Failure to exclude spouse from settlement

Good morning everyone

I have been asked to look at a settlement that was created in 2014 by a different firm. It’s a standard discretionary trust for the family of the settlor. There is a clause that says “exclusion of Settlor and Spouse” which fails to exclude the spouse. It says:

“Notwithstanding anything else in this settlement, no power conferred by this settlement shall be exercisable, and no provision shall operate so as to allow trust property or its income to become payable to or applicable for the benefit of the Settlor of the estate or the legal personal representatives of the Settlor in any circumstances whatsoever”.

The Settlor does not at present have a spouse, but does have a long term partner, who is mentioned in the document. I do not believe they have any intention of marrying, but do forum members foresee any problems with this through the omission of the exclusion, given the theoretical possibility of a spouse becoming entitled.

many thanks

Fiona Dodd
Mayo Wynne Baxter

Where the settlor’s spouse may benefit under the trust (whether or not the spouse actually does benefit) causes the trust to be settlor interested for income tax. As the settlor is specifically excluded from benefit and currently there is no spouse then the trust will not currently be settlor interested for income tax.

For CGT as per the above, although if dependent children may benefit the trust is settlor interested for CGT. The key consequence in such cases is the inability to claim hold-over relief (TCGA 1992 ss. 165 and 260); no imputation of gains to the settlor.

For IHT if the settlor is excluded even if a futures spouse would fall within the class of beneficiaries there is no GWR on the part of the settlor (assuming that the settlor does not benefit directly/indirectly in the spouse’s benefit).

Malcolm Finney

Under s77 TCGA (trust gains charged on the settlor) before it was repealed, the possibility of a future spouse or civil partner benefiting was to be ignored. However there is no similar exclusion from the CGT hold over
provisions as regards settlor interested trusts, which seems ominous to me.

Malcolm Gunn

Malcolm Gunn raises an interesting point when he points out that with respect to dependent children the trust cannot be settlor interested on this ground alone where the settlor does not in fact have any such child as this is specifically provided for in subsection (4B) of s.169F.

I think by implication Malcolm then suggests (or queries) whether hold-over relief may be denied even where the settlor has no spouse if a spouse (if he had one) could benefit under the terms of the trust as in this case there is no similar get-out provision to sub (4B).

This would seem to be a logical inference.

Certainly this view would be consistent with that expressed in Unmarried settlor v IRC (a decision I found strange) although that case was not a CGT hold-over case but one on TCGA 1992 s77. In addition, ITTOIA 2005 s.625(4) (albeit income tax not CGT) specifically excludes from the term “spouse” a person to whom the settlor is not married but may marry later.

Prima facie, it would thus seem that it was intentional to preclude hold-over relief based on the possibility that a spouse of the settlor could benefit under the terms of the trust if the settlor ever married in the future. Absolutely crazy !!

Malcolm Finney

There is a real absurdity here: you can be married and included as beneficiary, yet Trust is not settlor interested, or unmarried and not a beneficiary, yet settlor interested.
Under Trust A Joe is married and although excluded from benefit, his current spouse is not. However, they are permanently separated. The Trust is not settlor-interested: effect of Sec169F(4)(a) of tcga.
Under Trust B, Fiona Dodd’s situation, Joe is not married. The absence of a CGT legislative exclusion + some support from IRC v Tennant (1942) and Unmarried Settlor (2003) means, for CGT hold over, Trust B is settlor-interested. Fiona Dodd’s Trust is definitely not settlor-interested for income tax, unless Joe marries. HMRC manuals confirm this income position (as they have to). They are silent, according to my research, on the CGT position.

Nigel Hollinshead