Gifting back trust income to settlor

Trusts Discussion
1

Is there any issues or tax avoidance implications for a granchild/ beneficiary of a trust to gift back the income to settlor.

2

A de facto reservation of benefit?

3

Any income tax implications would you think?

4

Is it an “arrangement” within s620(1) ITTOIA 2005? Is the grandchild an adult? If the settlor is not taxable the grandchild is and if the child pays no tax because of a PA the trustees will presumably have to deduct at 45% so a refund will be required. If they pay tax after a credit presumably the gift will be net. Is it a gift for IHT by the child? Depends on the figures. If the child is a minor so the parent has to be involved in these procedures it looks very artificial.

For me it does not pass the sniff test so risks HMRC looking at it. If the trust has subsisted for a reasonable time before this begins and the child is an adult it might be defensible. But a plan to fly under the radar may not succeed, with the settlor facing interest and penalties if an arrangement has to be ultimately conceded, because mounting a challenge against HMRC outweighs any tax benefit. Some people love this kind of escapade but others later regret it.

Jack Harper

5

Is this a ‘settlement’ with the consequence that the income is treated as income of the settlor (grandfather)?

6

Beneficiary is minor, tax is reclaimed and parents receive the refund.

7

So you are proposing that the parents or one of them make a gift on behalf of the minor. It is far from clear whether parental responsibility permits a parent to dispose of a child’s property as s.3 of the Children Act 1989 is silent on the point but decided cases indicate that a contract of sale may be entered into. The counsel of perfection is to seek a Specific Issue Order under s.8.

I find it vanishingly remote that a judge would hold it to be in the best interests of a child for him, through the instrumentality of his parents, to give away his property. Under s1 in any question about the administration of a child’s property or income from it “the child’s welfare shall be the court’s paramount consideration”.

The child should be consulted if Gillick competent to see whether he agrees with any proposal for disposing of his property. The risk is that without a hearing and an a SIO the disposal will have civil liability repercussions, and even criminal liability, if the child later objects. That might happen if he later falls out with his parents. Though that never happens, does it?

Blundering off into a China Shop, law or no law, may be the parents’ chosen style but I would not recommend it and would not accept instructions to be involved with it. I have no idea what HMRC would do but they could certainly argue that it was void for lack of parental authority or attack the trust as a “settlement” and tax the settlor. It is undoubtedly voidable by the child on attaining majority but that is not a point open to HMRC to argue. However, the general principle of English property law is that X cannot dispose of property owned by Y and any attempt to do so is a nullity, which is open to HMRC to allege.

Jack Harper

8

You might want to consider sham issues as well as it isn’t clear that the trust deed accurately reflects the true arrangements. The trustee is not following the terms but instead allowing (directly or indirectly) income to be paid to the settlor.

9

Coming to this query late on I note the person [ apologies if I am mistaken but we do not appear to know what their connection to the family/trust is or whether they are a professional solicitor/accountant etc (which I consider could be a bit worrying) or lay person( perhaps less worrying but in which case I would strongly suggest they consider paying for proper professional advice) ] asking the question says:

“Beneficiary is minor, tax is reclaimed and parents receive the refund”

They do not say what the parents do with the tax refund! And we do not appear to have been told the amounts involved/at risk.

The trust income and tax repayment belong to the minor beneficiary and I would hope they appreciate what their legal responsibilities are!

These types of queries do worry means without wishing to appear unhelpful I wonder whether in the interests of the forum a stronger line needs to be taken when ‘worrying’ queries are raised.

Andrew Mortimer - retired trust tax specialist who is no longer paying subscription which entitles use of TEP qualification

1 Like