Interest in possession tribunal case: Schrödinger's trustees

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Can trustees simultaneously exist and not exist for the purposes of the Taxes Management Act 1970? This was one of the questions examined by the FTT for the Trustees of the Paul Hogarth Life Interest Trust 2008.

What must trustees report?

In many cases, trustees directly receive and manage income and gains and make decisions about which beneficiaries should receive distributions. Such trustees are treated as a separate legal person with a distinct and separate rate of tax, subject to the full panoply of returns, assessments and penalties.

However, where the beneficiaries of an interest in possession (IIP) trust have an absolute right to income as it arises, the trustees frequently mandate the income to the beneficiaries, bypassing their own hands altogether. In the absence of either capital gains or income (chargeable event) gains, such trustees have very little active involvement.

Judge Richard Thomas recently had to consider how this translates into responsibility for tax returns for the trustees of an IIP which had no income to report.


HMRC issued a notice to file a self assessment return for 2010/11 on 6 April 2011 to “The Paul Hogarth Life Interest Trust 2008” (TC06757). The normal filing dates of 31 October 2011 (paper) or 31 January 2012 (online) applied. An electronic return was eventually filed on 5 September 2012.

This led HMRC to issue penalties under Schedule 55 Finance Act 2009 totalling £1,200, which were appealed.

Relevant trustees

The term “relevant trustees” is derived from s7(9) TMA 1970 and, for income purposes, refers to those persons who were trustees when the income arose and any successors. Section 7 relates to notifying chargeability to tax, and it is clear from the above definition that, if no income arises during a tax year which is chargeable on the trustees (nor any chargeable event gains or capital gains), there are no relevant trustees who have any obligation to notify HMRC.

What complicates things, however, is that s7(9) TMA 1970 defines relevant trustees “for the purpose of this act”. So when s8A TMA 1970 specifies that HMRC can issue tax return notices to “any relevant trustee”, it would appear to be those non-existent trustees who are in the frame.

The penalty provisions in Schedule 55, FA 2009 are written in a more modern style, and paragraph 1 specifies that a penalty “is payable by a person (P) where P fails to make or deliver a return”.

Judge Thomas had no difficulty in concluding this meant that the person (P) on whom a penalty can be assessed must be the person upon whom the return was validly served – in other words, the “relevant trustees” (who, as we have already established, appear not to exist).

Was the notice valid?

Judge Thomas concluded, given the nature of the trust and the fact that no income was received by the trustees, the definition in s7 TMA 1970 does indeed invalidate HMRC’s ability to issue a tax return under s8A, TMA 1970.

Might this, he wondered, be a deliberate choice by Parliament? He saw some support for this on – of all places – HMRC’s website, which in 2011 read:

It's important to think about whether HMRC really needs to be told about your trust. To avoid having to complete a tax return unnecessarily it’s better to wait until your trust is receiving income or has made any chargeable capital gains” (writer’s emphasis).

Added to this is the fact that the trust return used for the year – form SA900(2011) – does not ask any questions which would garner any usable information from trustees in the situation of the Hogarth trust. A blank return would certainly pass the test of “unnecessary”. For that reason, the judge ruled that “a notice to file cannot be given, and no one can be penalised for failing to deliver one”. The appeal was allowed and the penalties were cancelled.

Special circumstances

The judge also reviewed whether HMRC had adequately considered if there were special circumstances which would negate the penalties. He felt that this was the case.

For periods up to 5 April 2012, the (now repealed) s76 TMA 1970 dealt specifically with trusts where all the income is mandated to the beneficiaries, as did HMRC’s trusts manual at TSEM3040 – which points out that income mandated to beneficiaries is excluded from the trust return. Since HMRC did not consider this (or, if it did, failed to give reasons for rejecting this reason as being a special circumstance) HMRC’s decision was flawed.


Trustees of an interest in possession (IIP) trust who mandate all their income to the beneficiaries should not be troubled by tax returns unless they realise gains. The income is taxable in the hands of the beneficiary, and HMRC is wasting its own time, as well as everyone else’s, by issuing unnecessary tax returns.

This judgment confirms and offers reassurance that penalties should not be due for late filing of the inevitable “nil” return.

About Andy Keates


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