Lifetime Trust with Settlor retaining right to income - GWR?

We have been approached by a Tax Planner about assisting with the preparation of some lifetime trusts. The idea being that the Settlor puts assets into a Discretionary Trust (investments or rental property but not family home). The Settlor then receives the income for life but is not entitled to any of the capital.

The advisor is of the strong opinion that the fact they are excluded from the capital benefit of the Trust means that this is not caught by the GWR rules. I am not yet convinced and further reading of the HMRC manuals about GWR has not shown me anything different to what I already believed.

I would be interested to hear other forum members views. Is exclusion from the capital benefit under the trust, but retaining all income sufficient to exclude the value of the Trust from the death estate?

Jessica Williams
The Head Partnership Solicitors THP

I think the Civil Service would best describe this argument as “ambitious”.

By definition, if an individual is receiving the income derived from capital assets, they are enjoying the capital so contravene s.102(1)(b).

See also para 5(1) Sch 20 FA 1986, which states:

…the principal section and the following provisions of this Schedule shall apply as if the property comprised in the gift consisted of the property comprised in the settlement on the material date, except in so far as that property neither is, nor represents, nor is derived from, property originally comprised in the gift.

There may be cases confirming this but I don’t think they are necessary. The alternative is that this Tax Planner has spotted a major hole in the legislation that has been missed for 30 years.

Andrew Goodman
Osborne Clarke

The tax planner is an idiot!

Iain Cameron
Star Legal

As I understand it the view being taken is that subject to careful drafting
the same result i.e. no GWR can be obtained as that obtained with an
investment in an insurance bond discounted gift [ carve out ] trust.

Furthermore by using let property this does not result in a a Pre Owned
Asset income tax charge [POAT]

Andrew M Mortimer

1 Like

Looking at a typical Discounted Gift Trust document, it seems the Settlor retains the right to regular payments of capital rather than the right to income. The Settlor is also giving away the right to receive the remaining capital. At the time of establishing the DGT, the loss to the donor’s estate is the amount of the investment less the actuarial value of the right to receive future payments of capital retained by the Settlor.

By retaining the right to income, is not the Settlor retaining an interest in the whole of the capital, thereby invoking the GWR provisions AND making a chargeable lifetime transfer?

Graeme Lindop
Coles Miller Solicitors LLP

My understanding, rather like that of Andrew Mortimer, is that this is considered to be a viable tax planning scheme which is not a GWR because the donor is giving away the capital and retaining the right to the income, regarding those interests as two separate things. There are problems with POAT, and there may be problems with land under some of the anti-avoidance legislation, although I have never seen these problems discussed in detail. I recall, from a STEP conference I believe, that the best arrangement was likely to be a settlement of cash which is then used to buy rental property, although the transfer of an existing rental property into such a trust might also work. CGT might be a problem.

Having said all of the above, I have never done it and have therefore never had cause to research the scheme in any detail. Also, in this age of heightened aversion to tax avoidance it may be considered more risky now than before, but I don’t think you can dismiss the idea altogether.

Diana Smart
Gordons LLP

This matter is lucidly, very expertly and fully explained by reading two recommended texts:
(a) Trust Taxation and Estate Planning, Chamberlain & Whitehouse, 4th Edition at Para 39.31;
(b) McCutcheon on IHT, 6th Edition at Para 7-41;
I am not persuaded by the arguments in (b) but am by those in (a). With terrible brevity: do not do this by becoming an income-only beneficiary of a Discretionary Trust. Only consider it by carving out an income-interest before settlement of the capital source.
The case law against the first route goes back to the 19th Century.
Nigel Hollinshead