Writing for Taxation magazine, BKL tax adviser Terry Jordan responds to a reader’s query about transferring trust shares to a beneficiary or their spouse.
We have a trust client with one (now adult) beneficiary who has a pre-2006 interest in possession. The trust property comprises shares in a non-trading company that are pregnant with gain. The trustees and the beneficiary are now inclined to transfer some (or all) of the shares out of the trust and into the ownership of the beneficiary or their spouse.
On the assumption that what is set out below can be achieved from a legal perspective, we seek readers’ views on the following possible sequence of events.
At the request of the beneficiary, the trustees could make the beneficiary’s spouse a beneficiary of the trust, with a proportion of the interest in possession, within the beneficiary’s available nil-rate band, being transferred to the spouse. Some of the shares would be redesignated as a separate class of shares for this purpose.
A charge would then seem to arise under IHTA 1984, s 52, but at 0% within the nil-rate band, and the spouse’s interest in possession would then appear to be relevant property going forward.
After at least one complete quarter has elapsed the shares that are subject to the spouse’s interest in possession are appointed to the spouse. An exit charge will arise at (broadly) an effective rate of 0.15% (for each complete quarter) of the excess of the value of the shares over the trust’s nil-rate band. This exit charge, which might be nil, will permit the trustees and the spouse to make a joint holdover election, such that the spouse acquires the shares at the trustees’ capital gains tax base cost.
If they wish there could be a later nil-gain/nil-loss inter-spouse transfer from the spouse to the beneficiary, and the whole exercise could be repeated in seven years.
Query 19,119– Lou Scannon.
Reply by Terry ‘Lacuna’ Jordan, BKL
It is implicit here that the settlor was someone other than the beneficiary with an interest in possession. That interest arose before
22 March 2006 so the underlying capital value forms part of the beneficiary’s inheritance tax estate. An appointment of shares to the beneficiary would be an ‘enlargement’ of the interest and no charge to inheritance tax would arise by virtue of IHTA 1984, s 53(2). Since the company is not trading, capital gains tax holdover relief would not be available under TCGA 1992, s 165 and because no charge to inheritance tax would arise it would not be available under s 260 either.
Were the beneficiary’s spouse to become entitled to an interest in possession on death it would be a ‘transitional serial interest’ under IHTA 1984, s 49D and no charge to inheritance tax would arise. By contrast, an appointment of an interest in possession during the first beneficiary’s lifetime would occasion a chargeable transfer for inheritance tax purposes. The liability for any tax would be that of the trustees.
As Lou Scannon has identified, the appointed part of the fund would then be relevant property with the potential for proportionate or ‘exit’ inheritance tax charges on absolute appointment that would afford capital gains tax holdover relief under TCGA 1992, s 260.
If the terms of the trust permit, a more straightforward approach might be for the interest in possession to be terminated in part, leaving the current beneficiary as a discretionary object to whom absolute appointments could be made later.
It should be borne in mind that the settlement will have started when it was created, albeit it will not have consisted of relevant property throughout. Also, when any appointment is made it is imperative that a new settlement is not created for capital gains tax purposes; otherwise a disposal would occur without the possibility of holdover relief in view of s 81.
The article is available to subscribers on the Taxation website. It will be available here in due course.
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