20 Annual acquisitions by discretionary trusts

Summary

This section provides that, where on a chargeable date in any year, commencing with the year 2003, property is subject to a chargeable discretionary trust (see section 19), the trust will be deemed to have taken an absolute inheritance on that date. All the provisions of the Act will apply to the inheritance so taken, except where restricted by section 21.

The section also contains other provisions—

• to counter avoidance of the annual charge to tax by appointments of property out of the discretionary trust for short periods,
• to ensure that certain future interests not in possession on the relevant date will not be taxed, and
• to eliminate a 1% annual charge on property in the same year in which a once-off 6% charge is imposed on the same property under section 15 of the Act.

Details

(1) Where, on a chargeable date in any year, commencing with the year 2003, property is subject to a chargeable discretionary trust, the trust will be deemed on each chargeable date to become beneficially entitled in possession to an absolute interest in that property and to have taken on each such date an inheritance as if the trust and the trustees were together a person for the purposes of the Act. Each chargeable date on which property is subject to a chargeable discretionary trust is the date of the inheritance.

The definition of the term “chargeable discretionary trust” ensures that an annual 1% charge cannot arise on any chargeable date while—

• the disponer is alive, or
• any one of the principal objects (i.e. the disponer’s spouse, his/her children and the children of a pre-deceased child of the disponer) of the trust, if any, is under the age of 21 years.

Where there are no principal objects of the trust, the charge will apply on the chargeable date each year if the property is subject to a chargeable discretionary trust on that date (but see note on subsection (4)).

(2)(a) Property includes property representing such property.

(2)(b) This provision prevents the avoidance of the 1% annual charge by the appointment of property out of a discretionary trust for short periods spanning a chargeable date.

Where property is subject to a chargeable discretionary trust prior to a chargeable date, it is deemed to remain subject to a chargeable discretionary trust notwithstanding the creation of an interest in possession which is in existence on the chargeable date if that interest is—

• revocable, or
• will cease on an event other than—
  • the death of that person, or
  • the expiration of a period certain of not less than 5 years.

(3) A claim for discretionary trust tax will not arise in respect of an interest in remainder until it becomes an interest in possession on, say, the death of a life tenant or in respect of an interest in a policy of assurance until the policy matures on a death, is surrendered or where the insurer makes a payment of money or money’s worth in full or partial discharge of the policy under section 41 of the Act.

(4) Property will not be subject to a 1% discretionary trust tax charge on any chargeable date if that same property is subject to the once-off 6% charge under the provisions of section 15 of the Act or under section 103 of the Finance Act 1984 on the same date or within the year prior to that date.

Relevant Date: Finance Act 2015