I have a couple of questions regarding the application of the settlor-interested provision for tax purposes in respect of a vulnerable person trust for the benefit of the settlor’s child. They wish to settle some assets into trust for their disabled daughter and have no other dependents. If their daughter passes away they would wish for the assets to revert to them. However, I am concerned that this would make the trust settlor interested and they would end up not benefiting form the vulnerable person election. I understand that if they are named as a default beneficiary in the event of the primary beneficiaries death, it would still be settlor interested.
If the settlor made loans (non-interest bearing and repayable on demand) to the trust, would this also be classed as an interest?
Is there any way of actually achieving this that the members are aware of?
I should have added that they plan for the trust to purchase a property and rent it out in the short term to accrue a cash pot with the hope that the beneficiary can ultimately live there with the cash pot as support. Ideally they would like to avoid the rental income being classed as their own
A settlor interested settlement arises if trust property may be payable to to the settlor (or spouse) or may be used to provide a benefit. This includes a revocable interest in favour of the settlor (spouse).
A loan interest free (or below market) from the settlor would give rise to an interest on the part of the settlor and hence the trust would be settlor interested.
You are very helpful Malcolm, thank you. Would the same apply if the loan was interest bearing? I understand that the settlor would then be paying income tax on that in any event.
If the loan is made on market/arm’s length terms this should not precipitate an interest in the settlement on the part of the settlor.
You might like to check out the “capital sums” legislation re repayments by the trustees of the loan (whether at market terms or not) [ITTOIA 2005 s633 et al].