The Gazette 1987

SEPTEMBER 1987

GAZETTE

thereby become " en t i t l ed in possession" to a "benefit" and ac- cordingly take no inheritance: in re Traf ford's Settlement Trusts [1984] STC 236. The conse- quence is that no inheritance tax is payable on the death of a potential object of a discretionary trust. By its very nature, a discretionary trust enables capital acquisitions tax to be held at bay until such time as the trustees decide to exercise their discretion. It is in order to remedy this deficiency in the capital acquisitions tax legislation that the Legislature has enacted ss. 104 to 109 FA 1984 and the ad- ditional provisions in ss. 102 to 108 FA 1986. Referring to these now in chronological order:- S.106(1)FA 1984 S. 106(1 )FA 1984 provides that when "property" becomes "sub- ject t o" a "discretionary trust" (as defined in s.104) the trust itself is to be deemed to have taken an in- heritance on the latest of the following three dates:- (a) t he date upon which the pro- perty became subject to the discretionary trust, or ( b ) t he date of the disponer's death, or (c ) the date on which there ceases to be a "principal object" of the trust who is under the age of 25 years. The latest to occur of these dates is referred to as "the date of the inheritance": s. 106(1). Proper- ty subject to the trust on that date is subject to a once-off inheritance tax at a flat rate of 3%: s.109. At first sight s. 106( 1) appears to be relatively straightforward. Fur- ther inquiry shows that this is not so, "the date of the inheritance" depending to a very great extent on who is the "disponer" in relation to the trust. As the examples set out below will demonstrate, identifica- tion of the "disponer" in relation to a particular discretionary trust can be a matter of some difficulty and it by no means follows that the set- tlor named in the trust instrument is the "disponer" in relation to the trust thereby created. The three dates mentioned in paras, (a) (b) and (c) of s. 106(1) above are each the subject of extensive statutory and judicial exposition:-

Paragraph (a) Property which "became sub- ject" to a discretionary trust before 25 January 1984 is "deemed to have become subject to the trust on that date"; s. 106(2). Such pro- perty does not escape the levy of inheritance tax under s. 106(1) merely by having become subject to a discretionary trust before that date. Paragraph (b) The "disponer" referred to in s. 106(1 )(b) is clearly the disponer "under or in consequence" of whose "disposition" the property became subject to the dis- cretionary trust. S.2(1) CATA 1976 defines the word "disponer" as the person "who, for the pur- poses of the disposition, directly or indirectly provided the property comprised in the disposition". This definition, which is based on the UK income tax legislation relating to settlements, is effective- ly no different from that in s.2 SDA 1853, which defined the equivalent expression "predecessor" in the former succession duty legislation as "the person from whom the in- terest of the successor is or shall be derived". Case law is plentiful, both in relation to the UK income tax legislation upon which the definition of "disponer" in s.2(1) CATA 1976 is based and in relation to the definition of the correspon- ding word "predecessor" in the former succession duty legislation. Used with discretion, it provides valuable guidance in identifying the "disponer" in relation to a par- ticular discretionary trust. Example (1) A gives shares in a family com- pany to his step-daughter B, the market value of which amounts to £100,000. B subsequently an- nounces her engagement to C, who is employed by a competitor. A therefore asks B to transfer her shares to her (B's) brother D, who is employed by the company, assuring her (B) that she need not be disappointed because he (A) will shortly do far better for her. She accordingly transfers her shares in the family company to D, whereupon A settles investments having a value of £200,000 upon discretionary trusts for the benefit of B and her children. A and not B is the "disponer" in relation to the

trust: A. G. -v- Biggs [1907] 2 IR 400. "This (£200,000) was not paid to or through her: it did not pass through her hands and she never possessed or enjoyed or con- trolled it. There was no complete gift of it to her, nor did she bring it into settlement. It was paid by her stepfather to the trustees of her settlement for the benefit of herself and her children, and until so paid it was (A's) proper money. He therefore was the (disponer). . . " : 408 per Johnson J. Example (2) On H's marriage to W, he (H) ef- fects a policy of life assurance on his life for a sum of £100,000 payable on his attaining the age of 60 years. Having taken out the policy, he assigns it to the trustees of a discretionary trust established by his future father-in-law for the benefit of W and the children of the marriage. H's godmother C (who is unrelated to him) offers to pay and pays the premiums payable in respect of the policy. After some years, the trustees surrender the policy and the proceeds of the sur- render are held by the trustees as property of the discretionary trust established by H's father-in-law. H and not C is the disponer in relation to the proceeds of the policy: A. G. -v- Rial/[ 1906] 2 IR 122. "Now, (C) never had any interest in the policy. It was effected, not by her, but by (H): there was no devolution of it, and the disposition of it necessary to bring it within section 2 was its assignment by (H) alone upon trusts under which she (C) took no interest. Shp was not, therefore, according to the ordinary meaning of the words, the 'settlor', 'disponer', . . . or other person from 'the interest' in the policy derived, and is therefore . . . not within the definition of 'predecessor' in sec- tion 2 " : 129 per Palles CB. Example 3 A dies intestate, whereupon his sole surviving brother B takes out letters of administration believing himself to be the sole surviving next of kin. A certain Mrs. D ap- pears and claims one-half of A's estate on the ground that she is the daughter of C, a long lost sister of A and B. B does not accept Mrs. D's claim, but enters into a deed of family arrangement whereby he (B) settles £30,000 of A's estate on

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