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Taxes Management Act 1970

These days organising a family trust, whether it’s to benefit children/grandchildren or to legally move assets so they can’t be grabbed by the Local Authority to pay for nursing home fees; more and more individuals are setting them up.

In today’s Blog, I’m looking at the implication of a Tax Tribunal in which the question was posed; can trustees simultaneously exist and not exist for the purposes of the Taxes Management Act 1970? This was the key question examined by the Tribunal, with regard to the Trustees of the Paul Hogarth Life Interest Trust 2008.

What must trustees report?

In most trust situations, the trustees directly receive and manage income and gains and make decisions about which beneficiaries should receive distributions. Such trustees are treated as a separate legal person with a distinct and separate rate of tax, subject to the full panoply of returns, assessments and penalties.

However, where the beneficiaries of an interest in possession (IIP*) trust have an absolute right to income as it arises, the trustees frequently arrange for the income to pass directly to the beneficiaries, bypassing their own hands altogether. In the absence of capital gains, such trustees have very little active involvement.

(* From an Income Tax perspective, an IIP trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust as it arises, but not the underlying capital from which the income derives. The trustee must pass all of the income received, less any trustees’ expenses, to the beneficiary)

The tribunal judge, Judge Richard Thomas had to consider how this translates into responsibility for tax returns for the trustees of an IIP which had no income to report.

Trustees: What happened

HMRC issued a notice to file a self-assessment return for 2010/11 on 6th April 2011 to “The Paul Hogarth Life Interest Trust 2008”. The normal filing dates of 31st October 2011 (paper) or 31st January 2012 (online) applied. An electronic ‘Nil’ tax return was eventually filed on 5th September 2012.

This resulted in HMRC issuing penalties under Schedule 55 Finance Act 2009 totalling £1,200, which were then appealed by the trustees.

Trustee: Was the penalty notice valid?

In this case the term ‘relevant trustees’ arose; which refers to those persons who were trustees when the income arose. It is clear that, if no income arises during a tax year which is chargeable on the trustees, there are no relevant trustees who have any obligation to notify HMRC.

The penalty legislation specifies that a penalty “is payable by a person (P) where P fails to make or deliver a return”. Judge Thomas had no difficulty in concluding this meant that the person (P) on whom a penalty can be assessed must be the person upon whom the return was validly served – in other words, the “relevant trustees” (who, as we have already established, appear not to exist).

Judge Thomas concluded, given the nature of the trust and the fact that no income was received by the trustees, that HMRC’s ability to issue a tax return was invalid and therefore, so was the penalty.

Tax Accountant Conclusion

Trustees of an interest in possession (IIP) trust who mandate all their income to the beneficiaries should not be troubled by tax returns unless they realise gains which are taxable.
Any income and any potential tax is the responsibility of the beneficiary, and HMRC is wasting its own time, as well as everyone else’s, by issuing unnecessary tax returns.


If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.

David Jones Tax Accountant