Readers’ Forum on Taxation: Beneficiary of a Testamentary Trust – Taxation

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“Our client, Mr. X, passed away many years ago. His wife, Mrs. X, and a local lawyer were trustees and executors. The will left his limited liability company shares, which were wholly owned by him, to a testamentary trust, which is discretionary in nature.

His daughter, who works for the company, is going to receive a large sum of money from the company. Accordingly, a P11D form will be prepared.

The daughter is named as the potential beneficiary of the testamentary trust.

I have two questions:

  • Tax under CTA 2010, s. Will 455 be due as a result?
  • Would it be possible to exclude him as a beneficiary to avoid the s 455 tax?

I look forward to readers’ responses. Query 19869 – Uncertain.

Response from Terry Jordan: The loan must be made to a participant or their associate

‘When Mr X died he left shares in a 100% owned company to a discretionary trust under his will, and I infer they would have had 100% business property relief under the IHTA 1984, s. 104.

This is still considered first-to-die best practice for spouses and civil partners, as it locks in the relief and prevents it from being overridden by the spousal or civil partner exemption. This could be advantageous if the rules were to change or if the shares were to be sold during the survivor’s lifetime.

Further planning is sometimes possible as the survivor could exchange what would be taxable assets on the second death for shares which, once held for two years, would again benefit from the relief.

The daughter of Mr. X, who works for the company, must receive a large loan (presumably the de minimis provisions of CTA 2010, s 456(3) are not in issue) and a P11D must be prepared. Uncertain asks if a liability under CTA 2010, s. 455 will arise because of the loan and whether it would be possible to remove the daughter as a potential beneficiary from the testamentary trust to avoid the charge. These loans are treated as subject to tax at the rate of income tax, but charged to the company as if it were corporation tax. It should be noted that the top dividend rate is proposed to be raised to 33.75% on April 6 this year as part of the package to fund social care and NHS costs.

For Section 455 to bite, the loan must be made to a participant or an associate of a participant.

A priori, the girl is not herself a participant so is she a partner? Although his mother does not personally own shares of the company, she is a trustee of the trust that owns them.

HMRC business tax manual at CTM61525 states: “Where the trust holds shares in a related company, any loan from that company to the trust will be chargeable because the trustee(s) are all participants or associates of a participant (and each trustee will be a relevant person , either because that trustee is a natural person or, in the case of a corporate trust, because CTA 2010, s 455(6) makes them a relevant person).

Therefore, the mother as trustee is part of the business. Therefore, the client’s daughter is an associate of his because she is a relative (see LTC 2010, s 448(1) (a)). Accordingly, a charge will be laid under Section 455.

I was wondering if a charge could be avoided if the mother retired as trustee. However, would this be covered by CTA 2010, s 464A? Also, is the daughter herself a participant (see CTM60160) by virtue of her interest in the shares as a beneficiary?

In my experience, it would be unusual for the will to provide for the exclusion of future beneficiaries, but a potential beneficiary could achieve the same result by irrevocably assigning all rights to charity; however, that apparently wouldn’t remove the charge here.

Originally published by Taxation Magazine Readers’ Forum

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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