Father put a Property into Trust. Trustees are Settlor and Brother. Principal Beneficiary is his adult daughter. Under a Clause headed Trust Income it states “The Trustees shall pay the Income of the Trust Fund to the Principal Beneficiary during her life”. In a separate Clause “Ultimate Trust”, it states that “the Trust Fund shall be held upon Trust for the Principal Beneficiary absolutely but if she shall die during the Trust Period (80 Years) the Trust Fund shall be held upon trust for such issue …” Overriding Powers allow for “The Trustees may appoint that they hold the Trust Fund for the benefit of any Beneficiaries” ?
The property was lived in by the daughter for a while but she has now married, had children and moved.
The Property was the let for the last 6/7 years. And … the Father declared the rental income on his own SATR! paying mostly 40%. The Father holds the Rental Income on a separate Bank Account.
Client wishes the property to be registered with Trust Registration and the tax position regularised.
Can I:-
Treat this as Interest in Possession and pay 20% Trust Tax?
Daughter has not to date received any Income Distribution; how to deal with?
Were it not for the initial occupation of the property by the daughter, this would have the hallmarks of a sham.
As it stands, the daughter would appear to have a right to the income her father, the settlor, has retained.
I anticipate the trust deed includes the usual settlor exclusion clause (and in any event there is no power to add the settlor as a beneficiary)
Strictly, he should account to her for that income (before tax) and both she and her father notify HMRC that they have incorrectly disclosed their income and seek for HMRC to correct the situation. If the daughter becomes liable for intertest and penalties, technically these should be reimbursed by her father as he was acting in breach of trust by retaining the income for himself. The father may also face an uphill struggle to reclaim the tax he has overpaid, but that is a consequence of his breach of trust.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Hi thanks Paul for comments. Yes Settlor and Settlor’s Spouse are excluded from Benefit.