My mind has (hopefully only) temporarily gone blank!!
I have a will trust where the beneficiary will receive his capital entitlement at 25; he has been entitled the income from his trust fund for the last 6 1/2 years, since his 18th birthday. The 1925 Trustee Act was not amended so that the entitlement to income and capital arose at the same point. The deceased died on 1 January 2008.
When the beneficiary reaches the age of 25 will the trustees have to pay CGT or can the gain be held over under section 260 TCGA?
I would be very interested to learn the answer to this one. My ‘simple’ understanding is if the trust encashes / realises the gain, then the trust is liable for the tax. If the trustees appoint the asset to the beneficiary then he/she is liable for the tax when the gain is realised / crystallised, and the gain is from the date of death.
Often Life Bonds are used in such circumstances such that no capital gain arises and then segments of the bond are appointed without taxable event for the trust, and dealt with via the beneficiaries own tax position; e.g. if a basic rate taxpayer and the top sliced gain when added to other income is still within the basic rate, no tax is payable because onshore life bonds are deemed to have already been taxed at the basic rate.
Whilst the posting states that the beneficiary will receive his entitlement at age 25, it then states that the capital entitlement vested at age 18.
Is the legacy contingent on attaining age 25, or merely payment is purportedly deferred to age 25?
If the former, then IHT is payable (whether at nil rate or otherwise) upon the beneficiary satisfying the contingency. Provided that the beneficiary attains 25 before 1 January 2018, or after 31 March 2018, hold over should be available (the “Frankland trap” will apply if his 25th birthday occurs between these dates).
If, however, the capital of the legacy vested absolutely on his 18th birthday, a different situation arises and all transactions since then will be his for CGT purposes and not the trustees’.
If at the date of death of the testatrix, the beneficiary had all parents (including any step parent) living, the trust will be a relevant property trust. An exit charge will arise on their 25th birthday and hold over relief would be available to avoid the CGT charge then arising under s.71 TCGA 1992 being assessed on the trustees. However, if the 25th birthday falls on, or within 3 months of the 10th anniversary of the death of the testatrix, holdover relief will not be available (the “Frankland trap”).
If, though, at the date of death of the testatrix, one or more of the beneficiary’s parent or step parents were dad, the trust will be an 18-25 trust, not a relevant property trust. The trustees will still be liable for CGT on the deemed disposal under s.71 TCGA 1992 although, as a charge to IHT will still arise on the beneficiary attaining 25, hold over relief can be claimed. However, unlike a relevant property trust, the “Frankland trap” does not apply to an 18-25 trust and so there is no risk of losing the opportunity to claim hold over due to the date of the beneficiary’s birthday falling in the wrong time period.
As the trust will be a relevant property trust or a s.71D (18-25) trust s.260 TCGA 1992 hold-over relief will be available on the beneficiary attaining age 25.
Under either trust an exit charge will arise (albeit re the s71D trust based on the period from the date the beneficiary attained age 18). As a s71D trust suffers no ten yearly charges the “Frankland trap” will not apply although it will, of course, apply to a relevant property trust.
In the absence of a claim for hold-over relief the trustees will be exposed to a CGT charge as they will be deemed to have sold and re-acquired the trust property when the beneficiary attains age 25 (TCGA 1992 s.71). Any claim will need to be made by both trustees and beneficiary (within 4 years of end of tax year of disposal).