The Gazette 1988

GAZETTE

JANUARY/FEBRUARY 1988

I nhe r i t ance Tax on D i sc r e t i ona ry T r us ts Part 2

S.I03(1) FA 1986 S. 103(1) FA 1986 imposes an annual "inheritance t a x " (in reality an annual wealth tax) on property subject on each 5th April to a "chargeable discretionary trust". The annual "inheritance t a x" so payable is levied at a flat rate of 1 %: s. 106. The expression " cha r geab le discretionary t r u s t" is defined in s.102 as a discretionary trust in r e l a t i on to w h i ch (a) t he " d i spone r" is dead, and (b) there are no "principal objects". In deter- mining whether a particular trust is a "chargeable discretionary t r u s t" as defined in s . 102 on a particular 5th April, one is thus referred back once again to the question who, in relation t o t he t r u s t, is t he " d i spone r "? A penalty of £1 , 000 or double the inheritance tax payable, encourages one to arrive at the correct answer: s.108. A measure of relief is afforded by s. 103(4) FA 1986 which provides that the annual "inheritance t a x " of 1 % payable on each 5th April is not to be levied if property subject to that tax is also subject " o n that same da t e" (i.e. on the 5th April in any particular year) or " w i t h in the year prior to that date" to the once- off inheritance tax of 3% payable by reason of s. 106(1) FA 1984. Example (6) In 1960 A settles property on discretionary trusts for the benefit of his three children, B, C, and D. B attains the age of 25 years in 1974, C in 1976 and D in 1979. On 1st February 1986 A dies and the trust property becomes subject to the once-off inheritance tax of 3% imposed by s. 106(1) (b) FA 1984. The additional annual in- heritance tax of 1% imposed by s. 103(1) FA 1986 will not be payable on 5th April 1 986. Identifying the "disponer" It will be apparent that the crucial question in relation to both the once-off inheritance tax of 3% im- posed by s. 106(1) FA 1984 and the annual inheritance tax of 1 % imposed by s. 103(1) FA 1986 is

who is the "disponer" in relation to the discretionary trust in ques- t i o n ? " Un t il t h is has been answered one cannot determine who the "principal ob j ec t s" are, whether the disponer is dead, and whether the trust is a "chargeable discretionary t r u s t" as defined in s. 102 FA 1986. In order to answer this question t wo further questions must be asked:- (A ) " Un d e r" (or " i n consequence o f " ) which " d i spos i t i on" did the property become subject to the trust?

instance, it is arguable that the " d i spos i t i on" " u n d e r" which the property (i.e. the 100 shares of £ 1 in the company hiring out A 's ser- vices to the film studio) became subject to the trust was the trust instrument itself. On the other hand, one could argue w i th equal f o r ce t hat t he " d i s p o s i t i o n" " u n d e r " wh i ch t he p r ope r ty became subject to the trust was the " a r r angemen t" of which the trust was merely one constituent element. Such authority as exists sug- gests that regard must be had to the "causa proxima" rather than to the "causa remota": A. G -v- Up- ton LR 1 Ex 224, 231 per Bramwell B. In Parr-v-A.-G[ 1926] AC 239, for example, property was settled to the use of A for life w i th re- mainder to A 's first and other sons successively in tail male. A and his eldest son B disentailed and resettl- ed the property upon trust for A for life " b y way of restoration and confirmation" of his life interest under the original settlement, w i th remainder to B for life, w i th further

( B) Who " p r o v i ded" the property " f o r the purposes o f " that " d i spos i t i on "? To answer (A) requires all the skill and subtlety of a logician train- ed in the arts of medieval disputa- tion. In Example (4) above, for

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