Readers’ forum: Discretionary trusts

Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on a married couple who wish to transfer properties into separate trusts for each of their two children.

‘My clients are a married couple who wish to transfer properties into separate trusts for each of their two children. The husband and wife will be joint trustees and the value of each trust will be in excess of £1m.

The couple must have total control over each trust and be in a position to claim holdover relief regarding capital gains tax liability on the transfers. All properties in question are owned equally by the parents.

I would be obliged if Taxation readers would recommend the type of trust that will meet the above requirements.’ Query 19,319– Trustworthy.

Reply by Terry: Most lifetime transfers to trust are chargeable immediately

‘Trustworthy’s clients each want to settle more than £1m into trusts. Following Labour’s extensive changes to the inheritance tax treatment of settlements, announced on and in some respects effective from 22 March 2006, almost all lifetime transfers to trust are chargeable immediately rather than potentially exempt. On the face of it, each client would have an immediate inheritance tax liability of more than £135,000 (£1m less £325,000 x 20%) with the possibility of a further charge if they die within seven years.

As long as they were the only trustees they would retain control, albeit they would have to exercise their discretion for the benefit of the beneficiaries. For capital gains tax holdover relief (TCGA 1992, s 260) to be available on the disposals, both settlors and their minor unmarried children would have to be excluded from any possible present or future benefit (TCGA 1992, s 169B to s 169G). It would be usual to include a charity as the ultimate default beneficiary to avoid any possibility of a resulting trust in favour of the settlors. Even if the named charity ceased to exist the cy-près doctrine would mean that another charity would benefit instead. On gifts into trust the holdover election is made by the settlor alone.

There might be another possible planning opportunity. For the gain to be held over it is not necessary for the property to be given away for no consideration at all. The clients could sell the properties to the trust for any amount up to the original capital gains tax allowable cost without affecting the right to hold over the gain. It would only be if the actual selling price were to exceed the cost that capital gains tax would start to become due. By selling for the cost figures, the clients would reduce the value of their immediately chargeable transfers and therefore the inheritance tax liability.

Stamp duty land tax (SDLT) would be payable by reference to the actual price paid rather than by reference to the market value. The purchase price could be left outstanding and there would be no adverse tax consequences to this – but no tax advantage either. The clients might later decide to make outright gifts of the debts due as potentially exempt transfers.’

The article is also available on the Taxation website.

For more information, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

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