A Will has a NRB Discretionary Trust with Residue on Flexible Life Interest Trusts, with STEP second edition incorporated.
The Discretionary Trust has received say £1m from a post death sale of the business (full BPR). The LIT has two properties worth say £2m. The trustees of both trusts are the same individuals. Can the NRB Trust lend to the Residue Trust?
One view I have come across is that the trustees cannot lend to themselves, as it is effectively trustees lending to themselves (Peter and Paul lending to Peter and Paul).
The other view is that they can, as they are acting in different capacities? It has been suggested that if the trustees are changed for both trusts, and the terms are commercial the arrangement is possible, but the trustees want to give a simple interest free loan as they see this as being for the benefit of the spouse (the life tenant).
Many years ago I had counsel’s advice that you cannot have the same parties on both sides of the transaction - it can be a nullity at law. However, Peter and Paul (in one capacity) could lend to Peter as a nominee for P+P (in another capacity). Ideally you would add another trustee to one trust but I think the nominee position also works.
The explanation is that trustees who are individuals do not have separate legal personality. This is most acute in practice whenever they enter into a contract with a third party: they incur personal liability and need to bargain, if they can, for a limitation of some kind e.g. to the value of the trust fund or even non-recourse. Arm’s length counterparties of course may well not agree to that; such lenders will invariably expect suitable security, most likely over specific trust assets.
Needless to say trustees should ensure they have the requisite powers and exercise them properly so that they can be indemnified out of the trust funds and should carefully calculate whether these are likely to prove adequate for that purpose.
The additional trustee,
for one of the trusts, is a workable idea if the candidate is OK with the burden of office but the nominee plan raises serious doubts to my mind. What is his or her personal exposure on the contract?
This is not akin to the traditional device of granting a lease to a nominee for the grantor: the exposure of the nominee is limited (and will seek an indemnity if independent) though the grantor is at risk if the nominee misbehaves with the legal term of years (if he can find Equity’s darling) and the lease terms can minimise this with assignment restrictions. A contracting nominee may be held personally liable on the contract and a judge may not be prepared to disregard the underlying reality in deciding whether the ruse secures the fiendish purpose the use of a nominee was intended to serve.
If the numbers stack up an SPV with separate legal personality may be viable, to enter into a back to back loan. A company is the obvious choice and where limited liability is not required or acceptable an unlimited company might suit, especially given its privacy and regulatory advantages. This puts its trustee shareholders in a position as regards their personal exposure which is identical to their lending directly.
A shelf limited company may or may not be cheaper in the long run. An LLP or Scots law partnership are rather exotic and the latter will involve unfamiliar governing law if there is no existing connection with the jurisdiction (the bonny land of fiars, liferenters, missives, and warrandices—though also of The Macallan 25 year old).
I follow the logic, (albeit I am still not convinced why the different capacities are not recognised.) On this note, if assets (say a property) held in the Residue Trust were sold to the Discretionary Trust, does the same principle apply… namely that the transaction is effectivley void/voidable as the same trustees are selling to the same trustees, or could it be argued that as there is an actual shift of assets, payment of SDLT and potentially CGT, and income being received in different proportions, then this has sufficient ‘real world’ element to it for HMRC to accept the position?
I hope this makes sense, and it would not surprise me if the answer I am given is a repetition of what has already been said, namely change the parties, problem solved. I am just looking at it from a simplicity point of view, and trying to save paperwork for the sake of paperwork.
Ignore tax. The fiscal approach is generally to confer fictional personality on a trust comprised of or including individuals. Such a fiscal creation can deal with another such even though at the relevant time the actual individual trustees are identical. SDLT does not do that precisely.
It is also a problem only with a sale but not with a gratuitous exercise of a trustees’ power: if trustees are empowered to transfer trust property to another trust there is no need for the trustees of the recipient trust to play any part. A sale requires a seller and buyer and they cannot be the same person.
If identical trustees of two
distinct trusts exchange assets, assuming each has the requisite power, it is not strictly a sale, even if one asset is cash. This may be a matter of semantics, the archetypal distinction without a difference, but whether it has any substantive consequences will depend on the precise legal purpose which calls for analysis.
Tax legislation will invariably specifically equate in substance an exchange of assets with a sale, or perhaps 2 sales, but the chargeable event will not usually be defined as a sale anyway but rather as a disposition, disposal or transfer, with or without further clarification.
So SDLT moved away from stamp duty, which required a document to be “a conveyance or transfer upon sale”, to an “acquisition”, with clarification, in s.43 FA2003 (land transactions) and to cover any gap made an exchange 2 such acquisitions in s.47.
Schedule 16 deals with trusts and in effect makes trustees of a non-bare trust the “purchaser” in relation to an “acquisition”: para 4. Every purchaser must have a corresponding “vendor”: s.43(4). The law is less explicit than one would like perhaps but I suggest that the structure of the tax does not permit trustee purchasers to avoid liability on an acquisition just because the vendors are the same persons as trustees of another trust or indeed the same individuals acting as joint beneficial owners. The identity of the vendor rarely matters and when it does it does not seem to have created problems concerning trustee vendors. Note that paras 7 and 8 of Sch 16 clarify the treatment of some operations unique to trusts.