Recently met a client to update his Will. He is LT of IPDI created in Wife’s Will re: half matrimonial home. He moved out to live with his son a few years ago and rented out the house. He has been declaring all rental income on his tax return.
Trust is not registered.
When registering the Trust, on question of the Trust has/will be income/tax liability, is Trust declared as having not received income as income all to LT? Though in a sense it has received income/tax liability albeit straight to LT and declared by him.
Once registered (which I may or may not be instructed to do), would HMRC expect separate tax returns even though he is LT and has been declaring all income as ‘mandated’ to him. Would anything need to be done? Such as writing to HMRC to say income mandated to LT so no Trust tax returns in the past or going forward.
I am possibly over thinking this but thoughts appreciated.
I would suggest registering the Trust as non-taxable and writing to HMRC to inform them that the income passes directly to LT and is declared on his personal tax return. HMRC will usually respond confirming the Trust does not need to file a tax return. I believe this way is a lot easier from an administrative point of view and is acceptable to HMRC.
I would be inclined to write to HMRC now, explaining how the income has been dealt with and asking HMRC to confirm that this practice may continue. Subject to such confirmation, HMRC might also be asked to confirm that the trust may be registered on the basis that it has no income tax liability (as the life tenant is being assessed direct).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I agree that approaching HMRC first is the most expedient step. Certainly past experience shows that HMRC are prepared to accept tax returns from a LT even where the income has not been mandated and thus to rule that the trust itself is not liable to income tax.
This is undoubtedly within their powers under CRCA 2005. But this statute gives HMRC no authority to dispense with a TRS requirement unless the related non-tax law allows it or HMRC bona fide forms the opinion that there is no requirement to register imposed by it on the facts.
Just because HMRC administer both codes does not mean they can mix and match their powers. If the trust is liable to tax it must be registered as a taxable trust and if not as a non-taxable trust. The last person to be entitled (or at least claim) to exercise a dispensing power, though challenged at the time, was King James II and after he fled in 1688, the Bill of Rights abolished the suspending power outright and the dispensing power ‘as it hath been assumed and exercised of late’.
There is no such power for HMRC to register ANY estate under TRS though they think no one will notice or care. An estate may be required to notify chargeability under s7 TMA 1970 (if a “person” not being a trustee includes a PR or PRs as a “body of persons”: Sch 1 IA 1978) and probably HMRC can dispense with that obligation or at least decide not to levy a penalty e.g. if it acquires the prescribed information indirectly and in time. If anyone can show me where “trust” includes estate and “trustees” includes PRs in the TRS Regs I would be grateful.
If HMRC do not have power to enforce compliance they cannot charge a penalty for non-compliance.
Thanks for you replies. It is a strange one given there is clearly a trust as created by the Will (and which was constituted with land title being updated accordingly), that generates income but is not Trust income as mandated out, by action at the very least of the LT, which he is paying tax on.
Usually, a taxable trust would receive an initial self-assessment return on which the trustees would indicate that there is no income received in their hands it having been mandated to the life tenant who will be returning it on their tax return.
As I understand it, HMRC will usually by concession accept this and the trust will not receive a tax return for about 5 years when one would be issued to check the arrangements still stand and there has been no under reporting of chargeable gains.
I agree with Jack Harper that the TRS regulations relate to trustees rather than PRs but complex estates do have to register on the TRS in order to obtain a UTR. I have not investigated the ways and wherefores of this, suffice to say I believe HMRC would say (although they may disagree) that they would have preferred a separate system for complex estates to avoid confusion as the self assessment deadlines and penalties apply to them not the TRS ones. However, there were insufficient resources to create a separate system.
I agree with the comments of others - it is best to write to HMRC and explain the situation and seek ‘clearance’ for how the matter has been handled to date.