Discretionary Trust, Interest in Possession or Protective Trust

Hi I have had a trust come across my desk and I must admit am a little perplexed by the wording and ultimately the designation of such trust for taxation purposes. The wording ( is far from clear) but my initial interpretation is that we are dealing with a discretionary trust owing to their being no fixed right to income for said son. Alternatively, I am exploring the prospect of this trust being a protective one for which the son post 2006 is treated as having an interest in possession. Any thoughts most welcome.

"I give the residue to my Trustees UPON TRUST so that my Trustees shall invest the same at their discretion in any of the investments hereby authorised with power from time to time to vary such investments at discretion and shall during the life of my said son [ABC] at their discretion pay or apply the whole or any part of the annual income of the said residue and the investment thereof or if they shall from time to time think fit the whole or any part of the capital thereof to or for the maintenance and personal support or benefit of my son and may either themselves so apply the same or may pay the same for that purpose to any other person or persons without seeing to the application thereof"

“My Trustees shall during the period of 21 years from my death if my said son shall so long live accumulate the surplus (if any) of such income by investing the same and the resulting income thereof by way of addition to the capital of such fund and so as to be subject to the same trusts as hereby declared concerning the capital and shall during the remainder of the life of my said son if he shall survive me the period of 21 years pay or apply such surplus income (if any) to the person or persons and for the purposes to whom and for which the same would for the time being payable or applicable if my said son was dead”

“After the death of my said son and subject to the trusts aforesaid my Trustees shall stand possessed of the said residue in trust for such of my said sins children who shall be living at the date of my death and if more than one in equal shares”.

Daniel Boyle
Brethertons Solicitors LLP

Seems to me it’s a discretionary trust with the discretionary class being the son and his children who were living at the death of the testator: income can be paid to the son and any surplus must be accumulated but if the accumulation period has expired then the surplus can be paid to the son’s children.

Graeme Lindop
Coles Miller Solicitors LLP

Prima facie, this seems to me to be a standard discretionary trust, with power to accumulate for 21 years.

At the end of the 21 year accumulation period, for IHT purposes an interest in possession will arise in respect of those then entitled to income, being children of the son living at the date of the testator’s death. Unless negated elsewhere within the will, s.33 Wills Act 1837 will apply to the entitlement of any of the son’s children who die before the testator. For income tax purposes, the rate applicable to trustees will still apply as the trustees have power to direct income away from the default beneficiaries, regardless of whether that power is ever used.

I note, though, that the son is the only person to whom, or for whose benefit, income can be distributed during the initial 21 year period. Such arrangement may imply that the trust is intended to qualify as a disabled person’s trust, which would be deemed for IHT purposes to be an interest in possession. This will impact the CGT position within the trust as well, as it could qualify for the full annual CGT allowance, rather than the (maximum) half allowance normally available to trustees.

Paul Saunders

I refer to my posting on this matter earlier today, and clarify that when the 21 year accumulation period expires, although the son’s children will each become entitled to an interest in possession, it will be a non-event for IHT as the relevant property regime will continue to apply. This assumes the accumulation period expired after 21 March 2006.

Paul Saunders