Settlor Interested Trust and Revocable Life Interests


(Pinny Olsberg ACCA CTA) #1

I would greatly appreciate some thought on this conundrum I am considering.

My client set up a discretionary trust a month after his mother died. By Deed of Variation, he sent assets left to him in his mother’s Will to the Trust. The Trust is Settlor Interested.

I understand that for IHT purposes, the part left by the mother (via the DOV) is outside of the son’s Estate as the correct statement was made re IHTA1984 s142 and therefore the mother is the deemed Settlor for IHT.

For Income Tax purposes, all income in the Trust is taxed on the son as the Trust is settlor-interested.

Two questions, please -

  1. If the son is excluded by Deed, do the Settlor Interest rules cease immediately? Is there a 7-year rule for IHT relevant (can’t see it personally given that it wasn’t in his estate anyway)?

  2. If the Trustees appoint a revocable Life Interest to another of the beneficiaries - does this override the Settlor Interested Income Tax rules? What if income in the Trust is mandated directly to the Life Tenant; does that remove the Settlor Interested problem?

I would be interested in hearing other members’ learned thoughts.

Pinny Olsberg
Cohen Arnold


(andrew.goodman) #2
  1. Automatic attribution ceases but he could still be liable if distributions are made to his minor child. I don’t think timing is relevant.

  2. No, a life interest would not ordinarily trump the settlor-interested settlement rules. Income would still be attributed to the settlor.

Andrew Goodman
Osborne Clarke LLP


(Paul) #3

You would need to exclude not only the son but also his spouse or civil partner if he has one.

Paul Davies
DWF LLP