Trustee Support Services Limited’s (TSS) fee to register a trust is, currently, £200. Whilst the trustees are responsible for the payment of this fee, we appreciate that, in many cases, the trustees of the trust being registered will not have a trustee bank account through which they can make the payment.

This is especially likely to be the case if the trust holds investments where no income is produced, income is automatically reinvested or any income is mandated directly to beneficiaries. It is also likely to be the case where the trustees hold one or more life assurance policies, whether these are protection policies, investment bonds and/ or capital redemption policies.

In these situations, other parties involved in the trust may wish to make the payment of our fee on behalf of the trust. Such people are likely to include the settlor(s), a trustee or a beneficiary of the trust. Different tax implications will arise depending on precisely who will make the payment, and the type of trust, as follows;

1. A settlor of the trust wishes to pay the fee

Discretionary trust

Where the settlor pays the fee, this will normally be treated as a gift from the settlor to the trust. The £250 inheritance tax (IHT) small gifts exemption does not apply but the gift is then very likely to fall within the settlor’s IHT annual exemption of £3,000 (if available). Any amount in excess of the available exemptions would be a chargeable lifetime transfer (CLT) but would only become subject to a lifetime charge to IHT if the settlor’s lifetime cumulation exceeds his or her available nil rate band.

However, in the unlikely event of the settlor being a potential beneficiary under the trust, the deemed gift to the trustees may cause gift with reservation of benefit provisions to apply. In such circumstances, it would be better for the payment by the settlor to the trustees to be documented as an interest-free loan, repayable on demand, to the trustees (see 4. below).

Where the payment of the fee by the settlor is treated as a gift, provided this does not exceed the settlor’s available IHT exemptions, the gift should not be treated as “added property” to the trust under section 67 of the Inheritance Taxes Act (IHTA) 1984. If a CLT is triggered, it could be argued it is not added property because it does not increase the value of the property in the settlement. However, in these circumstances professional advice should be sought.

Bare (absolute) trust

Where the donor (settlor) pays the fee, this will be treated as a gift to the trust. However, the gift is very likely to fall within the donor’s £250 inheritance tax (IHT) small gifts exemption (provided there are not multiple bare trusts in favour of the same beneficiary).

Should the £250 small gifts exemption not be available, the gift is then very likely to fall within the donor’s IHT annual exemption of £3,000 (if available). Any non-exempt part of the gift would be a potentially exempt transfer (PET) so would have no inheritance tax implications provided the donor survives for 7 years after making the gift.

Flexible power of appointment interest in possession trust

Trust created pre-22 March 2006 – Prior to 2006, “flexible trusts” were frequently used to hold life assurance policies. In a case where the settlor is paying the fee to register a flexible trust that was established before 22 March 2006, the fee will be treated as a gift to the trust but should fall within the settlor’s £3,000 inheritance tax (IHT) annual exemption.

However, there could be a small number of cases where the settlor is a beneficiary under the trust and, in these cases, in order to avoid the fee payment giving rise to a gift with reservation of benefit, the fee payment should be documented as an interest-free loan, repayable on demand, from the settlor to the trustees (see 4. below).

In cases where the settlor is treated as making a gift to the trust, this could  be regarded as an addition to the trust which creates a new discretionary trust of the added property (in this case, the fee payment). However in correspondence with professional bodies in 2006, HMRC confirmed that:

“If a payment of cash was made and then spent immediately on, say, a tax liability or another expense” (as would seem to be the case with the fee payment to TSS Ltd) “then that short period will be the extent of its time as relevant period and there will be no question of having to consider what proportion of the existing settled property represents it going forward.”

The payment of the fee by the settlor should not, therefore, create tax issues for the trust.

If the settlor is a potential beneficiary under the trust, in order to avoid problems with the gift with reservation provisions, it may be preferable to document the payment of the fee as an interest-free loan, repayable on demand, from the settlor to the trustees (see 4. below).

A flexible trust created after 21 March 2006 is treated for inheritance tax purposes as a relevant property trust and is taxed as a discretionary trust (see above).

2. A trustee of the trust wishes to pay the fee

Where a trustee of the trust wishes to pay the fee, it is not recommended that the payment is made as a gift. This is because trustee would then be treated as a settlor of the trust and adverse tax implications could arise.

Instead, it would be more appropriate for the payment to be documented as an interest-free loan, repayable on demand, from the trustee making the payment to the trustees generally. Where the trust only has one trustee, this would necessitate the need for the appointment of an additional trustee before the loan is made (see 4. below).

3. A beneficiary of the trust wishes to pay the fee

Where a beneficiary under the trust wishes to pay the fee, it is not recommended that the payment is made in such a way as to be treated as a gift because of the adverse tax implications that may then arise.

Instead, it is thought that it would be more appropriate for the payment to be documented as an interest-free loan, repayable on demand, from the beneficiary to the trustees (see 4. below).

4. Loan to the trustees

Any loan made to the trustees should be made on the basis that it is interest-free and repayable on demand.  The loan could then be repaid when the trustees have funds available – for example when the trustees encash an investment, receive an income distribution or when they receive the proceeds of a life assurance policy. The parties should consult  their professional advisers on the tax implications of this action. A specimen draft loan agreement is available here for the consideration of the trustees with their professional advisers.

A specimen draft loan agreement is available here for the consideration of the parties with their professional advisers.