CGT & IHT consideration when a Reversionary Interest in a Trust is acquired for consideration

Trusts Discussion
1

I have the following scenario.
A died leaving his property in trust for his Wife (W) to reside in the property for the remainder of her life. Subject to that the property was left to her son (A). Son (A) now wishes to sell his reversionary interest to son (B). All parties are UK resident.
I am trying to consider the tax consequences.
IHT – I do not believe that there are any consequences for W, the Trust or A. But the reversion will form part of son B’s estate for future IHT as it was acquired by him for consideration.
In regards to the residence nil rate band (RNRB) and carried forward RNRB I believe on W’s death she still have an IPDI and as the trust still provides that a lineal descendant is” beneficially entitled” (as per s8J(5)) the RNRB is still available. However, I am not totally comfortable with this.
I do not believe that the disposal of the reversionary interest will give rise to a CGT liability for any of the parties. But the consideration paid by B means that on any future sale of the property this will be part of his acquisition value.
My issue is what happens when he becomes absolutely entitled? I do not believe there is a CGT issue for the trustees, but s76(2) TCGA 1992 suggests that there is in effect a deemed disposal by B of his reversionary interest, the consideration being the obtaining of the settled property. This raises the questions (i) what is the consideration for obtaining the settled property? Is it the value of the property at W’s death? (ii) If there is a deemed disposal for CGT by B, then is his acquisition value moving forwards the value of the property at W’s death?
I would be interested in receiving peoples comments.

Ian Partington
Horwood and James

2

  1. Sale by son A to B is a sale of son’s remainder interest. Remainder interest is generally excluded property for IHT (IHTA 1984 s 48) unless the interest is purchased (as it is here by B). Thus, on B’s death the remainder interest would form part of B’s estate for IHT.

  2. On W’s death (W possessing an IPDI) originally son A was to inherit but due to the sale by son A of his remainder interest to W’s son B it is B who becomes beneficially entitled to the trust property on W’s death. As B is a lineal descendant prima facie the RNRB applies on W’s death [IHTA 1984 s 8J(5)].

  3. Any capital gain on sale of remainder interest by son to B is not subject to CGT on son’s part (TCGA 1992 s 76(1)).

  4. However, on any future sale by B of his acquired remainder interest any capital gain then arising will be subject to CGT on B’s part [TCGA 1992 s 76(1)].

  5. When W dies B as the purchaser of the remainder interest becomes absolutely entitled to the settled property. As a consequence, a capital gain will be realised by B and subject to CGT [TCGA 1992 s 76(2)] as B will be treated as disposing of his remainder interest in consideration of obtaining the settled property. The consideration received will be the value of the settled property B receives at W’s death.

Going forward B’s asset is the now non-settled property whose base cost is the property’s vale at date of W’s death.

  1. However, the fact that a CGT charge may have arisen on B 's part does not preclude a CGT charge also arising on the trustees on their deemed disposal and re-acquisition of the settled property [TCGA 1992 s 71(1)].

Malcolm Finney