheritance (Provision for Family and Dependents) Act 1975 (IPFDA 1975) which modifies the disposition on death, or on a gift inter vivos. Interest will only run from the date of the order (IHTA 1984 s 236). HMRC may, in certain cases, secure payment of unpaid tax by imposing an HMRC charge, or mortgage over assets (IHTA  1984 ss 237–244). 729

19.50  Trust Tax Returns Where income tax or CGT has been overpaid, the excess is refunded, together with interest, in the form of a repayment supplement under ICTA 1988 s 824 and TCGA 1992 s 283. Interest paid on overdue tax is not deductible for tax purposes, and interest or repayment supplements received are not subject to tax.

INHERITANCE TAX RETURNS 19.50 Where there is a transfer of value for IHT purposes, which is not a potentially exempt transfer under IHTA 1984 s 3A, the transferor must submit an IHT return (IHT100) to HMRC’s Capital Taxes Office, giving details of the transfer and any IHT payable. In addition to the return IHT100 relating to transfers of value chargeable to IHT, such as a transfer by a settlor to the trustees of a relevant property trust, there will be chargeable events arising on, for example, property being transferred from the trustees to a beneficiary of a discretionary trust, the socalled ‘exit charge’ under IHTA 1984 s 65, or the ten-yearly charge under s 64 or on the termination of an interest in possession under s  52, unless this is exempt from charge under s 53. In these cases, an HMRC account for IHT on the chargeable event is included. HMRC may make regulations about accounts for IHT purposes, and describe their form and such particulars as may be required (IHTA 1984 ss 256 and 257).

Information and inspection powers 19.51 The provisions of Finance Act 2008 Sch  36 apply from 1  April 2010 and provide HMRC with powers to check records, obtain information and documents and carry out inspections of business premises. These provisions apply to IHT along with most other direct taxes. ‘Information’ includes both explanations and the creation of schedules and documents that are not already in existence. HMRC will usually make an informal request for information in the first instance, and only resort to their formal powers under Sch  36 in the event that information is not provided. Schedule  36 para 1 enables HMRC to issue an information notice requiring the taxpayer to furnish it with such information as it may require for IHT purposes by written notice, specifying a time limit to respond of such time as may reasonably be required (Sch  36 para  7). An information notice may be issued by HMRC or with tribunal approval. If the notice has been authorised by the tribunal, this must be made clear (Sch 36 para 6). Unlike the previous provisions of s 219, the issue of an information notice is not related to the issue of an enquiry notice and so enables records to be checked prior to a return being filed, or to gather information prior to the issue of a discovery assessment. A barrister or solicitor is only required to disclose non-privileged 730

Trust Tax Returns 19.54 information without his client’s consent. A  solicitor may be obliged to disclose the name and address of his client and, if the client carries on a business outside the UK relating to the formation of trusts and companies or managing or administering them, the name and address of any person in the UK for whom such services or facilities have been provided in the course of his business. Legal professional privilege is not extended to tax advisers or auditors, although there are some limitations on the information which may be required from them so that, for example, working papers need not be provided to HMRC. Tax advice, however, is not protected as privileged information (Sch 36 paras 23–28). 19.52 HMRC has similar powers to call for documents from a third party to check the tax position of another person. A  third-party notice must be agreed by the taxpayer or approved by the tribunal. A  copy of a third-party notice is generally provided to the taxpayer, unless HMRC can demonstrate to the tribunal that to do so would prejudice the assessment or collection of tax (Sch 36 paras 2–3). Photocopies of documents are normally satisfactory but originals must be produced on demand. HMRC may take copies. Appeals against information notices issued under Sch 36 may be made to the tribunal, other than in relation to a requirement to produce statutory records. There is no appeal against an information notice where the tribunal approved the issue of the notice. The appeal must be made in writing within 30 days and state the grounds for the appeal (Sch 36 paras 29–31). 19.53 HMRC may also levy penalties for non-compliance with information notices and with inspections. For failure, obstruction and concealment, etc there are three types of penalty. The penalties are: •

an initial penalty of £300;

•

a daily penalty of up to £60 a day for every day after the date the initial penalty is assessed until the information or documents are provided; and

•

a tax-related penalty. A  tax-related penalty will only be sought in the most serious cases and is based on the amount of tax at risk. Authority to seek a tax-related penalty is by application by an authorised officer to the Upper Tribunal.

Although, in most cases, the fines will be pecuniary in nature, it is possible for criminal charges to be brought against a taxpayer in certain circumstances. 19.54 HMRC may give notice in writing to a person who appears to be liable to pay IHT on a transfer of value, specifying the date of the transfer, the value transferred and the property to which it relates, the transferor, the tax chargeable and the persons who are liable to pay the tax, the amount of any overpayment, the interest applicable thereto and any other matter which 731

19.55  Trust Tax Returns appears to be relevant (IHTA 1984 s 221(1) and (2)). This determination may be made in accordance with an account or return, if thought to be correct, or to the best of HMRC’s judgment. It must also specify the manner in which the appeal may be made, but is otherwise determinative of the tax payable (IHTA 1984 s 221(3)–(6)). 19.55 An appeal against the determination can be made to the tribunal under IHTA 1984 s 222, or direct to the High Court (Court of Session in Scotland), if so agreed with HMRC or by leave of the court on notification by the appellant (IHTA 1984 s 222(1)–(3)). An appeal on the question of the value of land may be made to the Upper Tribunal if the land is in England and Wales, or to the Lands Tribunal for Scotland or Northern Ireland, as appropriate. (IHTA 1984 s 222(4B)). 19.56 The appeal must be made within 30 days of service of the notice of determination (IHTA 1984 s 222(1)), but an appeal out of time may be made with the consent of HMRC or the tribunal if there is a reasonable excuse and the appeal is made without unreasonable delay (IHTA 1984 ss 222 and 223). The appeal before the tribunal is not bound to follow the original grounds of appeal if the tribunal so allows under s 224. A notice of determination which can no longer be varied or quashed on appeal becomes evidence of the matters determined. (IHTA 1984 s 254). Where a determination has been made on the basis of a view of the law which then generally prevailed, and the tax paid, any question of whether the right amount has been paid should be determined on the same view, notwithstanding that a subsequent legal decision has indicated that the view of the law being used was or may have been wrong (IHTA 1984 s 255). 19.57 An optional internal review procedure enables the taxpayer to request a review of HMRC’s decision. HMRC may also offer a review (IHTA 1984 s 223A, 223C). If no review is required by the taxpayer or offered by HMRC, the appeal proceeds to the tribunal in the usual way. The review is carried out by an HMRC officer who has not previously been involved in the original decision now under review. HMRC has 30 days from the date on which the review request is received to provide the taxpayer with its view of the matter (s 223B). The nature and extent of the review are ‘such as appear appropriate to HMRC in the circumstances’, although the appellant must be given the opportunity to make representations. The purpose of the review is to consider the validity of the decision rather than assess new facts or evidence (ARTG 4080), and ensure that it has been properly made and is one which HMRC would wish to defend at a tribunal. HMRC guidance states that in particular the following will be considered: •

whether the facts have been established and whether there is disagreement about the facts;

•

the technical and legal merits of the case; 732

Trust Tax Returns 19.58 •

matters of materiality and proportionality, ie  whether it would be an efficient or desirable use of resources to proceed with an appeal that will cost more than the sum in dispute;

•

likelihood of success; and

•

whether there are wider issues to consider such as policy issues or points of law which could impact future decisions.

HMRC must advise the appellant of the conclusion of the review within 45 days from the ‘relevant day’. Where the appellant has requested the review, the relevant day is the date HMRC notified the appellant of their view under s 223B. Where the review was offered by HMRC and accepted by the appellant, the relevant day is the date HMRC received notification of the appellant’s acceptance. The review may conclude that HMRC’s view is upheld, varied or cancelled. The conclusion of the review is conclusive for IHTA 1984 purposes, unless the appellant notifies an appeal to the Tribunal within 30 days of the date on which HMRC gives notice of the review (s 223G).

PENALTIES Failure to file a tax return 19.58 A unified code for late filing penalties was introduced by Finance Act 2009 Sch  55. These provisions apply for income tax returns from 2010/11. Penalties apply to the failure of trustees to deliver a trust return under TMA  1970 s 8A in a similar manner to those applying to an individual’s failure to submit an income tax self-assessment returns under TMA  1970 s 8. The initial penalty is £100 (FA 2009 Sch 55 paras 1 and 3). For periods prior to 2010/11, the penalty was capped at the amount of tax actually payable in respect of the return. A  daily penalty may be levied where the failure to submit a return continues after the end of the three-month period from the penalty date, ie the date after the filing date. The penalty is £10 for each day the failure continues during the period of 90 days beginning with the date specified in the notice issued by HMRC (para  4). The daily penalty ceases once the completed return is submitted. A further penalty of £300 or 5% of the tax liability which would have been shown by the return is due if the return remains outstanding for six months from the penalty date. If the return remains outstanding for more than a year beyond the penalty date, a further penalty is levied. The amount of the penalty depends upon whether information which would assist HMRC in assessing the taxpayer’s liability to tax is deliberately concealed. The penalty can be up to 200% of the tax liability depending upon the category of information withheld and whether the deliberate withholding of information is concealed. From 1 April 2016, inheritance tax was brought within the regime (FA  2015 Sch  20 para  3). There are three categories of information: 733

19.59  Trust Tax Returns •

Category 1 involves a domestic matter or an offshore matter where the territory in question is a category 1 territory or the tax concerned is neither income tax nor capital gains tax.

•

Category 2 involves information relating to an offshore matter where the territory concerned is a category 2 territory, and the information is relevant to the determination of an income tax, capital gains tax or inheritance tax liability.

•

Category 3 involves an offshore matter relating to a category 3 territory and the information would assist in determining liability to income tax, capital gains tax or inheritance tax.

19.59 The most recent table categorising territories was published on HMRC’s website on 24 July 2013 (see www.gov.uk/government/publications/ territory-categorisation-for-offshore-penalties/territory-categorisation-foroffshore-penalties-from-24-july-2013). Any territory (other than the UK) not shown under either category 1 or category 3 is a category 2 territory. The UK is treated as falling within category 1. A new ‘Category 0’ territory is introduced from a date to be appointed by FA 2015 s 120, Sch 20 paras 1 and 7. No date has been appointed at the time of writing. Information involves an ‘offshore matter’ if the liability to tax which would have been shown in the return includes a liability to tax charged on or by reference to: •

income arising from a non-UK source;

•

assets held outside the UK;

•

activities carried on wholly or mainly outside the UK, or

•

anything having effect as if it were income, assets or activities of a kind described above.

19.60 The amount of the penalty is the greater of £300 and a percentage of the tax liability which would have been shown in the return as follows: Category 1

Category 2

Category 3

Deliberate and concealed withholding of information

100%

150%

200%

Deliberate withholding of information

70%

105%

140%

The trustees may escape these penalties if they had a reasonable excuse for not delivering the return on time, or may set a determination aside, although in practice this is likely to be very difficult to establish where there are professional trustees (para 23). Penalties may also be cancelled if the notice 734

Trust Tax Returns 19.62 to submit a tax return under TMA  1970 s 8A is subsequently withdrawn (para 17A). 19.61 The penalty provisions above also apply to a failure to make a partnership tax return (para  25); and for failure to comply with specific requirements to produce returns, etc under TMA 1970 s 98. PAYE penalties are covered by TMA 1970 s 98A and Sch 55 paras 6B–6D for RTI penalties. Further provisions in relation to penalties are given in TMA  1970 ss 100– 107. Trustees were potentially liable to penalties and had to be particularly careful that they did not assist in the preparation of an incorrect return under TMA 1970 s 99, or give an incorrect certificate of non-taxability under s 99A prior to their repeal from 1 April 2013. New provisions regarding dishonest conduct by tax agents were introduced from 1 April 2013 by Finance Act 2012 Sch 38. 19.62 Penalties levied under FA 2009 Sch 55 para 6 for a taxpayer’s failure to file a return may be reduced where disclosure is made to HMRC. The level of reduction depends upon the quality of the disclosure, including its timing, nature and extent, whether the disclosure is prompted or unprompted. A  disclosure is ‘unprompted’ if the taxpayer has no reason to believe that HMRC have discovered or are about to discover the relevant information. The percentages below relate to the level of penalty to which a reduction may be available. For example, a ‘category 3’ penalty for deliberately withholding information (but not concealing the withholding) would attract a ‘standard’ penalty of 140% of the tax liability which could be reduced to a minimum of 80% by disclosure. Standard %

Minimum % for prompted Minimum % for disclosure unprompted disclosure

70%

45%

30%

87.5%

53.75%

35%

100%

60%

40%

105%

62.5%

40%

125%

72.5%

50%

140%

80%

50%

150%

85%

55%

200%

110%

70%

(Rates are those applicable from 6 April 2016) Penalties may not be reduced under these provisions below £300. Where two or more tax-geared penalties could be charged, these must not, in total, exceed the maximum penalty which can be levied (para 17). 735

19.63  Trust Tax Returns 19.63 The penalty provisions in relation to IHT include a £100 fixed penalty on failure to deliver an account, which may be increased by the tribunal to £60 per day until the account is delivered. The £100 penalty is increased to £3,000 if the failure to deliver the IHT account continues after the anniversary of the filing date (normally 12 months from the end of the month in which the death occurs) or six months from the end of the month in which the chargeable event occurs, unless there is a reasonable excuse (IHTA 1984 s 245). There are penalties for failure to provide information in IHTA 1984 s 245A; providing incorrect information under s  247; or failing to remedy errors under s  248. Proceedings for the recovery of penalties may be made under IHTA  1984 s 249, within the appropriate time limits under s 250. 19.64 Where HMRC took penalty proceedings against a solicitor acting for an estate, for alleged under-declaration of property values, not only were they held to be wrong in alleging negligence (Robertson v IRC [2002] STC (SCD) 182), but also to have acted wholly unreasonably (Robertson v IRC (No  2) [2002] STC (SCD) 242). The solicitor had put in a provisional valuation on account for IHT on the basis of the information which he then had in accordance with normal practice, and had acted prudently and properly throughout and fulfilled his statutory duties. The costs of the Special Commissioners’ hearing were, therefore, awarded against HMRC.

Offshore asset transfers 19.65 In order to discourage the movement of offshore assets to jurisdictions with less transparent regimes, additional penalty provisions were introduced from 27 March 2015 (FA 2015 Sch 21). These rules apply if a person is liable to a penalty where the behaviour is classed as ‘deliberate’, or the person was aware that they had a requirement to correct offshore non-compliance relating to 2016/17 or subsequent tax years, and assets are moved from one territory to another to prevent or delay HMRC becoming aware of the original failure giving rise to a penalty or requirement to correct (FA 2015 Sch 21 paras 2 and 3, as amended by F(No 2)A 2017 Sch 18 para 26(2)–(3). The amount of the additional penalty is 50% of the original penalty.

Penalties for errors in a tax return 19.66 Penalties apply where a tax return or other document such as a claim for relief contains either: a careless inaccuracy; or a deliberate inaccuracy (whether concealed or not), which leads to: an understatement of tax; or a false or inflated statement of a loss; or a false or inflated claim to a tax repayment. The burden of proof is on HMRC to demonstrate that a penalty may be imposed. For penalties related to an inaccuracy in a return or other document, it is therefore for HMRC to demonstrate that the taxpayer had a degree of culpability for the inaccuracy. 736

Trust Tax Returns 19.67 The penalty is a percentage of extra tax due, based on the seriousness of the offence which has given rise to the error (FA  2007 Sch 24 para  3). The maximum penalties depend upon the category into which the inaccuracy falls and are (FA 2007 Sch 24 para 4): Category 1

Category 2

Category 3

Careless

30%

45%

60%

Deliberate, but not concealed

70%

105%

140%

Deliberate, concealed

100%

150%

200%

Category 1 covers inaccuracies in documents involving domestic matters, or an offshore matter (or offshore transfer) where the territory concerns is a category 1 territory, and the tax concerned is not income tax or capital gains tax. Category 2 covers inaccuracies in documents relating to offshore matters and offshore transfers where the territory concerned is a category 2 territory, and the tax concerned is income tax or capital gains tax. Category 3 covers inaccuracies in documents relating to offshore matters and offshore transfers where the territory concerned is a category 3 territory, and the tax concerned is income tax or capital gains tax. If a tax return or claim etc contains more than one error, a penalty is levied on each respective error. For 2017/18 and later tax years, additional rules apply where there is an inaccuracy in a document relating to tax avoidance arrangements and the taxpayer has received advice in respect of those arrangements. Broadly, the taxpayer is unable to rely on the advice received relating to the avoidance arrangements in seeking to demonstrate that he has taken reasonable care (FA 2007 Sch 24 paras 3A–3B). 19.67 There are provisions contained in FA  2007 Sch 24 paras 9–11 that provide for reductions in the rate of the penalty when a taxpayer informs HMRC of the inaccuracy. The maximum penalties are reduced for: •

telling HMRC about any errors (up to 30% reduction);

•

helping HMRC work out what extra tax is due (up to 40% reduction); or

•

giving HMRC access to records to check the figures contained on the tax return or claim (up to 30% reduction).

Minimum penalties will still be levied, although a penalty for a careless inaccuracy where the disclosure is unprompted can be reduced to nil. In all other cases, penalties will be levied (see summary below): 737

19.68  Trust Tax Returns Maximum penalty

Unprompted minimum penalty

Prompted minimum penalty

Reasonable care

0%

0%

0%

Careless

30%

0%

15%

Deliberate

70%

20%

35%

Deliberate and concealed

100%

30%

50%

19.68 The penalty regime does not offer a reduction in the penalty based on the size of the tax loss or gravity of the ‘crime’, as before. Instead, the penalty is based on the potential loss of revenue which is the additional tax or NIC payable to HMRC as a result of correcting an inaccuracy or understatement (FA 2007 Sch 24 paras 5–8). HMRC indicates that where a significant period of time has elapsed between the inaccuracy and the taxpayer’s disclosure to HMRC, the reduction in the penalty levied will be restricted. HMRC interprets a ‘significant period’ to be three years or more, but may be less in cases where a disclosure covers a longer period overall (CH82444). 19.69 A taxpayer can appeal to the tribunal against a penalty on the following grounds; its amount; HMRC’s decision not to suspend it; or the terms of a suspension. On appeal, the tribunal will either affirm or substitute HMRC’s decision for another. 19.70 Under FA 2007 Sch 24 para 18, a taxpayer will not be liable for actions taken on his behalf by an agent where he can show that he took reasonable care to avoid an inaccuracy or failure. This is subject to the provisions regarding avoidance arrangements outlined at 19.66 above. Furthermore, a penalty for an incorrect return can be levied on the third party where the third party has deliberately provided false information or deliberately concealed information from the taxpayer (FA 2007 Sch 24 para 1A). Finally, Sch 24 para 21 prevents a penalty from being levied where an inaccuracy or failure has led to a criminal conviction (the ‘double jeopardy’ rule).

Asset-based penalties 19.71 An asset-based penalty may be charged in more serious cases, in addition to a ‘standard’ penalty for an inaccuracy or other failures relating to an offshore matter for tax years commencing on or after 6 April 2016. The assetbased penalty is based on the value of the asset underlying the inaccuracy, and may only be levied where the inaccuracy resulted from deliberate behaviour and the offshore ‘potential lost revenue’ is £25,000 or more (FA 2016 Sch 22 738

Trust Tax Returns 19.72 para 3). The rules initially applied only to failures relating to income tax and capital gains tax, but were extended to include inheritance tax from 1 April 2017 (FA 2016 Sch 22 para 2). Offshore potential lost revenue is broadly the additional tax due as a result of the failure, with certain modifications dealing the order in which income and gains are treated as having been taxed (FA 2016 Sch 22 para 5). The asset-based penalty is the lower of 10% of the value of the asset or ten times the amount of the offshore potential lost revenue (FA 2016 Sch  22 para  7). This may be reduced for disclosure and co-operation with HMRC in valuing the asset (FA 2016 Sch 22 para 8). The taxpayer may appeal to the tribunal against a penalty imposed under the above provisions. The tribunal may affirm or cancel HMRC’s decision to impose a penalty, or replace it with an alternative decision which HMRC would have had the power to make. The taxpayer may also request an internal review of HMRC’s decision.

Requirement to correct and failure to correct 19.72 Taxpayers with undeclared (or under-declared) income tax, capital gains tax, or inheritance tax liabilities relating to offshore interests had a period of grace between 6  April 2017 and 30  September 2018 in which to make disclosure to HMRC, prior to the introduction of the ‘failure to correct’ penalty rules introduced by F(No  2)A  2017 Sch  18. The end of the ‘requirement to correct’ period coincided with the commencement of exchange of data between countries who have signed up to the Common Reporting Standard. In contrast to other penalty regimes, such as those for inaccuracies in a tax return (FA  2007 Sch  24), penalties levied under the failure to correct rules make no distinction between careless and deliberate behaviour. In addition, the circumstances in which a taxpayer may argue that a ‘reasonable excuse’ applied are restricted to exclude situations where professional advice was obtained. The rules apply where there is ‘relevant offshore tax non-compliance’ which has not been corrected before 5 April 2017 (F(No 2)A 2017 Sch 18 para 3). The definition of non-compliance includes failure to notify chargeability, failure to make a return (including a trust return) or inheritance tax account, and failure to comply with a filing deadline relating to any of the above. The normal window for HMRC to raise an assessment in relation to offshore non-compliance is extended to 5  April 2021 where the deadline would otherwise expire after 6 April 2017 (F(No 2)A 2017 Sch 18 para 25). The penalty applying under the failure to correct provision is 200% of the potential lost revenue which has not been corrected within the requirement to 739

19.73  Trust Tax Returns correct period of 6 April 2017 to 30 September 2018. HMRC may reduce the penalty to reflect the quality of the taxpayer’s disclosure but the penalty cannot be less than 100% of the potential lost revenue (F(No 2)A 2017 Sch 18 paras 14, 16). Where a penalty has been levied under the failure to correct provisions, further penalties under both the asset-based penalty regime and asset transfer penalty regimes may also apply, see 19.71 and 19.6 above. HMRC also has the power to publish details of taxpayers incurring penalties under the failure to correct provisions where this exceeds £25,000 or five or more penalties apply (F(No  2)A  2017 Sch  18 para  30). Finally, Sch  18 para  24 contains double jeopardy preventing a penalty from being levied if the taxpayer has already been convicted of an offence or assessed to a penalty under a different provision.

RECORD KEEPING 19.73 The requirement for trustees to keep records, for the purposes of making proper tax returns under TMA 1970 s 8A, is contained in TMA 1970 s 12B and is the same as for individual and partnership returns, ie the requirement is to keep all such records as may be required for the purpose of enabling trustees to make and deliver a correct and complete return for the fiscal year (TMA 1970 s 12B(1)(a)). The records have to be kept until the latest of the date the HMRC enquiries are completed, or where an HMRC Officer no longer has power to make enquiries, ie the first anniversary of 31 January following the end of the year of assessment, except where the trustees are carrying on a trade, alone or in partnership, in which case it is the fifth anniversary of 31 January following the year of assessment (TMA 1970 s 12B(2)). 19.74 If the notice to make the return is given late, the period for which records need to be kept may also be extended (TMA 1970 s 12B(2A)). In the case of a trade or profession the records must include particulars of amounts received and expended in the course of the trade, and of the receipts and expenditure and details of all sales and purchases where the trade involves dealing in goods, including supporting documents (s 12B(3)). It is not always necessary to keep original records, except where specifically so required (s 12B(4) and (4A)). Failure to keep proper records will involve a penalty of up to £3,000, except where their only purpose would have been to support a claim or election not included in the return, or are dividend vouchers or tax deduction certificates where details of the income may be proved by other documentary evidence such as bank statements (s 12B(5), (5A), (5B) and (6)). Optical imaging is permitted: see Tax Bulletin, Issue 21, February 1996, p 283. HMRC published guidance ‘A guide to keeping records for your tax return’ (RK BK  1) is available at www.gov.uk/government/uploads/system/uploads/ attachment_data/file/377656/rk-bk1.pdf 19.75 Trustees will normally wish to keep records for some time in case of any challenge by beneficiaries becoming entitled at a later date, eg on reaching 740

Trust Tax Returns 19.79 their maturity. With capital gains records there can be a problem where there are pre-1996/97 capital losses, as there is no power within the Taxes Acts to agree these figures with HMRC until such time as the losses can be used against subsequent trust gains (Todd v South Essex Motors (Basildon) Ltd [1988]  STC  392). The records ultimately need to be sufficient to support a possible HMRC challenge in order to convince the tribunal that the return is correct or the assessment is excessive (TMA 1970 s 50(6)).

DEDUCTION OF TAX FROM DISTRIBUTIONS 19.76 Where distributions are made to a life tenant from a trust, ie where the income is first of all received by the trustees and not mandated direct to the life tenant, the trustees must, on request, give the beneficiary a tax certificate under ITA  2007 s 495. This is given on form R185 (Trust Income) which distinguishes between: (a)

untaxed income;

(b) income liable at the dividend rate, eg UK dividends; (c) annuities; (d) income liable at the basic rate, eg property income; and (e)

foreign income where UK tax at less than the basic rate has been deducted when taking into account the overseas tax.

The form should show the net amount of the beneficiary’s income, the UK tax or tax credit and the net amount of the beneficiary’s share, which is then used by him in completing the trust supplementary pages in his personal tax return. 19.77 Where the trust is a relevant property trust, the trustees will have paid tax at the rate applicable to trusts, and the certificate of deduction on form R185 (Trust Income) will show the nature of the payment, such as a distribution from a discretionary trust, profits, or other source out of which it is paid, eg the trust fund, the gross payment, the income tax deducted at the trust rate, and the net payment. 19.78 In the case of a will trust, the trustees will use form R185 (Estate Income) or R185 (Trust Income) as appropriate once the trust has been established, which if it is a trust of residue may be some time after the date of death. If income is distributed to beneficiaries, form R185 (Estate Income) would be used for differentiating between income receivable, tax paid, and the taxable amount where it is subject to basic rate tax or tax at the dividend rate. 19.79 There follows over the remaining pages of this chapter a detailed worked example. 741

19.79  Trust Tax Returns

GENERAL TRUST EXAMPLE Completed return and calculation of tax payable The trustees of the Florov Trust were determined to complete the Trust and Estate Tax Return (SA900) for 2018/19 and collected the relevant information, trust return, supplementary pages and tax calculation guide. The trustees ran a small hotel on behalf of the trust and began by completing the Trust and Estate trade pages, TT1–TT4 of SA 901. They completed the business details and noted the accounting period from 1 January to 31 December 2018 in boxes 1.4 and 1.5. They calculated the capital allowances and balancing charges for boxes 1.14 to 1.23. Turnover was in excess of £30,000, so they completed the standard accounts information (SAI) boxes, noting that the figures excluded VAT in box 1.28. The figures were extracted from the accounts for the year, which required a certain amount of reallocation of expenses to fit in with the headings in boxes 1.29 to 1.65. The trustees resolved to ask the accountants to change the accounts headings to match the SAI boxes in future to make this task easier. The net profit in 1.65 agreed with the accounts figure and the trustees considered what expenses would be disallowable for tax purposes and inserted speeding fines of £200 in box 1.37, entertaining expenses of £6,870 in box 1.39 and depreciation of £14,750 in box 1.44. The total of boxes 1.30 to 1.45 was inserted in box 1.66, the balancing charges in box 1.68 and the net business profit for tax purposes was calculated for boxes 1.73 and 1.76 at £82,471. There was a loss brought forward from 2017, during which the manager had been replaced, of £26,874, inserted in boxes 1.88 and 1.89, resulting in a taxable profit after losses brought forward, in box 1.90, of £55,597, which was also the figure of total profits from the business in box 1.92. The trustees completed the balance sheet summary figures and decided to submit the audited accounts with the tax return, as these explained the accounting policies used, and noted this in the white space for additional information. The trustees were not Lloyd’s Underwriters and could ignore the Lloyd’s pages. The trustees owned substantial areas of farmland and were partners in a farming partnership which prepared its accounts on a fiscal year basis. The partnership statement had been obtained from the farm accountants and the trustees used this to complete the Trust and Estate partnership pages TP1 and TP2 of SA902. The trustees’ share of total taxable profits from this business, in box 2.7, were £42,555. The farming partnership had sold some partnership land during the year and the trustees’ share of the chargeable gain was £26,640, in respect of which details were inserted on the capital gains pages TC1, TC2, TC3 and TC6. 742

Trust Tax Returns 19.79 The trustees owned farmland that was let to the partnership at a market rent, which required completion of the Trust and Estate land and property pages TL1 and TL2 of SA903. There were no furnished lettings so the gross rent of £18,000 was inserted in box 3.20. As the land was let on a fully repairing lease there were no other expenses to claim and the profit for the year (box 3.42) was also £18,000. The trust owned foreign shares and the trustees listed on the Trust and Estate foreign pages TF1–TF5 of SA904 the country of origin, the gross dividend, the foreign tax and the amount chargeable, which was the gross amount; so columns B  and E  were the same, because the foreign tax at column D  was being claimed as a credit and the box in column E was ticked accordingly. The total of column E (box 4.2) was £2,645. The total of the foreign tax credits in column D, £248, was entered in box 4.9. The trust has a life tenant, Suzie, entitled to one half of the trust income, and three discretionary beneficiaries, Jon, James and Gemma. Therefore, the tax credit relief referable to that part of the net income, after deductions, chargeable at the trust dividend rate of 38.1% under ITA 2007 s 479(3), was half of £248, ie £124, inserted in box 4.9A. The only chargeable gain made by the trust in the year was the sale of the partnership land, so the Trust and Estate capital gains pages TC1–TC8 (SA905) were completed accordingly, the taxable gain for 2018/19, box 5.11, being £20,790 (£26,640 less the annual exempt amount of £5,850 for 2014/15). The trust is UK-resident, so the Trust and Estate non-residence pages TNR1 and TNR2 are not applicable. Having completed the supplementary pages, the trustees turned to the Trust and Estate Tax Return and answered questions 1–5 and 8.16, 9, 13, 14, 17 in the affirmative, and 6–7 and 23, 8.1–8.14, 8.17 and 10A, 10B, 10C, 11, 12, 13A, 15A, 16, 18 and 20 in the negative (or left them unchecked). The standard rate band available to the trustees of £1,000 was entered at box 9A. Interest from UK banks amounted to £5,420 gross (box 9.4), of which half related to Suzie’s life interest (box 13.11). Dividends from UK companies amounted to £10,000 (box 9.15). There were no interest payments or annual payments made and no additions to the trust funds. The trustees incurred trust management expenses of £4,000 (box 13.19), chargeable to income in accordance with the trust deed, of which half are related to Suzie’s life interest. The figure of income charged at the dividend rate 743

19.79  Trust Tax Returns in box 13.7 being £5,000 (half the UK dividends of £10,000) plus £1,446 (half of foreign dividends of £2,893), net of tax at the dividend rate was therefore £6,322, and the management expenses applicable thereto under ITA  2007 ss 484 and 486 were £2,000 (boxes 13.8, and 13.20). The basic rate income applicable to Suzie was £27,798.50 (half of trading profits of £55,597) plus £21,277.50 (half of partnership profits of £42,555), £9,000 (half of rents of £18,000) and £2,710 (half of the interest from UK banks of £5,420 (box 9.4)) ie £60,786 (box 13.11). Discretionary payments of £10,000 each were made to the three discretionary beneficiaries, returned at question 14. The unused tax pool brought forward from 2017/18 (box 14.15) was £19,873. There were no capital payments to children of the settlor and no capital transactions with the settlor (questions 15 and 15A). The trust has never been non-resident (question 16). The trustees had not been able to submit the trust return by 31  October as they were awaiting the partnership statement from the farm accountants and so had to calculate the tax payable (question 17, see below). No repayment was due (question 18). The trustees’ contact number was given at question 19 and their names and addresses at question 20. No other information was required at question 20, so the trustees signed the declaration and submitted the return before 31 January 2020. The tax calculation showed tax payable for 2018/19 of £45,392.23 (box 17.1) less paid on account £10,690, which appeared low because of the trading loss in 2017/18 and chargeable gain in 2018/19. The balance of £34,702.23 was paid on 28 January 2019, to be on the safe side, together with the first payment on account for 2018/19 of £20,617.11, a total of £55,319.34. The calculations, using HMRC tax calculation guide, are shown on the following pages. The calculation identifies the different types of income, dividend type income, savings and non-savings income and deemed income. Allowable deductions for interest or losses are shown and tax is calculated at the appropriate rates for each type of income. Trust management expenses relating to income taxed at the rate applicable to trusts, or the dividend trust rate, are calculated and allocated in accordance with ITA 2007 ss 484–486. Income liable at the rate applicable to trusts or the dividend trust rate under ITA 2007 s 486 is identified and the additional tax calculated. The tax pool under ITA 2007 s 497 is calculated, together with any additional tax liability, or the tax pool carried forward. The tax due is computed, less foreign tax credits and including chargeable gains, and deducting payments on account. Then the payments on account for the following year are calculated, as is the amount payable or overpaid at 31 January following the end of the fiscal year. 744

Trust Tax Returns 19.79

Trust and Estate Tax Return 2019 for the year ended 5 April 2019 (2018–19) Tax reference Date

1232467891

Issue address

08/04/2019

900

Florov Trust

HM Revenue & Customs

Trust and Estates HM Revenue & Customs BX9 1EL

Florov Trust

Phone

For Reference

0300 123 1072

This notice requires you by law to send us a tax return giving details of income and disposals of chargeable assets, and any documents we ask for, for the year 6 April 2018 to 5 April 2019. We’ve sent you this paper form to fill in, but you can also file the tax return online using our internet service (you will need to buy commercial software). Make sure the tax return, and any documents we ask for, reach us by: • 31 October 2019 if you want us to calculate the trust’s or estate's tax or if you file a paper tax return, or both, or • 31 January 2020 if you file the return online Whichever method you choose, the tax return and any documents asked for must reach us by the relevant deadline or we will charge an automatic penalty of £100. If you file online, you have until 31 January to file the tax return and you’ll receive an instant on-screen acknowledgement telling you that we’ve received it. You can still file online even if we’ve sent you a paper tax return. To file online, go directly to our official website by typing www.gov.uk/taxreturnforms into your internet browser address bar. Do not use a search website to find HMRC services online. If this return has been issued to you after 31 July 2019, then you must make sure that you fill it in and return it by the later of:

Make sure your payment of any tax the trust or estate owes reaches us by 31 January 2020. Otherwise you’ll have to pay interest, and possibly a late payment penalty. We may check the Trust and Estate Tax Return. There are penalties for supplying false or incomplete information. Calculating the trust’s or estate’s tax You can choose to calculate the trust or estate's tax. But if you do not want to, and providing we receive the return by 31 October 2019, we’ll work out the tax for you and let you know if there is tax to pay by 31 January 2020. However, if you file later than 31 October 2019 or 3 months after the date this notice was given, see the Trust and Estate Tax Calculation Guide (sent with this return unless we know you have a tax adviser). The Trust and Estate Tax Return – your responsibilities We have sent you pages 1 to 12 of the tax return. You might need other forms – 'supplementary pages' – if the trust or estate had particular income or capital gains. Use page 3 to check. You are responsible for sending us a complete and correct return, but we’re here to help you get it right. Ways we can help you: • the Trust and Estate Tax Return Guide should answer most of your questions, go to www.gov.uk/taxreturnforms • phone us on the number above

• the relevant dates above, or • 3 months after the date of issue

6$ 

3DJH 

745

+05& 

19.79  Trust Tax Returns INCOME AND CAPITAL GAINS for the year ended 5 April 2019 Step 1

You may not have to answer all the questions in this tax return.

Tick if this applies

– read the 1) If you’re the trustee of a bare trust (except an unauthorised unit trust), that is, one in which notes in the beneficiary(ies) has/have an immediate and absolute title to both capital and income, you can the Trust go straight to Question 17 on page 10. Do not tick the box if you choose to complete the return. and Estate Tax Return 2) If you’re the personal representative of a deceased person and completing this tax return for a period of administration and all the points below apply: Guide • • • • •

all the income arose in the UK you do not want to claim relief (Questions 10A and 10B) no annual payments have been made out of capital (Question 11) all income has had tax deducted before you received it there are no accrued income profits or losses, no income from deeply discounted securities, gilt strips, company share buy-backs, offshore income gains, or gains on life insurance policies, life annuities or capital redemption policies where no tax is treated as having been paid on the gain • no capital payments or benefits have been received from a non-resident, dual resident or immigrating trust then, if you’ve made no chargeable disposals, go straight to Question 17 on page 10. If you’ve made chargeable disposals, answer Questions 5 and 6 at Step 2 and then Questions 17 to 22. 3) If you’re the trustee of an interest in possession trust (one which is exclusively an interest in possession trust), and: • • • •

no income arose to the trust, or all trust income is received directly by the beneficiary(ies), or all the income arose in the UK and has had tax deducted before you received it, or part of the income is received directly by the beneficiary(ies) and the part that is not received directly by the beneficiary(ies) comprises only income arising in the UK which has had tax deducted before you receive it and all of the following points apply – the answer will be 'No' in box 8.13 of Question 8 – there are no accrued income profits or losses, no income from deeply discounted securities, gilt strips, company share buy-backs, offshore income gains, or gains on life insurance policies, life annuities or capital redemption policies – you do not wish to claim reliefs (Questions 10A and 10B) – no annual payments have been made out of capital (Question 11) – no further capital has been added to the settlement (Question 12) – no capital payments have been made to, or for the benefit of, relevant children of the settlor during their lifetime (Question 15) – the trust has never been non-resident and has never received any capital from another trust which is, or at any time has been, non-resident (Question 16) then, if you’ve made no chargeable disposals, go straight to Question 17 on page 10. If you’ve made chargeable disposals, answer Questions 5 and 6 at Step 2 and then Questions 17 to 22. 4) If you’re the trustee of a charitable trust you must complete the charity supplementary pages as well as this form: • if you’re claiming exemption from tax on all your income and gains, you can go straight to Question 7. You should answer Questions 10 and 11, if appropriate, and complete Questions 19, 20, and 22 • if you’re claiming exemption from tax on only part of your income and gains, you must answer Questions 1 to 9 for any income for which you’re not claiming exemption you should answer Questions 10 and 11, if appropriate, and complete Questions 19, 20 and 22. 5) In any other case, including if you’re the trustee of an unauthorised unit trust, you should go to Step 2.

Step 2

Answer Questions 1 to 7 and 23 to check if you need supplementary pages to give details of particular income or gains. The notes in the Trust and Estate Tax Return Guide will help. When you’ve answered Questions 1 to 7 and Question 23, answer Question 8. Go to www.gov.uk/taxreturnforms to download any supplementary pages that you need. Make sure you ask for the supplementary pages for the Trust and Estate Tax Return.

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Trust Tax Returns 19.79 INCOME AND CAPITAL GAINS for the year ended 5 April 2019 Q1

Did the trust or estate make any profit or loss from a sole trade? Read the note for this box in the Trust and Estate Tax Return Guide if you are the personal representative of a deceased Name at Lloyd's.

Make sure you have the supplementary pages you need, tick the box below when you have got them

Yes

9

Trust and estate trade

9

9 9

Trust and estate partnership

9 9

Q2

Did the trust or estate make any profit or loss or have any other income from a partnership?

Yes

Q3

Did the trust or estate receive any UK property income?

Yes

Q4

Did the trust or estate receive any income from foreign companies or savings institutions, offshore funds or trusts abroad, land and property abroad, or make gains on foreign life insurance policies?

Yes

Is the trust or estate claiming relief for foreign tax paid on foreign income or gains, or relief from UK tax under a Double Taxation Agreement?

9

Yes

9

Trust and estate foreign

9

9

Trust and estate capital gains

9

Q5

Capital gains Did the trust or estate dispose of chargeable assets worth more than £46,800 in total? Yes Answer 'Yes' if: • allowable losses are deducted from the chargeable gains made by the trust or estate, and the chargeable gains total more than the annual exempt amount before deduction of losses, or • no allowable losses are deducted from the chargeable gains made by the trust or estate and the chargeable gains total more than the annual exempt amount, or Yes • you want to make a claim or election for the year. Read the note for this box in the guide.

Trust and estate UK property

Q6

Is the trust claiming to be not resident in the UK, or dual resident in the UK and another country for all or part of the year?

Yes

Trust and estate non-residence

Q7

Is the trust claiming total or partial exemption from tax because of its charitable status?

Yes

Trust and estate charities

Yes

Estate pension charges etc

Q23 Pensions – in the case of an estate, are there any tax charges and/or taxable lump sums? Read the note for this box in the guide.

Q8

Read the notes for this question in the guide. Answer all the questions. Are you completing this tax return: – for a period of administration – as the trustee of an unauthorised unit trust – as the trustee of an employment related trust – as the trustee of a Heritage Maintenance Fund

Yes

9 8.3 9 8.5 9 8.7 9

8.2 8.4 8.6 8.8

– as the trustee of an Employer Financed Retirement Benefit Scheme (EFRBS)? If this happened during the return year enter the date the EFRBS first became operative in box 21.9 on page 12

8.9

9

8.10

If you’re a trustee: – can any settlor (or living settlor's spouse or civil partner) benefit from the capital or income?

8.11 9

8.12

– are you a participator in an underlying non-resident company (a company that would be a close company if it were resident in the UK)?

8.13 9

8.14

– is the trust liable to Income Tax at the special trust rates (the trust rate of 45% or the dividend trust rate of 38.1%) on any part of the income or would it be on any income above the standard rate band (for example, you have discretion about paying income to beneficiaries)? – has a valid vulnerable beneficiary election been made?

Step 3

No

8.1

8.15

8.16 9

8.17 9

8.18

Now fill in any supplementary pages before answering Questions 9 to 22, as directed. Please use blue or black ink to fill in the Trust and Estate Tax Return. Please do not include pence. Round down income and gains. Round up tax credits and tax deductions. Round to the nearest pound.

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19.79  Trust Tax Returns INCOME for the year ended 5 April 2019 Q9 Did the trust or estate receive any other income not already

Yes

included on the supplementary pages?

9

If Yes, fill in boxes 9.1 to 9.26 as appropriate.

If you wish, you may in the following circumstances leave blank some of boxes 9.1 to 9.26: a) if you’re the trustee of an interest in possession trust (one which is exclusively an interest in possession trust), you may exclude income which has had tax deducted before you received it unless (i) that income has not been received directly by the beneficiary and there are accrued income sheme losses to set against the interest or you’re claiming losses against general income, or (ii) its exclusion would make you liable to make a payment on account which would not be due if you included it – see page 15 of the Trust and Estate Tax Calculation Guide concerning payments on account before following this guidance b) if you’re the personal representative of a deceased person, you may exclude income which has had tax deducted before you received it unless there are accrued income scheme losses to set against the interest. If the reliefs claimed at Question 10A on page 6 exceed untaxed income, you will need to include estate income that has had tax deducted to make sure a repayment can be calculated Have you received any taxed income which you are not including in this Trust and Estate Tax Return because (a) or (b) above apply?

Yes

Interest and alternative finance receipts 

Interest and alternative finance receipts from UK banks and building societies (including UK Internet accounts) – if you have more than one bank or building society, etc account enter totals in the boxes. Taxable amount











Where no tax has been taken off

9.1

Other taxed UK interest distributions – read the note for this section in the guide (do not include Property Income Distributions)

Tax taken off

Amount after tax taken off

9.2

9.3

£

£

National Savings & Investments (other than First Option Bonds, Guaranteed Growth Bonds and Guaranteed Income Bonds)

National Savings & Investments First Option Bonds, Guaranteed Growth Bonds and Guaranteed Income Bonds

Other income from UK savings and investments (except dividends)

6$ 

£

5,420

Gross amount before tax

9.4

£

9.5

£

9.6

£

Taxable amount

Taxable amount

Amount after tax taken off

9.7

Tax taken off

9.8

£

3DJH 

Florov Trust - UTR:12324 67891

748

£

Gross amount before tax

9.9

£

Trust Tax Returns 19.79 INCOME for the year ended 5 April 2019 Dividends 







Dividends from UK companies (but excluding Property Income Distributions from UK Real Estate Investment Trusts or Property Authorised Investment Funds)

9.10

Dividend distributions from UK authorised unit trusts and open-ended investment companies

9.11

£

9.12

£

9.13

£

9.14

£

9.16

£

Total dividend

10,000

£

Total dividend/distribution

Total dividend

Stock dividends from UK companies

Bonus issues of securities and redeemable shares and loans written off

Taxable amount

Gains on UK life insurance policies, life annuities and capital redemption policies 

on which no tax is treated as paid



on which tax is treated as paid

Amount of gain

Tax treated as paid

9.15

£

9.18

£

Amount of gain

Other income 

Other income (including Property Income Distributions from UK Real Estate Investment Trusts or Property Authorised Investment Funds)

Amount after tax taken off

9.17

£

Tax taken off

Losses brought forward

9.20

£

Gross amount before tax

9.19

£

Losses used in 2018–19

9.21

£

2018–19 losses carried forward

9.22

£

Deemed income – read the notes in the guide Taxable amount 

Accrued Income Scheme profits and deeply discounted securities

9.23 9.37A

£



Other deemed income etc

9.24

£



Company purchase of its own shares

9.26

£

9A.1

£

Taxable amount

Q9A

Taxable amount

box 9.25 not in use

Standard rate band 

Amount of standard rate band – read the notes in the guide

6$ 

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749

1,000

19.79  Trust Tax Returns OTHER INFORMATION for the year ended 5 April 2019 Q10A Do you want to claim any reliefs or have you made

Yes

any annual payments, or patent royalty payments? 

Trustees: annual payments

10.2A



Trustees: patent royalties

10.5A

£

10.3A

£

10.6A

£

£

Q10B Do you want to claim special Income Tax treatment where a valid

Yes

vulnerable beneficiary election has effect?

Yes

discretionary employment income payments?

Yes

Amount of payment

11.1

Annual payments

£

10.7A

£

Gross amount

Gross amount

If Yes, fill in box 10.1B. If not applicable, go to question 11.

£

If Yes, fill in boxes 11.1 to 11.3 as appropriate. If not applicable, go to question 12.

Tax taken off

11.2

£

£

If Yes, fill in box 10.1C. If not applicable, go to question 11.

10.1C

Amount of relief claimed – read the notes in the guide

Were any annual payments made out of capital or out of income not brought into charge to Income Tax?



10.4A

10.1B

Amount of relief claimed

Q10C Employee Benefit Trusts – do you want to claim relief for

Q11

£

Tax taken off

Amount of payment



10.1A

Tax taken off

Amount of payment



Amount of payment

Personal representatives: interest on loans and payments made under alternative finance arrangements to pay Inheritance Tax



If Yes, fill in boxes 10.1A to 10.7A and/or 10.1B to 10.1C as appropriate. If not applicable, go to question 11.

Gross amount

11.3

£

£

If you’re a personal representative, go to Question 17. Do not fill in Questions 12 to 16.

Q12

Have any assets or funds been put into the trust in year 2018–19?

Settlor's name and address

Yes

If Yes, fill in boxes 12.1 to 12.9 as appropriate. If not applicable, go to question 13.

Description of asset

12.1

12.2

Postcode Value of asset

12.3

£

12.6

£

Description of asset

Settlor's name and address

12.4

12.5

Postcode Value of asset

6$ 

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750

Trust Tax Returns 19.79 OTHER INFORMATION for the year ended 5 April 2019 Q12

Continued Settlor's name and address

Description of asset

12.7

12.8

Postcode Value of asset

12.9

£

If you ticked box 8.15 in Question 8, on page 3, do not complete this page – please go to Question 16 on page 9 and carry on filling in the tax return. If you have ticked box 8.16 in Question 8, on page 3, complete Questions 13 to 15A. Otherwise, go to Question 16.

Q13

Is any part of the trust income not liable to tax at the special trust rates?

Yes

9

If Yes, fill in boxes 13.7 to 13.21 below. Otherwise, fill in boxes 13.19 to 13.21 only.

Boxes 13.1 to 13.6, 13.9, 13.10, 13.15 and 13.16 are not being used

Income to beneficiaries whose entitlement is not subject to the trustees' (or any other person's) discretion 

Amount of income chargeable at the dividend ordinary rate



Trust management expenses applicable to the income in box 13.7



Amount of income chargeable at the basic rate



Trust management expenses applicable to the income in box 13.11 13.12 £

13.8

£

13.7

£

6,322

13.11

£

60,786

13.13

£

13.17

£

13.19

£

13.21

£

2,000

Income allocated to specific purposes 

Amount of income chargeable at the dividend ordinary rate



Trust management expenses applicable to the income in box 13.13 13.14 £



Amount of income chargeable at the basic rate



Trust management expenses applicable to the income in box 13.17 13.18 £

Trust management expenses 

Total amount of deductible trust management expenses – read the notes in the guide

4,000

total of column above  

Expenses set against income not liable at the special trust rates

13.20

£

Q13A Is this a settlor-interested trust where part of the

Yes

income is not settlor-interested? Complete box 13A.1 only if you have ticked both boxes 8.12 and 8.16 and part of the trust income, which is liable at the special trust rates, is not settlor-interested. 

2,000

Total income not liable to UK Income Tax and not included elsewhere on this Trust and Estate Tax Return (non-resident trusts only)

Amount of tax pool applicable to income that is not settlor-interested – read the notes in the guide

6$ 

13A.1

3DJH 

Florov Trust - UTR:12324 67891

751

£

If Yes, complete box 13A.1. If not applicable, go to question 14.

19.79  Trust Tax Returns OTHER INFORMATION for the year ended 5 April 2019 If you ticked box 8.15 in Question 8, on page 3, do not complete this page – please go to Question 16 on page 9 and carry on filling in the tax return. If you have ticked box 8.16 in Question 8, on page 3, complete Questions 13 to 15A. Otherwise, go to Question 16.

Q14

Have discretionary payments of income been made

Name of beneficiary

If Yes, fill in boxes 14.1 to 14.15 as appropriate. Otherwise, fill in box 14.15 only.

Net payment

14.1 Mr James Fiddlesticks

14.2

£

10,000

14.3 Mr Jon Fiddlesticks

14.4

£

10,000

14.5 Ms Gemma Fiddlesticks

14.6

£

10,000

14.7

14.8

£

14.9

14.10

£

14.11

14.12

£

14.13

14.14

£



Q15

9

Yes

to beneficiaries? Trustees of Heritage Maintenance Funds: do not complete these boxes for expenditure on heritage property. Read the notes on this section in the guide before filling in these boxes.

Amount, if any, of unused tax pool brought forward from last year (enter '0' if appropriate)

Have the trustees made any capital payments to, or for the benefit of, relevant children of the settlor during the settlor's lifetime?

Tick the box if the beneficiary was a relevant child of the settlor and the settlor was alive when payment was made.

14.15

19,873.00

£

If Yes, fill in box 15.1. If not applicable, go to question 15A.

Yes

Amount paid 

Total capital payments to relevant children

15.1

Q15A Were there capital transactions between the trustees and the settlors?

£

If Yes, fill in boxes 15A.1 to 15A.12 as appropriate. If not applicable, go to question 16.

Yes

Capital transactions between the trustees and settlors – read the notes on this section in the guide and enter the name(s) of the settlor(s) in the 'Additional information' box, box 21.9, on page 12. Date

15A.1

Amount

15A.2

Name of company (if appropriate)

15A.3

£

Registered office

15A.4

Postcode Date

15A.5

Amount

15A.6

Name of company (if appropriate)

15A.7

£

Registered office

15A.8

Postcode Date

15A.9

Name of company (if appropriate)

Amount

15A.10

£

15A.11 Registered office

15A.12

Postcode

6$ 

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752

Trust Tax Returns 19.79 OTHER INFORMATION for the year ended 5 April 2019 Q16 Has the trust at any time been non-resident or received any capital from another trust which is, or at any time has been, non-resident?

Yes

If Yes, have the trustees made any capital payments to, or provided any benefits for, the beneficiaries?

Yes



If Yes, read the notes on this section in the Trust and Estate Tax Return Guide and, if appropriate, fill in box 16.1. If not applicable, go to question 17.

16.1

Total capital payments or value of benefits provided

£

Please give details of the payments in box 16.1 in the boxes below. If there are insufficient boxes please provide the additional details on a separate sheet. Name of beneficiary

Name of beneficiary

16.2

16.3 Address of beneficiary

Address of beneficiary

16.5

16.4

Postcode

Postcode

Amount/value of payment/benefit

Amount/value of payment/benefit

16.6

16.7

£

Name of beneficiary

£

Name of beneficiary

16.8

16.9 Address of beneficiary

Address of beneficiary

16.10

16.11

Postcode

Postcode

Amount/value of payment/benefit

Amount/value of payment/benefit

16.12

16.13

£

Name of beneficiary

£

Name of beneficiary

16.14

16.15 Address of beneficiary

Address of beneficiary

16.16

16.17

Postcode

Postcode

Amount/value of payment/benefit

Amount/value of payment/benefit

16.18

16.19

£

£

If you’ve received capital from any other trust which is, or at any time has been, non-resident please provide the following details. Date trust set up

Name of trust

16.20

16.21 Address of trustee

Amount of value received

16.22

16.23

Postcode

6$ 

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Florov Trust - UTR:12324 67891

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£

19.79  Trust Tax Returns OTHER INFORMATION for the year ended 5 April 2019 Q17

Yes

Do you want to calculate the tax?

9

If Yes, do it now and then fill in boxes 17.1 to 17.10 below.

To get the Trust and Estate Tax Calculation Guide, go to www.gov.uk/taxreturnforms 













Q18

Total tax due for 2018–19 before you made any payments on account (put the amount in brackets if an overpayment)

17.1

£

Tax due for earlier years

17.2

£

17.4

£

Tick box 17.3 if you’ve calculated tax overpaid for earlier years and enter the amount in box 17.4

17.3

Tick box 17.5 if you’re making a claim to reduce your payments on account. Enter your reduced payment in box 17.7 and say why in the 'Additional information' box, box 21.9, on page 12

17.5

Tick box 17.6 if you do not need to make payments on account 17.6

Your first payment on account for 2019–20 (include the pence) Tick box 17.8 if you’re claiming a repayment of 2019–20 tax now and enter the amount in box 17.9

45,392.23

17.8

Pension charges due – enter the amount from box 22 of the Working Sheet in the Notes on Estate Pension Charges etc

If the trust or estate has paid too much tax do you want to claim a repayment?

Yes

(If you do not tick 'Yes', or the tax overpaid is below £10, we’ll use the amount you’re owed to reduce the next tax bill.)

17.7

£

17.9

£

17.10

£

20,617.11

If Yes, fill in boxes 18.1 to 18.12 as appropriate. If not applicable, go to question 19.

If the tax has been paid by credit or debit card, we will always try to repay back to the card first before making any repayment as requested below. Should the repayment (or payment) be sent: 



to your bank or building society account? Tick box 18.1 and fill in boxes 18.3 to 18.7

18.1

to your nominee's bank or building society account? Tick box 18.2 and fill in boxes 18.3 to 18.7 and boxes 18.9A to 18.12 as required

18.2

If you do not have a bank or building society account, read the notes for this question in the guide, 18.8A tick box 18.8A

or 





Name of bank or building society

18.3

If you would like a cheque to be sent to your nominee, tick box 18.8B and fill in boxes 18.9A to 18.12 as required

18.8B

If your nominee is your adviser, tick box 18.9A

18.9A

Adviser's reference for you (if your nominee is your adviser)

18.9B I authorise

Name of account holder

18.4

Name of your nominee or adviser

18.10 Address of nominee or adviser

Branch sort code

18.5

18.11

Account number Postcode

18.6

to receive on my behalf the amount due Building society reference

18.12

18.7

This authority must be signed by you. A photocopy of your signature will not do.

Signature

6$ 

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Trust Tax Returns 19.79 OTHER INFORMATION for the year ended 5 April 2019 Q19

Please provide a daytime phone number in case we need to contact you with any questions about the information you have provided in this return or in the Trust Register You can find information about the Trust Register at www.gov.uk/topic/personal-tax/trusts



Q20

Your daytime phone number (including the area code)

19.1

You have a responsibility to ensure the information you have supplied on the Trust Register is accurate and up to date to the best of your knowledge and belief. Tick this box if there have been any changes or additions to the people associated with the trust, and you’ve provided the updated details on the Trust Register or you’ve confirmed on the Trust Register that there have been no changes to the trust.

20.1

These people include trustees, personal representatives, beneficiaries, members of the class of beneficiaries, settlors, protectors, agents or any other natural person exercising effective control over the trust.

Q21

Other information 













Date

If you’re completing this Trust and Estate Tax Return as a personal representative, please enter in box 21.1 the date of death of the deceased.

21.1

If the administration period ceased in the year to 5 April 2019, please enter in box 21.2 the date of cessation.

21.2

Date

If the administration period ceased in the year to 5 April 2019 and there is a trust created by the deceased’s will or the rules of intestacy that apply in England & Wales, please tick box 21.3. Read the notes in the guide. If you are a trustee and the trust was terminated in the year to 5 April 2019 please enter in box 21.4 the date of termination and, in the 'Additional information' box, box 21.9 below, the reason for termination.

21.4

If this Trust and Estate Tax Return contains any figures that are provisional because you do not yet have final figures, please tick box 21.5. Read the notes for this question in the guide. If any 2018–19 tax was refunded directly by the HM Revenue and Customs office, or (personal representatives only) by the Jobcentre Plus (in Northern Ireland, the Social Security Agency), please enter the amount in box 21.6. Do not include any refunds of excessive payments on account or any Gift Aid repayments claimed from HMRC Charities.

21.3

Date

21.5 Amount

21.6

£

Disclosure of tax avoidance schemes Read the notes about boxes 21.7 and 21.8 in the Trust and Estate Tax Return Guide. Scheme reference number or promoter reference number

Tax year in which the expected advantage arises – year ended 5 April

21.8

21.7

Please do not include any changes of circumstances (for example, name and address) relating to the lead trustee, other trustees, settlors, beneficiaries, class of beneficiaries, protectors, agents or any other natural person exercising effective control over the trust in box 21.9.

21.9 Additional information

6$ 

3DJH 

Florov Trust - UTR:12324 67891

755

19.79  Trust Tax Returns OTHER INFORMATION for the year ended 5 April 2019 Q22

Declaration I have filled in and am sending back to you the following Trust and Estate Tax Return pages:

9 9 Trust and estate partnership 9 1 to 12 of this form

Trust and estate trade

9 9 Trust and estate capital gains 9 Trust and estate UK property 1 TO 12 OF THIS FORM Trust and estate foreign

Trust and estate non-residence Trust and estate charities Estate pension charges etc

Before you send the completed tax return back you must sign the statement below. If you give false information or conceal any part of trust or estate income or chargeable gains, you may be liable to financial penalties and/or you may be prosecuted.

22.1

The information I have given in this tax return is correct and complete to the best of my knowledge and belief.

Signature

Date

• Please print your name in box 22.2

• Enter the capacity in which you’re signing in box 22.3

22.2 Florov Trust

6$ 

22.3 Trustee

3DJH 

Florov Trust - UTR:12324 67891

756

Trust Tax Returns 19.79 Trust AND and ESTATE Estate TRADE Trade TRUST for the year ended 5 April 2019 (2018–19) Name of trust or estate

Florov Trust

Tax reference

1232467891 The Notes tell you when you need to complete more than one set of ‘Trust and Estate Trade’ pages. You must complete a separate copy of these pages for each trade and for each set of accounts relating to the basis period. Box numbers 1.9, 1.18, 1.19, 1.82 and 1.94 to 1.96 are not used on these pages. To get notes and helpsheets that will help you fill in this form, go to www.gov.uk/taxreturnforms

%XVLQHVVGHWDLOV Name of business

Description of business

1.1 Florov Hotel

1.2 Hotel

Address of business

1.3 High Street Accounting period

Please read the notes before filling in these boxes. Start Postcode 

Tick box 1.6 if the details in boxes 1.1 or 1.3 have changed since the last Trust and Estate Tax Return 1.6



Date started if after 5 April 2018



Date ceased if before 6 April 2019



1.4 

1.7



1.8 

Tick box 1.10 if you entered details for all relevant accounting periods on last year's Trust and Estate Tax Return and boxes 1.14 to 1.73 and 1.99 to 1.10 1.115 will be blank



End

01/01/2018

31/12/2018

1.5

Tick box 1.11 if the accounts do not cover the period from the last accounting date (explain why in the 'Additional information' box, box 1.116 on page TT 4)

1.11

Tick box 1.12 if the accounting date has changed (only if this is a permanent change and you want it to count for tax)

1.12

Tick box 1.13 if this is the second or additional change (explain in box 1.116 on page TT 4 why 1.13 you have not used the same date as last year) Tick box 1.13A if you used cash basis, money actually received and paid out to calculate your income and expenses

1.13A

&DSLWDODOORZDQFHVDQGEDODQFLQJFKDUJHV 



Capital allowances

Balancing charges

Capital allowances at 18% on equipment including cars with lower CO2 emissions

1.14

£

8,661

1.15

£

Capital allowances at 8% on equipment including cars with higher CO2 emissions

1.16

£

5,200

1.17

£

1.20

£

4,162

1.21

£

Boxes 1.18 and 1.19 are not used



100%, enhanced and other capital allowances

total of column above

Total capital allowances/balancing charges 

1.22

Tick box 1.22A if box 1.22 includes enhanced capital allowances for designated environmentally beneficial plant and machinery

£

18,023

total of column above

1.23

£

1.22A

,QFRPHDQGH[SHQVHV If the annual turnover was £30,000 or more, ignore boxes 1.24 to 1.26. Instead, fill in page TT 2. If the annual turnover was below £30,000, fill in boxes 1.24 to 1.26 instead of page TT 2. Please read the notes. 



Turnover including other business receipts and goods taken for personal use and balancing charges from box 1.23

1.24

£

Expenses allowable for tax including capital allowances from box 1.22

1.25

£

box 1.24 minus box 1.25

Net profit (put figure in brackets if a loss)

SA901 2019

1.26 £

Page TT 1

757

HMRC 12/18

19.79  Trust Tax Returns ,QFRPHDQGH[SHQVHV You must fill in this page if the annual turnover was £30,000 or more – read the notes. If the trust or estate was registered for VAT, do the figures in boxes 1.29 to 1.64 include VAT?

or exclude VAT? 1.28

1.27

Disallowable expenses included in boxes 1.46 to 1.63

9

Sales/business income (turnover)

1.29

£

326,627

Total expenses



Cost of sales

1.30

£

1.46

£



Construction industry subcontractor costs

1.31

£

1.47

£



Other direct costs

1.32

£

1.48

£

70,972

box 1.29 minus (boxes 1.46 + 1.47 + 1.48)

Gross profit/(loss)

1.49

£

Other income/profits

1.50

£



Employee costs

1.33

£

1.51

£

63,275



Premises costs

1.34

£

1.52

£

40,820



Repairs

1.35

£

1.53

£

15,690



General administrative expenses

1.36

£

1.54

£

10,380



Motor expenses

1.37

£

1.55

£

11,863



Travel and subsistence

1.38

£

1.56

£

4,727



Advertising, promotion and entertainment

1.39

£

1.57

£

10,870



Legal and professional costs

1.40

£

1.58

£

1,250



Bad debts

1.41

£

1.59

£

650



Interest and alternative finance payments

1.42

£

1.60

£

220



Other finance charges

1.43

£

1.61

£



Depreciation and loss/(profit) on sale

1.44

£

1.62

£



Other expenses

1.45

£

1.63

£

200

6,870

14,750

Put the total of boxes 1.30 to 1.45 in box 1.66 below

255,655

14,750 2,486 Total expenses

total of boxes 1.51 to 1.63

1.64

£

176,981

boxes 1.49 + 1.50 minus 1.64

Net profit/(loss)

1.65

£

78,674

7D[DGMXVWPHQWVWRQHWSURILWRUORVV boxes 1.30 to 1.45 





Disallowable expenses

1.66

£

Goods taken for personal use and other adjustments (apart from disallowable expenses) that increase profits

1.67

£

Balancing charges (from box 1.23)

1.68

£

21,820

boxes 1.66 + 1.67 + 1.68

Total additions to net profit (deduct from net loss)

1.69



Capital allowances (from box 1.22)

1.70

£



Deductions from net profit (add to net loss)

1.71

£

18,023

£

21,820

boxes 1.70 + 1.71

1.72

£

18,023

boxes 1.65 + 1.69 minus 1.72

Net business profit for tax purposes (put figure in brackets if a loss)

SA901 2019

Page TT 2 Florov Trust - UTR:12324 67891

758

1.73

£

82,471

Trust Tax Returns 19.79 You must fill in boxes 1.74 and 1.75 and all other boxes on this page that apply to the trust or estate.

$GMXVWPHQWVWRDUULYHDWWD[DEOHSURILWRUORVV Basis period starts

01/01/2018

1.74

and ends

31/12/2018

1.75

Profit or loss of this account for tax purposes (box 1.26 or box 1.73)

1.76

£

Adjustment to arrive at profit or loss for this basis period

1.77

£

1.79

£

1.81

£

1.89

£



Overlap profit brought forward

1.78

£



Overlap relief used this year

82,471

box 1.78 minus box 1.79 



Overlap profit carried forward

1.80

£

Averaging for farmers and creators of literary or artistic works (read the notes if you made a loss for 2018–19)

Net profit for 2018–19 (if a loss, enter '0')

1.83

£

Allowable loss for 2018–19 (if a profit, enter '0')

1.84

£



Loss offset against other income for 2018–19

1.85

£



Loss – calculate relief by reference to earlier years

1.86

£

Loss to carry forward (that is, an allowable loss not claimed in any other way)

1.87

£



Losses brought forward from earlier years

1.88

£



Losses brought forward from earlier years used this year



82,471

26,874

box 1.83 minus box 1.89

Taxable profit after losses brought forward 

Any other business income

1.90

£

1.91

£

55,597

boxes 1.90 + 1.91

Total taxable profits from this business 

1.92

Tick box 1.93 if the figure in box 1.92 is provisional

£

1.93

6XEFRQWUDFWRUVLQWKHFRQVWUXFWLRQLQGXVWU\ 

Deductions on payment and deduction statements from contractors – construction industry subcontractors only

1.97

£

1.98

£

7D[WDNHQRIIWUDGLQJLQFRPH 

Any tax taken off trading income (excluding deductions made by contractors on account of tax)

SA901 2019

Page TT 3 Florov Trust - UTR:12324 67891

759

55,597

19.79  Trust Tax Returns 6XPPDU\RIEDODQFHVKHHW Leave these boxes blank if there is no balance sheet. 

$VVHWV

Plant, machinery and motor vehicles

1.99

£

28,742

Other fixed assets (for example premises, goodwill, investments)

1.100

£

413,850



Stock and work in progress

1.101

£

22,667



Debtors/prepayments/other current assets

1.102

£

4,250



Bank/building society balances

1.103

£

12,897



Cash in hand

1.104

£

420



Trade creditors/accruals

1.106

£

25,633



Loans and overdrawn bank accounts

1.107

£



Other liabilities

1.108

£









/LDELOLWLHV

total of boxes 1.99 to 1.104

1.105

£

482,826

total of boxes 1.106 to 1.108

1,250

1.109

£

26,883

box 1.105 minus box 1.109

1HWEXVLQHVVDVVHWV (put the figure in brackets if there were net business liabilities)

1.110

£

455,943

 5HSUHVHQWHGE\ Capital account 

Balance at start of period*

1.111

£

437,269



Net profit/(loss)*

1.112

£

78,674



Capital introduced

1.113

£



Drawings

1.114

£



Balance at end of period*

60,000 total of boxes 1.111 to 1.113 minus box 1.114

1.115

£

455,943

* If the capital account is overdrawn, or the business made a net loss, enter the figure in brackets.

1.116 $GGLWLRQDOLQIRUPDWLRQ

Accounts for the year ended 31 December 2018 attached.

Now fill in any other supplementary pages that apply to you. Otherwise, go back to page 4 of the Trust and Estate Tax Return and finish filling it in.

SA901 2019

Page TT 4 Florov Trust - UTR:12324 67891

760

Trust Tax Returns 19.79 Trust TRUST and Estate Partnership AND ESTATE TRADE for the year ended 5 April 2019 (2018–19) Name of trust or estate

Florov Trust

Tax reference

1232467891 You will need to fill in a copy of these pages for each partnership of which the trust or estate was a member, and for each business the partnership carried on. If you want help, look up the box numbers in the ‘Notes on Trust and Estate Partnership’. For help filling in this form, go to www.gov.uk/taxreturnforms and read the notes and helpsheets.

3DUWQHUVKLSGHWDLOV Partnership reference number

Partnership trade or profession

2.1 1234567890 

Date started being a partner (if during 2018–19)

2.2 Farming 

2.3

Date stopped being a partner (if during 2018–19)

2.4

7KHVKDUHRIWKHSDUWQHUVKLS VWUDGLQJRUSURIHVVLRQDOLQFRPH Basis period starts

06/04/2018

2.5



Share of the profit or loss of this year's account for tax purposes



Adjustment to arrive at profit or loss for this basis period



Overlap profit brought forward

2.9

and ends

05/04/2019

2.6

Overlap relief used this year

£

2.7

£

2.8

£

2.10

£

2.12

£

2.13

£

2.19

£

42,555

box 2.9 minus box 2.10 



Overlap profit carried forward

2.11

£

Averaging for farmers and creators of literary or artistic works (or foreign tax deducted if Foreign Tax Credit Relief not claimed)

Net profit for 2018–19 (if loss, enter '0' here) Allowable loss for 2018–19 (if profit, enter '0' here)

2.14

£



Loss offset against other income for 2018–19

2.15

£



Loss – relief to be calculated by reference to earlier years

2.16

£



Loss to carry forward (that is, an allowable loss not claimed in any other way) 2.17 £



Losses brought forward from earlier years



Losses brought forward from earlier years used this year

2.18

42,555

£

box 2.13 minus box 2.19

Taxable profit after losses brought forward 

Add amounts not included in the partnership accounts which are needed to calculate the taxable profit

2.20

£

2.21

£

42,555

box 2.20 + box 2.21

2.22

Total taxable profits from this business

SA902 2019

Page TP 1

761

£

42,555

HMRC 12/18

19.79  Trust Tax Returns 6KDUHRISDUWQHUVKLSLQYHVWPHQWLQFRPH 



If the partnership had any investment income and your share will be returned in boxes 9.1 to 9.40, on pages 4 and 5 of the Trust and Estate Tax Return, tick box 2.23

2.23

Share of losses on partnership investments

2.24

2.25 $GGLWLRQDOLQIRUPDWLRQ

Now fill in any other supplementary pages that apply to you. Otherwise go back to page 4 of the Trust and Estate Tax Return and finish filling it in.

SA902 2019

Page TP 2 Florov Trust - UTR:12324 67891

762

£

Trust Tax Returns 19.79 Trust and Estate UK Property for the year ended 5 April 2019 (2018–19) Name of trust or estate

Florov Trust

Tax reference

1232467891 If you want help, look up the box numbers in the notes on Trust and Estate UK Property. For help filling in this form, go to www.gov.uk/taxreturnforms and read the notes and helpsheets. Answer this question to help you decide which parts of pages TL 1 and TL 2 to fill in. Is the income from furnished holiday lettings? If this does not apply to you, turn over and fill in page TL 2 to give details of the property income

YES

If 'Yes', fill in boxes 3.1 to 3.19 before completing page TL 2

)XUQLVKHGKROLGD\OHWWLQJVLQWKH8.RU(XURSHDQ(FRQRPLF$UHD(($ Fill in one page for UK businesses and a separate page for EEA businesses.  

Income from furnished holiday lettings

3.1

Estates only - if you’ve used traditional accounting rather than cash basis to calculate the estate’s income and expenses, put ‘X’ in the box (trusts cannot use cash basis)

3.1A



([SHQVHV (furnished holiday lettings only)



Rent, rates, insurance and ground rents

3.2

£



Repairs and maintenance

3.3

£



Finance charges, including interest

3.4

£



Legal and professional costs

3.5

£



Cost of services provided, including wages

3.6

£



Other expenses

3.7

£

£

total of boxes 3.2 to 3.7

3.8

£

box 3.1 minus box 3.8

3.9

Net profit (put figures in brackets if a loss) 

7D[DGMXVWPHQWV



Private use

3.10

£



Balancing charges

3.11

£



Capital allowances

3.13

£





£

box 3.10 + box 3.11

3.12

£

Put ‘X’ in box 3.13A if box 3.13 includes enhanced capital allowances for designated environmentally 3.13A beneficial plant and machinery Loss brought forward used against this year’s profits

3.14

£

boxes 3.9 + 3.12 minus (boxes 3.13 + 3.14)

3.15

Profit for the year after losses

£

boxes 3.9 + 3.12 minus box 3.13

Loss for the year

3.16

£

£

read the notes 

Total loss to carry forward

3.17



Put ‘X’ in the box if this business is in the EEA

3.18



If you want to make a period of grace election, put ‘X’ in the box

3.19

SA903 2019

Page TL 1

763

HMRC 12/18

19.79  Trust Tax Returns 2WKHUSURSHUW\LQFRPHQRWLQFOXGLQJGLYLGHQGVGLVWULEXWLRQVIURPIXUQLVKHGKROLGD\OHWWLQJV 5HDO(VWDWH,QYHVWPHQW7UXVWVRU3URSHUW\$XWKRULVHG,QYHVWPHQW)XQGV  

Estates only - if you’ve used traditional accounting rather than cash basis to calculate the estate’s income and expenses, put ‘X’ in the box (trusts cannot use cash basis) 3.19A



,QFRPH



Rents and other income from land and property

 



([SHQVHV (do not include figures you’ve already put in boxes 3.2 to 3.7 on page TL 1)



Rent, rates, insurance and ground rents

3.24

£



Repairs and maintenance

3.25

£



Finance charges, including interest

3.26

£



Legal and professional costs

3.27

£



Costs of services provided, including wages

3.28

£



Other expenses

3.29

£

Tax deducted

3.20

£

Chargeable premiums

3.22

£

Reverse premiums

3.22A

£

18,000

3.21

£ boxes 3.20 + 3.22 + 3.22A

3.23

£

18,000

total of boxes 3.24 to 3.29

3.30

£

box 3.23 minus box 3.30

Net profit (put figures in brackets if a loss)

3.31



7D[DGMXVWPHQWV



Private use

3.32

£



Balancing charges

3.33

£

Capital allowances

3.35

£

 



£

18,000

boxes 3.32 + 3.33

3.34

£

Put ‘X’ in box 3.35A if box 3.35 includes enhanced capital allowances for designated environmentally beneficial plant and machinery 3.35A Cost of replacing domestic items

3.36

£

Box 3.37 is not in use

boxes 3.35 + 3.36

3.38

£

boxes 3.31 + 3.34 minus box 3.38

Adjusted profit (if loss enter '0' in box 3.39 and put the loss in box 3.40)

3.39

£

3.41

£

18,000

boxes 3.31 + 3.34 minus box 3.38

3.40

Adjusted loss (if you have entered '0' in box 3.39) 

£

Loss brought forward from previous year

box 3.39 minus box 3.41

3.42

Profit for the year 

Loss offset against total income

3.43

£



Loss to carry forward to following year

3.44

£



Put ‘X’ in box 3.45 if these pages include details of property let jointly

3.45



Residential finance costs not included in box 3.26

3.46

£



Unused residential finance costs brought forward

3.47

£

Now fill in any other supplementary pages that apply to you. Otherwise, go back to page 4 of the Trust and Estate Tax Return and finish filling it in.

SA903 2019

Page TL 2

Florov Trust - UTR:12324 67891

764

£

18,000

Trust Tax Returns 19.79 Trust and Estate Foreign TRUST AND ESTATE NON-RESIDENCE TRUST AND ESTATE TRADE for the year ended 5 April 2019 (2018–19) Name of trust or estate

Florov Trust

Tax reference

1232467891

If you want help, look up the box numbers in the notes on Trust and Estate Foreign. For help filling in this form, go to www.gov.uk/taxreturnforms and read the notes and helpsheets.

)RUHLJQVDYLQJV Fill in columns A to E, and tick the box in column E if you want to claim Foreign Tax Credit Relief. Country

A ,QWHUHVWDQG RWKHUVDYLQJV LQFRPH



tick box if income is unremittable 

Amount before tax

Foreign tax

Special Withholding Tax

Amount chargeable

B

C

D

E

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

total of column above

4.1A 

'LYLGHQGV

Belgium

£

2,645

£

248

4.1

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

total of column above

SA904 2019

total of column above

£

£

4.2A

Page TF 1

765

tick box to claim Foreign Tax Credit Relief 

£

£

2,645

9

total of column above

4.2

£

2,645

HMRC 12/18

19.79  Trust Tax Returns )RUHLJQVDYLQJVLQFRPHWD[DEOHRQWKHUHPLWWDQFHEDVLVDQGIRUHLJQLQFRPHIURPODQGDQGSURSHUW\DEURDG Fill in columns A to E, and tick the box in column E if you want to claim Foreign Tax Credit Relief. Country

A  'LYLGHQGV LQWHUHVWDQG RWKHU VDYLQJVLQFRPH WD[DEOHRQWKH UHPLWWDQFHEDVLV

tick box if income is unremittable 

Amount before tax

Foreign tax

UK tax and Special Amount chargeable Withholding Tax

B

C

D

E

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

total of column above

4.2B

 ,QFRPH IURPODQGDQG SURSHUW\DEURDG IMPORTANT

£

£

  &KDUJHDEOH SUHPLXPV

£

£

–

read the notes

£

4.3

total of column above

4.2C

£

£

£

£

total of column above

£

tick box to claim Foreign Tax Credit Relief 

£

total of column above

4.4

£



Residential finance costs from boxes 4.32A or 4.37B

4.4A

£



Unused residential finance costs brought forward

4.4B

£



Disposals of holdings in offshore funds and income from non-resident trusts

4.5

£



Gains on foreign life insurance policies, life annuities and

4.6

£

Amount of gain

capital redemption policies – on which no tax is treated as paid



Gains on foreign life insurance policies, life annuities and capital redemption policies – on which tax is treated as paid

SA904 2019

Tax treated as paid

4.7

£

Page TF 2 Florov Trust - UTR:12324 67891

766

Amount of gain

4.8 £

Trust Tax Returns 19.79 )RUHLJQ7D[&UHGLW5HOLHIIRUIRUHLJQWD[SDLGRQWUDGHSDUWQHUVKLSDQGRWKHULQFRPH Read the notes

Enter in this column the page number in the ‘Trust and Estate Tax Return’ from which information is taken. Do this for each item for which you are claiming tax credit







Country

Foreign tax

Amount chargeable

A

C

E

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

£

Enter in box 4.9 the total Foreign Tax Credit Relief on the income (if there’s an entry in box 4.9, you must also complete box 4.9A) Enter in box 4.9A the amount of Foreign Tax Credit Relief referable to that part of net income, after deductions, chargeable at the special trust rates or dividend trust rate (Enter zero if appropriate)

tick box to claim Foreign Tax Credit Relief



4.9

£

248

4.9A

£

119

)RUHLJQ7D[&UHGLW5HOLHIIRUIRUHLJQWD[SDLGDQG6SHFLDO:LWKKROGLQJ7D[GHGXFWHGRQFKDUJHDEOH JDLQVUHSRUWHGRQWKHµ7UXVWDQG(VWDWH&DSLWDO*DLQV¶SDJHV The middle three columns below are no longer used. Please make entries only in the first and fifth columns – read the notes Amount of gain under UK rules

Period over which UK gain accrued

Amount of gain under foreign tax rules

Period over which foreign gain accrued

Foreign tax paid

C

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£

£

days

£

days

£



If you are calculating the tax, enter the total Foreign Tax Credit Relief on the gains in box 4.10

4.10



Special Withholding Tax on gains

4.10A £

Now go back to page 3 in the Trust and Estate Tax Return and finish filling it in

SA904 2019

Page TF 3 Florov Trust - UTR:12324 67891

767

£

tick box to claim Foreign Tax Credit Relief 

19.79  Trust Tax Returns ,QFRPHIURPODQGDQGSURSHUW\DEURDG If you had income from furnished holiday accommodation in a European Economic Area (EEA) country, please enter the details on the ‘Trust and Estate UK Property’ page, not on this page – read the notes. Fill • • •

in one page TF 4 if: there’s only one overseas let property, or there’s more than one but all overseas let properties are in the same country and all the income is remittable, or there’s more than one and they are in different countries but there has been no foreign tax deducted from any of the income and all the income is remittable If any of the income is unremittable or the overseas let properties are in different countries and some foreign tax has been deducted, you must fill in a copy of page TF 4 for each property letting. (Take copies of TF 4 before you start or go to www.gov.uk/taxreturnforms) Please put the trust or estate name and tax reference next to the address box on each copy. If you’re using page TF 4 to return income from more than one property, please use the address box below for the first property and the 'Additional information' box on page TF 5 for the other addresses. Address of property

Postcode 

Estates only – if you’ve used traditional accounting rather than cash basis to calculate the estate’s income and expenses tick box 4.11C (trusts cannot use cash basis)

4.11C



,QFRPH



Income – total rents and other receipts (excluding chargeable premiums)

4.11



Tick box 4.11A if box 4.11 contains income from more than one property

4.11A

Tick box 4.11B if the income in box 4.11 is unremittable

4.11B





([SHQVHV



Rent, rates, insurance, etc

4.12

£



Repairs and maintenance

4.13

£



Finance charges, including interest

4.14

£

Legal and professional costs

4.15

£

Costs of services provided, including wages

4.16

£

Other expenses

4.17

£







£

total of boxes 4.12 to 4.17

4.18

£ box 4.11 minus box 4.18

Net profit (or loss) – show loss in brackets

4.19

£

 7D[DGMXVWPHQWVWRQHWSURILWRUORVV 

Private use

4.20

£



Balancing charges

4.21

£



Capital allowances

4.23

£





box 4.20

4.22

Tick box 4.23A if box 4.23 includes enhanced capital allowances for designated environmentally 4.23A beneficial plant and machinery Costs of replacing domestic items

4.24

+ box 4.21

£

boxes 4.23 + 4.24

£

4.25

£ box 4.19 + box 4.22 minus box 4.25

Adjusted profit (if loss, enter '0' here, and enter loss in box 4.27)

4.26 box 4.19 + box 4.22 minus box 4.25

4.27

Adjusted loss (if '0' in box 4.26)

SA904 2019

Page TF 4 Florov Trust - UTR:12324 67891

768

£

£

Trust Tax Returns 19.79 ,QFRPHIURPODQGDQGSURSHUW\DEURDGFRQWLQXHG Fill in boxes 4.28 to 4.32A (if you have completed only one page TF 4) or boxes 4.33 to 4.38 if you have completed a separate page TF 4 for each property. 

Taxable profit or allowable loss from box 4.26 or box 4.27 (enter a loss in brackets)

4.28

£



minus losses brought forward from earlier years

4.29

£

box 4.28 minus box 4.29

4.30

Total taxable profits (if box 4.28 is a profit and is more than box 4.29)



/RVVHVHWF



Loss offset against total income

4.30A £

Loss to carry forward to the following year 

£

Copy to column B on page TF 2

If you’ve only one property or your properties are all in the same foreign country and foreign tax was deducted, enter the tax paid

4.31

£

4.32

£

Copy to column C on page TF 2 and fill in columns A and E as appropriate 

4.32A £

Residential finance costs not included in box 4.14

Copy to box 4.4A on page TF 2 If you’ve filled in more than one page TF 4 enter details below using a separate line for each overseas let property. Exclude any unremittable income from the 'Taxable profit or loss' column. Country

Taxable profit or loss

Foreign tax

Amount chargeable

Residential finance costs not included in box 4.14

(from box 4.26 or box 4.27)

1

£

£

£

£

2

£

£

£

£

3

£

£

£

£

4

£

£

£

£

5

£

£

£

£

6

£

£

£

£

Total of column above



minus losses brought forward

4.33

£

4.34

£

4.35

£

Total of column above

Total taxable profits

Copy to column B on page TF 2



/RVVHVHWF



Loss offset against total income 4.37A £

Loss to carry forward to the following year

4.38

4.36

£

Copy to column C on page TF 2

£

4.39 $GGLWLRQDOLQIRUPDWLRQ

SA904 2019

Page TF 5 Florov Trust - UTR:12324 67891

769

Total of column above

4.37

£

Copy to column E on page TF 2

Total of column above

4.37B

£

Copy to box 4.4A on page TF 2

1232467891

Tax reference

Tick box if estimate or valuation used

B

770 £

6

SA905 2019

HMRC 12/18

Copy to box 5.2

£ £

£ £

8

£

Copy to box 5.1

£

£

£

£

£

£

£

Enter chargeable gains after reliefs, but before losses in lines 1 to 6. Enter losses arising in lines 7 to 8.

H

£

Total losses

Total gains

Enter details of any elections made, reliefs claimed or due and state amounts (£)

G

7

Total

£

5

Losses

£

4

£

£

3

Total

£

2

Disposal proceeds

E

£

D

Enter the Enter the later of date date of of disposal acquisition and 31 March 1982

C

Page TC 1

Disposal Type R, see* on page TC 4

AA

1

Gains

Brief description of assets Enter full description of assets on page TC 6

A

Residential Property

If you want help, look up the box numbers in the notes on Trust and Estate Capital Gains. For help filling in this form, go to www.gov.uk/taxreturnforms and read the notes and helpsheets.

Florov Trust

Name of trust or estate

Trust and Estate Capital Gains for the year ended 5 April 2019 (2018–19)

19.79  Trust Tax Returns

1232467891

Tax reference

771 £

HMRC 12/18

Copy to box 5.10

£

£

£

SA905 2019

26,640

26,640

Copy to box 5.9

£

Total losses

£ £

8 Total

Total gains

£

£

£

£

£

Enter chargeable gains after reliefs, but before losses in lines 1 to 6. Enter losses arising in lines 7 to 8.

H

£

26,640

26,640

Enter details of any elections made, reliefs claimed or due and state amounts (£)

G

7

Losses

£

6 £

£

5

Total

£

4

£

£

Disposal proceeds

E

3

01/10/18

D

Enter the Enter the later of date date of of disposal acquisition and 31 March 1982

C

Page TC 2

Tick box if estimate or valuation used

B

£

L

Type of disposal Enter Q, U, L or O, see* on page TC 4

AA

2

1 Florov partnership land

Gains

Brief description of assets Enter full description of assets on page TC 6 and onwards

A

Other property, assets and gains

If you want help, look up the box numbers in the notes on Trust and Estate Capital Gains. For help filling in this form, go to www.gov.uk/taxreturnforms and read the notes and helpsheets.

Florov Trust

Name of trust or estate

Trust Tax Returns 19.79

19.79  Trust Tax Returns