Trust income and gains: Sub-fund elections - overview
From 6 April 2006 trustees of a settlement can elect for a fund or other specified portion of settled property to be treated as a separate settlement. This treatment may be administratively more convenient. For example, a trust may be split between two or more sets of trustees with no trustees in common. This may well occur where a will provided a life interest for the testator’s widow and following this there may then be trusts for each of the children. The property may be divided between separate funds relating to each child and, particularly if there are discretions to be exercised over capital, each branch of the family may prefer to have particular trustees. A desire for privacy may also be a factor.
For income tax up to 5 April 2006 separate returns for each fund could be issued and completed. But from the introduction of Self-Assessment this did not apply for CGT because CGT should always have been assessed in one assessment on the trustees. The CGT concept of ‘the trustees of the settlement’ now applies for Income Tax (see TSEM3036), so from 6 April 2006 there is only one return and one Self Assessment. See CG33334 about giving any advice on sub-fund elections.
The fund to which the election applies is known as a ‘sub-fund settlement’ and the original is known as the ‘principal settlement’. The trustees of the sub-fund settlement are treated as the trustees of that settlement only and not of the principal settlement unless they are, as a matter of fact, trustees of both. Similarly, the trustees of the principal settlement are treated as trustees of that settlement only and not of the sub-fund settlement, unless they are trustees of both.
Where a sub-fund election is made there is a deemed disposal by the trustees of the principal settlement and a deemed acquisition by the trustees of the sub-fund. There is no hold-over relief in such cases unless it is available under the normal CGT rules. See CG33331.
A valid election means that the sub-fund is treated as a separate settlement for all tax purposes with the exception of the annual exempt amount (see CG18115).
The provisions for making an election and the consequences of doing so are in TCGA92/Sch4ZA and this Schedule is given effect for income tax purposes by ITA/S477 and for CGT purposes by TCGA92/S69A.