I deal with a number of property co-ownership trusts where the settlor has died. The trustees wish to instruct us to register the trust with the TRS, however, the property is not being rented and there is no cash to pay our fees. Typically they are ‘family’ trusts and the trustees or beneficiaries are willing to cover our costs.
I would normally advise trustees that professional costs should only be settled from the trust fund as otherwise this could be considered an addition to the trust from a non-settlor and may introduce tax complications, however, I cannot see any sensible alternative here. Has anyone else come across this issue?
I suggest that it may depend on whether the TRS registration fee is viewed as capital, or income expenditure.
If income, perhaps the income beneficiary (i.e. the person with the right of occupation) should meet the cost.
If a capital expense, the remaindermen might be approached to lend the trust the monies to pay the fee, in much the same way as they might be asked to lend the trust money to cover essential repairs, etc.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
An expense of this nature seems to me to be a capital expense.
Julian Cohen
Simons Rodkin
I suggest that it may depend on whether the TRS registration fee is viewed as capital, or income expenditure.
If income, perhaps the income beneficiary (i.e. the person with the right of occupation) should meet the cost.
If a capital expense, the remaindermen might be approached to lend the trust the monies to pay the fee, in much the same way as they might be asked to lend the trust money to cover essential repairs, etc.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
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I deal with a number of property co-ownership trusts where the settlor has died. The trustees wish to instruct us to register the trust with the TRS, however, the property is not being rented and there is no cash to pay our fees. Typically they are ‘family’ trusts and the trustees or beneficiaries are willing to cover our costs.
I would normally advise trustees that professional costs should only be settled from the trust fund as otherwise this could be considered an addition to the trust from a non-settlor and may introduce tax complications, however, I cannot see any sensible alternative here. Has anyone else come across this issue?
Regs 44, 45 and 45ZA impose obligations on the trustees. They are surely entitled to reimbursement of TRS costs from trust property. Where this is impracticable or undesirable (to prevent a forced sale) these may be met perforce by a settlor or beneficiary or even a trustee who is or is not one of these or both.
I would not see this as an addition to the trust fund; rather it is done to secure that it is not depleted. Nor is it a loan, for a settlor or beneficiary has no right to reimbursement unless agreed by the trustees. If a true loan is created there is undoubtedly a risk that the lender (if that is not the actual direct Settlor) becomes an indirect settlor, unless the loan is on arm’s length terms; if it is not then the draconian s633 ITTOIA 2005 could apply to any repayment of the loan to the direct Settlor or other lender as indirect settlor.
If the trustees pay they obtain a lien which is not a loan. If they instruct the agent a non-trustee who then pays the professional’s bill in a sense makes an addition/indirectly by obviating the accrual of that lien, which would reduce the trust fund when ultimately exercised by the trustees. But on those facts the lien simply never arises and I have grave doubts whether action to prevent the diminution of a trust fund constitutes a provision of funds to it. A fortiori if the trustee does not instruct but the payer of the bill does. (As ever the contrary is not totally unarguable but I am not aware that HMRC have argued it.)
Query whether s10 IHTA would apply to the non-trustee bill payer as a gratuitous benefit is intended to be conferred “on any person”. That phrase can include trustees but they would have a lien if they paid it and the benefit to those who will benefit from the non-depletion of capital (surely the costs are not chargeable to income?) may be minimal (fixed remainder) or too speculative (contingent or defeasible remainder or discretionary object). In any event ss19 or 20 may exempt.
I realise that the sums at stake per trust are not likely to be huge. For an instance where HMRC is prepared to apply a de minimis rule see the example in TSEM 4120 of an indirect settlor where the direct settlor’s original £100 is “usually disregarded”. I have not come across the issue save where the sums were greater than anything HMRC might overlook and the funds provider had to choose between making a chargeable transfer outside s10/ becoming an additional settlor (by addition or soft loan) or making a loan on arm’s length terms.
In Clay Discretionary Trust Trustees v RCC [2008], albeit a case on trust management expenses and deductibility, the C/A concluded that expenses incurred for the benefit of capital and income beneficiaries are wholly chargeable to capital.
On the basis that the cost of registration (and updating) is for the benefit of both capital and income beneficiaries the capital beneficiaries should bear the cost.
On Jack’s s 633 ITTOIA 2005 point and funding by way of a settlor loan, the section will apply on a repayment of a loan by trustees to the settlor lender even if the loan was made on an arm’s length basis. Broadly, if there is no trust income, no actual tax charge arises at that time (note 10 year cap).
If a settlor has created the trust in respect of which fees/costs are to be incurred and subsequently lends monies to the trustees to discharge these fees/costs, albeit on a non-arm’s length basis, then s633 will bite when, for example, the trustees repay the loan.
If a true loan is created there is undoubtedly a risk that the lender (if that is not the actual direct Settlor) becomes an indirect settlor, unless the loan is on arm’s length terms