I have started acting for a new client who was Settlor of a Personal Injury Trust created in 2022.
The Trust Deed says that the Settlor has decided to create a bare trust for his own benefit, and Clause 1 says that the Trustees must hold the Trust fund on Trust for the Settlor absolutely.
The difficulty is with Clause 2. This states that the trustees may pay some or all of the income from the Trust Fund to the Settlor or use it for his benefit; but otherwise the trustees must add the income to the Trust Fund.
Clause 2 seems to me to indicate that the Settlor does not have an immediate right to enjoy the income, ie that the trustees have discretion as to whether to pay it out to him, or alternatively add it to trust capital.
Income has not yet arisen; but when it does, my hesitation is whether this will be taxed as a “bare trust” or income from a trust where there is no Interest in Possession, ie where income is taxed at the trust rate(s)?
Without sight of the document your trust comes perilously close to not being a trust at all. Certainly a trust where the settlor is the sole beneficiary is likely to be such; if at least he is not also the sole trustee it has a chance of being a bare trust. A bare trust can still be such even if the trustees have certain active duties to perform, but my own view is that where the income, if not paid out to him, is accumulated for the benefit of the sole beneficiary it is still only a bare trust. You do not say what happens if the beneficiary dies; gifts over in that event, or in others, governed by the terms of the trust will stop it being a bare trust.
It is gratifying to say for once that HMRC have some very user-friendly commentary on the tax aspects, which turn on the nature of a trust as being bare or not. See TSEM1563 and 1568; and IHTM1630 and 16068. Do not be put off by the particular context of trusts for a minor; this is because a bare trust for an adult is somewhat unusual, unless the adult was formerly entitled as a beneficiary while a minor.
HMRC’s comments are indeed most useful, thank you. The trust deed states that on the settlor’s death the Trust fund must be paid to the settlor’s personal representatives to be held as part of the settlor’s Estate.
I have never myself been instructed to draft or advise on a “personal injury trust” but I am familiar with the chapter in Mr Kessler’s book. The trust in the query could well fit his standard precedent.
His commentary makes some caveats. He cites OH v Craven about the suitability of the STEP standard provisions but he makes clear with his outline provisions of a trust made by compromise of a claim that the specific drafting could produce tax outcomes quite different to those of a bare trust.
He accepts that s32 applies, expressly incorporated in his precedent but surely implied in any event, and hints that this would allow a Pilkington advance. Though he does not say so I could envisage that wider custom drafted powers with the same objective could incautiously obviate the bare trust status. Hence “Without sight of the document…” prefacing my post.