Deed of assignment of part of income by life tenant

Trusts Discussion
1

Hi,

Life Tenant of pre 2006 settlement wishes to assign (by a revocable deed of assignment) part of LT’s dividend income to LT’s (adult) children so as to reduce LT’s own income tax liability so such income will be taxable on to children direct.

Am I correct that the percentage of income paid to children (by trustees) as a result of such a deed will be not taxable on LT but on children and there will be no other adverse tax consequences of proceeding with the deed?

Thank you for any insight onto this matter.

Regards
Marcela

2

It is not possible to assign income to another person (so that the recipient is taxable on it) without assigning the source itself. Even that must be done before the income arises if it is taxed on that basis rather than as received.

Special regimes have to be created in the tax system to override this principle e.g stock lending (transfer and re-transfer of securities) and sharing of income from jointly-owned assets by spouses and civil partners under s836 ITA 2007.

A life tenant cannot assign the source even if the income is mandated because the right owned by him or her (or it) is to income alone.

Jack Harper

3

Whilst an assignment of income alone is not possible, LT could assign a part of his actual qualifying interest in possession to, for example, one of his adult children (C).

C then becomes entitled to the income arising on the trust property in which LT’s interest subsisted prior to assignment.

LT would no longer be subject to income tax on such income.

Malcolm Finney

4

I am a little perplexed by the suggestion that a life tenant cannot assign a part of their income to a third party.

Their entitlement is the right to receive income, which is not a right to the underlying assets. I agree they cannot assign the capital (the tree, using an ancient analogy), but I have seen many instances where they have assigned the right to the “fruit”. At times the assignment has been of all of the right, in others only a proportion/fraction. In many instances they have been advised by Chancery counsel.

HMRC has accepted such assignments as a PET for IHT purposes and the assignee acquires an interest in possession “pour autre vie”. However, under current IHT rules (i.e. post 21-March 2006), I am inclined to think that such an assignment would create a relevant property trust in the equivalent proportion of capital and, if I recall the CGT rules correctly, there will be no CGT free uplift when the original life tenant (being the “autre vie”) dies.

If the proposed assignment is intended to save income tax, I fear that the wider tax consequences might result in a more significant tax burden than the arrangement seeks to avoid

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

5

Paul

As I get further and further into my retirement I’m getting more & more rusty on various tax matters.

I agree you can assign a right to income but in the circumstances described for income tax purposes it falls foul of the anti avoidance provisions in S809 ITA 2007 and the income will still be taxable on the life tenant [ rather than the children ]

I also agree that as an interest pour autre vie [ for the life of another ] there is no CGT uplift on death of the life tenant on the underlying asset producing the assigned income.

As the income is still assessed on the life tenant I think the trustees will not have to pay the trust rate of income tax on the assigned income and I’m inclined to agree that an assignment of income away from an interest in possession would create relevant property for IHT purposes

Andrew

6

The questioner specifically stated that a revocable deed of assignment was planned. My answer should have pointed out that this would be a “settlement” in which the settlor life tenant would retain an interest, though not if it was irrevocable.

Andrew is right to cite the transfer of income streams anti-avoidance in Chapter 5A Part 13 ITA. In fact, although this can catch a wholly gratuitous transfer (not just as might be supposed a sale at or below market value), HMRC take the view that “If the beneficiary of a discretionary trust or an interest in possession trust sells their interest, they are transferring the asset from which the right to income arises. The underlying asset from which the right to relevant receipts arises is the interest in possession. Because the transfer of the income is the consequence of the transfer of an asset the transfers of income streams provisions will not apply” :SAIM11040

I tried very hard in practice to discourage clients from arrangements that were technically viable, clever and sophisticated but which were likely to entail elaborate and fee-intensive operation and defence (for which only some have the bottle when a firm challenge materialises).

Also it is “pur” not “pour” autre vie (an incorrigible pedant speaketh).

Jack Harper

7

This is the fundamental difference between a usufruct/usufruit where you can, as the right to income is a legal right and assignable in whole or in part and an interest in possession in settled property where you can’t.
The only UK solution would be to try converting the rights into Scottish proper liferent, but in doing so you would either terminate or modify the interest in possession.

Peter Harris
Barrister

8

I must confess to being a little confused. I had assumed that the original poster was effectively asking about assignments of a qualifying life interest in possession.

Do members agree or disagree with the following comments (assuming irrevocable not revocable transfer):

  1. An assignment of the life tenant of his interest is possible.

  2. The consequence of assignment is that the assignee becomes entitled to the income which arises from the property assigned (ie the property (or all part) which gave rise to the income to the life tenant).

  3. The assignment could be to other trust beneficiaries but need not be.

  4. The assignee’s interest is an interest PUR autre vie (just in case Jack is reading).

  5. For income tax purposes (assuming an irrevocable assignment), the income arising to the trust property in which the life tenant’s assigned interest formerly subsisted is subject to income tax on the part of the assignee due to. entitlement thereof.

  6. I struggle, and always have, with HMRC’s interpretation of ITA 2007 s809 referred to above contained in SAIM 11040. Wrt an assignment of the whole or part of an interest in possession there is, it seems to me, no transfer of any underlying asset from which the income arises. For income tax purposes there has been no transfer of any underlying trust asset, only income.

  7. For IHT purposes, the assignment is a deemed transfer of value (IHTA 1984 s52) and I would have thought this is a chargeable lifetime transfer, not a PET, and any continuing trust subject to the relevant property regime.

  8. There are no CGT consequences of the assignment as no absolute entitlement arises at that time in any part of the trust property.

  9. No uplift for CGT purposes arises on the death of the assignee.

Malcolm Finney

9

I agree with Malcolm, although would add the following points:

  1. if the life tenant dies before the assignee, the assignee’s right to income also ceases as the life tenant cannot assign anything more than that to which they are entitled

  2. If the assignee dies before the life tenant, the assignee’s entitlement passes into their estate and is dealt with under the terms of their will or intestacy

  3. On the death of the life tenant there is no CGT free uplift in respect of that element of the trust fund generating the assignee’s income, although as an exit charge will arise in respect of that element gains could be held over, provided that then life tenant’s death did not occur within 3 months after an IHT periodic charge is due.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

10

Agree with Paul’s added comments.

Malcolm finney

11

Apologies for overlooking SAIM 11040 and coming back on this but something in my old grey cells about the idea still worried me as I seemed to recall having in the dim and distant past previously advised against a client trying this…

In his post Jack explained that the original life tenant would be a settlor of the income and what the difference would be if the assignment was revocable or irrevocable.

Marcella’s original post refers to a revocable deed

In these circumstances it now looks to me that Part 5 Chapter 5 1TTOIA 2005 [ sections 619,624 & 625 ] comes into play and the income would still be assessable on the original life tenant WITHOUT ANY DEDUCTION OF TRUST MANAGEMENT EXPENSES.

Consequently if I’m correct the idea would not work and as well as the professional fees incurred the original life tenant is likely to have a larger income tax liability due to no deduction being available for allowable trust management expenses on the assigned interest.

Am I now correct? [or should I arrange for the men in white coats to come and collect me]

Andrew

12

It seems there is general agreement that a revocable assignment does not work because of the settlements legislation but that an irrevocable one can and may be of an entire life interest or of such an interest in part only of the trust fund, whether fractional or in a specified part. In the last case careful definition is required: for example, if the part is a dividend-yielding security what happens if it is altered or disposed of ?

Paul and Malcolm have set out the tax consequences and I have only two comments:

1 On Malcolm’s point 6, I too cannot fathom why HMRC take the favourable view about a transfer of an interest in income from a trust-owned asset that they clearly do not where the income transferred is generated by an asset owned personally. This interpretation effectively gives an income tax (as well as a CGT) exemption to a sale of a life interest to a commercial company.

My personal view is that it is not for HMRC to correct perceived omissions in the law or avoid unintended consequences. While this may be unchallenged because welcome what happens if HMRC encounter an undeserving example or deliberate exploitation, as they see it? It is too tempting for them just to tell a taxpayer in private that they are minded to resile from their view and so force capitulation; they have told a Tribunal through Counsel (in Sippchoice) that their view as expressed in their Manual was wrong in law, where it did not suit them. Crocodile tears of repentance flowed.

Provided there is no agreement for it to happen, assignor and assignee could transfer the life interest back and forth, stripping the income out whenever it suited (perhaps at some CGT cost to the assignee). Expect here a carve-out from HMRC equally as non-legitimate as their original view.

2 The disposal of a life interest by the original life tenant is not always CGT-free. Usually s76 TCGA will exempt any gain even if there is consideration but, where the trust is settlor-interested, s76A and Sch4A can cause a deemed disposal of underlying assets in a resident trust.

Jack Harper

13

Hi all

I am very grateful for all the kind responses and help, how amazing - thank you.

My initial question refers to a revocable deed of assignment - I found an HMRC manual on the topic which I would like to share - The manual refers to a “revocable mandate” which I understand would include a revocable deed of assignment.

Your views on the IT, CGT and IHT analysis will be very welcome - thank you in advance - Marcela

IHTM04085 - Settled Property: The Charge Where An Interest In Possession Is Disposed Of.

Where a person who is beneficially entitled (IHTM04031) to an interest in possession (IIP) (IHTM16000) in settled property ‘disposes’ of their interest, IHTA84/S51 (1) applies. The disposal does not rank as an actual transfer of value (IHTM04024) but is treated as ‘the coming to an end of their interest’. Tax is charged in accordance with IHTA84/S52 (1): this means that the disposal is regarded as a deemed transfer of value (IHTM04025) and the lifetime exemptions (IHTM14131)are excluded.

Where the interest that’s disposed of is one in which the person became beneficially entitled to on or after 22 March 2006, S51 (1) only applies if the interest is an immediate post-death interest, a disabled person’s interest within S89B (1)(c) or (d)or a ‘transitional serial interest’ (IHTM16061).Where the interest that’s disposed of is one which the person became beneficially entitled before 22 March 2006 S51 (1) is disapplied if the provisions of S71A (trusts for a bereaved minor – IHTM42815) or S71D (18-to-25 trusts– IHTM42816) apply to the underlying property, S51 (1B).

A further exception here concerns a disposition that satisfies the conditions for relieff or maintenance of the family (IHTM04171), IHTA/S11. Where the conditions in s.11 are met, the disposal is not treated as bringing the interest to an end, IHTA84/S51 (2).

The word ‘disposal’ is not specially defined and hence has its ordinary English meaning. A beneficiary should be regarded as having disposed of their interest, for example, if they settle it on someone else; or if they charge it with an annuity; or assign it to someone else for a fixed term.

On the other hand a revocable mandate given by a beneficiary to pay income due in respect of his beneficial interest to another merely confers a running right to receive such income as and when it arises until the mandate is revoked: it neither disposes of nor determines the beneficial interest itself, which remains with the original beneficiary.

14

HMRC are making a very subtle point here and it has nothing to do with income tax.

Malcolm Finney’s point 7 was:“For IHT purposes, the assignment is a deemed transfer of value (IHTA 1984 s52) and I would have thought this is a chargeable lifetime transfer, not a PET, and any continuing trust subject to the relevant property regime.” This is the effect of assigning a pre-2006 IIP (your case).

This causes a charge to IHT on the trust fund, or on the part in which the IIP subsists if only part is assigned, subject to NRB and available annual exemptions (unless the family maintenance let-out applies). Unless this effect is fully appreciated a nasty surprise could occur just by the LT assigning all or part of the IIP; WORSE, even a revocable assignment has that effect for IHT and, furthermore, does not achieve the income tax objective because it is a “settlement”.

What HMRC are saying is that if the LT merely assigns the income as and when it arises it is not (in their opinion) an assignment of an IIP and so has no IHT effect under s52(1). This would require very very precise drafting. And would have no income tax effect as the LT would remain taxable on the income. The statement by HMRC is a general one and carries no guarantee that they will later agree with the intended consequences of the actual drafting.

The drafting would also have to deal with the quantum of what was being assigned the gross income or the income net of income tax payable by the LT. The gift of the income itself (whether gross or net) would be a separate transfer of value for IHT but possibly exempt under “normal expenditure” and annual exemption or otherwise a PET ultimately.

This finely tuned distinction requires one to know exactly what one is doing and how to do it and is about IHT not income tax.

Jack Harper