Hopefully a quick one: can someone please point me to the legislation regarding the ability to add a settlor back in as a discretionary beneficiary of a settlor excluded trust after 6 years?
I would have thought that if you have a trust from which the settlor is excluded from benefit (which would be on account of an express provision to that effect), it will not be possible to add the settlor as a beneficiary, regardless of the time-frame.
Paul Davidoff
Thanks @pddavidoff
I think what I’m looking at is the operation of s169B(1) TCGA 1992 - if the trust was established as being settlor excluded but after 6 years, the trust become settlor interested, would there be any claw back of hold-over relief?
Section 169C refers to the “clawback period” of 6 years. However, see also the subequent sections, in particular s169F which defines what it means for a settlor to have “an interest in a settlement”. It is possible for a non-settlor-interested trust (in the context of holdover relief) to become settlor-interested if the settlor subsequently gets married/enters into a civil partnership or has children / step-children who are minors and who can benefit. However, for the trust not to be settlor-interested at the time of settlement, it is difficult to see how there could be a power for the trustees later to add the settlor as a beneficiary: or are you thinking that the trust could provide that the setllor could be added, but only after 6 years have elapsed since the settlor’s addition of property to the trust? I would have thought that such a provision would still cause the trust to be settlor-interested at the time of settlement on account of s169F(2) (in relation to the settlor / spouse) which provides that the settlor has an interest in the settlement if:
“(a) any property which is or may at any time be comprised in the settlement, or
(b) any derived property,
is, or will or may become, payable to or applicable for the benefit of the individual or his spouse or civil partner in any circumstances whatsoever.”
Paul Davidoff
New Quadrant
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Thanks again @pddavidoff
The trust deed contains a provision for the settlor (during their lifetime) and the trustees (upon the death or incapacity of the settlor) to add beneficiaries to the class of beneficiaries (not specifically referencing the settlor).
The trust was set up 8 years ago as settlor excluded but the settlor now needs ÂŁ50,000 from the trust. Yes, we could advance capital to a beneficiary but then the beneficiary would then have to PET this back to the settlor. If however, the settlor was added as a beneficiary using the express provision within the trust, this could avoid that situation. And yes, there was a s260 claim made when the trust was established.
The wording in s169F is not identical but ominously similar to s625 ITTOIA 2005 (settlor retains an interest) and the settlements legislation has a much longer history and voluminous case law. The key shared words are “may” and “in any circumstances” and the CGT version emphatically adds " whatsoever". Each provision has carve-outs though these are not exactly identical. In fact the CGT version has fewer exceptions and is also more stringent in that the mere possibility of a dependent child benefiting prevents relief whereas with an income tax settlement the settlor is only charged to tax (provided settlor and spouse are themselves excluded) if income is actually paid to a child: s629 ITTOIA.
In IRC v Botnar [1999] STC 205 the settlor was excluded under the settlement itself but could be added as a beneficiary of a transferee trust, which appeared from extraneous material to have been quite intentional. I would not suggest any reliance upon lack of initial intention even if that could be proved.
There is simply no justification for reading in a time limit. If that were relevant the statute would say so. The now repealed legislation in s660 ICTA had a time limit of 6 years which is why deeds of covenant had to last for longer, a rule which was rigidly enforced. And compare s168(4) where a recapture charge on the emigration of the donee is specifically time limited.
Jack Harper
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Most lifetime trusts of income-producing property will contain a clause preventing the settlor and spouse from benefiting in any way. Such a clause would override the power to appoint either as a beneficiary even if the power itself did not. To add in such circumstances would be a beach of trust and any appointment of any funds would be void as being, in effect, made to a non-beneficiary.
Not only would adding the settlor as a beneficiary claw back the held over gain but might give HMRC ammunition to charge the settlor on past trust income, on the basis that the argument that the power to add was not originally intended to benefit the settlor is undermined by actually adding the settlor as a beneficiary. If IHT matters it would create a GROB which would need to be survived by 7 years, or at least an actual payment to the settlor would and I would not want to be arguing that simply adding the settlor did not.
Jack Harper
It seems pretty clear that at the time the trust was set up it fell to be treated as “settlor interested” for CGT hold-over relief purposes. See TCGA 1992 s169B(1) and (2) and TCGA 1992 s169F(1) and (2).
Malcolm Finney
You find that there is no express prohibition on adding the settlor to the class of beneficiaries, but there might be a provision prohibiting the trustees from exercising any power to benefit the settlor (even if the settlor is a beneficiary).
Also, trustees cannot normally exercise their powers in a way where they know the intention is to benefit someone who is not a beneficiary.
Paul Davidoff
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There is a specific clause (as per James’ standard DT precedent) excluding the Settlor and Settlor’s Spouse as beneficiaries. So that trumps the trustees’ power to add beneficiaries?
The two are separate things: it may technically be possible to add X to the class of “Beneficiaries” (although the provisions of the trust deed may also prohibit that), but that is of no use if the trust deed expressly prohibits the trustees from doing anything to benefit X.
Paul Davidoff
“Notwithstanding anything else in this Trust, no power conferred by this Trust shall be exercisable, and no provision shall operate so as to allow Trust Property or its income to become payable to or applicable for the benefit of the Settlor or the Spouse of the Settlor in any circumstances whatsoever.”
If this is what it says on your Tin then it does what it says, even if the trust also defines a Beneficiary to include “1.1.5 Any Person or class of Persons added to the class of Beneficiaries by the Trustees by deed with the consent in writing of:
1.1.5.1 the Settlor or
1.1.5.2 two Beneficiaries (if the Settlor has died or has no capacity to consent).”
Jack Harper
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Thanks both, very helpful and much appreciated.