Vulnerable Beneficiary Election / Settlor Interested Trusts

(edward.allen) #1

I am instructed by Trustees in relation to the administration of a Personal Injury Trust. The Trust is a Discretionary Trust and a number of years ago the accountants that complete the tax returns for the trust advised us that we should make a vulnerable person election. Although the trust is discretionary the injured person is the only beneficiary receiving any benefit (income or capital) from the trust. That beneficiary is in receipt of qualifying benefits.

The accountant has recently contacted me and advised that they will not be able to make the vulnerable person election this year. Apparently, they have recently received correspondence from HMRC in relation to a similar trust rejecting the vulnerable person election on the basis that the trust is settlor interested.

The beneficiary is the individual that received the personal injury award and, accordingly, the settlor of the trust.

Has anyone else a similar experience?

Edward Allen
Langleys Solicitors LLP

(Julian Cohen) #2

Surely the settlor is the defendant (if the payment was made while money was still in court), and so this is not a settlor-interested trust. It depends the facts of the case, and to say that HMRC have “a similar trust” which is settlor-interested is facile of the accountant.

Julian Cohen

Simons Rodkin

(edward.allen) #3


I’m not sure they are incorrect that the Trust is Settlor Interested. My understanding is that PI trusts usually are treated as being settlor interested. The claimant receives the award and then settles it. This would be the case even where the trust was established by the Court of Protection for someone lacking capacity. In this case the Trust Deed was approved by the Court and it clearly identifies the claimant as the Settlor.

Edward Allen
Langleys Solicitors LLP

(Malcolm Finney) #4

Not sure I follow the accountant’s comments.

I would suggest that the trust is settlor interested [ITTOIA 2005 ss. 624-648].

Accordingly, no special treatment of the trust arises for income tax purposes and thus an election has no implication for income tax purposes but will have for CGT.

For CGT even if settlor interested an election can be made such that special treatment applies for CGT (the settlor not being subject to CGT on imputation of trust gains).

Malcolm Finney

(lesleyrance) #5

I have one long running trust. I did try to argue my case with HMRC quite a few years ago now but their view is that such a trust is settlor interested and I have seen nothing since legislation-wise that causes me to think they may have changed their minds. So I don’t/can’t make a vulnerable person election each year. However, although that might seem on the face of it like bad news - because the Trustees are liable at the higher rates and consequently have a high tax bill each year - in reality the situation (in my case anyway) is more or less circular because the beneficiary can reclaim the tax shown on the R185 as having been paid by her, albeit it is actually due back to the Trustees.

I admit to finding this all very complicated at first but you might find my article “Settlement Struggle” in the 15 January 2014 issue of Taxation of use.

Lesley Rance
Miller Hendry

(Lucy Orrow) #6

Lesley Rance - I have a similar situation, where the trust pays the tax, the beneficiary reclaims the tax and it gets paid back to the trustees.

Lucy Orrow
Lambert Chapman LLP