Settlor Interested Trust?

We are acting for some married clients (A and B) who have been given the following advice:

They ask a friend to set up a pilot trust with A and B’s children (currently minors), future children and grandchildren as the potential beneficiaries. A and B will be the trustees. A and B would then set up a company which will issue 3 classes of shares (A;B &C shares). As the company would have no value at the time of issue of the share capital the shares would in effect have “no value”. The intention is for the C shares to be issued to the trust. The company will then pay dividends on the C shares to the trust who will in turn distribute to the children.

I’d be grateful for the forum’s input as to whether you foresee any tax implications with this arrangements. Does the trust run the risk of becoming settlor interested?

Cara Hughes
Kingston Smith

The fact the trust is to be set up by a friend will not prevent A and B
being the economic settlors and the usual consequences of that applying,
including taxation. Whilst, for IHT, I font believe it will be settler
assessable on the facts, as stated, the settlers will be assessable to
income tax on distributions to their minor children.

Are the C shares to be issued to the trustees, or settled by the
settlers? If the former, the trustees will need to be put in funds to
subscribe for those shares.

Any distribution on the C shares will need to be supported by the
company generating distributable profits. However, at the time the
shares enter the trust it might be preferable for the company to be
merely a shell and only commence activities once the initial dust has

Paul Saunders

I think your summary misses out the vital question of how the company acquires the money to generate profits and the terms of the C shares (for example do they only benefit when the company’s NAV reaches a threshold)? It would also be helpful to know what the stated purpose of the plan is. It may of course be simply to limit the tax on accumulated investment profits to corporation tax rates.

If the funds are added by way of subscription for the A & B shares and the C shares are issued for only nominal consideration then this may well be a chargeable transfer by A & B - either under the general rules (because the A&B shares are worth less than is paid for them or s.98 IHTA (alteration of share capital)). It may or may not involve associated operations, depending on the order in which the shares are issued.

The settlement should not be settlor interested for income tax under ITTOIA s.624/5 as A & B are not beneficiaries (assuming they are excluded). The trustees will in any case pay the highest rate of income tax and it does sound like an “arrangement” so I suspect that any trust distributions to minor children would be caught and attributed to A & B under s.629.

Unless the method of adding value to the company somehow avoids a chargeable transfer and the income tax settlements legislation, it would seem that the same result could be achieved by the parents establishing the trust and transferring shares to it directly.

Andrew Goodman
Osborne Clarke LLP

I would review the decision in Butler v Wildin and consider its possible application to this scenario. It was a controversial decision, which was settled out of court during proceedings before the Court of Appeal but HMRC no doubt regard the High Court decision to be still relevant.

Malcolm Gunn

M B Gunn & Co Ltd