CGT holdover relief on transfer out of settlor interested trust

Trusts Discussion
#1

X made a self-settled life interest trust in 1999 to take advantage of CGT retirement relief, and part of the gain was held over. The original shares are still held in the trust and it is still an unquoted trading company.

If the trust is wound up and the shares transferred back to X, is there any reason why we can’t hold over the gain again (including the previously held over gain) under s 165 TCGA? I can’t see anything in the legislation preventing it but also can’t find any commentary confirming that it is possible, so am worried about missing something.

Also, if we can hold over the gain, what happens to the gain, including the previously held-over gain, on X’s death? If the shares remain in trust, that previously held-over gain would become chargeable on X’s death (although it should still be possible to hold it over again).

Diana Smart
Gordons LLP

#2

I assume the conditions of TCGA 1992 s 165 are still satisfied.

The trust would not appear to be a revertor to settlor trust (assuming on termination of the interest in possession the trust property does not have to revert to the settlor).

Trust and X’s death

If the shares remain in the trust, on X’s (ie the interest in possession beneficiary) death the held-over gain will fall subject to CGT but any gain arising whilst in trust is not subject to a CGT charge [TCGA 1992 s 74].

The held-over gain should be capable of further hold-over under TCGA 1992 s 260 or s 165.

Trust wound up

If the trust is wound up with the shares appointed back to X (who thus becomes absolutely entitled to the shares) no IHT arises [IHTA 1984 s 53(2)] but any gain arising (including the previous held-over gain) would be eligible for hold-over under TCGA 1992 s 165.

Then, on X’s subsequent death (X owning the shares absolutely), there would be an uplift for CGT purposes without any resultant CGT charge (ie all gains are effectively wiped out).

Malcolm Finney