Combining of trust funds

We are dealing with a Will which contains two discretionary trusts that are identical in every respect except for the definition of the trust fund. One is for specific property, and the other for residue. There is no express power in the Will to simply combine the two funds by resolution (as is contained in some of James Kessler’s precedents), but the trustees do have the usual wide powers of appointment, advance and transfer to another settlement.

It may be administratively convenient to combine the two trusts, but I am not sure how best to achieve this. We are still within 2 years of death, so I believe an appointment would be read back for IHT purposes, and I think we should also be OK for CGT as the estate administration has not yet ended. I assume that as we have no express power simply to combine the funds by resolution, a deed of appointment would be needed (rather than a transfer to another settlement, which could trigger a CGT disposal, and doesn’t feel right anyway in the circumstances). Or could we argue that it is only one trust anyway?

This isn’t something I have come across before, so am probably over-thinking it, but I should be glad to hear if that is the case.

Diana Smart
Gordons LLP

If they are identical in all respects- in particular, I believe that as they have the same settlor and the same beneficiaries, they will be treated by HMRC as a single settlement- I can’t see any reason to treat them as other than a single trust

Tim Gibbons

I can. If the trust funds are not the same.

Jack Harper

These are two distinct trusts, and as such will be treated separately by the trustees and hmrc.

They will be related settlements for the iht relevant property trust regime. As they have the same settlor I believe this will mean the cgt allowance and basic rate band for each trust will be split equally.

If there is a wide power of appointment allowing transfer to another trust this could be exercised and read back for iht purposes if within the powers of the trustees and within 2 years of the death.

There would be a cgt disposal if it is clear on the figures that the property will not abate, so is due to the trustees of that trust in any event. Hold over would not be available within 2 years of the death-but after that there would be no read back for iht.

There must have been a reason for the two trusts, which needs to be explored very carefully before doing such an appointment.

Trustees are entitled to 50% of the annual exempt amount available to individuals which is itself to be divided by two where both settlements (as here) are made by the same settlor.

The first £1,000 of trust income is subject to income tax at basic/dividend ordinary rate but, as above, is divided by two where both trusts are settled by the same settlor.

An appointment within two years of death should not give rise to CGT assuming the estate has not at that time been completely administered. If CGT did arise within the two year period hold-over relief only possible under TCGA 1992 s165.

Malcolm Finney

See CGTM para 33280 for discussion of one or more settlements

Malcolm Finney

Thank you, all, for your responses. The HMRC guidance at CG33280 is a classic example of being both helpful and unhelpful at the same time, because it seems to set out all the possible permutations and possibilities for there being one trust or more than one trust, without giving any indication as to how you actually decide in a given case. There is similar but less detailed guidance in the IHT manual, where they conclude that the position is often not clear!

We will therefore have to err on the side of caution and assume that there are two trusts, with all the potential tax problems associated with combining them that follow on from that.

I have spent some time over the years making multiple trusts distinctive to ensure separate identity and avoid this dilemma. That indicates HMRC preference not to treat them as separate but their Procrustean integrity causes their preference to be determined by their perceived advantage in the specific circumstances. A usual device is to have a different named charity as an eligible beneficiary in each trust. It may be possible to add such a beneficiary if the trustees have that power which is not unusual.

Jack Harper