Trust income and gains: Sub-fund elections - conditions for making an election
An election may be made only if all the following conditions are satisfied on the specified date, and conditions 2 to 4 are satisfied throughout the period from the specified date to the date the election is made:
- The principal settlement must not itself be a sub-fund settlement.
- There must be some property comprised in the principal settlement which is not the sub-fund settlement.
- Property cannot be co-owned by the trustees of the principal settlement and the trustees of the sub-fund settlement.
- Subject to certain exceptions, a person cannot be a beneficiary under both the principal settlement and the sub-fund settlement.
A principal settlement may have more than one sub-fund settlement but sub-fund settlements cannot themselves split into further sub-fund settlements. Conditions 2 and 3 ensure that there is ring-fenced property in both the principal settlement and in the sub-fund settlements.
Where the reality before the election is made is that there are two separate funds which together contain all the property in the settlement the trustees must decide which is to be the sub-fund settlement and which the principal settlement. The principal settlement is for Income Tax and CGT purposes a continuation of the settlement before the election. In appropriate cases a further sub-fund settlement election could be made in respect of the principal settlement.
In relation to condition 4 there are certain circumstances when a person is not treated as a beneficiary under either the principal or sub-fund settlements. If the only occasion on which property comprised in the settlement in question will or may become payable to a person, or become applicable for his or her benefit, is one of the events listed below, then that person is not a beneficiary for the purposes of condition 4:
- The person marries or enters into a civil partnership with a beneficiary under the settlement in question.
- A beneficiary under the settlement in question dies.
- The trustees of the settlement in question exercise their power of advancement under Section 32 of the Trustees Act 1925, Section 33 of the Trustees Act (Northern Ireland) 1958, a similar provision under a jurisdiction other than England and Wales or Northern Ireland or under the terms of the settlement deed.
- There is a failure or determination of protective trusts as specified in Section 33 of the Trustee Act 1925,
For example A may have the life interest in possession in the principal settlement. If the life tenant of the sub-fund settlement dies without children A takes the capital as remainderman. This is an example of the second bullet point above.
If one of these events occurs after the election is made, this does not have any effect on the status for tax purposes of the two settlements.
The election is treated as taking effect on the ‘specified date’. This cannot be earlier than 6 April 2006 or later than the date the election is made. The specified date must be shown on the election.