Am I right in thinking that the simple ring-fencing of trust assets (50:50 but into named funds) for the two remaindermen within a QIIP trust has no tax consequences? The remaindermen are entitled to half the trust assets each already upon death of life tenant, simply ringfencing and naming their 50% funds is not a disposal for the remaindermen or trustees (?)
Dear Chris,
I think that must be correct, that can’t be a disposal. Disposal is given its ordinary meaning as it is not defined in the CGT legislation. The ordinary meaning of to dispose of something is to get rid of that thing. By ring-fencing assets, the trustee has not not gotten rid of the trust assets; hence there is no disposal. The following section of the HMRC CGT manual explains the meaning of the word disposal:
I also do not consider that there has been a deemed disposal as a result of the beneficiary becoming absolutely entitled. Despite the ring-fencing, the remaindermen, are only entitled to the asset on the death of the life tenants; therefore, they have not become absolutely entitled to the assets. See the following section of the HMRC CGT Manual, regarding the deemed disposal on a beneficiary becoming absolutely entitled to trust property:
Yours the ever faithful Legal Beagle
Thank you - I thought that too, but couldn’t find anything concrete for or against the view. Appreciate your confirmation
If the life tenant has died and the trust fund is absolutely distributable as a consequence of that death, for CGT purposes there will have been a disposal on the death of the life tenant and the trustees will be deemed to be holding as bare trustees (for CGT purposes only) with effect from that date.
If trust assets are appropriated to the remaindermen other than in the proportion that their entitlements bare to each other, the remainderman taking a lesser proportion of the asset will be deemed to have made a disposal for CGT purposes as at the date of the appropriation. This is looked at on an asset by asset basis.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I’m wondering what the benefit would be in setting up 2 separate funds for the remaindermen now. Unless the 2 funds are identical and remain so until the death of the life tenant (in which case why partition now?), isn’t there a danger that by the time the life tenant does die the 2 funds are different in value so that the remaindermen are not receiving equal shares?
I have acted for families who wanted to do this because the several branches wanted to follow very different future investment strategy. But simple segregation does not achieve the purpose of insulating one fund from risks undertaken in another. A way of avoiding that is to corporatise each sub-fund using a limited company to hold the assets.
This will cause CGT disposals by the trustees. So it works best in a non-resident trust with a non-resident non-domiciled settlor. But it can work in a resident trust, even if only partially, if the underlying assets disposed of trigger an acceptable CGT bill, perhaps keeping back assets heavy with gain which will then at least be insulated from the liabilities of the new companies.
One such family referred to their respective companies as “Pots” and to the heads of family of each branch as “Potheads”.
Jack Harper
I’m wondering what the benefit would be in setting up 2 separate funds for the remaindermen now. Unless the 2 funds are identical and remain so until the death of the life tenant (in which case why partition now?), isn’t there a danger that by the time the life tenant does die the 2 funds are different in value so that the remaindermen are not receiving equal shares?
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Previous Replies
If the life tenant has died and the trust fund is absolutely distributable as a consequence of that death, for CGT purposes there will have been a disposal on the death of the life tenant and the trustees will be deemed to be holding as bare trustees (for CGT purposes only) with effect from that date.
If trust assets are appropriated to the remaindermen other than in the proportion that their entitlements bare to each other, the remainderman taking a lesser proportion of the asset will be deemed to have made a disposal for CGT purposes as at the date of the appropriation. This is looked at on an asset by asset basis.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you - I thought that too, but couldn’t find anything concrete for or against the view. Appreciate your confirmation
I should have added that the trustees can often guarantee loans to the underlying companies and charge the retained assets full of gain as security. There are many specific tax planning issues to address but one, a loss arising in one company, can be dealt with by grouping via an intermediate holding company. Modern trust deeds usually give trustees all the powers they need but it is prudent to obtain as many consents from living beneficiaries as possible and have them indemnify the trustees. I guess this is at least moderately big ticket stuff.
Jack Harper
I have acted for families who wanted to do this because the several branches wanted to follow very different future investment strategy. But simple segregation does not achieve the purpose of insulating one fund from risks undertaken in another. A way of avoiding that is to corporatise each sub-fund using a limited company to hold the assets.
This will cause CGT disposals by the trustees. So it works best in a non-resident trust with a non-resident non-domiciled settlor. But it can work in a resident trust, even if only partially, if the underlying assets disposed of trigger an acceptable CGT bill, perhaps keeping back assets heavy with gain which will then at least be insulated from the liabilities of the new companies.
One such family referred to their respective companies as “Pots” and to the heads of family of each branch as “Potheads”.
Jack Harper
I’m wondering what the benefit would be in setting up 2 separate funds for the remaindermen now. Unless the 2 funds are identical and remain so until the death of the life tenant (in which case why partition now?), isn’t there a danger that by the time the life tenant does die the 2 funds are different in value so that the remaindermen are not receiving equal shares?
–
Previous Replies
If the life tenant has died and the trust fund is absolutely distributable as a consequence of that death, for CGT purposes there will have been a disposal on the death of the life tenant and the trustees will be deemed to be holding as bare trustees (for CGT purposes only) with effect from that date.
If trust assets are appropriated to the remaindermen other than in the proportion that their entitlements bare to each other, the remainderman taking a lesser proportion of the asset will be deemed to have made a disposal for CGT purposes as at the date of the appropriation. This is looked at on an asset by asset basis.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you - I thought that too, but couldn’t find anything concrete for or against the view. Appreciate your confirmation
–
Previous Replies
I’m wondering what the benefit would be in setting up 2 separate funds for the remaindermen now. Unless the 2 funds are identical and remain so until the death of the life tenant (in which case why partition now?), isn’t there a danger that by the time the life tenant does die the 2 funds are different in value so that the remaindermen are not receiving equal shares?
If the life tenant has died and the trust fund is absolutely distributable as a consequence of that death, for CGT purposes there will have been a disposal on the death of the life tenant and the trustees will be deemed to be holding as bare trustees (for CGT purposes only) with effect from that date.
If trust assets are appropriated to the remaindermen other than in the proportion that their entitlements bare to each other, the remainderman taking a lesser proportion of the asset will be deemed to have made a disposal for CGT purposes as at the date of the appropriation. This is looked at on an asset by asset basis.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you - I thought that too, but couldn’t find anything concrete for or against the view. Appreciate your confirmation