Self Assessment for the Elderly: How Trusts will be affected

Perhaps the most common form of Will Trust, after provision for the very young, is the provision of an income for an elderly dependent, often the widow. The provision may of course be the simple grant of a life interest or, where substantial sums are involved and other considerations apply, the trustees may have certain discretions. It is estimated that a very substantial proportion of all Will Trusts are administered without professional help, and many of these may have existed for years without the need for formal annual accounts. The income from the trust investments has been mandated to the tenant for life and as often as not the investments have lain undisturbed (save for the occasional take-over or rights issue) from year to year.

Awareness of the Problem

Whether Self-Assessment ("SA") will change all that is the subject of this series of articles. Certainly those elderly people who watch television or who read newspapers can hardly fail to have become aware of SA through the extensive advertising by the Inland Revenue. Elderly beneficiaries of trusts will, increasingly over the next few months, seek reassurance from their trustees about the tax position. Lay trustees, who in the nature of things may very well be as old as the beneficiaries (for example close friends of the testator), will also need urgent advice on SA for trustees.

Hundreds of thousands of elderly taxpayers are entitled to seek repayment of tax deducted at source. Whilst they will by now probably have made the necessary arrangements with Building Societies for interest to be paid gross, they will still be seeking repayment of tax deducted from Trust Income, probably at the end of each year, and they will now wish to know whether SA will make any difference to the procedures. In April of this year it was estimated that 61 sacks of mail per day were being received by Leicester 7 Tax District (one of the main repayment offices) and in an attempt to reduce delays at that office (and at Belfast) taxpayers and their advisers have been urged to send the tax vouchers with the claims, because the claims are now being worked without the files. (A word of warning here for tax advisers: the Inland Revenue have from time to time been willing to welcome members of the professions to an office tour, and I once heard a suggestion that competent tax advisers should avoid Leicester in the spring lest they be roped in to help with the volume of work!).

All this places an extra burden on the practitioner dealing with trusts to get it right first time and every time.

Training for Advisers

In theory, there ought not to be too many difficulties, because the rules for trustees are substantially the same as for other taxpayers and there is a strong "family resemblance" between the new trust return, which has reached final draft form, and the ordinary SA return. Advisers who have attended the (free and very helpful) training courses for SA and who have studied the technical manuals SAT1 and SAT2 already have much of the background knowledge that will be needed. The Trusts Department of the Inland Revenue are, however, aware that the agent educator packs and seminars have so far reached more of the accountancy profession than lawyers, even though very many trusts are entirely administered by lawyers without accountancy help.

There is no substitute for reading the technical manuals and (when the draft of the trust return is more widely available than at present) studying the return pack in detail and attempting to complete some dummy examples.

The New Return Pack

The pack itself (which is still being refined) consists of the return, the return guide, the calculation sheet and the calculation guide. Forms 1, 31 and 32, (which would have become more familiar to advisers if not subject to such frequent variation!) will no longer be used in their present form. Form 922 may well continue, though perhaps in a revised form. Form 41G trust is still central to the administration of trusts as the basic "control document" from which the Inland Revenue determine the basis of taxation of the trust.

There was a facility, up to 5th April 1991, whereby a professional adviser could send the trust instrument to the Inland Revenue who would issue a ruling as to the tax treatment of the document. Apparently 26 inspectors worked in a team to provide these rulings, and although the facility has not been available for many years, some practitioners found it so useful that they still (vainly!) seek rulings. The SA Return, page 8, allows for the inclusion of additional information, but it is clear that the mere submission of a long document will not be acceptable to the Inland Revenue as an attempt to pass to them the burden of knowing the correct treatment of the settlement for tax purposes. No document should actually accompany a return, but if the taxpayer really feels he must submit the trust instrument because it is suggested that some portion of the trust instrument may give rise to a difficulty, the "additional information" section of the return can be used only if the part of the document giving rise to concern is clearly identified and the attention of the Inland Revenue directed towards the nature of the difficulty. It is considered reasonable for the practitioner to know the meaning and tax treatment of the trust instrument by virtue of which he is acting or on which he is advising.

Whilst the return must be addressed and sent to the trustee because that is a legal requirement and is good service, it is intended that eventually the adviser will receive copies of SA documents in the way that he previously received copy assessments. The idea was canvassed that it might be possible to incorporate Form 64-8 into the return, but that suggestion has not so far been adopted. The form can be obtained from local tax offices. It may well be that in certain trusts the Inland Revenue have been in correspondence with advisers even where a Form 64-8 has long since been superseded. It is almost certain that, in the early stages, payment notices will be received by trustees without a copy being sent to the adviser, so the need for the adviser to be up-to-date with the administration of the trust will be greater than ever before.

£100 automatic penalty

Filing dates are important. They are the same as for other taxpayers. If a return is sent late, or if it is incomplete (perhaps by the omission of a relevant schedule) interest and penalties may follow. Failure to send in the right supplementary pages triggers an automatic penalty of £100. The trustee is responsible for making sure that he has supplied the right pages and whilst it is eventually hoped that the return will be customised, based on past returns, the burden is on the trustee to get it right. Help is always available from 8.00 am to 10.00pm, on every day of the year save Christmas Day itself.

Before even considering the new return it will be as well for advisers to look carefully at existing trust files with a view to clearing arrears cases. The 1996/97 liability will be based on the figures for 1995/96 insofar as those are not stood over on appeal. When the 1995/96 figures are agreed it will be possible to amend the payment on account for 1996/97. It is therefore necessary to clear all years prior to 1996/97. Clearance for this purpose means getting all the outstanding information in, agreeing all the liabilities and seeing that those liabilities are all paid. There will be a blitz by the Inland Revenue on all years up to 1995/96. The pithy advice to practitioners is "get on with it".

Practitioners used to be able to meet the Inspector to sort out difficult cases. Apparently that facility may still be available under SA, particularly where a meeting will help to clear outstanding appeals. It is understood that some of the "old chestnut" files were difficult because there had been changes of personnel both at the professional office and at the Revenue.

Now for the good news: "Clearance Boxes"

The final draft of the Trust and Estate Tax Return, sets out a number of "clearance boxes", the correct completion of which may save the adviser much time. For example a trustee of a bare trust (defined as one in which the beneficiary has an immediate and absolute title to both capital and income) may tick the first box, and proceed straight to page 7 of the return, where he need only supply one telephone number and indicate whether there has been any change of trustee, giving particulars. He may then if he wishes supply additional information relevant to the taxation of the trust, for example to show that it was terminated or the administration period ceased during the year, but subject to that, all he need do is sign the declaration in the return and send it back. The date for doing so is 30th September 1997 where the Revenue are to calculate the tax or 31st January 1998 if the trustee is making the calculation. With so little to do, the adviser should be able to note his file early in the year that the return has been dispatched.

This same facility, merely to complete the formal parts of the return, will apply in any of the following situations:

(i) where the trustee is trustee of an Interest In Possession Trust and where he has mandated all the trust income to the beneficiary, or

(ii) where the trustee is the trustee of an Interest In Possession Trust and all the income arises in the United Kingdom and has had tax deducted before the trustee received it, or

(iii) where the trustee is the trustee of an Interest In Possession Trust and has mandated part of the income to the beneficiary where the part not so mandated comprises only income arising in the United Kingdom which has had tax deducted before the trustee received it, or

(iv) where the person completing the return is the personal representative of a deceased person and all the income arises in the United Kingdom and has had tax deducted before the personal representative has received it.

Unfortunately for practitioners, the date of termination of a trust, or the date of cessation of an administration period, remains as obscure under SA as it always was. There is no more explanation, either in the return or in the return guide, than can be found in statute. It might be helpful to have more information in the notes to specify occasions, for example the death of a tenant for life, which might bring a trust to an end.

The basis of taxation of each trust

Before a detailed consideration of the draft tax return, advisers will appreciate that it becomes necessary for them to refresh their memory as to the precise taxation of each trust with which they are dealing. Where Form 41G is lost in the mists of time (or perhaps in a file which has long since been shredded) the practitioner would do well to look out the trust instrument and satisfy himself as to the basis of taxation of the trust, particularly noting whether the existence of any discretion takes the trust outside those catagories of trust, mentioned in this article, which will enable a trustee merely to "top and tail" the SA return. Such a re-appraisal of the administration of the trust is no bad thing anyway; frequently trust instruments do contain discretions which, if exercised judiciously, can save tax for the family as a whole.

Of particular relevance in this area, and worthy of mention in passing, is the situation where the elderly person enjoys a reasonably comfortable lifestyle and is in the position of being able to manage without some of the trust income. This combination of circumstances may enable the elderly beneficiary to make gifts out of income, as was the case in Bennett and others v IRC [1995] STI 13. Mrs Bennett in that case received the gross income of a trust fund which, at £300 per annum, was adequate for her needs. Her late husband had had shares in a family company which were now held by the trustees and were sold for other shares plus £1,843,248 in cash which, naturally, began to generate a substantial income. Mrs Bennett did not need the extra income and told her solicitor so, signing a form of authority addressed to the trustees authorising them to distribute the surplus, which they did. After only two annual payments had been made, and within three weeks of the second such payment, Mrs Bennett died suddenly and unexpectedly. Notwithstanding the very substantial size of each payment Lightman J held that the payments had been made as part of the normal expenditure of Mrs Bennett and were therefore exempt transfers under s21 IHTA 1984.

Next Issue

In the next part of this article I shall be examining the final draft of the trust and estate tax return itself in some detail, and considering the automatic procedure for the withholding of tax repayments by the Inland Revenue. I shall mention points arising from the tax return guide and describe, for those advisers who deal with many trusts each year, the facilities of the electronic lodgement service. Finally I shall discuss particular problem areas which professional advisers have already identified, including s660A negotiations, the future use of form 922, the proper recognition of base valuations for CGT purposes where no value has been ascertained for IHT, and special features of foreign resident trusts.

Toby Harris LL.B, A.T.I.I ,Consultant with Matthew Hutton - Tax Consultant