A discretionary will trust with wide and flexible powers of appointment within the relevant property regime. The trustees follow a Memorandum of wishes that provides for 25% of the income to be given to each of the son and daughter. The remaining 50% is divided 10% to each of 5 grandchildren, 3 of whom are adults, the other two minors. The trust owns land.
The trustees are looking to appoint out the land to the beneficiaries in the same proportions absolutely, before selling the land, with the interests for the minors being held by their parents on bare trusts for them.
Question
Holdover relief should be available for the adult beneficiaries but there’s something in the back of my mind re whether the appointment to minors on such terms can take effect to move it out of the relevant property regime, so as to enable holdover to be claimed and further, can the parents sign the election?
Kurt Lee
Lester Aldridge LLP
1 CGT
I assume the trust is not settlor-interested. Hold over relief under s260 is available for any IHT “chargeable transfer” which is not a PET and that term extends to any RPT chargeable event (s65(1) IHTA) but not a 10 year anniversary, of course, as that is not a CGT deemed disposal.
A potential trap is that such an event does NOT occur “if the event in question occurs in a quarter beginning with the day on which the settlement commenced or with a ten-year anniversary”: s65(4).
The issue at the back of your mind is probably the trap in accumulation and maintenance trusts that if a beneficiary became entitled to an interest in possession and only later to a trust asset beneficially, the first was not a CGT deemed disposal and the second was such; but was not an IHT chargeable transfer (s53(2) IHTA). Whereas if the asset had been simply appointed outright it would have been. If you are confident that your trust does not fall within s71, s71B or s71E IHTA (A&Ms, bereaved minors, 18-25) this trap is not relevant. So if your RPT is a bog standard DT with the powers you describe an outright appointment to an eligible beneficiary will qualify for hold-over subject to the 3 month trap above and the current/future residence issues.
A point which arises as regards the minors is to ensure that there is either no settlement for CGT or a separate settlement (CG33280). There is no settlement if the minor is absolutely entitled to the asset but for being a minor: s60 TCGA. For example a bare trust with parents as trustees being entitled to withhold the asset (and any income) until majority because the minor cannot give a valid receipt.That involves excluding s31TA 1925 which means in turn that income will be taxed as it arises and that the minor will be entitled to the asset and accumulated income at 18 (not easy to prevent but possibly by using s32 TA 1925).
If the appointment results in settled property for CGT provided it is a separate settlement the CGT trust rules apply: no deemed disposal unless until absolute entitlement occurs but if it is an RPT an opportunity then for further hold over relief. But see 2 below. The income tax treatment if s31 is not excluded will be different (trust rates and a pool) but it is possible to create a CGT settlement with s31 excluded by giving the minor a life interest, perhaps revocably, with overriding powers of appointment over capital so income is taxed as it arises but can be witheld before 18.
If the appointment is on a “bare trust” within s60 TCGA it seems that both the transferor and transferee trustees would have to claim hold over relief as s60 makes the latter nominees for the minor, an “individual”. If the transferee trustees are “trustees of a settlement” (i.e. of “settled property” for CGT) then only the transferor trustees have to claim.
2 IHT
There is a complication in s81(1) IHTA. If the property moves directly from one RPT to another it is deemed to remain in the transferor RPT for calculating the rates of IHT charges and the occurrence of 10 year anniversaries. This applies “Where property which ceases to be comprised in one settlement becomes comprised in another”. It is perfectly clear from s65(1)(a) that s81 does not prevent a chargeable event occurring as a result of the property in question ceasing to be comprised in the transferor settlement, provided if in fact and law that it does so cease e.g. does not become comprised in some kind of sub-settlement within the original.
Jack Harper
Thank you for your reply. Very useful commentary on the trusts that may continue for a minor.
Kurt Lee
Lester Aldridge LLP
I’m not sure I agree with Jack re his s81/65(1)(a) comment.
No IHT charge arises on a transfer from one relevant property settlement to another [s81 IHTA 1984]. However, a CGT charge does arise under s71 TCGA 1992.
TCGA 1992 s260 is inapplicable as no chargeable transfer occurs.
Malcolm Finney
I greatly regret not consulting IHTM42229! HMRC does not say in terms that in its view s81 overrides s65(1)(a) but that is the obvious implication, especially “The transfer of property will rarely give rise to an exit charge. That is because either the property remains relevant property or there is a statutory exemption that applies, e.g. a transfer to a special trust such as a charitable trust or an employee benefit trust (see IHTA/S75, S75A & S76)”. Before 22 March 2006 it was possible for s65(1)(a) to operate despite s81 as an appointment into an IIP trust would have constituted the appointed property ceasing to be relevant property.
If there is no exit charge it is another trap as no CGT relief under s260 as Malcolm says. Mea culpa. You can see I have retired! It would probably be too helpful for HMRC to cross-reference to the CGT implications of the two traps. Such directions are far from uncommon e.g. BIM67701 to CG73200.
Jack Harper
I must eat more humble pie and amend my earlier comments. Chamberlain and Whitehouse on Trust Taxation etc 4th Ed support Malcolm’s view that where property moves from one RPT to another s81 IHTA prevents an exit charge and so CGT hold-over relief too under s260 TCGA: paras 35.32 and 21.53 footnote 48.
So where an appointment is made to a minor to secure CGT hold-over for a non-business asset it will be vital to ensure that this is not a transfer to an RPT. The potential pitfall is s31 TA 1925. This applies where property is “held in trust” for a minor “for any interest whatever”. This can include a trust for a minor who has an absolute interest.
The start point is s43(2)(a) and (b). This defines “settlement” for IHT and dictates the existence of a “trust”. Because a minor cannot hold a legal estate in land it will be impossible to avoid a trust because even if it is not express it will be implied under para 1(1) Sch 1 TLATA 1996. With pure personalty it may be possible to avoid a trust, though Articles will normally prevent a transfer of shares to a minor so that the legal title will be held on trust. I would not care to get into a debate with HMRC on whether a non-express trust exists on the evidence available.
Section 31 TA 1925 will convert the minor’s absolute interest into a trust within s43(2)(b). So if it is excluded it will not create a settlement for IHT. In fact there is some doubt about whether it must be excluded. In Part E of STEP’s Q&As with HMRC on FA 2006 Q 31 HMRC confirmed that “where assets are held on an absolute trust (i.e. a bare trust)” they will not be settled for IHT s43 whether s31 is excluded or not. Most regrettably this is not mentioned in IHTM 16030 or16042. Can one still rely on it? What is a “bare trust”? The rationale put forward by STEP was that the accumulations of income would pass to the minor’s estate if he died before 18. Excluding s31 in terms is safer but this exchange may be cited if one is stuck without that having happened. While s31 can sometimes operate after a trust has commenced for hold over the crucial position is when the property transfer is made.
The above book does not refer to this situation in its examples in para 28.01. It does refer to property held on trust contingently on attaining 18 with a gift over. This is by far the more common provision because the gift over is designed to overcome the minor (unless privileged) being unable to make a will and so dying intestate. This is stated to be a settlement within s43(2)(a) and no comment is made about the effect of s31.
Jack Harper
Don’t worry Jack, I live on eating humble pie.
Malcolm Finney