Revenue Statement

[1996] PCB 76, from Taxation Practitioner November 1995

Where the trustees of an "A & M" trust apply capital to pay school fees my understanding is that this would be treated for inheritance tax purposes as the beneficiary whose fees were being paid becoming absolutely entitled to the capital.

Suppose, however, that the trustees enter into arrangements to pay fees direct to the school out of capital. In these circumstances, would the Revenue contend that the beneficiary never became absolutely entitled to the capital, such that the condition in section 71 (1) (a) was not satisfied as regards that part of the trust fund?

Revenue Response

You pose the situation where trustees of an A & M trust apply capital to pay school fees and ask whether a payment of capital direct to the school in respect of fees for the beneficiary would fail to satisfy the condition in section 71(l)(a) Inheritance Tax Act 1984. The answer is no: such a payment would not give rise to a charge to Inheritance Tax.

Such a payment would have to be made under a power contained in the settlement, like for example the power of advancement in section 32 of the Trustee Act 1925. The effect of such a power in relation to section 71(l) or rather its predecessor in paragraph 15, schedule 5 of the Finance Act 1975, was considered in Inglewood v. IRC [1983] S.T.C. 133. We would regard the question you have raised as sufficiently covered by the reasoning of Fox L.J. at page 139.

A broad summary of his reasoning is contained in his comment on a power of advancement that "since its sole purpose is to enable the trust property to be applied for that person's benefit before he attains the specified age, it would be artificial to regard the trust as not satisfying the provisions of paragraph 15, now section 71(l)".

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