Lifetime Discretion Trust condundrum

I have been instructed by a client who set up a lifetime discretionary trust with a will writing company in 2019. She was under the impression that her house was transferred into the trust, and this is certainly what is mentioned in the schedule regarding the trust property. Upon further investigation with the Land Registry, we have discovered that her house is held under a separate title to her garden, and it is only the garden of the property which was formally registered into the name of the Trustees. My client wants to wind up the trust and appoint the property back out to herself. My question is, although it is clear that the house has not been formally transferred into the name of the Trustees, can it be assumed that the garden has? This is certainly the position at the Land Registry, but in so far as preparing the correct trust documentation is concerned, the Lifetime Discretion Trust document only refers to the property address, and not specifically the garden.

I suspect there cannot be any clear answer - and if anything the arguments would favour it being settled) so, absent any IHT saving, it is probably safest/easiest to assume it was transferred in and pass a one line resolution advancing it back out (or whatever formalities are required).

I assume the client was not also a trustee, in which case the house itself may be considered to have been settled, even absent a transfer.

Andrew Goodman
Osborne Clarke LLP

If the trust was validly established, and the description of the settled property may be sufficient to that end, then the equitable interest in the house would have vested in the trustees and they would be both entitled and obliged to require the settlor to perfect their legal title by a “conveyance” if she had it or could compel its transfer. Apparently the garden has gone over presumably by a TR1. If this is the correct analysis of events the Trustees would have to exercise an available power of appointment. This is the safest course since if this analysis is wrong and the house was not settled the appointment out of it is just misconceived and of no legal effect. This is acting de bene esse in Uncle Gavin language.

The distinction matters for tax purposes. A legally effective appointment out is an RPT chargeable event subject to the 3 year rule and this may be positively helpful for CGT hold-over, subject to the CGT position on the way in. As to that what has been done, or what would now have to happen, concerning the CLT in and any chargeable gain? It may be that the argument that the house was not validly settled if properly arguable would be best for tax.

Although the rights of other discretionary beneficiaries (I am assuming she is one herself!) are flimsy their right to challenge the adopted view at least needs evaluation.

There seem to have been some strange goings on in 2019 which might be actionable if the targets have the wherewithal. I wonder too whether the provisions of Part 3 Legal Services Act (reserved activities) were observed.

Jack Harper

Thank you for your reply Andrew. The client was a Trustee, and also a life tenant of the trust.

Thank you for your reply Jack. The Settlor is also a Trustee and she has a life interest in the property and has continued to occupy it since the existence of the trust. My understanding is that the PPR would apply upon any transfer back out of the property by the Trustees (assuming that it was validly transferred in the first place).

I have written to the company concerned to try and unravel what has gone on but I don’t hold out much hope of received a useful response.

There cannot be both hold over relief under s260 on the way in and PPR on the way out because of s226A TCGA. PPR can apply on both legs or hold over on both or PPR in and hold over out. PPR is not optional and hold over can only apply to the part of the gain, if any, arising on the disposal which is chargeable.

So if full PPR was due on the way in then s226A would not be in point later. And then PPR would apply on the way out, if due in full on the facts, or hold over relief for any part of the gain that was not relieved (provided the later CGT disposal was also an RPT chargeable event). If it was not, and the chargeable part related to business use of the residence, hold over relief under s169J could apply. s260 would apply to an outright distribution from an RPT unless the 3 month rule negated it as an IHT chargeable event.

I appreciate your considerable disadvantage concerning the true facts, on this aspect and generally. It may only prove possible to reach a reasonably tenable and thus properly arguable version of these, with appropriate additional or confirmatory documents, and then work out the tax consequences that must follow, including any reporting formalities and claims. The tax analysis may influence (-ish) the chosen version as long as it does not distort or undermine its rationale.

HMRC are unlikely to help with its formulation; the way they sit po-faced on the fence when rectification is a possible outcome is highly indicative. It is wise not to overegg the chosen version as pursuing it only to have it ultimately overturned may add to costs and unexpected surprises if HMRC’s differing version ultimately prevails. This can be exacerbated if bona fide but inaccurate reporting is nullified a substantial time later. It might be prudent to contrive some contemporary full disclosure beyond what is demanded by the logic of the version. While that will not stop any tax strictly due, or finesse the discovery rules, it could engage the Interest Review Unit if HMRC have to admit reluctantly (as always) that the delay is down to their tardy challenge (DMB 405030).

As the settlor was also a trustee I’m pretty sure the equitable interest in the entire property will have transferred to the trust (any trust work should have the relevant cases/principles) so the decision to wind up the trust (by advance/appointment) and tax returns should include the entire property.

Andrew Goodman
Osborne Clarke LLP

I share Andrew’s confidence about this vital issue of principle but a little less about the likely practicalities and their resolution.

Snell deals with it in Chapter 24 of my 32nd edition entitled “Trusts arising to enforce an informally expressed intention”.

1 Where the title of the donee is complete in equity the donor holds the retained legal title on a constructive trust for the donee
2 This trust gives effect to the donee’s equitable right to require the donor to fulfil the remaining steps to complete the transfer of the legal title
3 Cited as authority is Pennington v Waine [2002] EWCA Civ 227, although this concerned shares. The ratio of its being too unconscionable for the donor to resile does not seem limited to shares. A share transfer form was signed but not delivered to the company or the transferee rather than never having been created at all but surely unconscionability must prevail also in that circumstance.

A Settlor even of land must not be allowed to derogate from her own grant and must be obliged to provide further assurance by a transfer in appropriate mode if the correct analysis of events was to vest the equitable interest unequivocally on trusts she created. That is the critical evidential question here. Although the Settlor may not resist, HMRC and perhaps other trustees or beneficiaries may need to be convinced positively and must presumed to do so.

Nevertheless the principle has to be applied anew to every particular set of facts and the evidence and the correct conclusions to be drawn may not always be straightforward.

Jack Harper