HMRC v Thorpe [2009] EWHC 611 (Ch)

Facts

  • Mr. Thorpe, a UK resident, established an offshore trust designed to benefit his children, who were also UK residents.
  • HMRC contended that the trust beneficiaries held a "power to enjoy" income from the trust under Section 739 of the Income and Corporation Taxes Act 1988 (ICTA 1988), making the trust income taxable in the UK.
  • The beneficiaries argued their powers were limited and did not provide them with sufficient control over the trust's income.
  • The trust deed allowed beneficiaries to request distributions of income, but distribution decisions remained at the discretion of the trustees.
  • Trustees were obliged to consider the beneficiaries’ requests for distributions, but retained final authority on whether to distribute income.

Issues

  1. Whether the beneficiaries’ ability to request distributions of trust income constituted a "power to enjoy" under Section 739 of ICTA 1988.
  2. Whether the influence or control exercised by beneficiaries over the trustees regarding income distributions triggered UK tax liability on the trust income.
  3. How the statutory definition of "power to enjoy" under Section 739 should be interpreted in the context of beneficiary rights and trustee discretion.

Decision

  • The court held that the statutory definition of "power to enjoy" under Section 739 of ICTA 1988 is not confined to direct control, but also includes situations where beneficiaries can influence the use or distribution of income.
  • The right of beneficiaries to request income distributions, combined with the trustees’ obligation to consider these requests, was deemed sufficient influence to amount to a "power to enjoy."
  • Consequently, the trust income was held to be taxable in the UK, as the beneficiaries’ powers came within the scope of Section 739.

Legal Principles

  • Section 739 of ICTA 1988 is aimed at preventing tax avoidance by attributing income from transferred assets abroad to individuals with a "power to enjoy."
  • "Power to enjoy" is defined broadly in the legislation, encompassing both direct control and indirect means of influencing the application of income.
  • The legal relationship between trustee discretion and beneficiary rights must be carefully scrutinized to determine tax liabilities.
  • Drafting of trust deeds and the documentation of trustee discretion are important to clarify the scope of beneficiary powers and potential tax consequences.

Conclusion

The judgment in HMRC v Thorpe [2009] EWHC 611 (Ch) clarifies that even indirect beneficiary influence over trust income may constitute a "power to enjoy" for UK tax purposes under Section 739 ICTA 1988, exposing such income to UK taxation. Trustees and beneficiaries should be mindful of how trust provisions may trigger tax liabilities.

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