Member Since: 23rd Mar 2012
1st Nov 2019
My 2 cents
To the extent that the funds arose from the bare trust I believe the interest there on is taxable on the children. To the extent that it arises from the funds contributed by the parents I think it is taxed on them. The link to the taxationweb forum infers otherwise. I’m not convinced. To be honest I really doubt it is worth worrying over unduly. Presumably this is a holding account where monies are transferred for a short time pending payment of fees. The tax on the interest arising would surely be de minimus. If the bank statement is in the parent’s name it may be best to put it on their return to avoid the cost of dealing with the enquiry that arises when their return doesn’t match the information received from the bank.
As to whether the parents are entitled to use funds held on bare trust to pay school fees, I think that is a question of the rights and responsibilities of the trustees and I don’t think it directly impacts on the tax position. So I don’t think it is susceptible to attack from HMRC.
I have some sympathy with TD’s position in that I agree the contract is between the parents and the school. However I think the legal position is that trustees of a bare trust for minors have duties over and above those of a simple nominee, and these duties entitle them to apply the capital in their best judgement for the benefit of the minors, which surely includes the payment of school fees. It does also benefit the parents in this case - as I say, I do understand the objection - but I really doubt the children would have any success in bringing a claim against them.
Also wanted to note I have seen practical problems to this sort of planning from 2 angles.
If all of the capital is applied for school fees, we are not talking about mega sums for even the most expensive education. The income tax and CGT savings would be really quite modest. This should be set against the time and costs involved in setting up such a structure and administering it - legal fees, declaration of trust, stockbroker fees. For the sake of a few hundred pounds tax per year it could be a bit of a palaver, compared to the simpler alternative of gifting the money to the parents for them to pay school fees.
If on the other hand only part of the capital is earmarked for school fees, the tax savings are more substantial. But in such cases the grandparents need to be quite clear of the implications for the unspent capital on the children’s 18th birthday. They would be walking into a substantial nest egg and are entitled to spend every penny of it on beer.
25th Oct 2019
I agree that the tax is decided by the legal position. This is invariably the case as beneficial ownership is the cornerstone of CGT.
I said that the OP should review and give great weight to the advice received from the solicitor, and he may wish to rely on it. I don't believe that this will give a less favorable outcome. I am simply giving my opinion, based on what the OP says, on the legal position as I understand it - to be clear, I am not a lawyer, I am ACA TEP - and noting that it is reasonable for the OP to attempt to understand the position for himself before he defers to the advice from the solicitor.
To my mind, the issue here is not so much the legal position regarding beneficial ownership, but how the OP goes about explaining this mess to HMRC after they open an enquiry into Mum's amended tax return
24th Oct 2019
I agree that this is a legal matter. Taxation always is - it arises out of statute and case law. The OP should certainly review any advice received from the solicitor and it should strongly influence their approach (to a greater extent, no doubt, than any comments, including mine, which are given on an open forum). However given that the OP has professional obligations to the client, I think it is perfectly reasonable for him/her to research the issue in an attempt to form his/her own view. The OP cannot defer to legal advice unless they are comfortable they have a broad understanding of the issue.
We are told that the children received an inheritance from their late grandfather's estate under his will. Because they are minors, the capital is held by Mum on bare trust for the children until they become 18. Hopefully you have seen the will and it is unambiguous on this point. Mum used these funds to purchase a property for the children. Hopefully there is a clear audit trail (eg bank statements) which confirms that the monies used to purchase the property came from the capital held for the kids. You say that it was always her intention the house was going to be the children's.
As the trustee of a bare trust for minors, Mum is entitled and required to apply the trust assets in the best interest of the children, and the purchase of property for an investment return would seem to be consistent with these duties.
The fact that Mum has collared the income and included it on her tax return is a problem in as much as any subsequent amendment to her return makes HMRC scrutiny more likely. However, if you are confident that it was always her intention that the property was held for the children, it follows from this that her actions arose from ignorance of the legal position regarding income. The fact that she has acted in breach of her duty as trustee in doing this does not to my mind provide sufficient ammunition to HMRC. I don't think it is a basis for them to allege that Mum borrowed (ie stole) the money from the childrens' trust fund.
I don't think the fact that no deed of trust was registered at the time is decisive either, although again it makes HMRC scrutiny more likely. There ought to be plentiful contemporary evidence (eg extracts from the will, correspondence confirming receipt of the inheritance, bank statements as above) to show that the property was always held in trust for the children and paid for with their money.
If you are confident of the facts, explain them properly and provide relevant evidence as above, then it sounds to me like there is insufficient basis for HMRC to contest it.
(As an aside, I would speculate that even if Mum did filch the money to acquire the property for herself - which you don't believe - it is strongly arguable that there is a constructive trust over the property in favor of the kids anyway because it was paid for with their money. This would mean the beneficial interest would still reside with the children. As I say, this is speculation. And it is in any case an argument one would not like to have to run)
23rd Oct 2019
Noted and thanks. If that is the case, then I think the answer to the OP is that beneficial title to the property and the rents arising from it is unambiguously the children's from the date of the grandfather's death.
Presumably the solicitor is talking about registering a declaration of trust at the land registry. I don't think this has any bearing on beneficial ownership; it simply records the ownership on the public record.
If the mother has as a matter of fact been holding the income on trust for her children, then 'all' that has happened is that she has overstated her income because she has included rent on her tax return that she has no entitlement to. The tax return should be amended to reflect this.
If on the other hand mum has been enjoying the income from the property (and that is the reason why she has included in on her tax return), then she has misappropriated income properly due to her children. This isn't clear. Can the OP clarify? In practice, if this is the case, she should reimburse the kids and put her affairs in order going forward.
I am not clear how any of this involves "making 5h1t up"
23rd Oct 2019
You say "my client's father passed away and left inheritance to her two children." You then say "no legal document or trust was set up at the time." Surely this is contradictory. What does the father's will say as to how the property passes on his death? That has to be the starting point in establishing beneficial ownership.
29th Feb 2016
I think s65(2) simply sets out the mechanics by which the charge to tax would be calculated in the event of an exit charge.
The issue of whether a charge arises in the first place is dealt with in s65(1) which states
"(1)There shall be a charge to tax under this section—
(a)where the property comprised in a settlement or any part of that property ceases to be relevant property (whether because it ceases to be comprised in the settlement or otherwise); and
(b)in a case in which paragraph (a) above does not apply, where the trustees of the settlement make a disposition as a result of which the value of relevant property comprised in the settlement is less than it would be but for the disposition."
(a) does not apply here - no property comprises within a settlement has ceased to be relevant property.
(b) is also not in point in my opinion. It refers to where "the trustees of the settlement make a disposition." In your scenario 1 the trustees have not made any disposition. The company has simply issued new shares to acquire a business. In your scenario 2 the trustees have made an appointment within the settlement, but I do not agree with the premise that there has been any diminution in value. I would have thought the valuation basis is that of an arms length transaction between willing buyer and willing seller. I do not think the shares are worth less simply because the trustees exercise their right to give a beneficiary an absolute interest in income.
29th Feb 2016
No and no.
An exit charge would arise when assets which were subject to the relevant property regime cease to be relevant property. This isn't the case here. Any diminution in value of the shares is irrelevant for these purposes.
7th May 2015
It's a 14/15 distribution
It is the date of payment which is relevant, or the date on which the beneficiary became absolutely entitled to the income, if earlier - see TSEM3759
If the trustee signed and issued a cheque on 5th April 2015, then the income must surely be deemed to vest with the beneficiary on that date, irrespective of when he presents the cheque.
14th Jun 2013
Are you saying that on the death of the first spouse a nil rate band discretionary trust was settled, as was once common, and the trustees then loaned the capital of the trust fund to the surviving spouse? If so what were the terms of the trust deed and any loan instruments over the IOU?
Where money is lent without interest or at a low rate of interest, I would say the premium on repayment would usually be in the nature of, or in substitution for, interest and would be an income receipt.
The uplift would be taxable at the trust rate (45%). This may well be unattractive. Given the receipt is in the nature of rolled up income, I would have thought as a matter of trust law it is an accretion to the fund's capital account (albeit within the scope of income tax). So tax paid by the trustees is unlikely to be available to frank future income distributions out of the tax pool.
It ought to be possible to waive the right to interest on repayment of the debt and make further additions to the trust fund without facing such a steep tax liability, although obviously this would depend on the specifics.
There is a fair amount of supposition in the above given the lack of detail.
1st Jun 2013
I don't think there are any tax implications to the loan per se and certainly no equivalent s455 charge.
The BIK rules for beneficial loan interest would only be relevant if the trust was employment related.
I think the previous post refers to the situation where an offshore trust makes loans to a beneficiary. Offshore trusts are not themselves subject to CGT but a record is maintained of stockpiled gains which may be imputed on to a UK beneficiary when they receive a capital payment or other benefit from the trust. This would include interest free loans. I assume your trustees are UK resident and this point doesn't apply.
I think strictly speaking the trustees need to consider whether the loan is appropriate. The recipient is no longer a beneficiary as he has become absolutely entitled to his share as against the trustees. The loan is therefore being made from the younger children's share of the trust fund, which is probably a breach of trust as they have a duty to apply capital for the benefit of the remaining beneficiaries. Certainly no professional trustee would sanction it, although I do appreciate that in your case it is unlikely the children will wish to bring a claim against their own parents.