My local council will in principal accept top-up fees from a private trust depending on the ‘terms’ of the trust. It is a discretionary trust and he is a beneficiary eligible for local authority funding in care.
Has anyone experience of this? Should the payments be capital or income? Could they be regarded as his income athough having no right to it?
any distributions received from a UK discretionary trust will be characterised as income or capital depending upon what the trustees have in their discretion decided to distribute and also depending on whether the individual concerned is part of the class of income and/or capital beneficiaries. Assuming they decide to exercise their discretion to distribute income to him (being far easier to do than capital) then it will be his income and will also carry a repayable 45% tax credit.
Point the first - the local authority, when it conducts a financial assessment, must disregard both income and capital received from the discretionary trust. The Care and Support Statutory Guidance can be found here: Care and support statutory guidance - GOV.UK (www.gov.uk). You didn’t ask this, but it was a question I had to address recently as a Trustee of a discretionary trust.
Point the second - whilst capital distributions, if kept sufficiently frequent and modest in size so as not to take him over the local authorities UCL, may have their own attraction, the distribution of income is simpler and allows the recovery of at least some of the tax credit. Against that you have to set the cost of issuing a R185 and submitting this with a tax return. Difficult to choose without any numbers.
Thank you Michael and also Maxine of 2 days ago for your response and both confirming that this is a good and practical way of using the trust fund.
I have discussed the matter with the trust’s FA and in this case we think that capital payments are best for three reasons. Firstly, the fund is currently invested on a platform (?) in low income producing investments and has a mechanism for producing income by regularly selling units so that looks after a lot of admin. Secondly, the beneficiary doesn’t have the mental capacity to deal with the R180/R185 forms which would mean employing an accountant. Thirdly, although the capital gains tax allowance is being reduced greatly from the current £6100, the sales producing these payments are unlikely to incur any CGT (which would ‘only’ be at 20%).
The fund’s current value is about £270,000 and the top-ups would be in the low hundreds per week. There are three other beneficiaries with different needs, so it’s not a lot.
John Francis
A curiosity in the guidance. Income from a DT is to be disregarded specifically. Oddly there is no such treatment of capital but under “Capital available on application” the capital in a DT is not to be treated as belonging to an eligible beneficiary or as capital which he can be regarded as having access to.
Can anyone explain the logic of the following in Annex B:
"Income treated as capital
- The following types of income should be treated as capital:
- (b) income derived from a capital asset, for example, building society interest or dividends from shares. This should be treated as capital from the date it is normally due to be paid to the person. This does not apply to income from certain disregarded capital"
Is it not income too? It is hard to find the basis for this in the Regulations SI2672/2014 and indeed very hard to see how they fit with the Guidance in many areas. No mention in them of DTs for example. Which prevails in the event of a discrepancy?
Jack Harper
By way of contrast, there is the income tax decision in Cunard’s Trustees v CIR 27 TC 122, where capital payments made to the LT to top up her income were held to be income in her hands because they were in the nature of income.
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But what about Stevenson (Inspector of Taxes) v Wishart and others [1987] 2 All ER 428 where numerous capital payments to a beneficiary for medical expenses and care home fees were judged to retain their nature as capital and not deemed to be income (as HMIT wanted) despite their recurring nature.
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I suspect it’s a rather arbitrary carry over from Income Tax which differentiates personal earned income from unearned income both in reporting terms and in eligibility for reliefs.
A secondary factor could be the desire for the capital value to be increased by the total return rather than just the capital return of the underlying assets as that would boost IhT takings.
The goose has many feathers, and this may just be a deliberate targeting of some that are otherwise difficult to pluck.
You should be aware that trusts generally only have half the individual CGT allowance so you are looking at gains in excess of £3,000pa until 5 April 2024 then £1,500pa thereafter and that may also be reduced if the settlor created other trusts.
Maxine
Indeed. But beneficiaries have their own allowances and lower marginal CGT rates. Assets can therefore be transferred at cost provided a subsequent claim under S260 TCGA 1992 is made. Trickier with an LPA in action, but theoretically workable.
Two sets of IHT100 and accompanying forms were sent to HMRC IHT to report 10-year anniversaries (somewhat belatedly). The Settlement contains 25% of the shares in an unquoted company valued at £150K for the 1st TYA and £204K for the 2nd. We have received a letter from HMRC saying:
“If you’ve not heard from us by 25 July 2023, we have no questions to ask about the information or values you’ve given on the form(s) IHT100. Our papers will be closed on these events. We may still ask questions about changes you tell us about at a later date.”
Do members think I can rely on this or should I apply for formal Clearance Certificates in each case?
Graeme Lindop
Probate Consultant
Coles Miller Solicitors LLP
I think you (and your client!) can rely on it up to a point. IHTM09071-2 gives an indication of when HMRC will and will not open negotiations and presumably they will have decided not to do so before making the statement. Sorry to ask but I assume it was not an excepted settlement (IHTM6120-6130 esp. 6127))? Just on the figures they might on the 80% of current NRB on a gross assets basis (IHTM06124) but you say they were submitted belatedly. You would have to go back a very long time to breach this measure. When the rules were first introduced on 6 April 2007 the NRB was £300,000.
S239 IHTA allows a statutory clearance when the transferor has died. Also a non-statutory assurance (IHTM40151) which presumably would only be resiled from on the same grounds as a clearance certificate under s239 ((4) and (5) and see IHTM40141-6.
The “changes” are presumably those in s239(4) repeated in IHTM40014. You will have made all pertinent enquiries at the date of submission and to date. If later changes take place without your knowledge and control you cannot be blamed.
It would not be unreasonable to ask for instructions, indicating what could cause a revocation, and the costs of seeking any type of clearance.
No doubt the most important fact is the valuation of unquoted shares. HMRC must have taken a view on those because a modest uplift is unlikely to prevent a post clearance charge unless it amounts to fraud or material failure to disclose. That depends on the quality of the valuation and whether the person doing the valuing is competent and has not built in too fancy an allowance for possible upward negotiation. There is not usually the same concern about how much of the NRB has been used that an agreed value would provide. There is no way I know to force HMRC to agree. This could be useful to a living settlor who intended to make additions which may or may not be better than a new settlement.
The organic growth in value of the shares is, for tax, an inevitable hazard in principle but with the (current!) headroom and the (currently!) low rates on any excess it may not prove too expensive; in the absence of a liquidity event in the time before the next anniversary or an unfavourable statutory change to the RPT charging structure (surely not?). By a Goverment that considers Trusts to be evidence of moral turpitude and calls Non-Dom status tax avoidance?
Jack Harper