We have a client M who plans on appointing out trust assets to beneficiary D (Daughter only child). D already owns a property and intends, with the blessing of M, to gift the funds to her partner P so that P, who has never owned a property, can purchase a property outright in his own name to avoid double SDLT. Both D and P are likely to live in the property at some point although it may be let in the short term. There is no intention to have a trust deed although the parties are likely to enter into a Pre-nup.
Aside from the use of NRB, the GROB, the risk of P running off with the money or being bankrupted is this evasion or avoidance as we are struggling to decide as it sounds to good to be true.
Yes, it’s fine. Makes little sense but nothing to stop it.
You would just want to ensure that P has no intention of immediately transferring the property to D or holding it to her order (i.e. he will be and remain the absolute owner)
We have no detailed information about the trust. An appointment to a beneficiary D with the intention of ultimately benefiting a non-beneficiary P is prima facie void as a fraud on the power. This carries no connotation of dishonesty, simply that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power. As the effect is to make the exercise void and not voidable it cannot be acquiesced in or ratified by M or D. The principal risk lies in a third party notably HMRC taking the point.
It is a moot point as to whether the operation could be seen as a “benefit” to D. The law recognises in limited circumstances that an exercise may be a benefit to the appointee even when it also or instead benefits another person to whom they have moral obligations e.g. a spouse, children or even charity. There were 3.6m couples cohabiting in the UK in 2021 yet the law generally treats them quite differently to those who are married or civil partners. I am not aware of any case where a cohabitant has been held able to benefit under an equitable power but it is not hard to envisage equity being prepared to accommodate that where the relationship is stable and long-term. While a tax-saving motive does not in itself affect the issue if it is the only motive it might sway a court to deny validity. It is difficult to eliminate the risk and so the potential downside of the appointment being void needs careful evaluation.
Modern trusts often allow a beneficiary to be added and this might be possible here. If “pre-nup” really means that the couple are contemplating marriage it might be worthwhile postponing D’s gift until after the event. A spouse of D may be an express beneficiary of the trust and even if not would probably come within the ambit of a “benefit” to D.
GROB is mentioned and IHT treats cohabitants very differently to spouses. Postponing the D gift until after marrage will deal with the problem. If the D-P transfer is not initially exempt as one between spouses it is far from obvious that any reservation falls away on their subsequent marriage. It would be very odd if it did not as the actual transfer of an undivided share in P’s property to his wife would then be exempt. Before then HMRC might regard D’s staying in the property, while unlet, with P as not referable to the prior gift but this is another grey area. Before IHT it seems to have been accepted that a spouse occupied a matrimonial home as such and not as prior donor of it to her husband. There is no express exemption for a benefit by occupation, whether by associated operations or under para 6 Sch 20 FA 1986, just because the person benefiting is a spouse or because the benefit is not a substantive legal right.
Provided the gift from D to P is genuine and not a sham I do not see why P should not be a first time buyer for SDLT. P is not apparently connected to D (the definition is in s1122 CTA 2010) so there is no issue of a linked transaction.