Settlor for IHT, CGT and IT on resettlement

Trustees of a pre-2006 life interest trust are considering advancing funds (with consent of the life tenant) to a new disabled person trust for the benefit of the remainder beneficiary. I expect this will be considered a resettlement even if the same trustees act.

In this circumstance, am I correct that:

  • The original settlor is the settlor of the new trust for CGT purposes under s.68B(3)(a) TCGA
  • The life tenant is the settlor for IHT purposes under s.49 & 51 IHTA 1984
  • The original settlor is the settlor of the new trust for Income Tax purposes under s.471 ITA 2007

Some of the commentary suggests that, where the life tenant is involved in the resettlement (by giving consent?), any income received by the new trust during the life tenant’s lifetime must be considered to have been settled by the life tenant.

Tobias Gleed-Owen
Hewitsons LLP

Assuming resettlement occurs I would agree that the settlor of the new trust for income tax (ITA 2007 s.471) and capital gains tax (TCGA 1992 s.68B) purposes is the original settlor.

However, I am less convinced that for IHT purposes the settlor is the consentor (ie the life tenant) although I must confess to some uncertainty. IHTA 1984 s.43 provides that “settlement” means “… any disposition … of property” and IHTA 1984 s.44 provides that “settlor” includes “… any person by whom the settlement is made…”.

IHTA 1984 s.272 defines “property” as excluding a “settlement power” as defined in IHTA 1984 s.47A.

Can it not therefore be argued that as a settlement power is not “property” then the consentor cannot be the settlor?

It does, however, seem clear that the consentor is a settlor for income tax purposes for ITTOIA 2005 Part 5 Ch 5; s.624.

Malcolm Finney

Thank you Malcolm. I too am uncertain regarding the IHT settlor - the life tenant is not really ‘making’ the settlement in the ordinary sense of the word.

However, s.44 goes on to state that “settlor … includes any person who has provided funds directly or indirectly for the purpose of or in connection with the settlement”. The assets are passing from the (deemed) beneficial ownership of the life tenant to the settlement by a transfer of value so, for IHT purposes, I would have thought the life tenant must be considered to be providing the funds?

Tobias Gleed-Owen
Hewitsons LLP

The transfer is effected pursuant to an appointment by the trustees, not the consentor, albeit with the consent of the consentor. Does this, however, mean that the provision of funds to the transferee trust have been provided. by the consentor?

Under IHTA 1984 s44, as you indicate, the. answer would seem to be “yes” but only by dint of treating the life tenant as possessing beneficial ownership of the funds (IHTA 1984 s49) which in reality is, of course, not true.

Unfortunately, Tobias, I fear my inadequate academic talents (such as they are!) leave me undecided and I look forward to a definitive opinion being posted by those far more knowledgeable than me.

Malcolm Finney

For income tax purposes, I am also mindful that the footnote of 1.24 of Whitehouse & Chamberlain’s Trust Taxation and Estate Planning 4th ed states that:
“when the life tenant consents to the exercise of a power of advancement that ends his life interest, it arguably makes him the settlor of the income for income tax purposes”
And goes on to say at 9.83 that “It is not clear whether the holder of a life interest who consents to termination of that interest becomes a settlor”

The cited case is D’Abreu v IRC (1978) STC 538 but that case appears to concern a deed of release and assignment of a contingent reversionary life interest coupled with exercise of a power of appointment - not a typical consent to advancement under s.32 TA 1925.

Tobias Gleed-Owen
Hewitsons LLP

As per my earlier post I tend to the view that the consent of the life interest (which is a decision of the life tenant) would cause the consentor being treated as settlor under the very broad definition contained in ITTOIA 2005 s620.

I have attempted in the past to find some authority but failed; I had come across D’Abreu before.


Malcolm Finney

The problem with pronouncements about what is, or is not, arguable is that you don’t know where you stand. In a case like the one you have proposed I have previously arranged for the life tenant to release (to the trustees) the requirement that they obtain his consent to any exercise of their powers of advancement. After a decent interval of time and a period of reflection the trustees then made the advancement on slightly different terms to what was originally proposed. In those circumstances I would struggle to see how the life tenant could be treated as the settlor.

For IHT, the life tenant is deemed to make a transfer of value, but the settlor remains the original settlor.

Paul Davies
Clarke Willmott LLP