Savings account - life interest in the income

TheGreenFrog

An elderly relative is the beneficiary of a life interest in the income of a discretionary trust.  The trust amount is not large and has been in a bank fixed rate account for many years.  The bank has traditionally paid out the interest directly to the relative, but now is refusing to do so and says it must be paid to the account holders (who are the trustees).  I think when originally set up the bank understood the account to be a trust account, but somewhere over the years something has changed.  I suppose the interest can go to the trustees who would then pay my relative, but this will complicate matters.  Is this just the march of regulation and banks tightening up procedures, or are there major banks which will pay out the income to someone other than the account holder? 

poseidon1

TheGreenFrog said:

An elderly relative is the beneficiary of a life interest in the income of a discretionary trust.  The trust amount is not large and has been in a bank fixed rate account for many years.  The bank has traditionally paid out the interest directly to the relative, but now is refusing to do so and says it must be paid to the account holders (who are the trustees).  I think when originally set up the bank understood the account to be a trust account, but somewhere over the years something has changed.  I suppose the interest can go to the trustees who would then pay my relative, but this will complicate matters.  Is this just the march of regulation and banks tightening up procedures, or are there major banks which will pay out the income to someone other than the account holder? 

If this is one of the High street banks ( Barclays, Lloyds etc)  the trustees are fortunate to be allowed to retain an account at all.  Other than possibly as part of their private banking arms, the  high street banks exited  providing banking services to family trusts years ago. 

By the bank now insisting the interest be paid direct to the trustees, the compliance position will be  complicated but may also shine a spot light on  areas of potential trustee non compliance as follows:

1) Have the trustees ever registered the trust on HMRC's Trust Register? Its a requirement first introduced in 2017 as a result of EU regs to combat money laundering, and for which penalties arise for non compliance.

2) Have the trustees ever been registered to complete annual trustee self assessment tax returns in the past and paid basic rate tax on the interest? If not, they will certainly be required to do so when the bank interest is paid direct to them, and thereafter only account to the life tenant for the net interest after tax.

3) You intimated ( unusally) that this is a discretionary trust, subject to an overriding  life interest. If the trust was created after March 2006 and holds assets other than cash at bank, does the trust qualify for 'excepted settlement' status for the purposes of the 10 year anniversary IHT reporting requirements? 

You ask whether there are banks that would pay interest direct to the life tenant. As indicated above, none of what you term the 'major banks' are an option. There are smaller specialist possibilities, with Cater Allen ( part of Santander) immediately springing to mind. However you can only access their services by way of professional introduction from a solicitor  or possibly via financial advisory services. See link below to Cater Allen's offering - 

https://www.caterallen.co.uk/accounts/specialist-banking/solutions-for-trusts

TheGreenFrog

Thank you @poseidon1, that is what I suspected.  Cater Allen looks overkill for this particular trust.  The trustees will just have to route the interest via their personal accounts, which may raise questions from HMRC.  Which is a pain but easily explained (hopefully!).

In answer to your other points, the only asset is the cash in the account.  The trust was I understand set up as a plan to use part of nil rate band of relative's deceased spouse, so pre-dates transferability of NRB.  The trust is registered with HMRC and, because of the life interest and unchanging nature of the trust's only asset, there has been no need for trustees to make any returns to HMRC.  Relative has declared all the income to HMRC and will continue to do so.