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Post-death gain on Discounted Gift Trust policy

Settlor died in 20/21 - how to report gain (if at all)?

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My client invested in a DGT 5 years pre-death - she passed early 20/21 and the Tax Return for 20/21 was finalised and submitted - she was a basic rate taxpayer.

The policy was held in Trust but the Trustees decided, late in the 20/21 tax year to cash-in the policy due to the significant income tax saving that would be possible - where a policy is held on trust, the settlor of the trust will normally be chargeable if still available to charge. A settlor who dies may in some cases be chargeable on an event occurring after death, for example where the policy held by trustees is on the life of someone other than the settlor and continues following the settlor’s death (which it did in this case).

When a chargeable event occurs after a UK resident settlor’s death, but before the end of the tax year, the gain will be chargeable as part of the total income of the deceased settlor for that tax year - by virtue of ITTOIA 2005 Section 465(3).

I have the s844 Chargeable Event Certificate and have calculated that the Top Slice when added to the Settlor's income for 20/21 would still leave her in the basic rate, and with the attached basic-rate tax credit, no further income tax liability arises.

My question is do I need to report this given there is no tax liability, and if I do (which I suspect I should), how to do so - by amending the year of death tax return or via a letter?

Thanks in advance.

Replies (14)

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By Tax Dragon
09th Jun 2021 17:19

Who advised the trustees? Is the analysis definitely correct?

I ask because s464(1) says that the person liable for any tax is determined according to how the rights under the policy or contract are owned or held immediately before the chargeable event in question. The deceased at that point would have had no such rights. The PRs would have had no rights (that's how DGTs work - retained benefits [rather, benefits carved out] end on death of the deceased). So I'm looking at s467 - s467(4)(b) in particular. Hence, whilst there may be a gap/nuance in the law that some clever advisor has spotted (and that I might once have known but have long since forgotten), my skimming briefly through the sections now is neither bringing back memories of same nor causing me to nod along in agreement with your (/the trustees') premise.

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By Tax Dragon
09th Jun 2021 17:18

.

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By richard thomas
09th Jun 2021 18:04

I am replying here as a person who had almost exactly the same position as you. My mother died in December last year having paid the premium on such a policy in 2010.

My case was slightly different in that my mother was the only life assured so the gain arising on her death was chargeable on her (the dead settlor rule not applying where death is the chargeable event) and was returned in her final tax return of income up to the date of death. As an aside I filed that return in April showing a repayment due of about £1,100 (overpaid PAYE) and I have not heard a dickie bird.

Turning to your case, I do not follow you when you say a dead settlor may be chargeable on a gain arising after their death. Section 467(4) ITTOIA seems to make it clear that the trustees are liable if the settlor has died. And s 465(3) which you refer to does not reveal anything about a gain arising after death but within the same tax year. Where would the gain be returned? Not by the PRs in their own right as s 466 does not apply, while HMRC require a tax return of income arising to the taxpayer up to the date of death.

If the gain is taxable on the settlor, then I think that what you have in relation to top-slicing relief (TSR) sounds right. As to your question, then again assuming you are right about the gain arising to the settlor, whether you return the gain depends entirely on whether the settlor was required by HMRC to file a return for the tax year of death or not. If not and there is nothing else to notify, then the gain isn’t either - s 7(6)(b) TMA 1970 – assuming that “liable to tax” in that subsection does not apply to the gain before TSR. Section 7 is rather odd in referring to an amount of income being “liable” to tax at a particular rate, as Part 2 ITA 2007 only refers to “liable” in relation to total liability (eg s 23). As TSR is given at Step 6 in s 23 as a tax reduction, I incline to the view that if higher rate tax would have been chargeable on the gain before TSR then it is notifiable.

But if I were you I would suggest that the trustees (if not you) seek advice about the position before distributing the trust assets. A tax barrister who knows a lot about this area is Barrie Akin.

As to the chargeable event certificate, s 844 of what Act are you referring to?

[EDIT] Drafted and posted before seeing TD's post, who seems to have come to the same conclusion as me.

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By sumo69
09th Jun 2021 19:14

Thanks for the comments.

The analysis presented to me relies upon s465(1) - an individual is liable for tax if UK resident FOR THE TAX YEAR in which the gain arises and condition A, B or C is met.
Condition B was met - the rights were held on non-charitable trust which the individual created.

I added the CAPITALS for emphasis - I have no argument at all that the Trustees would be liable if the chargeable Event hadn't been crystallised in 2020/21, the year of death of the Settlor.

For info, this analysis has been taken from a Tax Advisor's letter who works for the fund management company involved - a very large plc.

So do you still think there is an issue with the advice?

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Replying to sumo69:
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By Tax Dragon
09th Jun 2021 20:07

I think the issue is that, even if the individual is liable as you say, it doesn't seem to stop the trustees also being liable - as s467 says they are.

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Replying to sumo69:
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By richard thomas
10th Jun 2021 10:46

Yes

In my view the words in capitals are there simply to show that someone who is non-resident throughout a tax year is not liable to tax on a chargeable event gain. This is reinforced by subsection (1A) which applies the same logic to a case where there is a split year under the SRT.

But even if the adviser's letter is right there is a conflict between s 465 and s 467. They cannot both apply or there would be double taxation. The standard way of interpreting two conflicting provisions is to apply the old Latin maxim "Generalia specialibus non derogant", ie the more specific provision applies. In this case that would be s 467.

I'm not sure why you think the fact that the adviser works for a large plc matters. The people on here whose advice you seek generally don't work for a large plc but for themselves or small/medium sized firm, or in my case are retired.

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Replying to richard thomas:
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By Tax Dragon
10th Jun 2021 12:26

Richard the explanatory note to s464 mentions the double tax charge (or, rather, that there is nothing within the sections themselves to prevent it). I'm aware that the courts have held (was it Vesty? one of the ToAA cases anyway), when HMRC went after the whole family for tax on the same income, that such multiple charges don't apply. Is your "Generalia specialibus non derogant" principle statutory? Common law? Common sense? Other?

I agree your conclusion here of course - that the s467 charge is the one that sticks - but there are cases where it (Generalia specialibus non derogant) seems not to apply. There are provisions taxing employees on money they never receive, for example, which seem laden with possible double- (or, at least, over-) taxation scenarios. When can we rely on "Generalia specialibus non derogant" - and when can't we?

Late edit: I've probably picked the wrong line of yours to quote. (It sounded flashier.) The statement of greater interest is probably "They cannot both apply or there would be double taxation."

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Replying to Tax Dragon:
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By richard thomas
10th Jun 2021 17:19

The principle is not statutory. It is one of the principles (or maxims or canons - the US term) of statutory interpretation and so is judge-made law. All courts and judges these days accept that the law on statutory interpretation is authoritatively set out in "Bennion on Statutory Interpretation" by Francis Bennion, and the principle is discussed at section 355 (in the 5th edition, the only one I have access to).

There is a separate principle against double taxation which would apply if the "specialibus" principle does not. This derives I think from FS Securities in the House of Lords and was last authoritatively discussed to my knowledge in HMRC v Investec Asset Finance plc and another [2018] UKUT 69 (TCC). In both those cases the issue was whether the same person could be taxed twice on what was the same income, which is not quite the case here.

It was indeed Vestey in which it was held that you could not tax multiple people on the same income, but the background is rather different to this case. In Vestey the question was whether CIR could choose which of several candidates to tax under the TOAA legislation, being discretionary beneficiaries of a trust. The HL said they could not, but added that HMRC's self-imposed limitation to the effect that they could only assess the total income of the trustees and not more, on whoever they chose was not lawful. They did not have such a discretion, and if the law said so they must tax each beneficiary on the whole of the trust income. Lord Wilberforce said:

"When Parliament imposes a tax, it is the duty of the Commissioners to assess and levy it upon and from those who are liable by law. Of course they may, indeed should, act with administrative commonsense. To expend a large amount of taxpayer’s money in collecting, or attempting to collect, small sums would be an exercise in futility: and no one is going to complain if they bring humanity to bear in hard cases. I accept also that they cannot, in the absence of clear power, tax any given income more than once."

It is this last sentence which is relevant here. Lord Wilberforce does not restrict his remarks to cases where the same income is taxed more than once on the same person.

But this scenario arose in Dimsey v R in the House of Lords in 2001 where the complaint was that the transferee company was liable to CT on the income on which the transferor was liable under TOAA. The House thought that because there were anti-double taxation measures in the legislation but which did not include the CT/IT case, Parliament had given the matter thought but had decided not to amend it on the advent of CT, maybe because the situation was very unlikely to arise in practice and because the "burnt fingers" rule applied (they didn't say that: that is my gloss).

There is no avoidance in this case - in fact s 465(3) usually works against the Revenue's interests now that the trust rate is 40% and trustees do not get TSR.

The pat answer to your final question is that you can deploy the "specialibus" principle in any case: whether the court accepts that it applies is another matter. But I can't lay down a hard and fast rule.

Since posting my first reply I have come across two parts of Sch 45 FA 2013 (the SRT) which support the view that a person dying in a year is resident for the whole year - paras 2(3) and 10..

There are also pointers in the other direction: one is that the dead settlor rule has applied in periods before there was any reference to the settlor having been requited to be UK resident. Another is that the OP's adviser's interpretation is capricious. If the settlor dies on 5 April there will be no opportunity for the trustees to decide to cash in the policy. Why should the date of the settlor's death matter?

The third is that if the dead settlor is liable, then the PRs are liable to pay the tax and my use the assets of the estate to pay it (s 74 TMA). But in this case the trustees will have the money, not the PRs. Admittedly there is a right under s 538 ITTOIA for "the individual" to be reimbursed by the trustees, but it is not clear other it would apply to a deceased individual. My view is that it would, and in relation to legislation of this kind I so held in Winstanley v HMRC [2018] UKFTT 154 (TC) upholding HMRC's arguments.

But the question whether s 465 applies in this case or not is irrelevant as if it does, "specialibus" will apply to put the charge on the trustees.

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Replying to richard thomas:
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By Tax Dragon
10th Jun 2021 17:37

Thank you. Lots to digest.

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By sumo69
10th Jun 2021 18:04

Wow this has become quite a discussion.

Can I add a couple of further facts in case it changes any opinions made?

The PR’s and the Trustees were the same 2 individuals - the Settlor’s daughter and son-in-law, and the Trust beneficiary was the daughter solely, who was the Life Assured by the policy.

I also think I may suggest getting a professional opinion before reporting anything to HMRC.

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By More unearned luck
10th Jun 2021 20:27

Where there are multiple lives assured and at least one of them is living when the settlor dies there is no CEG on the settlor's death even if the settlor was one of those lives, as policies do not normally pay-out until the last death. I have had IFAs of dead clients asserting that if the bond is surrendered in the remainder of the tax year of death the resulting gains is taxed on the settlor at his marginal rate and not on the trustees (who pay tax at 45%).

Support of these claims comes from HS320 which says at 3.2:

A gain will be treated as income of trustees of a trust if the rights:

*...
*...
*...
*are held on non-charitable trust and the person who created the trust has died, unless the gain arises in the same tax year in which the individual died
*...
*...

The proviso is not in s 467(4)(b), so where is it?

I assume the corollary of the the gain not being taxed on the trustees is that it is taxed on the settlor but 3.1 doesn't say so, but IPTM3240 confirms that it is. Again where is the law?

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By sumo69
11th Jun 2021 15:27

I found the following text at IPTM 3240 as referred to by “More unearned luck”:

Unfortunately devoid of statutory references, but let’s assume this gives sufficient comfort that I want to report this as income of the deceased, would a letter suffice or shall I re-open the already submitted TR for the year of death? As a reminder, the TSR and tax credit would result in no further tax due.

“Policies and contracts held on trust

The general rules relating to policies held on trust are described in IPTM3250. Where a policy is held on trust, the settlor of the trust will normally be chargeable if still available to charge. A settlor who dies may in some cases be chargeable on an event occurring after death, for example where the policy held by trustees is on the life of someone other than the settlor and continues following the settlor’s death. When a chargeable event occurs after a UK resident settlor’s death, but before the end of the tax year, the gain will be chargeable as part of the total income of the deceased settlor for that tax year.

Where the gain arises on an event after the end of the tax year in which the settlor died, the trustees will be taxable on the gain.”

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Replying to sumo69:
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By More unearned luck
13th Jun 2021 11:45

I would probably amend the return and say why in the white space.

It's the trustees who have a problem if the practice in IPTM3250 is not statutory and if HMRC resile from it as they will not be self-assessing the tax that would then, on HMRC's newly held view, be due. To any DA dated after 5/4/25 they can make a defence based on s 29(2) TMA 1970 if they make a 2021 TR.

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By richard thomas
14th Jun 2021 14:15

In my view for the reasons I have given above, IPTM3240 & HS320 amount to, in some circumstances, but not all, an unpublished extra-statutory concession. The exception is where, exceptionally, more tax would be paid by the settlor than by the trustees. In that case it would be an unauthorised charge to tax.

That means as MUL suggests that HMRC might change their stance. If they did then while you would have good case for JR against HMRC on the Matrix principle that is not a route you would necessarily want to go down. But I agree with MUL that a defence by the trustees against a DA assessment under s 29(2) might succeed.

What the position is in relation to the deceased depends now whether the return made was for the whole tax year or the period to date of death. When I was my mother's PR the return sent to me was specifically for the period to date of death. If that was so in your case then the PRs will not have made an incorrect return. They would then have until 5 October 21 to notify the liability of the deceased. If the return was for the tax year as a whole then you need to amend the self-assessment and potentially face penalties.

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