Deceased’s will provided for his 4 children to be beneficiaries.
1 to receive 10% absolutely
1 to receive 30% absolutely
the other two to receive 30% each but held in a discretionary trust for their benefit.
(of these two 1 is an adult who has no capacity and is special needs and the other is adult with capacity but the testator thought she might need a degree of protection from predators)
The two executors are also the trustees of this express trust, full details of their powers are contained in the will so there is no separately drafted trust deed.
The lead trustee is about to register the will trust with HMRCs Trust Registration Service.
My question relates to the disclosure of the trust assets during the registration process.
To date the entirety of the Estate Assets (total 400k cash and a tenanted property valued at 150k which is to be kept as and investment) sit in the executor bank account as estate property and no cash or share in the property has been appointed to the Trust’s bank account as the administration period is still underway and no distributions have been made.
The Trust registration process requires a statement of the assets in the trust at the date of registration.
As no assets have been appointed to trust should that value be 0 or should it be implied that the trust beneficiary’s share of 60% of the estate’s asset value should be declared as a putative trust asset ?
Sorry for the long winded question but there is not much guidance in HMRCs Trust Registration Manual.
You have not mentioned if Probate has been obtained, which would be required prior to dealing with the Trust.
The value of the estate is all assets owned by the deceased, possibly with the addition of any gifts that exceed the gifting allowances in the last 7 years.
Do the Executors understand their legal duties as well as their duties as Trustees of the Trust. If in doubt, then do seek professional advice.
Thank you.
Yes Probate has been obtained.
The question was in relation to the requirement to register the trust and the value of the assets to be included.
HMRC are using the TRS as a means of notifying the existence of what they call “complex” estates. This is not authorised by the TRS regulations but no one, least of all HMRC, seems to be worried that this may be outside their lawful powers. The line of least resistance is to comply. But note that this action does not supersede the need to comply also with s7 TMA or precluding it by filing an estate tax return. Their views are set out in TRSM27000-3.
During the administration period there is no trust subsisting so none needs to be registered separately. HMRC acknowledge that legal analysis as correct but do not fully reflect it by their practice. It is a requirement to estimate the asset value when registering a taxable trust but that is for later.
A crunch point may arise 2 years after death or when the admin period ends as regards the trust assets if earlier. It is then that a trust declared by the Will may need to be registered. HMRC seem to regard that as necessary for a non-taxable trust at the 2 year point even if the admin period has not then ended as regards the trust assets, which is wrong in law and inconsistent with their view in e.g. TSEM6035 and 6045. Estates and trusts are even dealt with by separate departments within HMRC. Again compliance is the expedient route. But that is not how taxable trusts are to be dealt with. They must be notified via TRS by a deadline linked to the date a tax liability arises TRSM40030. They need a separate UTR and not that previously given to the estate: TRSM27030.
So if as it seems the admin period is still on foot there is no need to register the estate unless it falls within one of the 3 bullet points in TRSM27010. But if the estate has a liability to tax it must even so comply with s7 or make a return. What happens in the future will depend on how and when the estate is administered. The absolute interests may be discharged by cash payments and no trust, not even a bare trust, may ever arise (HMRC appear to accept that routine use by the Will of the words “on trust” may not actually create a trust! TSEM6035). The discretionary trust will be registrable as taxable or non-taxable at the latest 2 years after death (per HMRC).
The summary of the Will’s provisions is not clear about how the assets will be appropriated if the investment property is to be retained long term. If £550k is the net estate 60% is £330k so that asset could be put into the DT plus part of the cash. Self-evidently if the trust becomes registrable because of a tax liability on the rent under TRS before assets have even been appropriated to it the value of its assets can only be estimated. Appropriation would terminate the admin period as to the relevant assets. This is why the regulations and HMRC’s interpretation is so ludicrous. They should accept that no trust can become registrable until it exists and that this is only triggered by the end of the admin period, regardless of how long after death that occurs. If you follow their view and are forced to register as a taxable trust prior to any appropriation of assets to it (I can’t believe I’m writing this) you will have to guess at the asset value. In the realm of make believe the one sane person is king. You will be registering a trust with no assets that does not exist. A fake trust. Simples!
Jack Harper
Technically I believe a trust exists even if no appropriation has been made. The trust has a chosen in action, and it is perfectly possible for the trustees to appoint that without an appropriation.
Simon Northcott
A trust without a trust fund is incompletely constituted. Its existence, if it exists at all, is inchoate. Would you register it if it was never completely constituted? What exactly is the chose in action? The beneficiaries of the Will have a chose in action but that is not what is to be settled on trust. Sorry, in my view a trust which is incompletely constituted is for the time being a nothing.
Jack Harper
The asset in the trust fund is the right of the trust to receive 60% of the estate, which clearly has a value.
Also, if the Trust is a nothing, how can the trustees exercise their power if appointment?
Simon Northcott
A trust without a trust fund fails one of the three certainties. It has no trust fund until the admin period ends and an appropriation is made, and land requires a consent if re King’s Will Trust is good law. This is Equity entry level.
Jack Harper
If the trust fund were a specific asset e.g. the property it may now be apparent that it will not be needed for administration and could be assented. If the trust fund is 60% of residue and residue has now been ascertained then arguably it may now have been completely constituted. But these are fact-specific issues which I have no knowledge of. My point in general is that it is entirely possible for these matters not to have been resolved in an estate yet apparently HMRC expect the will trust in question to be registered while it has not commenced. TSEM6035 “The trust will commence when assets are transferred to the trustees or when the administration has been completed, whichever event happens first.” I fully agree and query why this view is not implemented for TRS.
Jack Harper
We must agree to disagree.
Simon Northcott
With a taxable trust it would seem that for income tax and CGT a liability arises either within the admin period or after it has ended. So only in the latter case is TRS activated. But in theory other taxes in TRSM25030 could be triggered in the former case and HMRC have turned a blind eye to that possibility, even I think in their design of the online registration system.
With a non-taxable trust HMRC’s view is that the exclusion in para 7 Sch 3A of the regulations does not apply after 2 years from death apparently even if the residue comprising the prospective trust fund is still not ascertained and the admin period is thus still on foot. In my view this is both wrong in law and totally contradictory to TSEM6035.
Jack Harper
Thanks Jack,
I’ve read and reread the comments made by yourself and Simon.
To add a bit of flesh to the predicament in which the executors of the will I am looking at.
The testator died Sept 2018 so a much longer than normal administration period, largely resulting from the testator being a beneficiary of his late mothers will, which was finally concluded late 2021. Allowing a set of estate accounts to be prepared.
So the executors/trustees are well over any time limits for registering trusts under TRS.
The estate is well below the requirement to register under TRSM27030 and has not been registered
The two executors are also the trustees and he will is drafted so as to place all of the real and personal property of the testator into the hands of trustees and after the usual expenses the residue is the dealt with as I set out
1 to receive 10% absolutely
1 to receive 30% absolutely
the other two to receive 30% each but held in a discretionary trust for their benefit.
(of these two 1 is an adult who has no capacity and is special needs and the other is adult with capacity but the testator thought she might need a degree of protection from predators)
The discussion has now led me to think that there will be 2 Trusts to registered.
- To deal with the administration of the entire estate
- to deal with the DT created under the will (which currently has no assets as no distribution has been made)
Despite the reservations expressed in the discussion trail, I think the most expedient thing to do in order not to attract further penalties from HMRC for late registration would be to register the estate trust naming all 4 beneficiaries, and then register the DT as and when assets are appointed to that trust, this would allow a partial distribution to made within the administration period?
So my final questions are, - Should the Trust of the whole estate created on death be registered and treated as having come into existance at the date of death or grant of probate?
- is it reasonable to delay the registration of the DT until it receives any assets
Sorry to have opened a can of worms!
Graham, there is only one trust that is a candidate for registration on TRS and that is the discretionary trust. Estates are not registrable as such and HMRC only require them to be registered if “complex”. TRS20370: “The complex estate registration is for administration period tax purposes only, and is separate from registration under TRS, which requires registration as a trust rather than an estate, even if the trust covers or relates to the period of administration of the estate”.
The questions then are is the DT registrable as a taxable or non-taxable trust and if so what is the deadline. An added complication of that is that a trust registrable in one category may become registrable in the other, at least going from non-taxable to taxable, though the Regs are opaque on this point.
During the admin period (AP) no trust subsists but the AP applies in relation to particular assets. It ends when residue has been ascertained. As regards pure personalty, this is a question of fact. But with land an assent is required in writing. It seems likely that the AP has ended as regards the cash but not the property.
If you accept HMRC’s interpretation the DT became registrable as a non-taxable trust after the expiry of 2 years following the death because it then ceased to be an excluded trust and became registrable within 90 days of that or if later 1 September 2022. HMRC’s failure to recognise for TRS that a trust has no existence in law until the AP has ended (as to the assets destined to comprise the trust fund) is not mirrored in tax legislation. You say it “currently has no assets”. HMRC apparently thinks that does not matter. I do but Simon Northcott disagrees. The best course is surely to register and if a penalty is canvassed to use my argument as a defence; that a trust with no assets is not registrable in principle because it is not an express trust within the Regs being incompletely constituted and so pro tem unenforceable.
The DT is registrable as a taxable trust if it has an income tax liability and the deadline is 31 January (or 5 October in some cases) following the end of the tax year in which the trust had a liability to UK taxation. So there is a specific interface with tax law. The DT may or may not yet have become entitled to taxable income. Presumably the estate assets have already generated taxable income. On the face of it the DT will be entitled to 60% of that. No liability will have arisen under s655 ITTOIA 2005 if no income has been paid to the trust. When it is paid it will be taxable under s483 ITA 2007 and s479 ITA at the trust rate. It seems likely that the trust will not be re-registrable as taxable for a while until it receives income (unless another relevant tax liability is incurred). A trust with no income is not liable to income tax; even HMRC are likely to agree.
Who is entitled to the income taxable on the executors at basic rate matters for higher/additional/trust rates but clearly also affects TRS so far as a trust is entitled to it. That entitlement can be affected by what use is made of the executors’ power of appropriation. If residuary beneficiaries are entitled to percentage shares of residue their incipient entitlement is to that percentage of each and every asset comprised in it and of the income therefrom net of expenses. On the face of it 60% the total net income is due to the DT when the AP ends which may have happened with the cash but perhaps not with the rented property if no assent has been made.
The power may be used to treat income and capital differently though consent of beneficiaries may be required for that and in principle to any exercise of it. It is a moot point whether an appropriation can alter who is liable to tax above basic rate on income already accrued but as a residuary beneficiary has no entitlement to any particular asset arguably it can on the basis that there is no entitlement to income ahead of appropriation either of it or the underlying asset. There is a valuable note on appropriations at https://www.step.org/system/files/media/files/2020-03/Briefing_note_Appropriations_E&W.pdf co-authored by Paul Saunders who is a regular contributor here.
Jack Harper
Thank you very much for this comprehensive response Jack
I agree that the most expedient course is to register the trust now and see what HMRC say, if anything.
I cannot be the only person faced with this this dilemma.
It would be interesting to hear from any other members who have had interaction with HMRC following the registration of a DT created by a will.
Graham
My best guess is that if registration is not bothered with, ( and for what it’s worth I agree with Mr Harper),I do not believe that HMRC/TRS would levy a fine until the trust does truly come into existence and if then it were not to be registered they’d levy their fine. Leastways the level of fine for non registration is a small fraction as to the level of find that the French ‘tax man’ will charge for non registration and as the French have not implemented The Hague ruling it is seriously weird that they can charge for the registration of a Trust ( I have a UK client now living in France with an IOM Trust ) when apparently they do not recognise such an ‘entity’, perhaps in the belief that it is some perfidious anglo Saxon device to do them down !