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Taxation: Settlor’s spouse

Writing for Taxation magazine, BKL tax adviser Terry Jordan considers a discretionary settlement where the potential beneficiaries included the settlor’s husband.

 

The potential beneficiaries of a discretionary settlement included the settlor’s husband. The husband died in 2008 and the settlor has not remarried.

A discretionary settlement which was set up in 1993 by a married woman excluded her as a potential beneficiary under any circumstances, the then “class of beneficiaries” being all her adult children. Her then husband was not excluded and, in fact, was added to the class of beneficiaries in 1994.

The husband died in 2008. No distributions have ever been made to any potential beneficiary other than her late husband and, since his death, no distributions have been made.

Since the death of my client’s husband, I have continued to treat the settlement as settlor-interested on the basis that, although the settlor has not remarried, this remains a possibility. It would be possible to add any future husband to the class of beneficiaries and the settlor retains that right while she continues to live.

Consequently, looking at section 1 of part 2 on page 2 of HMRC’s Helpsheet 270, it appears to me that it would be possible “in any way, for the property to be applied for the benefit of the settlors’ spouse” (were, of course, she to have one). None of the exceptions that are stated on page 4 of Helpsheet 270 are relevant.

I am now beginning to wonder whether my treatment of the settlement has been correct. Any views of readers, whether they are confirmatory or otherwise, would be very much welcomed.

Query 18,213 – Country Bumpkin

 

Reply from Terry “Lacuna” Jordan, BKL

Because the trust was created after the introduction of inheritance tax it was necessary to exclude the settlor herself; otherwise it would have constituted a gift with reservation of benefit. Trusts created during the capital transfer tax era typically included both the settlor and his or her spouse as potential beneficiaries.

It is generally well known that, if a trust is “settlor interested”, the income tax liability falls on the settlor. It used to be the case that only the settlor returned the income on his or her tax return and the trustees did not, but nowadays the trustees are liable and they provide the settlor with a form R185 (Settlor).

The settlor is given credit for the tax paid by the trustees and if, as a result, the settlor obtains a repayment he or she is obliged to return that repayment to the trust.

Older readers may recall the case of Vandervell v CIR [1967] 2 AC 291 where the settlor was held liable on dividends paid to the Royal College of Surgeons.

The relevant legislation is now contained in ITTOIA 2005, s 619, s 624 and s 625. However, and most importantly, s 625(4)(d) provides that “the settlor’s spouse or civil partner” does not include “a person to whom the settlor is not married but may later marry or a person with whom the settlor is not a civil partner but of whom the settlor may later be a civil partner”.

Accordingly, since the husband’s death in 2008, the client’s trust has not been settlor-interested.

 

This article is also available on the Taxation website.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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