In Trustees of the Paul Hogarth Life Interest Trust 2008 v HMRC [2018] TC06757 the First-Tier tribunal (FTT) held that a notice to file a tax return cannot be served on a trust where all income is mandated to the life tenant and there are no chargeable gains; the late filing penalties were invalid.
When HMRC issues a notice to any ‘relevant trustee’ under s8A TMA 1970 for the purpose of establishing the amounts in which the trustees, settlors and beneficiaries are chargeable to income tax and capital gains tax, they must file a self-assessment tax return for the year in question.
The income of a UK Interest In Possession trust (IIP) belongs to the life tenant beneficiary.
- It is taxable on the trustees with a tax credit available to the beneficiary unless:
- The income is mandated to the beneficiary and paid to them directly from the source and not through the trust bank account.
All income of The Paul Hogarth life interest trust 2008 was mandated to the life tenant. The trust did not have any chargeable gains for the 2010-11 tax year.
- A Notice to file a tax return for the tax year 2010-11 was issued on 6 April 2011.
- The trustees filed a return in September 2012.
- Late filing penalties totalling £1,300 were issued during 2012 and the trustees appealed.
The FTT allowed the appeal:
- If there is no income chargeable on trustees (because it is mandated to the beneficiaries) and no chargeable event gains arise or accrue s7 TMA (requirement to notify chargeability) is of no effect and there is no obligation on anyone to notify HMRC.
- A notice to file a tax return cannot be issued to trustees under s8A TMA where all income is mandated to a beneficiary and there are no chargeable gains in the year, and no one can be penalised for failing to deliver one.
The judge commented on the alternative grounds for appeal here saying:
- There was no Reasonable excuse on the ground of reliance an adviser once the penalty notices were issued.
- HMRC’s decision that there were no special circumstances was legally flawed as they gave no reasons for the decision and did not take into account that the income was mandated to the life tenant.
Links to our guides:
S8(1) Notice to file a tax return
Appeals: grounds for appeal toolkit
Grounds for appeal: HMRC error or flaw
External link:
Trustees of the Paul Hogarth Life Interest Trust 2008 v HMRC [2018] TC06757