I am dealing with a matter currently whereby the testator (who has now passed away) left the residue of his estate to a discretionary trust with his children and grandchildren as potential beneficiaries. There are two children who are also the Trustees and they have decided to exercise their power to appoint the assets out of the trust to them both in equal shares.
The residuary estate includes a 1/3 share of a property owned by the deceased (1/3 owned by each of the children already) and therefore the deceased’s 1/3 will go to the children in equal shares and they will ultimately own it 50/50. One of the children has now advised she wishes for half of her 1/3 to be transferred directly into the name of a limited company (for tax reasons- the property is a rental property).
There is no express provision in the Will for Trustees to add beneficiaries and I understand from research that there are no statutory provisions that allow them to add beneficiaries.
Has anyone dealt with a similar situation before? I am thinking perhaps a deed of variation can be prepared to vary the terms of the trust wording in the Will?
The practical problem with a variation is that a DT is likely, though not always, to have eligible beneficiaries who are minors or unborns who are unable to consent. However a will DT could appoint the property interest to the two individuals under s144 either of whom who could then vary their own entitlement under s142. It will be a question of fact and law whether the trustees are acting responsibly so they must formally consider the claims of others eligible.
But SDLT needs attention. The appointment by the trustees will be exempt (no consideration) under para 1 Sch 3 FA 2003 and the variation would normally be exempt under para 4. But does s53 apply to substitute market value if the individual making the variation is “connected” with the company transferee under s1122 (3) and (8) CTA 2010? Will the individual or persons connected with her control the company?
S.53(4) overrides the para 1 exemption but has nothing to say about its interaction with para 4. Para 4 does not apply on its own terms if consideration in money or money’s worth is received. If no such consideration is actually received does it matter that s53 deems there to be a market value consideration? SDLTM30220 says that s53 is subject to any other exemption; does that mean para 4 where exemption is only refused if there is consideration in money, which it is plainly not, or money’s worth? My view is that deemed consideration is not money’s worth either but there is no specific mention in ss.53 or 54.
If I were advising I would take up the advice in the guidance for completing SDLT4 to contact HMRC if a point is not covered. Normally exempt transactions do not need to be returned on SDLT1—they are not subject to a “relief”not even an “other relief Code 28”. An SDLT4 is in point as technically the “purchaser” is a company.
I know nothing about the beneficiary or stamp duty point (sorry Jack) but when I think about companies I think about employees, directors, employment-related securities and, where the value of shares are artificially increased, s447 ITEPA 2003. I have no idea of the facts but it would be worth making sure that all of the shareholders with ERS in the company are within s449 ITEPA 2003. Otherwise PAYE/NIC may well be due (s697 ITEPA 2003). For completeness, discretionary trusts also make me think about Part 7A ITEPA 2003 but it’s unlikely that either gateway would be satisfied if it is purely a family arrangement.
Is not the answer for the one beneficiary to declare a simple trust of her “spes” in favour of the company. The beneficial interest in any property thus appointed would surely vest straight in the company and the beneficiary would drop out for all relevant tax purposes, I think.
The mere spes is not a species of property. Lord Walker said in Schmidt v Rosewood that” the object of a discretionary trust has no more of an assignable or transmissible interest than the object of a mere power” [2003] UKPC 26 at [40]. It is a mere personal right to due administration. A future interest can be transferred by a contract to assign for consideration but the effective date of the transfer cannot occur until the interest has become a present right to a concrete species of property and it will be this that will be transferred at the future effective date.
A significant aspect will be valuation. One might otherwise hope that an inchoate right would have a current low value, if any at all, but this is an illusion. Until the relevant discretion of the holder is validly exercised by appointing an eligible object a legally recognised property right, legal or equitable whether in possession or action, the object has nothing susceptible of transferring and a gratuitous attempt to do so is a nullity.
Perhaps I should say something about a contract to assign for consideration of a future interest in property of any kind, in case fertile minds think I may be hinting at a panacea. I’m not. The entire area is, with one exception, a rather murky area of the law based piecemeal on highly fact-dependent cases, some ancient, which nonetheless have some general value as precedents.
1 The exception is the absolutely quotidian principle of a company creating a charge over its future book debts.
Consideration must be valuable according to the conscience of Equity so it must be adequate, unlike the general contractual rule that it does not have to be.
The contract will be immediately binding as between the parties but not necessarily upon third parties, as it confers rights in personam not in rem. However the contractual assignee’s right under the contract is itself a proprietary right although not in the subject-matter while it does not yet exist.
Once the subject interest comes into existence a right of automatic specific performance arises but not discretionary as it is in general contract law. This is an aspect of Equity regarding as done what ought to be done.
There is some authority that this automatic vesting of equitable ownership entails a degree of retrospection or at least relation back like a specific legacy. Where the contract creates an equitable mortgage the priority of mortgagees is determined by reference to the date of contract. And if the contractual assignor later becomes bankrupt the subject-matter of the contract has definitively ceased to be his property per Re Lind (1915). It is probably unwise to assume that for tax purposes beneficial ownership will follow the timing of “retrospective” equitable ownership (which in itself may not be truly settled law save for the two purposes above). That is at least certainly arguable, both by taxpayer and HMRC alike, unless there is specific provision. For example, the time of contract disposal rule for CGT the application of which has not always been straightforward on the particular facts. For IHT, would HMRC accept that a transfer of value had been made many years before at contract date or argue that income was receivable then where, as with trading or property income, that is the criterion rather than actual receipt?
A narrow distinction has often to be drawn between a present and future right. A contingent right can be either! The right to receive the future royalties from an intellectual work is a present right but a right to receive the future royalties themselves when they fall due is a future right.
If the concept has a role in tax planning its uncertainty of operation and any resultant downside has to be a feature with which the client is fully on board.