Exercising powers of appointment

I have been asked to advise on the CGT consequences in the following scenario. A trust deed gave the trustees a discretion to appoint capital to any one or more of a defined group “by deed or deeds revocable or irrevocable”.

The trustees decided to wind up the trust and wrote to the beneficiaries to set out the intended division of the trust fund, which consisted of quoted investments with unrealised gains.

Being charities the beneficiaries asked that the assets be appropriated to them, according to the indicated division, that the trustees then elect to hold over the gain and then sell as bare trustees, so as to avoid the impact of CGT when the inbuilt gains were realised. The trustees confirmed they would do that.

The trustees went ahead with the appropriation and sale, but failed to execute a deed of appointment first. We have been asked to advise the trustees on whether they can properly elect to have the gain held over and to treat the sales as having been effected as bare trustees, ie was their power of appointment been validly exercised by recording it in writing but not by way of deed?

Simon Leney
Cripps LLP

It may depend on the terms of the trust. Some trusts give the trustees a power to pay or transfer assets to the discretionary beneficiaries (effectively a power of advancement), in which case it might be claimed that the appropriation was a valid exercise of the power of advancement.

Diana Smart
Gordons LLP

I had understood that no exit charge arises on an appointment out of a discretionary trust in favour if a charity, as this is negated by the transfer of value being exempt under s.23 IHTA 1984.

If my understanding is correct, then there can be no opportunity for hold-over to be claimed under s.260 TCGA 1992.

However, does not s.257 TCGA apply to avoid any CGT on the appointment (if valid)?

Turning to the primary question, if the trust deed provides that any such appointment must (or “should” be made by deed), that is an essential pre-requisite and an attempt to exercise the power any other way fails (unless the trust is governed by, say, Jersey Law where “deeds” do not exist and the JRC has interpreted the reference to “deed” as “an instrument in writing”).

Technically, there has been no appointment, so that HMRC could well argue that the sales have been made by the trustees within the settlement, and not on behalf of the charities. Although it might be possible to persuade HMRC to accept that an appointment was made before the sales, that does not wash out the actual breach of trust, which could be actionable by any members of the discretionary class who have not benefitted, or feel they have not received their “just” share.

Paul Saunders

Yes Paul I agree - the transfer out of trust would be a no gain no loss transfer under s257.

Your point that the disposal might be a breach of trust may resolve the uncertainty about the effect of the actions. If the fact is that the assets were no longer part of the trust fund at point of sale, even though the methodology whereby they left the trust fund was defective, then for tax purposes the disposal was by the charities. I’ll review the exact terms of the letter to charities in the light of that thought.

Simon Leney
Cripps LLP

I agree with Paul’s comments.

However, I would add, from personal experience ‘years ago’, HMRC would
sometimes be prepared to “follow the money” and accept there had been a
disposal when distributions from a trust had not been validly made in
accordance with the terms of the trust.

Andrew M Mortimer

Whilst I agree with Andrew that HMRC may accept the position, and raise assessments on that basis, HMRC cannot waive a disappointed beneficiary’s right to challenge the trustees if they have acted in breach of trust.

If such a claim were to be litigated, and the trustees cited HMRC’s acquiescence in their defence, I wonder what view the court might take of HMRC’s conduct in turning a ”blind eye” to a breach of trust (and raising a tax assessment when, perhaps, there was no legal basis for that assessment)?

Paul Saunders