Does anyone have a view on whether a Discounted Gift Trust of a cluster of offshore life policies, where the death benefits are held on bare trusts for named adult beneficiaries, needs to register? Or will the Settlor’s retained benefits be exempt on the grounds of being a resulting trust; and will the death benefits be exempt on the grounds of being a trust holding insurance policy benefits received after the death of the life assured? Clearly, after the death of the life assured there will be an income tax charge but if no chargeable event has previously occurred there will be no tax liability until the death, assuming the settlor has survived 7 years from the gift.
Michael Hayes
For what it’s worth, my view is that the typical DGT (using single premium bonds) gives rise to the settlor retaining rights to future capital payments and the creation of a separate and distinct fund for the other rights to be held for other beneficiaries which exclude the settlor.
In essence, the DGT arrangement is a “carve-out” type arrangement and the settlor’s rights are not those arising under a resulting trust. Hence, no need to register.
The exemption from registration concerning life policies (SI 2017/692, Sch 3A para 4) is inapplicable as the single premium bonds are capable of surrender.
There is also no blanket exemption for bare trusts.
Malcolm Finney
A little more information would probably be helpful This is a Canada Life Inheritance Plan which holds a cluster of life policies under which there is a death benefit and a maturity benefit. Under the terms of the policies only one of these benefits can be claimed and the policies have no surrender value.
The maturity benefit under each policy will be payable on survival of the Donor to various ages from 80 to 150. In respect of each policy the Donor retains the right to the maturity benefit assuming s/he lives to the maturity date; but if the death occurs before the relevant maturity date the death benefit is held on bare trusts for named adults absolutely. In this particular case the Discount is no longer relevant because the Donor has survived 7 years from the date of the gift so it was perhaps a misnomer for me to call it a DGT although originally it was one. Effectively, the plan was designed to enable a donor to make a gift the majority of which would only be received by the named beneficiaries on the donor’s death but would be taken out of the donor’s estate after 7 years and with a reduced transfer of value in case of earlier death. There will clearly be an income tax charge when any qualifying event occurs.
Since there is no surrender value, can it be argued that Sched.3A Para4 does apply because the trust is only of the death benefit and not of the maturity benefit (the latter being carved out)? Or does the fact that the policy does pay out on maturity notwithstanding that the maturity benefit has never been subject to the trust mean that the exemption is not applicable?
We are not told whether this is a “UK” trust, which it must be to be registrable.
The policies seem to be held on a single trust, obviously express and therefore registrable if “UK”.
The trustees seem to be the legal owners of the policies and unless jointly owned with the donor that individual’s interest in them is equitable and conferred by the trust document.
In Brief 22/13 HMRC said of DGTs in general “the settlor’s retained rights are normally held on bare trust for the settlor”. That was their view and a generalised one. Presumably they took internal legal advice at least. Jurisprudence is never their strong suit unless it coincides with the expediency of their objective. Taxpayers were not much concerned by the precise analysis as long as the efficacy of the carve-out was accepted. But bare trusts whether stand-alone or as part of an overall express trust are registrable. There is clearly not a “resulting trust” but even one integrally contained in an express trust does not avoid that trust itself being registrable.
What is the precise nature in law of the "carve-out, is it still extant, and if so is it still held under an express trust (even though not being property with a reservation)? If the settlor is alive the trust itself must subsist as it cannot yet be ascertained until the Settlor’s death, however great the timing probability, who is entitled to what.
The insurance exclusion uses the term “paying out only”. I do not agree with Malcolm that this necessarily rules out any policy which is capable of being surrendered but “maturity” is clearly not a stipulated permissible occurrence. A trust could surely be excluded if it held qualifying policies plural but not if only some qualified, or if any policy provided alternative benefits, qualifying and non-qualifying, or just if different benefits of those two kinds emanated from a single policy but to the benefit of different beneficiaries under a unitary trust.
As apparently HMRC have told the ATT (for it is they) that more exclusions are coming along, and a new one has surfaced already, registration might be deferred until the bloke down the pub who drafts them has gone home.
Jack Harper
Thanks for these helpful comments. I think on balance registration is necessary, but good advice to wait a bit ahead of the September 2022 deadline. The trustees are UK resident BTW.
Have had a rethink following my earlier post and Jack’s post.
Sch 3A(4) states “A trust of a life policy …paying out only - on the death…of the person assured…”.
I assume that this is intended to exclude those policies which typically include a (small) element of life cover but which are primarily vehicles of investment (eg single premium bonds; endowment policies) and thus may pay out on maturity or early surrender (ie otherwise than only on death). Trusts of such policies would thus not fall to be treated as excluded trusts within Sch 3A.
I think that the fact that there is probably a carve-out of the rights to be retained by the settlor, such rights not being settled but held on bare trust, with the other rights being held in trust for other beneficiaries does not enable advantage of Sch 3A(4) to be taken.
Malcolm Finney
Have had a rethink following my earlier post and Jack’s post.
Sch 3A(4) states “A trust of a life policy …paying out only - on the death…of the person assured…”.
I assume that this is intended to exclude those policies which typically include a (small) element of life cover but which are primarily vehicles of investment (eg single premium bonds; endowment policies) and thus may pay out on maturity or early surrender (ie otherwise than only on death). Trusts of such policies would thus not fall to be treated as excluded trusts within Sch 3A.
I think that the fact that there is probably a carve-out of the rights to be retained by the settlor, such rights not being settled but held on bare trust, with the other rights being held in trust for other beneficiaries does not enable advantage of Sch 3A(4) to be taken.
Malcolm Finney
Apologies; not sure how I’ve double posted.
Coming back to the matter of DGTs, and the settlor’s rights being held by the trustees on bare trust. For TRS purposes, are we saying that we need to do two registrations, one for the trust holding the policy, and one for the bare trust? I don’t think we can include the settlor as a beneficiary (ref the retained rights) as that would make it a settlor interest trust, which it isn’t.
Thank you.
Sara
In my view one trust with one set of trustees with two distinct but not wholly separate limitations and initially two funds apparently though in reality two!. The DGT would not work with two separate trusts. Its avowed purpose can only be achieved if the settlor’s bare trust permits the funds transferred to it to be invested in the bond held exclusively for the other beneficiaries. The settlor can call for payments out of the bare trust to be funded by 5% annual withdrawals but any undrawn amounts and investment growth belong to the other beneficiaries.
This arrangement simply does not work with two separate trusts. A separate bare trust could have no other beneficiary than the settlor and the trustees would have to lend the fund to the other trust to buy the bond and it would be that trust which would have the right to the 5% drawdowns which it would have to use to repay the bare trust loan which would then be distributed to the settlor. Phew!
But here any undrawn 5% allowances would not belong to the other beneficiaries; they would represent the unpaid balance of the loan, which would have to be repaid from the bond and be in the settlor’s estate.
The essence of the single trust is that any undrawn amount is in effect transferred to the other beneficiaries but not by a further disposition by the settlor so no TOV. That can only be achieved by a single trust, and thanks to HMRC’s benevolent view that there is no GROB in the beneficiaries’ fund
Jack Harper
Oops! Should have said “in reality one”.
The necromancy in operation here is that the bare trust prevents a TOV by the settlor at the time of payment to the trustees yet the “after transfer estate” involves no reduction but can be then partly reduced or entirely depleted without another TOV. The trustees have two trust funds in one single trust but only ever one investment: the bond.
The settlor is only ever entitled to what is in the bare trust fund; initially money, which may disappear altogether in time, so no GROB in the bond fund. Presumably no GAAR as established HMRC practice. The nuisance after 2006 is that the trust limitations over the bond make it an RPT (previously sly IIPs could be used) whereas the bare trust limitations are not in a s43 (2) IHTA “settlement” . So one trust for TRS subject to HMRC schizophrenic analysis and fundamental inability to follow their own TSEM
Jack Harper
The CLI Wealth Preservation Trust (which I am assuming this is) with an initial bare trust plus a discretionary trust needs to be registered twice - both the bare and discretionary trust have to be registered, If this is a Republic of Ireland bond rather than Isle of Man there is also a requirement to register on the RoI equivalent - CLI have documents on their website which gives guidance on what the requirements are.
Hi Karen
The Wealth Preservation Account is a different product to the Discounted Gift Trust.
Both have to be registered on the TRS.
For the WPA, if the trustees differ on both the initial trust and discretionary trust, two separate registrations will be required.
Where the trustees are the same on both trusts, then only one registration is required. However if the trustees change on one of the trusts in the future, then the impacted trust must be registered too.
For the CLIAI (Ireland) bonds, it is not currently possible to register trusts on the Irish Revenue website.
I consider this to be fundamentally wrong but there are no prizes for getting it wrong and the registering of two trusts at the same time is hardly much of an inconvenience. I have registered several trusts and after the first registrations the main attention that will be needed is on a change of trustees.
I am not making a point about semantics here but, as I see it, it is not an initial bare trust “plus” a discretionary trust. It is a single trust from the outset with different beneficial limitations. Having practised as a trust lawyer for over 50 years I can nevertheless be fundamentally wrong. 50% of Counsel lose in court everyday.
I have read Canada Life’s webpages. They talk about the product as 2 trusts, no “plus” here, and understandably in non-technical language, but I cannot find anywhere in their online text or guide an instruction that two registrations are required. Their step by step guide to registration is excellent, comprising a series of screen shots of the actual procedure. Why don’t HMRC do this and similarly for all online procedures, in between walking the dog and the school run?
If this is correct then the typical drafting of the following are two separate will trusts for TRS:
1 NRB on a DT if spouse survives and residue for life interest to spouse with remainder over; or
2 IPDI to surviving spouse in 50%, remainder over; and 50% on a DT
One document, one set of executors and trustees. A unitary trusteeship over two different funds? 2 TRS registrations or one? What are subscribers here doing in practice?
s62 IHTA (“related settlements”", which does not govern the point, is ambiguous about what the position would be if it did not exist. It is often critical for CGT and “often difficult to determine in will trusts” per Chamberlain & Whitehouse at 11.50. The trustees of a Cayman Island fund, appointed out of a UK head trust, gave the separate UK trustees of the UK fund a nasty shock when the 2 funds were held to be “comprised in a single settlement” and they were taxable on gains realised by the offshore trustees in their fund:
Roome Edwards:https://www.bailii.org/uk/cases/UKHL/1981/TC_54_359.
html
As ever the answer may depend on which one favours (the intellectually dishonest) HMRC
Life Insurers are members of the same Establishment as HMRC so have probably been given their interpretation via the secret handshake. Why is it not in TRSM, save for an entirely vague reference to “Mixed Trusts” at 10030? Are the two examples above mixed trusts and, if not, what is? To me a mixed trust like them only has to register once. Surely this is the most obvious implication of HMRC’s too succinct statement in 10030 to which an example would have given clarity. Probably had to stop to feed the dog.
Jack Harper
Thank you to everyone who has replied.
The situation here is that a DGT is set up, so bond purchased and settlor retains right to payment of £x per month, hence “discounted gift”. There is only one Trust Deed - I have seen these for both Absolute and Discretionary Trusts.
My query arises because in the trust provisions there is a reference to “The trustees shall hold the donor’s rights… on bare trust for the donor absolutely”. Does this mean there is a separate express bare trust to register, with the settlor as a beneficiary (they are not a beneficiary of the trust holding the bond) and the asset being the right to receive the payments? The trustees and settlor are the same as the trust holding the bond.
Francesca, am I correct in my understanding that you are saying if the trustees are the same, there is only one registration required (for a WPA, which this is not) and a DGT?
Thank you again.
Sara
My very last contribution on this. It’s what HMRC regard as a mixed trust TRSM10030. It is unusual to have such a lifetime trust but it is very common in Will trusts
Jack Harper
Hi Sara
Yes a DGT is only one trust deed. So only requires one TRS registration.
Within a DGT the regular payments are carved out and paid absolutely to the settlor, but this is written with the DGT deed, so is not a separate trust (unlike the WPA)
The CL WPA is a packaged product with two trusts within it. So yes if both the initial (bare) trust and the discretionary trust have the same trustees, only one TRs is required
CL confirm this here: Trust Registration Service | Canada Life UK
I hope that clarifies
Thanks for the link Francesca. I was then able to find it from a drop down menu
“HMRC have confirmed that where the trustees differ on both the initial trust and discretionary settlement, two separate registrations must take place. However, where the trustees are the same on both trusts then only one registration is required. It is important to note that where any change occurs on either trust in the future, which means that there is a difference in the legal or beneficial ownership, such as a trustee change which only impacts one trust, then the trust impacted by the change will need to be registered separately”
This seems to me an admirable comment on the mixed trust phenomenon and absolutelyought to be in TRSM10030. It is wrong for such an important public body to make their view on a far from recondite issue only to a commercial company.
Everything HMRC says of this nature is in effect quasi-legislation because of their enforcement role and so should be publicly accessible like all UK law. It is especially important in TRS because of the large penalties (subject to HMRC’s self-denying ordinance for first time offenders) and because lay people are using the online service, as if it was like ordering on Amazon, to avoid entirely reasonable but still disproportionate professional fees.
Jack Harper