I have a case where the Trustees of a lifetime discretionary trust distributed all of the trust assets in March 2020. The Trust provides that the power of appointment shall be exercised by Deed. No Deed of Appointment was prepared. My query is whether a Deed of Appointment can be prepared now and backdated to when the Trust assets were distributed.
Hi Gary
A deed of appointment drafted now wouldn’t have retrospective effect and shouldn’t be backdated. If a deed of appointment is executed now, it would take effect on the date of execution and any tax implications would be on that basis (e.g. exit charges).
You need to decide whether the distribution was valid or not. If the transfer to the beneficiaries was invalid, arguably the trust still exists. (The asset of the trust would probably be a right to seek repayment of funds distributed in error, although how strong a claim that would be depends on the circumstances.)
If the trust does still exist, it will need to be registered on the TRS (if it wasn’t already) and any necessary tax returns filed.
Thank you for your response, James.
I’d have thought you might have two options:
1, Is there an express power of advancement that could have been used? These often have lower, or even no, formal requirements (albeit it is common to minute the decision/resolution); or
2. A deed of appointment, dated now, which recites that assets were transferred to the beneficiaries on x date and that the trustees now wish to exercise their power of appointment to appoint those assets to said beneficiaries absolutely.
Backdating isn’t an option.
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The law is not only about rights but also about remedies. The appointees may have the defence of proprietary estoppel if any one challenges their right to retain the appointed assets, certainly as against the trustees. This can be a sword as well as a shield and might entitle them to demand a confirmatory deed from the trustees which would speak only from the date of execution but operate to pass the legal estate relating to the the equitable estate which had already passed by operation of law.
Equity looks on as done what ought to have been done and has regard to substance rather than form. It will not even allow in this context a statute to be a cloak for fraud. An appointment does not need to be made by deed by statute or common law. I think it is open to the court to ignore the specific trust provision for a deed or to order a deed or other relevant transfer of legal title in further assurance of the equitable interest already transferred. If the assets included land one hopes that the transfer was al least in writing to satisfy s53(1) LPA 1925 though a court might apply subsection (2) but I think proprietary estoppel overrides these formality rules as in many cases the claimant is asserting that no transfer has in fact been made but should have been.
A court is hardly likely to be pleased to rule on the validity of the past transfer if the trustees could simply remedy the situation by repeating it and in a discretionary trust the trustees must only consider whether to appoint to any other beneficiary, which they apparently have already decided against.
That leaves HMRC as the only potential moaner. If the appointment has already been dealt with as effective in any tax compliance aspects: job done. If HMRC have some smartiboots points to take let them. They are unlikely to push that to litigation unless there is a large amount of tax at stake riding on the effective date issue which in any case is moot given the above analysis. I’d make the appointees parties to the deed and recite in full the background facts.
Jack Harper
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Thank you, Andrew.
There is an express extended power of advancement which reads “The statutory provisions for advancement shall apply but so that the power of advancement shall extend to the whole, rather than one half, of the share or interest of the person for whose benefit the advancement is made”
Am I correct in assuming that in this case where the Trustees just paid the Trust Funds out they will be able to rely on the power of advancement clause and for all purposes including tax the Trust will be deemed to have ended on the day the Trust Funds were paid out? There will be no need for a Deed of Appointment?
Thanks.
Subject to all the usual caveats of this forum, the fact i haven’t seen any documents (which could contain contrary terms) and don’t know anything else about it (!) that may well be the case.
s32 TA 1925 does not require any formality for implementation. On the contrary, it can be exercised “in such manner as they may, in their absolute discretion, think fit”. However, nor does it override the rules of general law for transferring equitable or legal title in any given asset. We are still not told which assets were “distributed” nor even whether the distribution was in writing. Hopefully writing at least was employed, which would overcome most of the theoretical snags in this area.
It seems that the trustees did intend positively to make a distribution of trust assets. Imagine that the trustees were no longer available for whatever reason to do anything further. Could the beneficiaries argue that s32 had been used albeit not expressly? Probably; but the distribution almost certainly did not happen in a vacuum. What evidence is there that the trustees intended to make an outright distribution of trust assets, freed thereafter from the former trusts attaching to them, even though without couching that in technical language or any reference to any power of theirs to do that. What evidence is there that they did not so intend?
If it is arguable, subject to cogent contrary evidence, that at least the equitable interests in the assets passed earlier, and given the trustees are in fact available, they could confirm in a document that they used s32. Here the evidential issue is mainly whether there is any extant evidence that would contradict that assertion. My suggestion is that such document should be under seal and that the beneficiaries be parties. That would prevent them as well as the trustees from resiling. Although a deed operates prospectively from the date of execution it can legally bind the parties retroactively as to the agreed treatment inter se of past acts and events. The trustees could then properly transfer any outstanding legal interest in any relevant asset without causing a change of effective date for tax purposes.
Of course if the trust requires a deed for the exercise of even the s32 power then you are back to square one but as I have said I still believe a Deed can be executed currently, acknowledging the beneficiaries’ equitable right and presumptively enforceable remedy to retain the assets as against the trustees, confirming the earlier contemporaneous intent of the trustees to exercise their power of appointment, and remedying their oversight by now transferring any legal title that can be demanded from them. In effect a compromise agreement under seal. Eventually someone in HMRC will get it, even if one has to brush aside a few bears of little brain who argue to change the operative date: the passage of the bare legal title is invariably not the relevant event for tax purposes as regards timing.
I note that Mr Kessler’s precedents permit the power of advancement to be in writing whereas the powers of appointment require a deed. I have found this distinction useful, especially since the 50% limit was removed. Although the consent requirement in s32 (1)(c) remains; presumably it was not relevant to the present query as an historic failure to provide it would seem to torpedo any argument that s32 was in effect employed at the earlier date.
Jack Harper
Can s32 be used to make an absolute advance under a discretionary trust? I always thought there had to be some entitlement to capital for s32 to apply, albeit possibly a contingent, conditional or remainder interest. Perhaps it could still apply if the trust deed contains express default trusts in favour of the beneficiaries?
Diana - quite right. An example of me only reading what I was expecting to see (in this case an express power to pay/transfer capital).
Excellent point Diana! s32 says an advance can be made to “any person entitled to the capital of the trust property or of any share thereof, whether absolutely or contingently on his attaining any specified age or on the occurrence of any other event, or subject to a gift over on his death under any specified age or on the occurrence of any other event, and whether in possession or in remainder or reversion, and such payment, transfer or application may be made notwithstanding that the interest of such person is liable to be defeated by the exercise of a power of appointment or revocation, or to be diminished by the increase of the class to which he belongs”
There are numerous cases on the legal nature of the interest of a discretionary object (or object of a different power) and of the particular power to benefit them as vested its holder. I commend the judgment of HHJ Paul Matthews in Harvey v Van Hoorn https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2023/1298.html&query=(Harvey)+AND+(Van)+AND+(Hoorn). The context is crucial.
Not only is the word “interest” not used in s32; it seems to provide an exhaustive definition of the type of person who may benefit and so it seems strongly arguable that in this context a discretionary object, whether of a discretionary trust or of any other power is not eligible. So it would be unwise to proceed on the basis that the use of s32 could reasonably be taken to have been employed by the trustees. I would do a compromise agreement under seal reciting the facts and the apparent rights and obligations of the parties, making the deed retroactive as between them, and executing also whatever other documents of title may be consequently in order. I believe that this can only be proper if it is clear that at least an equitable interest passed earlier, or any chattel was delivered or cash paid out, and the evidence supports or does not contradict the parties’ historic understanding that an outright distribution was intended. This could not be done, for example, if cash had clearly been advanced as a loan.
Of course the “oversight” by the trustees in not using a deed may remain an issue; but any other discretionary object who was not benefited has only the right to challenge for the trustees’ failure, if that is true, to consider them in the due administration of the trust, usually a highly speculative case. It is possible that HMRC may perceive an advantage in arguing that the date of the deed and not the earlier distribution is the appropriate effective date for any given tax purpose but their preferred stance in any live dispute of this kind is to await the event and not to intervene. Here there is apparently no actual dispute so no litigation to intervene in.
While HMRC could attack the compromise in separate tax litigation they would have to show that the historic lack of a deed made the earlier transfers void. I do not think that is on; because if assets were transferred with the intention of passing ownership, and ideally there is no problem like s53 LPA 1925, those transfers were not devoid of legal effect as the transferees almost certainly had a right of estoppel against the trustees to retain the assets. In a case of significant size HMRC might refuse to accept this argument unless the parties litigated it. They are spiteful enough certainly but it is not easy for a non-party to a transaction to successfully argue that what the parties have done is void if those parties maintain the opposite. Furthermore it might not be a case HMRC would care to lose and have reported and so give fancy ideas to others.
Jack Harper
An example where HMRC are entitled to insist on a Deed even if the parties protest is in the gratuitous forgiveness of a debt. As the debtor has no method of transferring the debt to the creditor because it cannot be assigned forgiveness under hand alone is unenforceable. Even here if HMRC took the point it could perhaps be argued that the creditor was estopped but no one should risk being forced into that.
Jack Harper