Vulnerable beneficiary trusts: Finance Bill 2013 amendments protect trusts with powers of advancement | Practical Law

Vulnerable beneficiary trusts: Finance Bill 2013 amendments protect trusts with powers of advancement | Practical Law

The Finance Bill 2013 was published on 28 March 2013. Measures on the tax treatment of vulnerable beneficiary trusts, first published in draft on 11 December 2012 and 17 January 2013, have been amended in relation to powers of advancement.

Vulnerable beneficiary trusts: Finance Bill 2013 amendments protect trusts with powers of advancement

by PLC Private Client
Law stated as at 26 Apr 2013 • United Kingdom
The Finance Bill 2013 was published on 28 March 2013. Measures on the tax treatment of vulnerable beneficiary trusts, first published in draft on 11 December 2012 and 17 January 2013, have been amended in relation to powers of advancement.
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Finance Bill 2013 clauses published on 28 March 2013 dealing with the tax treatment of vulnerable beneficiary trusts include amendments making it clear that both lifetime trusts and will trusts can still qualify for vulnerable beneficiary status even where the statutory power of advancement has not been expressly disapplied or where an express power similar to the statutory power of advancement is included. The amendments show that HMRC has taken note of post-consultation representations to ensure that powers of advancement will not automatically prevent qualification for the special tax treatment given to trusts for bereaved minors, 18 to 25 trusts and disabled trusts.
HMRC seems to have taken its eye off the ball when suggesting the removal of existing provisions that prevent powers of advancement from automatically breaching the new restrictions on the application of trust capital and income. What seems to have been intended as a tidying up exercise would have had detrimental consequences for existing will trusts and made drafting such favoured trusts more complicated in the future. The reinstatement of the carve out was widely expected.

Background

Powers of advancement

Trustees have a statutory power of advancement under section 32 of the Trustee Act 1925 (TA 1925), unless the trust document excludes it. This is a power to pay or apply trust capital for the advancement or benefit of beneficiaries who are objects of the power. It applies only to half of a beneficiary's interest in the trust fund, although most modern trust documents extend the power to apply to the whole of a beneficiary's share.
A trust document may contain express powers of advancement in addition to, or instead of, the statutory power. Most express powers are in similar terms to the statutory power, but with fewer restrictions.
Section 89(3) of the Inheritance Tax Act 1984 (IHTA 1984) confirms that the statutory power of advancement does not prevent a trust from qualifying for the special inheritance tax (IHT) treatment given to disabled trusts.
Section 71A(4) of IHTA 1984 has similar provisions to prevent powers of advancement, express or statutory, from disqualifying a trust from bereaved minors trust status.
Section 71D(7) of IHTA 1984 has similar provisions to prevent powers of advancement, express or statutory, disqualifying a trust from 18 to 25 trust status.
For further information on powers of advancement, see Practice notes, Exercising powers of appointment, advancement and transfer: overview: Powers of advancement and Practice note, Exercising powers of advancement: meaning of "advancement" and "benefit".

Draft Finance Bill measures

On 11 December 2012 and 17 January 2013, following consultation, HMRC published draft clauses to be included in the Finance Bill 2013 to implement changes to the taxation of trusts for vulnerable beneficiaries. One aspect of the proposed changes that appeared in the consultation was the removal of an existing provision that prevents powers of advancement from automatically disqualifying a trust from vulnerable beneficiary status. It was not clear from the consultation document exactly what was envisaged.
When the draft legislation was subsequently published it prevented trusts that did not expressly disapply the statutory power of advancement, or that contained express powers of advancement that could potentially breach the new restrictions on the application of trust capital and income, from qualifying as vulnerable beneficiary trusts. The draft legislation contained grandfathering provisions to protect trusts set up before 8 April 2013, the effective start date for the new rules, but, as individual practitioners and representative bodies such as the Society of Trust and Estate Practitioners (STEP) pointed out, those provisions would not assist wills executed before 8 April 2013 that contained such trusts.
The draft legislation removed the carve out provisions for powers of advancement across the board so that not only disabled trusts would be affected but also 18 to 25 trusts and trusts for bereaved minors.
For more background on the proposed changes to the taxation of trusts for vulnerable beneficiaries, see Legal update, Vulnerable beneficiary trusts: HMRC response to consultation and Finance Bill 2013 clauses.

Finance Bill 2013

Amendments relating to powers of advancement

HMRC has taken note of post-consultation representations to ensure that powers of advancement will not automatically prevent qualification for the special income tax, capital gains tax and IHT treatment given to trusts for bereaved minors, 18 to 25 trusts and disabled trusts.
The provisions contained in the draft Finance Bill clauses published on 17 January 2013 that removed the carve out for powers of advancement have been omitted so that trusts can still qualify for vulnerable beneficiary status even where the statutory power of advancement has not been expressly disapplied or where an express power similar to the statutory power of advancement is contained in a will trust or lifetime trust. The wording of the new clauses is in line with the existing provisions in IHTA 1984 for trusts for bereaved minors and 18 to 25 trusts.
(Paragraph 6(3), Schedule 42, Finance Bill 2013 inserting a new section 89(3)(b) to (f), IHTA 1984.)
(Paragraph 7(5), Schedule 42, Finance Bill 2013 inserting a new section 89A(6A)(b) to (f), IHTA 1984.)
(Paragraph 11(3), Schedule 42, Finance Bill 2013 inserting a new section 169D(4B)(b) to (f), Taxation of Chargeable Gains Act 1992 (TCGA 1992).)
(Paragraph 12(3), Schedule 42, Finance Bill 2013 inserting a new paragraph 1(1A)(b) to (f) of Schedule 1 to TCGA 1992.)
(Paragraph 14(3), Schedule 42, Finance Bill 2013 inserting a new section 34(3)(b) to (f), Finance Act 2005 (FA 2005).)
(Paragraph 15(3), Schedule 42, Finance Bill 2013 inserting a new section 35(4)(b) to (f), FA 2005.)

Small benefits provided for non-vulnerable beneficiaries

Under the new rules, set out in the Finance Bill 2013, small benefits provided for non-vulnerable beneficiaries are permitted up to an annual limit (in any tax year) of £3,000. The Finance Bill 2013, published on 28 March 2013, includes amendments to the earlier draft Finance Bill clauses, published on 17 January 2013, providing that a trustee's power to make such de minimis payments is included in the list of carve out provisions alongside those for powers of advancement. It appears that, when HMRC's attention was drawn to the problems surrounding powers of advancement, it became clear that powers involving de minimis payments would also have to be specifically carved out at the same time.
A carve out for small payments has been added to existing provisions for trusts for bereaved minors, 18 to 25 trusts and disabled trusts.
(Paragraph 2(3), Schedule 42, Finance Bill 2013 inserting a new section 71A(4)(za), IHTA 1984.)
(Paragraph 3(3), Schedule 42, Finance Bill 2013 inserting a new section 71B(2A) and (2B), IHTA 1984.)
(Paragraph 4(4), Schedule 42, Finance Bill 2013 inserting a new section 71D(7)(za), IHTA 1984.)
(Paragraph 5(3), Schedule 42, Finance Bill 2013 inserting a new section 71E(4A), IHTA 1984.)
(Paragraph 6(3), Schedule 42, Finance Bill 2013 inserting a new section 89(3)(a), IHTA 1984.)
(Paragraph 7(5), Schedule 42, Finance Bill 2013 inserting a new section 89A(6A)(a), IHTA 1984.)
(Paragraph 11(3), Schedule 42, Finance Bill 2013 inserting a new section 169D(4B)(a), TCGA 1992.)
(Paragraph 12(3), Schedule 42, Finance Bill 2013 inserting a new paragraph 1(1A)(a) of Schedule 1 to TCGA 1992.)
(Paragraph 14(3), Schedule 42, Finance Bill 2013 inserting a new section 34(3)(a), FA 2005.)
(Paragraph 15(3), Schedule 42, Finance Bill 2013 inserting a new section 35(4)(a), FA 2005.)

Grandfathering of existing will trusts and lifetime trusts

The Finance Bill 2013 contains a new definition for a "relevant settlement" which means:
  • A settlement created before 8 April 2013 where the trust provisions have not been altered on or after that date.
  • A settlement in a will executed before 8 April 2013 arising after that date that has not been altered on or after that date.
(Paragraph 19, Schedule 42, Finance Bill 2013.)
The new provisions allow relevant settlements (as defined) to qualify for vulnerable beneficiary trust status.
(Paragraph 9(2), Schedule 42, Finance Bill 2013.)
(Paragraph 11(7), Schedule 42, Finance Bill 2013.)
(Paragraph 12(7), Schedule 42, Finance Bill 2013.)
This protects vulnerable beneficiary trusts included in wills executed before 8 April 2013 and trusts established in lifetime before that date so that they will not automatically be disqualified under the new rules. Trusts that have already been established will not have to be amended. Property added after 8 April 2013 to a disabled trust set up before that date will also be protected so that such a trust will not have to operate partly under the old rules and partly under the new rules (Paragraph 9(2), Schedule 42, Finance Bill 2013).

Comment

HMRC launched a consultation on changes to the definition of a vulnerable person for tax purposes on 17 August 2012 when it also invited views on how to address inconsistencies in the qualifying conditions across the range of taxes (income, capital gains and inheritance tax) that must apply for trusts to receive special tax treatment. It seems to have taken its eye off the ball when suggesting the removal of existing provisions that prevent powers of advancement from automatically breaching the rules on the application of trust capital and income. What seems to have been intended as a tidying up exercise would have had detrimental consequences for existing will trusts and made drafting such favoured trusts more complicated in the future. HMRC may have been lulled into a false sense of security by the dearth of responses to this particular proposal. The initial lack of protest from practitioners can be explained by the fact that the draft legislation implementing this particular provision was not published until 11 December 2012, after the consultation period had closed.

Sources

Clause 213, Finance Bill (No 2) 2013.
Schedule 42, Finance Bill (No 2) 2013.
Finance Bill (No 2) 2013: Explanatory notes.
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