A settlement is any trust arrangement that is not a bare trust. Typical examples of settlement trusts include:
- interest in possession trusts – where the beneficiary has entitlement to the income of a trust. Trusts with an income interest, now commonly called income in possession trusts (although that is not a Scottish legal term), give the beneficiary the income from invested assets or, in the case of widows, often traditionally the right to occupy land or a house and enjoy any income from it; in which case the person was known as the life-renter or life-rentix.
Sometimes this was for a shorter period such as to the age of majority or came to an end on an event like marriage. Such a beneficiary generally has no entitlement to the capital of the trust;
- discretionary trusts – where the trustees have discretion about how to use the capital and income of the trust; and
- other types of trust that are settlement trusts for the purposes of LBTT include trusts for accumulation and trusts for maintenance and mixed trusts that are combinations of types of trusts or are set up in foreign jurisdictions.
A worked example of a settlement trust is provided separately on our website under LBTT Worked Examples.
Acquisition by trustees of settlements
The LBTT(S)A 2013 applies to the trustees of a settlement trust. When the trust acquires a chargeable interest the trustees are treated as buyers of the whole interest.
Trustees of a settlement are treated as a single and continuing body of persons.
Where the chargeable interest is acquired by the exercise of a power of appointment or the exercise of a discretion vested in trustees, any consideration paid to the trustees in exchange for the exercise of their power of appointment or discretion vested in them, so that the chargeable interest passes from a settlement trust to a beneficiary, is treated as consideration for the acquisition of the chargeable interest. In these circumstances, therefore, there is a land transaction for LBTT purposes.
Re-allocation of trust property as between beneficiaries
When a trust property is re-allocated and the beneficiary acquires an interest in different trust property and loses their interest in the chargeable interest with the beneficiary’s consent, the consent of the beneficiary does not constitute chargeable consideration. Therefore, there is a land transaction but it is an exempt interest as there is no consideration paid, no tax is payable and no LBTT return is required.
Liability to pay the tax, make a return and make a declaration
Where the trustees of a settlement are liable to pay tax, the payment may be recovered (but only once) from any one or more of the responsible trustees.
The LBTT return can be made by one or more of the trustees and all the relevant trustees must make the declaration as if they were buyers of the chargeable interest.
The ‘responsible trustees’ for LBTT purposes are those who were trustees at the effective date of the land transaction and any party who later becomes a trustee.
Scottish land can be made the subject of a trust under English law, with the beneficiary having an equitable right in the Scottish land. For the purposes of the LBTT(S)A 2013 such a right will count as an interest in the Scottish land for the purposes of section 4(2)(a) of the LBTT(S)A 2013 and as a major interest and hence an assignation of such a right will be a land transaction.
Paragraph 2 of schedule 18 to the LBTT(S)A 2013 goes further and prescribes that where property (including by implication land in Scotland) is held under the law of Scotland or any country outwith the UK on trust on such terms that if it were so held under English law, the beneficiary would have a beneficial interest, it is to be so treated for the purposes of the LBTT(S)A 2013 even if such a right is not recognised under the laws of Scotland or these other countries.
It will depend on the legal systems of the countries not covered by English law but, where possible, English law is to be applied by analogy and its effects copied in Scotland so that LBTT is chargeable as it would be where there is an English trust with an equitable interest held by the beneficiary in land in Scotland, and the equitable interest is assigned.