Replies to Queries

Readers' Forum

Replies to Queries — 1

Is it equitable?

In July 1995, our client created an interest in possession trust for his daughter. She is to receive an absolute interest in the fund in 2021. The settlor (he has no spouse) is prohibited from benefiting from the trust. The initial trust fund was £50, but on 16 April 1997 he gave the trustees £500,000 which they invested in a non-qualifying single premium with profits life assurance policy. The lives assured are the father and his daughter and the proceeds are payable to the trustees on the death of the last to survive. On 25 April 2003, the trustees surrendered the policy and a chargeable event certificate was issued in the settlor's name showing that six years had expired. There had been no interim withdrawals.

Is TA 1988, s 547 relevant? Our client and his daughter are both alive and resident in the UK and undoubtedly the father was the individual who created the trusts.

The question is whether the rights conferred by the policy or contract are vested in the daughter as beneficial owner. The father is a higher-rate taxpayer, but the daughter is not and s 547(A) recognises that two or more persons can have an interest in the policy. We think that the effect of s 547(A)(12) is that where non-fractional interests exist (which clearly is the case here) the rights shall be justly and reasonably apportioned. If that is so, then since the daughter has an interest in possession and the father is prohibited from benefiting, we think the whole gain is chargeable as income on the daughter.

Readers' opinions are sought.

(Query T16,496) — Split.

'Split' is correct in saying that TA 1988, s 547(A) recognises that two or more persons can have an interest in a policy. However, those interests must be 'relevant interests' in the rights conferred by the policy in question.

TA 1988, s 547(A)(3) states that, for the purposes of this section, a person has a 'relevant interest' in the rights conferred by a policy or contract … in the case of an individual, if a share in the rights is vested in him as beneficial owner, or is held on trusts created, or as security for a debt owed, by him'. This subsection then goes on to deal with the 'relevant interest' in the case of a company, personal representatives, trustees and a foreign institution. Nowhere is mention made of the possibility of a beneficiary of a trust having a 'relevant interest'.

So, although it is clear that the father has a relevant interest for the purposes of this section, it cannot be said that the daughter does so, because her share in the rights has not yet vested and will not do so until 2021. She has a present right to any income generated by the trust fund, but not to the immediate possession of the capital of the trust property. For this reason, the person chargeable to tax is rightly the settlor, in accordance with s 547(1)(a). The father has a statutory right to recover any tax paid from the trustees.

For the sake of completeness, the following additional observations can be made:

First, we were not told how old the daughter is, or was, at the time the policy was surrendered. The trust was created in 1995 and the stated intention was to give the daughter an absolute entitlement 26 years later, in 2021. The investment was made in 1997 and the surrender occurred in 2003. On the assumption that the trust was created in the year she was born, the youngest the daughter is likely to have been at the time the policy was surrendered is eight years old. She may, of course, have been much older than that, possibly adult.

Secondly, where a beneficiary has an absolute interest in a trust and has also attained the age of 18 years, Inland Revenue practice is to 'look through' the trust and assess any chargeable event gains on the beneficiary.

Thirdly, where trustees have the power to advance to a beneficiary the whole of his/her presumptive share in the trust fund and where the beneficiary has attained the age of 18 years, the trustees can assign the investment bond to the beneficiary in specie. In consequence, on subsequent surrender, the chargeable event gain (and corresponding potential income tax liability) will fall on the beneficiary and not on the settlor.

Fourthly, where chargeable event gains are assessed on an otherwise non-taxpaying beneficiary, income tax will be payable at any (or a combination) of the following tax rates: 0%, 10%, 20% or 40%, depending upon the type of bond (whether on or offshore) and his/her own tax position.

Finally, where the settlor is either dead or non-UK resident when a chargeable event gain arises and where the trustees are also non-UK resident, any gain will be treated as income of the trustees for the tax year in which the chargeable event occurred. This will be income available for distribution to a UK resident beneficiary receiving a payment from the trust.

The beneficiary will be assessed to income tax under Schedule D, Case VI in the tax year in which the income is received. — Molly.

Whilst attractive, 'Split's' argument is doomed to fail. A chargeable event has arisen under TA 1988, s 540(1)(a)(iii) and because the policy was held on non-charitable trusts created by a (living) settlor, the gain is deemed by s 547(1)(a) to form part of the settlor's total income. TA 1988, s 547A(3) makes it clear that the person with the relevant interest is the settlor and not the trustees. The daughter is not the beneficial owner for these purposes. (Indeed, were her rights as the interest in possession beneficiary to constitute her as beneficial owner in part, then any other beneficiaries under the terms of the trust would similarly be beneficial owners in part.) The settlor may be entitled to 'top-slicing' relief under TA 1988, s 550.

In hindsight it would clearly have been preferable for the trustees to have assigned the policy to the daughter in advance of surrender. An assignment for no consideration is not a chargeable event. It would have been necessary to see if the terms of the trust permitted such an advance but, as the daughter is prospectively entitled to capital, the Trustee Act 1925, s 32 would have allowed an advance to her of at least one-half of the fund.

Another possibility, again depending upon the precise terms of the trust, would have been a 'Saunders v Vautier' rearrangement.

Issue: 3980 / Categories: