As a trustee of a discretionary trust I am claiming compensation for negligence on the part of a service provider to the trustees which has resulted in financial loss to the trust. Of course the trustees are directly liable but the payment of it will constitute a transfer in. IHT100 (a) deals with transfers by individuals but this is a company. The Trust and Estates advice line tell me it goes under question 12 of SA900 but that doesn’t deal with inheritance tax liability.
Can anyone advise on this situation please?
The trustees essentially own the trust fund so if they are paid compensation in their capacity as trustees then it surely immediately becomes trust assets and has been transferred in. However, not by a settlor in the usual sense. How is HMRC informed and how is it taxed?
One possibility is to treat it as payment of a debt but HMRC will have no record of the debt so it would have to be retrospectively declared.
I do not see the payment of compensation as an addition to the trust fund as the trustees already have within the trust a right of action and the payment is merely the conversion of that right to cash.
If, say, a trust property was destroyed by fire, the insurance payment would not be treated as an addition to the trust but a conversion of the right to claim the insurance proceeds being converted to cash.
You need to identify if any part of the compensation is “income” in the hands of the trustees and allocate that accordingly. I believe that should be subject to income tax at the basic rate or at the trustees’ rate, depending upon the nature of the trust.
The tax treatment of the capital element of the compensation payment will depend upon the exact nature of the negligent service provider’s failure and its consequences. This should probably be discussed with the trustees’ tax adviser.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks Paul. So there should be no inheritance tax. There will be a small amount of interest income. I doubt there’s any CGT since there’s no gain.
A non-close company is unable to make a chargeable transfer (or, of course, a PET).
If a close company makes a transfer of value such value is apportioned amongst the company’s participators [IHTA 1984 s 94]. However, where there is no intention to confer a gratuitous benefit on any person such a transfer is not a transfer of value (IHTA 1984 s 10).
The receipt of any compensation may or may not be subject to income tax on the trustees part depending upon surrounding facts.
Malcolm Finney
Thank you Malcolm,
The important resolution to my problem is that the compensation Is not what I thought, a transfer in. I am not yet sure if there is any CGT liability. The payment is in cash whereas the loss was a saleable asset. How any realised gain would be calculated I don’t know.
Thank you
J
Can you-provide a bit more detail?
Malcolm Finney
The claim is at a sensitive stage, so no more details just now. I mainly wanted to establish whether this was going to be a transfer in because that would have entailed claiming compensation for the inheritance tax due. I’m now almost certain that it’s not.
Thank you
John