CGT Annual Exempt Amount for Trusts

Trusts Discussion
1

Para.6 Sch.1C of TCGA 1992 reduces the annual exempt amount for a qualifying UK settlement which is one of two or more comprised in a group. A recent question about recognising insurance policy trusts when determining a family trust’s annual exempt amount for CGT set me thinking anew about this.

Do Forum members agree that every express UK trust other than one held for a charitable purpose or held for pensions purpose as defined in Sch.1C TCGA 1992, [including those listed in Schedule 3A to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as ‘excluded’ trusts], must be counted in determining the annual exempt amount for any trust, other than one held for the benefit of a disabled person?

If so, an easily overlooked trust would include a co-ownership trust where land is held as tenants in common, such as the most commonplace case of a home held on that basis by a married couple.

And many trustees will have under-declared capital gains.

Ray Magill

2

Yes, an insurance policy trust (and a pilot trust) are qualifying settlements for the purposes of para 6, Schedule 1C TCGA 1992.

However, a bare trust such as that where a couple co-own their home as tenants in common, is not a qualifying UK settlement and therefore is outside of Schedule 1C.

Whilst it used to be the case that trusts for the disabled were no taken into account when identifying the number of qualifying UK settlements amongst which the annual exempt amount (AEA) was shared, that is no longer the case – see para 2, Schedule 1C – although I believe they still have double the AEA of an “ordinary” trust.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

“Settled property” is defined under TCGA 1992 s 68 as meaning “any property held in trust other than property to which s 60 applies…”.

S 60 refers to “Nominees and bare trusts” which would include Ray’s reference to “land held as tenants in common such as the most commonplace case of a home held on that basis by a married couple”. Thus, such would not qualify as qualifying settlements.

Malcolm Finney

4

Paul,

HMRC seem to be clear that ‘tenants in common’ constitute an express trust, in which case the beneficiaries are the settlors. A married couple owning their home as tenants in common would be within the exclusions in Sch.3A, but still counted as another trust of which each is a settlor.

I agree that trusts for the disabled are also within the count. My wording was defective.

Ray Magill

5

Ray, as Malcolm noted in his posting, s.60 TCGA 1992 applies to the scenario to which you refer. S.68 TCGA 1992 then provides that such an arrangement is not a settlement for CGT purposes. Accordingly, an arrangement to which s.60 applies is not counted for the purposes of paragraph 6, Schedule 1C TCGA.

I am not aware of a Schedule 3A to the TCGA 1992, and wonder if we are looking at two different issues?

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

6

Paul I think Ray is referring to Sch 3A of the 2017 ML Regs.

Malcolm

7

Malcolm,

I apreciate the reference, but I am not entirely convinced that one can read it through into Sch.4C.

Ray Magill

8

Paul,

As I have said to Malcom, I am not convinced that one can read S.68 through as affecting Sch.1C. S.68 says “settled property” means any property held in trust other than property to which S.60 applies… and references … to property comprised in a settlement are references to settled property. It doesn’t in terms define a settlement as such.

Para.7 Sch.4C refers to a qualifying UK settlement.

Thus, I remain stubbornly unconvinced that the structure of the Act makes it as clear as you say.

In my original posting I did give the full title of ‘Schedule 3A to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017’.

Ray Magill

9

To qualify as a “qualifying UK settlement” clearly requires that an entity under consideration is in the first instance a “settlement”.

TCGA 1992 s 68 makes it clear that “property” to which s 60 applies is not “settled property” for the purposes of TCGA 1992; in which case it then naturally follows those entities to which s 60 applies are not settlements there being no settled property [ie A married couple owning their home as tenants in common does not constitute a settlement].

I accept that for CGT (unlike income tax) purposes there is no explicit definition of “settlement” only “settled property”. Accordingly, the legislation has to be read in a manner which if at all possible causes it to “make sense”.

In short, a settlement requires there to be settled property and s 60 entities do not contain settled property.

Malcolm Finney

10

Malcolm,

You make a very persuasive argument. Essentially that a settlement can only mean an entity with settled property. I think it rather a backward analysis, but have to agree that, although the definitions could be more complete, your conclusion is more logical.

Nevertheless, I am still pondering the wide definition of a qualifying UK settlement in para.7 Sch 4C TCGA 1992, which aren’t confined to ‘express trusts’.

One kind in particular is trusts under S.42 Landlord and Tenant Act 1987 - which, rather surprisingly, are not bare trusts. Arguably their inclusion as excluded trusts in Sch.3A to the Regulations at both Para 1 and Para19 is otiose, as they are surely not express trusts.

Each lessee will be a settlor of such a trust; the tax position consequences generally being ignored.

Do you have any views on such trusts?

Ray Magill

11

I think it is perhaps important to note that not all “trusts” are in fact “settlements”; a classic example is a trust for one or more persons are absolutely entitled to settled property as against the trustees. Such “trusts” are not “settlements” and thus cannot fall within the “qualifying UK settlement” definition in TCGA 1992 Sch 4C para 7.

I think that whether a “trust” appears in Sch 3A MLR 2017 is of itself no determinant as to whether it should or should not be included in the number of settlements when ascertaining annual exempt amounts.

Malcolm Finney

12

Remembering that Sch 3A purports to
list express trusts that are excluded from certain obligations.

13

There are some very confusing statutory references in this thread not least to Sch 4C TCGA which is surely meant to be Sch 1C.

1 There is no one single consistent definition of “settlement” in TCGA.

2 The standard definition is of “settled property” and “property comprised in a settlement” in s68, with s60. A “trust” is a key component.

3 While HMRC generally disavow the relevance of the wider income tax definition they rightly point out in CG33200, 33220 and 33280 that this wider definition is employed in some places. As regards the annual exempt amount, para 2(7) Sch 1C as originally enacted was one such. Since FA 2006 current Sch 1C has been governed by s68A (definition of “settlor”) which applies “in this Act, unless the context otherwise requires”. It is now a self-standing code rather than an importation of s620 ITTOIA, as is still done in s97(7) for non-resident trusts and s286 (3ZA) for connected persons

4 In the background however is always the case law analysis per Roome v Edwards as to whether are or have become or cease to be more than one separate settlement

5 s97(7) does not apply to s86 with Sch 5. It is not easy to reconcile these provisions with s68A in such circumstances unless the context here displaces it. Even stranger is that s97(7), and so presumably s68A, applies to Sch 4C (not a typo). Yet among the substantive rules are provisions deducting from Sch4C gains any taxed under s86, despite different definitions applying to each set of rules. But why would that nicety trouble anyone bent on exterminating a tax avoider and to boot one involved with “Abroad”.

6 TRS is about express trusts. The meaning of an “express trust” is well understood in English trust law by judges and need not be defined if it suits. The trust created by s42 LTA 1987 is an express trust. Para 19 Schedule 3A of the (bovine ludicrous) AML regs exempts such a trust specifically despite its falling arguably within para 1 because the entire schedule is a rag bag of things that the politicians/bureaucrats do not wish to clutter up their world-beating register, whether by original plan or piecemeal afterthought. It is about expediency and has had no intellectual input. Consistency is thus a mirage. It is therefore a minefield for the unwary. So a trust is only exempt if it is created by the LTA or other statute though not if it serves precisely the same purpose but is custom drafted. Other contributors have cited the absurdity of para 9 where the trustees and beneficiaries of a co-ownership trust are or become or cease to be exactly co-terminous. I do not believe this arrant nonsense can be rationalised with the TCGA or indeed, by a sentient being, even within itself. Its author should be served with a Fixed Penalty Notice and made to resign.

Jack Harper

14

I can only apologise to Jack for incorrectly referring to Sch 4 instead of Sch 1 in my posts.

In point 2, Jack states “There is no one single consistent definition of “settlement” in TCGA”. As per my earlier post there is in fact no explicit definition contained in TCGA 1992.

May I ask Jack whether you (I am not) are in agreement with Ray’s statement:

"Do Forum members agree that every express UK trust other than one held for a charitable purpose or held for pensions purpose as defined in Sch.1C TCGA 1992, [including those listed in Schedule 3A to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as ‘excluded’ trusts], must be counted in determining the annual exempt amount for any trust, other than one held for the benefit of a disabled person?

Malcolm Finney

15

If we are looking at the annual exempt amount then we are not looking at any of the special kind of “settlements” within TCGA but at “settled property” within ss68 and 60. The word “settlement” is indeed not defined as such but this statutory concept is employed within the TCGA as four square linguistic shorthand for it, either on its own or in connection with “trustees of a settlement”. No trust save that which constitutes “settled property” falls within Schedule 1C as a “qualifying settlement” because there is no other kind of settlement than that which, in context, the Act prescribes, either instead or as well. Of course there are specific exclusions from Schedule 1C. I attach only marginal significance to the actual heading of the Schedule but it is supportive. Nor do I read anything adverse into the directory s1K(8) which refers only to “trustees”.

It is less than helpful for a statute to bandy around the word “settlement” because it is both an ordinary English word and, in a given context, a very precise technical legal term. This is compounded by the extended definition of “settlor” in s68A. Highly relevant to Schedule 1C and the annual exempt amount. It is necessary, where appropriate, to identify the settlor of every “qualifying settlement” i.e. of discrete “settled property”, in its separate Roome v Edwards existence if need be, in Schedule 1C and to do so using concepts borrowed by s68A from s620 ITTOIA and its case law but without actually importing all that. So no requirement for an element of bounty is imported. And reciprocal arrangements need not be legally enforceable for CGT (nod nod, wink wink, know what I mean?). The familiar overreaching scattergun process of identifying the settlor, for paranoid anti-avoidance reasons, does not detract from the objective, which is to identify that person as the settlor of a discrete trust, in fact of each of several such trusts, each of which contains its own distinctive parcel of “settled property”.

It is far from clear to me why Ray would find it instructive to make the statement quoted. I am not sure why a comparison of those trusts requiring AML TRS compliance should bear any resemblance to those entitled to an annual exempt CGT amount. TCGA does not even require a trust to be express to be settled property. Some registrable AML trusts will not be settled property nor will some AML excluded trusts.

True co-ownership sounding in trust, express or implied, is not settled property because of s60 but whether it will be AML registrable will depend whether it is express and then on the quixotic seredipity of the exact correspondence for the time being of its trustees and beneficiaries. The status of an AML excluded trust says nothing about whether it contains settled property for CGT. Though it may be right to warn some innocents abroad that such a trust may still be a qualifying settlement for the CGT annual exempt amount. A life policy or its cash proceeds can be settled property and so count within Schedule 1C despite itself being exempt from CGT and possibly AML/TRS excluded from Sch 3A of the Regs under paras 4 or 8.

I do not agree that every express trust “must be counted etc” because property held expressly on trust but which is not “settled property” is not counted. For other purposes it may be entirely appropriate to describe it as “settled” or “comprised in a settlement”. It is noteworthy that the draftsman of ToLATA 1996 avoided the word “settlement” like the plague, except in clause 2 in order to treat it there as anathema, and plumped for the more reality TV phrase “trusts of land”.

Jack Harper

16

Jack,

I always find your posts refreshing, and this certainly does not disappoint. However, I find it strange that you say a trust under S.42 LTA 1987 is an express trust. I can’t find a statutory definition, but that given by HMRC in TRSM 21030 is persuasive.

Setting that aside, of interest is this sentence from TRSM 21010 - ‘However, regardless of whether the trust is express or non-express, all trusts will use TRS to register with HMRC if the trust has a UK tax liability arising from UK income or UK assets.’

This has no basis in the Regulations, which only refer to ‘relevant trusts’, whose definition refers only to express trusts.

I assumed, as this only refers to two of the seven taxes listed in regulation 45(14), HMRC want to use the register as the place to report a liability for tax on income and gains in accordance with S.7 TMA 1970. However, TRSM25010 says 'Alongside the requirements to register as registrable express trusts, trusts may be required to register if they have a liability to UK taxation. The exclusions from registering as an express trust do not apply here.’
Trusts are required to register as taxable trusts if both of the following apply:
· the trust is a ‘relevant trust’ – see TRSM25020; and
· the trust has a liability to UK taxation in any given year – see TRSM25030
These trusts must register on the Trust Registration Service.

I now can only think that these are yet more examples of HMRC getting their guidance wrong.

Ray Magill
CTA (Fellow)

17

Ray, Your contributions are invariably thoughtful and it is always a pleasure to joust electronically!

1 As you say, only express trusts are required to register: Reg 42(2)(b). The extract you quote from TRSM 21010 is absolutely incorrect. Non-express trusts are not required to register. Never. Not ever. Not even hardly ever. TRSM 21040 quotes the law, which makes this clear, as a judge would say, beyond peradventure.

2 The contents of TRSM 21030 and TSEM 9500 are perhaps just unfortunate. An express trust will be encountered most often in relation to a human settlor, dead or alive, and a declaration of trust, deed or will. This rather pre-supposes that the publication is aimed at readers of “Janet and John go to Trusts” (but without essential pictures). That may be justifiable in certain types of guidance for lay readers but HMRC Manuals are used by more discerning people with professional responsibility, including HMRC employees. And in my view, often stated here, sometimes thoroughly misused. If it proves essential to challenge a public pronouncement by HMRC, which is clearly wrong, my experience is that eventually it is conceded once it reaches the desk of a brain owner… But before that happens there can occur a great deal of hassle, name-calling and costs as the apparatchiks at minion level defend the party line.

3 I have no doubt that an “express trust”, unless specifically defined and it is not, includes a trust created by legislation (or a corporate settlor). The statutory trusts on intestacy in s47 AEA 1925 are one example. So para 1 Schedule 3A of the regs is essential. (It does not always follow that the existence of an exemption proves that otherwise the law would have applied). TRSM 23140 clarifies this but TRSM 23020 undermines that with the fatuous comment “…trusts may be created in the absence of a will or under the intestacy rules. As these were not intentionally created by the settlor, trusts created in these instances are not express trusts and therefore not registrable express trusts for the purposes of TRS”. This comment is misleading and wrong but, hey, it’s only an HMRC Manual!

4 The TRS system does not absolve any person who is required to do so to notify chargeability separately to any relevant tax or make any other similar contact which tax law requires. No doubt we will have flotillas of reasonable excuse claims in the FTT from taxpayers claiming that they thought TRS was enough.

5 As this was raised by you some time back I draw attention to the the FCA rule changes from 29 July 2022 concerning funeral plan trusts. See FPCOB 3.1 and Annex 1. A “funeral plan provider” will probably be a non-human settlor who, one hopes, will not read the TRSM and conclude that their trust is not express. Will exclusions apply? Is the trust really “incidental” for para 14 Sch 3A and can para 11 apply, not least where the provider is permitted to obtain a payment of a “surplus”. Perhaps we will soon get another knee-jerk afterthought clarification from HMRC.

Jack Harper

18

Ray states:

Not sure if you checked out the Explanatory Memorandum to the MLR (EU Exit) Regs 2020 which state:

“7.6 Schedule 3A specifies the types of trusts that will be exempt from the new registration requirements. These trusts are not considered to be “express trusts” for the purposes of the Fourth Anti-Money Laundering Directive; such as, where the trust results from a legislative requirement rather than from the intention of the settlor or is merely incidental to a legitimate wider commercial transaction”.

This seems to indicate that to remove doubt (if there is any) as to whether a trust coming into being by way of statue is or is not considered to be an express trust, it will in any event not be so treated under the Regs and thus is excluded from the need to register.

Malcolm Finney

19

Malcolm

I was amazed to see you refer to the quoted passage and to cite as apparent legal authority an Explanatory Memorandum to a statutory instrument.

The principal purpose of such a document is not to inform or educate the public but to aid the Parliamentary committee that scrutinises draft SIs. Of course it is in the public domain and so is entirely capable of furnishing public misinformation. And does so splendidly.

While a court or tribunal would doubtless hold its contents to be inadmissible or irrelevant with a modicum of respect, the legal standing of such a document and its probative value to the forensic process is on a par with a newspaper horoscope or a bus ticket.

I would say that even if I were in full agreement with the contents. In fact I regard them as grossly misleading and totally inaccurate.

Judicial methodology for interpreting primary and secondary legislation is well settled and it is a myth that any deference is shown to third party opinions about the meaning of law simply because they emanate from a Minister, Government Department or even, as here, the Parliamentary draftsperson.

Jack Harper

20

So HMRC are saying that trusts such as those under S.42 LTA 1987 are not regarded as express trusts, but ‘to remove doubt’ they are included in Sch.3A despite not being express trusts. I can’t see how that removes doubt; it does the very opposite, especially as Sch.3A only excludes trusts that are not taxable.

Ray