Saunders v Vautier for Protective Trust

Trusts Discussion
1

I am dealing with a statutory protective trust. Subject to the protective life interest for A, the capital will pass to the life tenant’s son B absolutely (without any contingency that he survive the life tenant). A is widowed, has no other children, and there are no remoter descendants.

The two beneficiaries are now considering whether they may wind up the trust and partition the capital under the rule in Saunders v Vautier. As it is a protective trust, any potential beneficiaries who would become objects of trustee discretion if the provisions of s.33 TA 1925 were to be triggered would also need to be considered to ensure they are all identifiable, sui juris and consenting.

Under s.33, if the life tenant triggered the protective provisions, the following persons would become objects of the trust: “A and his or her spouse or civil partner, if any, and his or her children or more remote issue”. Having read Lewin 6-088 re the rule in Andrews v Partington, my understanding is that the class of ‘A’s children or remoter issue’ would close immediately upon creation of the trust since B is in existence, and no children born later can be included. This would mean that A and B would be the only objects of the trust. However, I am I left with two sticking points:

  • I presume the date of ‘creation of the trust’ for determining the class-closing would be the date when A triggers the protective provisions of s.33, not the original commencement date of the trust. Since this has not yet happened (and may never happen), it cannot be said definitively that B would be the only child of A’s at that time.

  • Theoretically A could marry in the future, thus including an unidentifiable future spouse as a object of the discretions of s.33.

Of course, A is well beyond child-bearing years and unlikely to remarry but I believe that is irrelevant. Am I right to conclude that Saunders v Vautier will not be possible?

We would of course recommend that the parties take opinion from counsel before actually proceeding but I would be grateful for members’ views as I suspect this is a no-goer.

2

I agree that the rule in Saunders v. Vautier will not assist in these circumstances.

Despite B having a vested interest in remainder from the outset, my understanding is that the objects defined in s.33(1)(ii)(a) are those in existence from time to time, so that any future wife or civil partner of A, and all issue of a are within the trustees’ discretion. The likelihood, or not, of A entering into another legal relationship is irrelevant in these circumstances.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

s.32 TA still applies, so this is one way the trust could be terminated, if it was all advanced to B with A’s consent. Otherwise apply to court to lift the protective trust element-not normally that expensive using Chancery counsel. However, CGT may be the determining factor.

4

Agree with Paul. But I think S v V may not be the only way round. James Kessler QC suggests that a life interest trust with overriding powers is better where you want to set up a trust as opposed to being stuck with it as you are. These can be used to terminate the IIP and appoint the capital elsewhere, or resettle it, flexibly without limitation to a s33(1) “forfeiture” event.

The tax advantages of a new lifetime s33 trust are zero and even a pre-March 2006 IIP job is going to cause a chargeable transfer on termination of the deemed IIP unless you have or can first appoint absolute reversionary interests to individuals. S33 only applies to the income so the trust must contain existing reversionary provisions about capital.

If there is not an express power there will be the statutory power under s32 to make an “advance”. S33 (1) exempts the use of either power to make an advance from triggering a forfeiture event. It is hard to see how it could be otherwise as S33 does not actually prevent a lawful appointment out or seek to affect the subseqent income of the funds so appointed. Even if it is not an “advance” (to a life tenant?) it could surely only bite on the income of funds remaining settled.

The latter requires the appointee to be entitled to the capital (so will surely exclude the life tenant) but exercising it in full in favour of individuals before any forfeiture occurs will allow the termination of the IIP to be a PET. Likewise any express power but that may apparently include an appointment to the life tenant, if the power allows, exempt from IHT. The life tenant could then make a PET.

Here B is already the sole remainderman. Even in the absence of an express power s32 (current version) could be used exhaustively in his favour. An express power might even be used to partly benefit both A and B, with exemption for A’s share and a PET for B’s. This only works with a pre-March 2006 acquired IIP. We are not told whether this is the case or not.

With other later lifetime-acquired IIPs termination alone will not but appointment out, even to the life tenant, will trigger an RPT chargeable event, but at a maximum of 6% and may be at a much lower rate. Depending on the age, health, assets, and personal future spending requirements of A this may be a better tax outcome overall than a PET by A (and an addition to his free estate in the process may be unwise). It may even be better to deliberately prevent a PET and attract an RPT charge where the IIP is pre-2006 by appointing to B B’s or others on trust so that there is no post-termination “gift to an individual” under s3A(2) IHTA.

S32 requires the life tenant’s consent though express powers may not and overriding powers will invariably not. Given the apparent views of A and B that seems no problem here. Any termination of a life interest, PET or not, needs IHT advice for the life tenant but especially as to a PET which may shift the tax bill from the trust fund to the free estate in the event of his/her death within 7 years since the cumulation does not taper. The beneficiaries of the free estate and those of the trust may be quite different e.g. children of the life tenant from different marriages.

I think s33 can be avoided by a trustee appointment

Jack Harper

5

Thanks all for your responses, which confirm my thinking. Yes I had considered s.32 but in our case the beneficiaries were keen on a partition rather than appointing all the to remainderman which is why I was considering S v V.

Jack - in our case the trust already exists (without overriding powers) so I’m afraid that is a non-starter. I quite agree that when creating new trusts a flexible life interest trust is almost always more appropriate than a s.33 protective trust. I also agree IHT advice would be needed (but I think that is relatively straightforward compared to analysing the availability of S v V in tricky cases!)

6

I did comment on your specific trust and mentioned the possibility of an “advance” avoiding the operation of s33. This could be in effect a partition if you have the power to advance to both A and B in desired proportions. I am certain that s32 would apply to B but I suspect an express power would be needed for A because, arguably, he would not be a “person entitled to the capital of the trust property or share thereof”.

The s33 exemption for an “advance” expressly contemplates the use of either a statutory or express power and should cover a latter type that can benefit the life tenant, unless general trust law is to the contrary as not defined in the Act. You seem to have no relevant express power.

You might consider a s32 advance to B. Then a purchase by B of A’s interest for an agreed value. This triggers s33 but a further s32 advance to B of all remaining trust property would not do so, leaving the protective trust empty.

IHT analysis is charge under s52 on amount of first advance to B but none on the sale of interest, under s88. Then s52 charge on the second advance. 2 PETS by A for an “old” trust (or 2 RPT charges if a “new” trust). The interest sold by A must have a low market value given s33 and so B paying a substantial price will be a transfer of value, and a PET, subject possibly to s10. If a straightforward partition were possible A would make the same PET so can B cope with his?

As 100% could be advanced to B but none to A there may be fraud on the power just because of the purchase (and a view would have to be taken as it would void the exercises of it, so HMRC could properly take the point). I have not considered CGT or SDLT. Nor of course not the actual trust deed.

As you intend instructing the Learned One…

This leaves me fully paragraphed so I hope it will not emerge as a solid block of text.

Jack Harper

7

On second thoughts I suspect that the automatic effect of s33 is to allow B to purchase only an expectancy of obtaining any income which A actually gets and I should think that rules out s10.

Jack Harper