Variation of trust required?


(Piers Tupman) #1

I have been instructed by the Trustees of a lifetime settlement established in the early 1970s. The trust is on the following basis:

Until the beneficiaries (the three children of the settlor) attain 21 income can be applied towards maintenance education of the beneficiaries at the trustees discretion. Any income not applied to be accumulated.

After each beneficiary attains the age of 21 years the income of the trust be paid to the benefit of the beneficiaries until they die or until the Vesting Date.

The Vesting Date is a date as the trustees deem fit.

The three beneficiaries who are the children of the settlor are now in their 50s.

It appears that the terms of the trust have not been complied with in that the income from the trust has not been paid to the beneficiaries from the date they achieved the age of 21. It seems that all of the income has been accumulated and there have been occasional payments of capital to the beneficiaries (using section 32 which has been amended to allow advancement of the whole of the money to which the beneficiary may be entitled). The situation is obviously unacceptable and needs to be regularised. The settlors trustees and beneficiaries are all alive and agreeable to any necessary action in order to regularise the position. Would it be possible for the beneficiaries to provide letters to the trustees confirming that they waive the entitlement to income? Would there have to be a deed of variation of the trust? Is it possible for these actions to take effect retrospectively to cover the period from when each beneficiary attained 21 to date. The trust has produced reasonable amounts of income over the years from a combination of share dividends and rental income received from a commercial property held by the trust.

Piers Tupman
Milburns Solicitors


(Andrew M Mortimer) #2

I doubt very much that any retrospective waivers of income can be made.

From what you say the children appear to have been entitled to income which
should have declared it on their personal tax returns - If they have not
declared any such income then they should admit this to HMRC who will no
doubt want interest and penalties on top of any additional income tax
liabilities they might have. If allowable income trust management expenses
have been paid by the trustees then these will reduce the children’s
assessable trust income

If the children validly give up their right to income ( who to? ) then
they will be settlors with possible income tax and IHT consequences.

I would strongly advise consideration is given [ by both the trustees who
apparently have been neglectful as regards their duties and the children if
they have undeclared personal tax liabilities ] to engaging a professional
advisor suitably qualified and experienced to deal with these matters.

Andrew M Mortimer


(Tim Gibbons) #3

‘Receivability without receipt is nothing’ per Lord Hanworth in Dewar v. Inland Revenue Commissioners [1935] 2 KB 351, 366

I can’t see any reason why the income entitlements cannot be waived. Indeed, in respect of income arising more than six years previously the rights of beneficiaries (absent concealment by the trustees) may in any case be statute-barred.

To whom does the income belong? Presumably it has been invested by the trustees and as such it would be treated as an accumulation to the capital.

I can see that problems (not least accounting problems) may arise due to the income beneficiaries having become de facto settlors. And if the trust is then broken and the income beneficiaries receive capital shares augmented by the income they have foregone there is an element of circularity which will bring another set of problems.

Tim Gibbons


(Paul Saunders) #4

I hope that all of the children are still alive, otherwise there will be another issue for any deceased child’s personal representatives - for not declaring the interest in possession.

How have the trustees dealt with the trust for tax purposes?

I suspect they may have filed income tax returns on the basis the trust was an accumulation trust – paying income tax at the trustee rate. Even in these circumstances, I understand HMRC will only entertain a claim for repayment of tax wrongly assessed for the last 4 tax years.

If the trustees have treated the trust as an accumulation trust, I anticipate they will also have treated it as falling within the relevant property regime. In correcting the IHT situation, I understand HMRC will only entertain a claim for repayment if the tax was paid within 4 years before the date of the claim.

Whilst, as Andrew Mortimer says, the children should now disclose to HMRC the income to which they were entitled over the years since they each attained age 21, I suggest the trustees and beneficiaries might put a joint case to HMRC to see if it will treat the historic overpayments of tax, and under disclosure, as cancelling each other out so that no adjustment (or perhaps minimal adjustment) will be required, with the trust being taxed correctly going forward. HMRC may want to have details of the income over the period and a note of how this might affect the individual beneficiary’s personal liability, so that it can justify its decision (if required).

Any agreement with HMRC will not, though, remove the trustees’ liability to the children to account to them for the trust income that should have been paid over to them as of right. I suspect any discussion around that might well depend on whether the trustees are family members or professional trustees.

Paul Saunders


(malcfinney1) #5

Unfortunately the "receivability without receipt is nothing’ is as so often the case a little misleading.

In the case of an interest in possession beneficiary the beneficiary is subject to income tax on the income (less expenses) as it arises whether or not he/she receives it from the trustees [Baker v Archer-Shee].

It is I suspect doubtful as a consequence that such income can be waived retrospectively.

Malcolm Finney


(Andrew M Mortimer) #6

As I see it unless there is a valid power to accumulate income ( in which
case the children would not appear to have had an interest in possession )
it cannot be accumulated and added to the trust capital even if the
trustees have invested it…

Furthermore I seems to me that if, for whatever reason, income to which the
children are entitled, is retained as capital by the trustees then the
children will each be settlors of fresh settlements in respect of the
income to which they are entitled both for IHT ( relevant property trusts
for post 21 March 2006 income, although gifts out of income relief might be
available ) and income tax (trust management expenses not deductible in
calculating any income they have a right to ).

If the trustees have invested the income to which the children are entitled
in chargeable assets then any ‘unwinding’ could have CGT consequences

As Paul says HMRC may be prepared to agree a composite settlement in
respect of any overpayments of income tax by the trustees and underpayments
of income tax by the children but I’m not so sure that they are as amenable
to doing this as they were in years gone by.

I would reiterate my suggestion that consideration is given to seeking
suitable professional advice, preferably from someone experienced in
dealing with this type of problem and negotiating with HMRC.

Andrew M Mortimer


(Piers Tupman) #7

thanks for your helpful response. It appears the trust has been operated on the mistaken assumption that it is a discretionary trust and tax paid on that basis.

Piers Tupman
Milburns Solicitors