Pre-Owned Assets

'At the meetings we have had with you, you raised certain points which you wanted clarified. Except where otherwise stated, statutory references are to Sch 15.'

'You were concerned that where trustees hold a policy of assurance, under the terms of which certain benefits have been retained by the settlor/proposer whilst the remaining benefits enure for others, the current provisions of para 8 are such that an income tax charge would be imposed on the settlor. This concern was based on the premise that the property comprised in the settlement is an indivisible chose in action, being the contract with the insurance company held by the trustees. You asked that we set out our views on why that approach to this draft legislation is in our eyes misconceived; these are as follows.

'"Settlement" and "settled property" for the purposes of Sch 15 mean the same as in IHTA 1984; see ss 43(1) and (2) of that Act.

'There are two relationships in being. The first is that between the company and the trustees, and is purely contractual. So far as the company is concerned that gives rise to an indivisible chose in action to which the company is one party. That is of no relevance to the current income tax/IHT issues. The material relationship is that between the trustees and the beneficiaries. The trustees possess the legal interest in the chose in action. They hold certain interests in the chose on the terms of a trust that falls into the IHTA 1984, s 43(2) definition of settlement for the benefit of persons other than the settlor. Those are the interests which are the property comprised in the settlement within the meaning of paragraph 8. Other interests, those retained by the settlor, are held by the trustees on a bare trust for him. A bare trust is not within the definition of settlement at all, and property so held cannot come within the ambit of para 8.

'So in the simple case where the settlor has retained a right to an annual income under arrangements which are not subject to the "gifts with reservation" (GWR) legislation, that right which is enforceable against the trustees is not property within para 8, being a bare trust. If the company is not providing the income to the trustees for them to pass on, then that would give rise to an action by the trustees against the company under the chose in action they hold.

'There may be more complex cases where the settlor's retained rights or interests are themselves held on trust. But that would normally be construed as being a freestanding trust of those benefits in which the settlor had an interest in possession, which would fall within the exemption in para 11.

'In the straightforward case where the settlor has retained a right to an annual income or to a reversion under arrangements which are not subject to the GWR legislation, that right is not property within para 8 as the trustees hold it on bare trust for the settlor. The settlor is excluded from other benefits under the policy and so Sch 15 has no application.

'Even if the para 11 provisions did not apply so as to exempt the case from charge completely, any Sch 15 charge would apply by reference to the value of the rights held on trust for the settlor, not by reference to the value of the underlying life policy.'

'You asked whether a settlor who made an interest-free loan to a settlement of which he was not a beneficiary would be treated as having an interest in the settlement for the purposes of TA 1988, s 660A.

'The making of the interest-free loan to the trustees does not in itself constitute a "settlement" for the purposes of Sch 15 (which adopts the IHT definition of settlement); and so in the case of a trust with a typical settlor-exclusion clause, the fact that the settlor has made an interest-free loan will not per se be caught by para 8 of Sch 15.

'For completeness, in Jenkins v CIR (26 TC 265) the Court of Appeal found that the making of an interest-free loan brought the settlement within what is now s 660A ...

'In the Jenkins case, the dispute was about whether certain income received by the trustees of the settlement could be assessed on the settlor under the provisions of FA 1938, s 38(4). That provision contained an extended definition of retaining an interest in income that is in similar terms to the definition of retaining an interest in property or derived property found in s 660A(2).

'The effect of the decision in Jenkins was that a settlor who has made an interest-free loan to his/her trust has brought himself or herself within the scope of s 38(4), and by implication s 660A (albeit that there would be no charge unless income actually arose to the trustees).

'But, as explained in the second paragraph above, the Jenkins case does not affect the fact that the trusts in question are not caught by Sch 15.'

'You were concerned to establish whether policies of this sort are caught by Sch 15, and suggested that TA 1988, s 660A(9) might apply.

'That provision relates specifically to income consisting of "annual payments made by an individual". There are no such payments here because there is no income arising from the trust at all: but even if there were, we do not see that it could have that character.

'Separately we have been considering whether the doctrine in CIR v Plummer ([1979] STC 793) might operate so that even though the arrangements are set up under a trust umbrella, the arrangements would not constitute a settlement for TA1988, s 660A purposes where there is no element of bounty for the settlor.

'However, in a formal trust if there is no specific exclusion clause excluding the settlor and spouse, then the settlor retains an interest in the "settlement". So if the settlor, or his or her spouse, is named as a possible beneficiary of the trust holding the partnership policy, there is no doubt that the settlor retains an interest.

'We have to go no further than the legislation itself to see if the settlor retains an interest in the trust, per s 660A(1). That subsection and (2) together are sufficient to bring the income into charge. The rest of s 660A is about exclusions, which are not relevant to the main point.

'There is no mention of "bounty" in the legislation. It has derived purely from case law and our view is that it is needed only to prove that there is a "settlement" (i.e. to include "arrangement") in the wider sense of s 660G.'

'This is very good news for consumers and their advisers. We have worked closely with the Revenue to ensure any confusion about this issue is brought to a swift close. We are delighted that this has been achieved and that consumers who have taken sensible advice about their finances will continue to benefit.'

'If this remains unchanged, then this will create significant difficulties for the business continuity of small enterprises in the UK. However, we are continuing to work with the Revenue to find a solution to this problem and I remain hopeful of a positive conclusion.'