Settlor Interested ?

[rubaduckduck]

A discretionary trust was set up in 2008 holding a property. The trust allowed the principal beneficiaries (settlors) use of property and income therefrom during the lifetime. No income arose during the life of the settlors. Following the death of the settlors the property has been rented out, the beneficiaries are now the daughters.

Is this trust still classified as settlor interest?

Does this mean, therefore, that the income will be subject to tax at 50% and the beneficiaries (basic rate taxpayers) can not reclaim the tax paid when the income is distributed to them?

Thanks for any help.

[section 44]

A discretionary trust was set up

trust allowed the principal beneficiaries (settlors) use of property and income therefrom during the lifetime.

Really? A discretionary trust where the beneficiaires have a life interest.

[maths]

Not sure what you are really trying to ascertain?

Was the trust set up in lifetime or under a will?

Is this trust still classified as settlor interest?

For income tax purposes ("settlor interested" for CGT purposes now abolished) following the death of the settlor(s) the trust would no longer be "settlor interested".

Whether prior to their death an interest in possession subsisted (as raised by section44) would depend upon the precise trust wording; if the settlor(s) prior to their death did possess an interest in possession the trust would still have been settlor interested but the provisions in this regard would be displaced by the interest in possession provisions with broadly the same consequences).

[rubaduckduck]

Thanks for the reply.

I was trying to determine whether, when the beneficiaries are paid the income, they would receive a refund of the higher income tax paid by the trust. The beneficiaries are basic rate taxpayers but the trust would pay the tax at 50%.

Is this not a discretionary trust but an interest in possession? Some of the trust wording is, as follows:

4. The Trustees shall hold the Trust Fund upon the following trusts namely :-
(a) Subject to the provisions of clause 11 hereof :
(i) Upon trust to permit the Principal Beneficiaries (PB) to have the use occupation and enjoyment thereof and to receive the income therefrom during the lifetime of the Principal Beneficiaries
(ii) If at any time during the lifetimes of the PB the Trust Fund shall comprise any dwellinghouse maisonette or flat or share or interest therein the Trustees shall at the request of the PB allow the PB to occupy such dwellinghouse maisonette or flat during the lifetimes of the PB for so long as the PB shall desire and there shall be no sale of any such dwellinghouse maisonette or flat or share or interest therein without the prior written consent of the PB during the lifetimes of the PB.....
(b) Subject as aforesaid the Trustees shall hold the Trust fund as to both capital and income upon trust for such of the Beneficiaries (B) in such proportions and subject to such trusts as the Settlors shall by deed or deeds revocable or irrevocable or by Will or Codicil irrevocably appoint without infringing the rules against perpetuities and subject to and in default of appointment as to both capital and income upon trust contingently for such of the Residual Beneficiaries as are living at the date of death of the PB and if more than one in equal shares absolutely Provided Always that if any Residual Beneficiary shall not be living at such date but shall leave a child.......

Thank you for any help offered.

[section 44]

It doesn't sound like a discretionary trust. The trust extract that you posted doesn't appear to give the trustees any discretion.

[maths]

If, following the death of the settlors the trustees possess discretion as to whom any income/capital of the trust should be appointed, then the trustees are liable at 50% on trust income and any income distributed to a beneficiary (if the latter is subject to income tax at less than 50%) may recover any excess tax paid by the trustees.

[rubaduckduck]

Thank you very much for the help given.

The beneficiaries are the settlors 2 daughters and they are entitled to 50% each. Does this fact together with the extract of 4b from the trust deed mean that the trust is an interest in possession rather than a discretionary trust? The extract from 4b states 'the Trustees shall hold the Trust fund as to both capital and income upon trust for such of the Beneficiaries (B) in such proportions...' - does this then mean therefore the beneficiaries will be entitled to this income when they want it and the trust is interest in possession?

the other extracts from the trust relating to income are:

5. The discretion and powers conferred on the Trustees by this deed shall be absolute and uncontrolled discretions and powers and any such discretions or powers appertaining to the management or administration of any property for the time being forming part of the Trust Fund shall be exercisable by the Trustees as if they were beneficially entitled thereto and no Trustee shall be held liable for any loss or damage to the trust Fund.....
14. The trustees will have the power to apply any part of the capital of Trust Fund or any accumulations of income of the Trust Fund in payment of any premium for the effecting or maintaining of any such policy or power to borrow from any person.....
22. The trustees may in their absolute discretion from time to time and at any time pay any part of the capital or income of the Trust Fund in meeting defraying or otherwise providing for any costs expenses or other liabilities incurred by the Trustees in the administration of the property......

Does change the view of whether it is an interest in possession or discretionary trust?

Thanks again.

[sgreen1979]

Probably pushing it but can anyone help any further?
Thanks