A settlor, S, creates a pilot trust intended to receive further funds after his death. Because there was no intention to use the trust during S’s life, there is no exclusion of S, the spouse of S, or the minor children of S; all are potential beneficiaries of this widely drafted trust. It is clearly a settlor interested trust.
Following S’s divorce, his brother, B, decides to help S and his children, but he does not want to give S the money directly, because he is worried about the former spouse of S coming back for more money. B therefore gives the trustees of the pilot trust some funds so that they can use it to buy a house for S to live in that is suitable for S’s children when they visit.
Am I right in thinking that although expressed in terms of B giving money ‘to the trust’, this is in fact a separate settlement, on identical terms, with B as the settlor? If this is correct, does that in turn mean that the recently received funds are not ‘settlor interested’, either in terms of S (who, along with his minor children, are beneficiaries of the trust), or in terms of B (who is not a beneficiary of the trust)?
Or does the initial £10 of settlor interested funds permanently taint the entire trust?
As a matter of trust law, there is a single settlement. For inheritance tax purposes, the brother is regarded as having created a different settlement on identical terms (IHTM42253). The same principle applies for the purposes of the settlor charge to income tax although the rule is framed differently (s 644 ITTOIA).
Although nearly six years has passed, I’m hoping that my question will nonetheless get through to you Paul, or perhaps, if not you, then to someone else who is able to respond.
The situation I am interested in understanding better is one where a husband has set up a discretionary trust for his wife, father and children. The wife now wants to transfer a part ownership of a house (not the marital home) into that trust, specifically to provide support to the father and the children nominated as beneficiaries of the trust.
As I understand it, from a trust and beneficiary perspective, the wife’s gift does not compromise the running of the husband’s trust as a viable, single entity. However, as per IHTM42253, there appear to be two implications: firstly, the wife’s gift would be assessed against her NRB allowance rather than her husband’s; and secondly, the calculation of exit and 10-year charges associated with the value of the wife’s gift to the trust, will be assessed on the basis of the date on which she made the gift, not on the basis of when the husband settled his money into the trust.
Furthermore, as I understand it from your explanation, any settlor income tax implications associated with the trust will be assessed on the basis of these being incurred by the husband and wife as separate tax payers, according to the nature and value of their respective gifts into the trust.
Any other thoughts you have on the arrangement I’ve described, would also be gratefully received.