Lifetime Discretionary Settlement with Settlor continuing to reside

S creates a lifetime discretionary settlement in November 1998 and transfers her residence into it.

S is within the class of discretionary beneficiaries (“the Discretionary Class”) as are children, grandchildren etc.

S is not a trustee.

S continues to reside in the property as if it were her home, but the Trustees made no written agreement in that regard or any sort of agreement, memorandum of trustee minutes, ever.

The main appointment of capital and income clause is follows:
“The Trustees shall hold the capital and income of the trust … in favour of or for the benefit of the members of the Discretionary Class or any one or more of them as the Trustees shall in their absolute discretion at any time or times before the Closing Date (but during the lifetime of the Settlor only with the Settlor’s consent in writing) by any deed or deeds revocable or irrevocable appoint”

The ‘Closing Date’ is the 80 year perpetuity period.

S is to enter residential care imminently.

You will not be surprised that the trust has not been reported to HMRC and no 10 yearly returns have been submitted or 10 yearly charges paid. The value of the property was likely in excess of £325k in 2008 and was definitely over £325k in 2018.


  • Can it be argued that the actions of the trustees (in letting S reside in the property without hindrance) and the terms of the clause set out above requiring the Settlor’s written consent in making appointments, have in fact created an interest in possession or right of residence for her (despite no Deed being executed)?
  • If not, presumably the trustees now need to go cap in hand to the Revenue and report on the Ten Yearly charges and pay any Tax and penalties
  • Clearly the trustees have not executed their duties properly (I will set that aside for now)
  • There is also the question of a potential capital gains tax charge when the property is eventually sold
  • On the plus side, if the property is outside S’s estate then this could prove beneficial with her impending care, unless the LA consider the trust a sham.

Apologies for the long post. Look forward to hearing your thoughts.

Adam Scott
Consultant Solicitor
Humphries Kirk LLP

This trust must have been made for non tax reasons, perhaps to protect the home from claims? There is a clear reservation of benefit so there is no IHT saving.

I would not expect HMRC to demur if the view is taken that S had an interest in possession from the outset. It is after all what they say in SP10/79, although most of us do not usually agree with that statement so readily!

Also the main residence exemption should be available. HMRC seem to take a fairly relaxed approach to claims for the exemption by trustees, as set out at CG65407.

There is no question of sham if the title was duly transferred to the trustees.

Malcolm Gunn

M B Gunn & Co Ltd

Dear Malcolm,

Thanks for your response.

As there is a clear reservation of benefit here, presumably POAT is not an issue, but should the Revenue be approached to confirm that that is indeed the case?

Adam Scott
Consultant Solicitor
Humphries Kirk LLP

Correct - POAT does not arise in respect of property subject to a reservation of benefit. I do not see any need to clear the position with HMRC, especially as regards POAT which is usually way out of their comfort zone. You might not even get a reply, I did not when I wrote once and that was to declare a POAT liability. The Eversden case and subsequently the case of Lyon’s PRs v HMRC SpC 616 indicate that the settlor who is in the class of beneficiaries has reserved a benefit in the trust and there is no carve out.

In fact the view which I suggest you take is that there was an interest in possession from the outset, so there is no reservation of benefit because the property remains in the settlor’s estate. Reservation of benefit applies only to the extent that settled property is not already in the estate. By the same token POAT does not then apply because of FA 2004 Sched 15 para 11(1) - exemption where the relevant property is in the estate of the person who disposed of it.

There is nothing for HMRC Inheritance Tax to argue about here. Either way the property is in the estate. If the interest in possession is regarded as ending, then FA 1986 s102ZA starts a reservation of benefit at that time.

Malcolm Gunn
M B Gunn & Co Ltd