CG33280 - Basic terms of trust law as applied to CGT: One settlement or several?
Settlement
In general the word `settlement’ for Capital Gains Tax purposes does not bear the special extended definition which it has for certain Income Tax purposes under ITTOIA05/S620 (previously ICTA88/S660G). It refers to any case involving settled property within TCGA92/S68. See generally the speech of Lord Wilberforce in Roome v Edwards 54TC359. From 6 April 2006 by reason of ITTOIA05/S685A (1)(b) the same principle applies for the purposes of Income Tax other than the ‘Settlements Legislation’ in Part 5 Chapter 5 of ITTOIA05.
Exceptionally the ITTOIA05/S620 definition applies for the purposes of TCGA92/S286 (3) (connected persons, see CG14590) and TCGA92/S87 (non-resident settlements, charge on beneficiaries, see CG38570+).
Where a sub-fund election is in force under TCGA92/SCH4ZA/Para 1, see CG33330, then the sub-fund is regarded as a separate settlement for all purposes, although the annual exempt amount has special treatment, see CG18115.
Capital Gains Tax liability falls on `the trustees of the settlement’ if they are resident in the UK (see also CG10900+ for occasions where liability might fall on the trustees of a non-resident trust). The trustees are the taxpayer for most purposes of CGT and the return for the settlement is issued to one or more of them. Details of the routine procedures to be used in trust cases are to be found in the TSEM. Even though liability to CGT falls on a beneficiary or settlor the computation of each chargeable gain is made by reference to the trustees’ circumstances.
When dealing with submissions relating to new settlements, HMRC BAI Assets, Residence and Valuation (Technical) may give advice if it is considered that there is more than one settlement for Capital Gains Tax purposes. In most cases, however, it will be for the case owner to decide by reference to the guidance here and at CG37800+ onwards whether there is more than one settlement for Capital Gains Tax purposes.
Separate settlements
It is necessary to know whether there is one settlement or more for the following reasons:
- The annual exempt amount, see CG33100, is given to the trustees of the settlement. If there are several settlements then each has its own annual exempt amount. The annual exempt amount varies according to the number of post-June 1978 settlements with the same settlor.
- Losses of one settlement cannot be set against the gains of another.
- The CGT assessment is made on the trustees of the settlement, not on the trustees of separate funds within a settlement, see CG33340 and CG35400.
- If assets are moved from one fund to another within a settlement, there is no disposal, but if assets are transferred from one settlement to another, then that is a disposal of those assets.
- For the purpose of valuing unquoted shares, for example on 31 March 1982 the blocks belonging to the trustees of separate settlements are valued separately.
One settlement or more?
In general you should assume that a single deed or will gives rise to a single settlement, even though there may be several distinct trusts. If it is suggested that there is more than one settlement, you should obtain a copy of the instrument, and ask the trustees why they think there is more than one settlement. It may be helpful at this stage to draw attention to the principles expressed by Lord Wilberforce in Roome v Edwards at 54TC390E, that `the mere existence of separate trusts applying to parts of settled property does not in itself give rise to a separate settlement’.
It is unlikely that two or more settlements were created by one original deed of settlement, except in the case of the marriage settlement, or where separate property is specifically allocated to separate trustees. Most cases where there is doubt are trusts created by a will, because it is extremely rare for there to be more than one will.
Roome v Edwards
In considering whether there is one settlement or more, it is important to consider the particular features set out in CG33280. The first three are
- Separate Property,
- Separate Trustees and
- Separate Trusts.
These three features are referred to by Lord Wilberforce at 54TC389G-I. He does however call them `indicia’ of there being separate settlements, and not conclusive pointers. At the top of page 390 he says that the question must be approached in a practical and common-sense manner.
The fact that a beneficiary may benefit under several clauses is sometimes a pointer to the trusts declared in those clauses being a single settlement.
A conventional marriage settlement is generally two separate settlements.
If you are considering whether a deed or will gave rise to one or more settlements, you should start by looking at the position at the date of the settlement or, in the case of a will trust, the date of death of the testator. You should resist any attempt by the trustees to start by analysing the position at the present time, for example, after a life tenant has died or a beneficiary has reached a particular age. If there are two settlements now, and only one originally, then there must have been a disposal within TCGA92/S71, see CG37800. Lord Wilberforce makes this clear in the middle of page 390.
Separate property
It is quite common, particularly in a will, for there to be one or more clauses that deal with specific property, for example a house or a parcel of unquoted shares. The residue is dealt with in one or more further clauses. This is a strong pointer to there being separate settlements, particularly if there is no possibility of the property falling into residue.
It is also quite common for a will to provide that one half of the residue is to be held on one set of trusts and the other half on other trusts, for instance half the property is held on trust for Mr A for life with remainder to his children and the rest on similar trusts for his sister Mrs B. If there is no direction in the will that the property should be divided into two separate funds, and in particular if it is dealt with as one single block of property, then that is almost certainly a single settlement.
If there are several funds which share some common property, for example land, that is a pointer to a single settlement.
Separate trustees
The appointment of separate trustees in a deed of settlement is an extremely strong pointer to a separate settlement, unless it clearly had a short term purpose. Separate trustees in a will are virtually unknown.
Separate trusts
It is quite common for a clause in a will or settlement to provide that if the preceding trusts of the clause fail, for example, because one person fails to reach a particular age or has no children, then the property is held on the trusts of another clause. In such a situation it could be said that the trusts are not separate. But this cannot be regarded as an absolute rule, particularly in the case of a will. Nevertheless if the possibility of failure of the preceding trust is not remote, and the examples above are not remote, and there is a specific provision for the property to be held on the trusts of the other clause, there is only one settlement.
By way of contrast, particularly in a will, where separate trusts are specified and there is merely a remote possibility that the trusts of one clause might fail with the result that the property falls into residue, it may be accepted that there are separate settlements.
It is quite possible for there to be identical, but separate trusts. If the deed or will provides for an individual or individuals or a charity to take absolutely under more than one clause, that in no way prevents there being several settlements.
Separate beneficiaries
The fact that the same person may benefit from several separate clauses of a will does not prevent there from being several settlements. However if at least one of these clauses provides discretionary trusts this may be a pointer to there being one settlement. The reason is that the trustees would probably be expected to consider the interests under the other clauses in deciding how to allocate the income of the discretionary fund. If so they are clearly trustees of the will trust as a whole.
Marriage settlements
Marriage settlements, or marriage contracts, as they are called in Scotland, are rarely created these days, but many are still in existence. The standard form provides that property comes from the husband (or his family) and the wife (or her family). There are two funds, the husband’s and the wife’s. Each starts with a life interest in their own fund. When one dies, the other now has a life interest in the deceased’s fund. Finally the property goes to their children on whatever trusts have been appointed by the parties by deed or will. In these circumstances it may be accepted that there are two separate settlements, even though at the end of the day there may be identical trusts for their children on both funds. If however this basic pattern is not followed, because all the property comes from one party, or the funds are not separated, or the trusts to apply after death are already specified, then this is one settlement with two settlors.
Additions to settlements
If additions are made by the original settlor or substantial funds are added to a nominal settlement by someone other than the original settlor, you should assume that a new settlement has not been created.
If additions are made by someone other than the original settlor and the existing settlement is not nominal you should assume that a new settlement has been created and advise the agent or trustees accordingly, provided that the additions are made by deed.
In general, a new settlement is created unless it is absolutely clear that the trusts are the same and the provider of the additional funds intended them to be added to the existing trust property and mingled with it.