Readers’ forum: Efficiency savings
Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on the merging two identical discretionary trusts to reduce costs of administration.
I act on behalf of two discretionary trusts that arose on the death of a husband and wife within a few years of one another.
The beneficiaries are the same and the asset values are similar at around £900,000 combined. Both pay out to the beneficiaries for school fees, living expenses and at the same time cover professional fees.
An investment holding company manages the trust funds, a service that attracts its own charges as well as commission and other fees that tend to come along with such investments.
There would be scope to reduce costs if there were just one trust being managed, which is of course in the interest of the beneficiaries. If there were only one trust, I imagine there would also be scope to merge the funds.
Since the trustees for each settlement are the same, can they then merge the two trusts? And how would this interact with the ten-year charges on the separate trusts?
I look forward to responses from Taxation readers.
Query 19,123– Executor.
Reply by Terry ‘Lacuna’ Jordan, BKL
Executor proposes that two discretionary will trusts should be merged to save fees. The first step will be to look at the terms of the two wills to see what provisions (if any) they contain regarding such a merger. It is likely that each trust will have different trust and accumulation periods.
The Perpetuities and Accumulations Act 2009 (PAA 2009) provides for the perpetuity period to be 125 years and abolishes the restrictions on accumulating income under the Law of Property Act 1925, s 164 to s 166. The effect of PAA 2009, s 15 is that if trustees exercise a special power of appointment given in a trust made before 6 April 2010 to transfer property from one trust to another, the perpetuity and accumulation periods of the transferor trust continue to apply, even after the transfer to the new settlement. So the date of execution of the wills and the dates of death may be relevant.
For inheritance tax purposes, the original settlement will be deemed to subsist in view of IHTA 1984, s 81, and ten-year charges will continue to be counted from the date of death. That treatment will give rise to a capital gains tax problem in the transferor settlement if the assets are pregnant with gain.
It is settled law that transfers from one settlement to another means the trustees of the transferor trust make a disposal for capital gains tax purposes (see Roome and Denne v Edwards 54 TC 359 and HMRC’s Statement of Practice 7 of 1984). No inheritance tax charge arises because of s 81 and, accordingly, capital gains tax holdover relief would be available only to ‘business’ assets under TCGA 1992, s 165, not s 260.
It may be that the practical solution is to keep the two trusts running until they have served their purpose and the assets can be appointed outright to the beneficiaries.