I’m wondering if somebody could please clarify who the settlors are in the following scenario for the purpose of registering a trust with the TRS:
Individual creates a discretionary trust with cash.
Cash is used to purchase an interest in a property.
Original owner of the property and the trustees of the discretionary trust enter into a declaration of trust confirming the equitable interests in the property between the original owners and the discretionary trust.
The discretionary trust is registered and I am happy with that aspect but wondered if somebody could confirm who the settlors of the property bare trust are in this situation.
Is it the original owners of the property on the basis that they are transferring a share of the property into the bare trust in accordance with the deed? (Regardless that the transfer is being made for consideration)
The deed states that the original owners ‘hereby declare that they hold the property on trust for themselves and the trustees’.
Or, is it the trustees of the discretionary trust on the basis that they have provided consideration for the property which is then to be held on bare trust by the original owners?
The DT trustees are one of the equitable co-owners of the property but it seems that under the express property bare trust created by the DOT the original owner is the sole trustee. So it is not excluded from registration. One trustee, but two different equitable owners: TRSM20350 Even bare trusts are registrable as non-taxable trusts unless excluded: TRSM10030.
It will not be registrable as a taxable trust as each of the two equitable owners will be taxable on income and capital gains from the property.
This is not a situation the trustees can properly allow to continue. It is their duty to have the legal title transferred into the names of all the equitable owners unless there are more than 4, in which case 2 of the trustees, if there are at least 2, should be transferees. At least one trustee must go on the title. A Form A restriction should have been applied for as soon as the DOT was executed and is essential. At present the sole registered proprietor is in a position to convey legal title in the absence of such a restriction: PG19 section 7.1. It will be entered routinely on a transfer to 2 or more proprietors who are tenants in common.
This raises the possible conundrum that once the legal title is transferred it may be the case that the trust becomes excluded because the bare trustees on the title will then be identical to the equitable owners.
If 90 days have passed since the DOT the trust should be registered asap to avoid a penalty regardless of HMRC practice in TRSM80020. If one was imposed, however unlikely, the trustees of the DT might have to bear it personally. If 90 days have not elapsed before the TR1 is executed and sent to HMLR what is the technical default position if they delay registration beyond the 90 day limit?
No doubt this would constitute a reasonable excuse. In a recent VAT case the Tribunal has decided that dealt by HMRC unreasonably delaying a repayment justified the trader in paying late as he needed the awaited funds. Presumably he was unable to claim set-off which is a recondite legal area at least to me; CPR Part 66.
This is a point, supervening exclusion, not covered by the SI or TRSM. From a land registration viewpoint the effective date is the date of receipt of the TR1 by HMLR so one hopes that applies for AML as well. As the powers that be have not thought about the issue presumably they have not thought about the solution either. Ignorance is bliss unless it is ignorance of the law on the part of a citizen/taxpayer as opposed to officialdom which though not omniscient is protected by the criminal offence of lese-majeste.
Thank you Jack and I note your comments in relation to the trustees’ duty to have the legal title transferred into the names of all equitable owners.
The trust is in fact being brought to a close, the property being appointed to the original owner absolutely and the registration being completed in advance of the deed of appointment bringing both the discretionary trust and bare trust to an end.
In view of the above, this brings me back to my initial query with regards to the settlors of the bare trust. I would be really grateful for any comments on this aspect.
As long as the purchase price was open market value the seller (the original owner) will not have provided funds directly or Indirectly to the DT settlement so will not be a settlor within s44(1) IHTA. The only settlor will be the person who settled the cash. OMV will be calculated with a discount for the part interest.
If the purchase price was less than OMV the original owner as seller will be a joint settlor but only to the extent of the shortfall and only in the separate settlement he is deemed to make under s44(2). There are no further statutory directions but one imagines that HMRC would accept that his settled fund would be that proportion of the value of the whole fund at any given time that the initial shortfall value bore to OMV at the time of the sale. This would also be a gift for s.102 FA 1986 as the original owner/seller is an eligible beneficiary of the DT so also of his deemed separate fund of which he is the settlor. So an initial GROB of that fund and a FA 1986 s.102(4) PET on the final distribution to him (of the whole fund) with a TOV equal to the then value of his settled part.
If the price exceeded OMV a RPT chargeable event will have occurred but no IHT as within the first 3 months of commencement date. If the seller had not been an eligible beneficiary of the DT the payment in excess of OMV might have been in breach of trust but, unlike for IHT, there must be a greater latitude than the slavish calculation in trust law, and there is always s.61 TA 1925. Here he is an eligible beneficiary.
(The original owner must be an eligible beneficiary of the DT so that an appointment may be made to him).
This final distribution is a chargeable RPT event and the calculation of the charge will be by reference to the cumulation, if any, in the 7 years before making the settlement of the cash settlor only; but if the price was less than OMV there are joint settlors and there will be 2 calculations based on their respective cumulations and the values of their respective parts of the entire fund.
There are also CGT consequences of joint settlors but s86 TCGA does not apply to a resident trust and the trustees are taxable on any gains. However, the identity of the settlor is relevant to hold-over relief being denied on the way in (but not on the way out), if the trust is settlor-interested, and there is an OMV
rule and a definition of an indirect settlor similar to IHT. Hold-over might be relevant if the price was less than OMV but the restriction for what would then be part consideration might well apply so whether there is a gain to hold over depends on the seller’s base cost; s.260(5). A settlor is connected with the trustee(s) of his settlement: ss.17, 18, and 286(4)(a) TCGA.
All of this underlines the desirability of the price being £x or such other amount as HMRC shall agree as OMV. (But not just that latter amount in case HMRC do not agree anything and the price is unascertainable and the contract unenforceable!).