Holdover relief and an old style A&M trust

I am dealing with an old style A&M trust established in 1995 by a grandparent for 2 grandchildren where the class has closed. No steps were taken to change the trust in 2007 so it now falls into the relevant property regime. Vesting age was set at 21 and the accumulation period set at 21 years from the date of the trust deed (October 1995)

The 1st grandchildren reached 21 in October 2015 and the 2nd grandchildren becomes 21 at the end of this year. Holdover relief has been claimed for the 1st grandchildren as clearly this was an exit from the trust of both capital and income.

The 21-year accumulation period ended in October 2016 so now the one remaining grandchild is absolutely entitled to the income. Should I be claiming holdover relief for this event? Effectively the remaining grandchild has gained an interest in possession in the trust fund?

Any pointers gratefully received.

Jane Whitfield
Barrett and Co

No hold over can be claimed as it does not give rise to an iht event, unlike the 21st birthday of the first one (unless that was within 3 months after the 10 year anniversary-the facts do not make the dates clear). If there is a large capital gain, and you have power to do so, you may be able to postpone the date of entitlement for some of the assets, so it is staggered.

Simon Northcott

It seems likely to me that:

The trust is a s71D IHTA 1984 age 18 to 25 trust [ s71D(3) ] and therefore
not a “relevant property” trust [ s58(1)(b) ] and 10 year anniversary
charges do not arise.

A s71E charge to IHT arose when the 1st grandchild became absolutely
entitled and will also arise when the remaining grandchild becomes
absolutely entitled.

There was no charge to IHT when the accumulation period ended.

Instead from that date the grandchild became absolutely entitled to the
income and the s479 ITA 2007 special rates for trustees ceased to apply.

As there will be a s71E IHT charge when the remaining grandchild attains
age 21 the hold over relief claim provisions in s260 TCGA will apply.

Andrew M Mortimer

No disposal for CGT purposes arose on expiry of the accumulation period, as the property remains within the trust.

Upon the second child attaining age 21 later this year, an IHT charge will apply. The amount of charge will vary depending upon whether the charge arises on the basis it is subject to the relevant property regime, or the trust is an 18-25 trust (taxed under s.71D IHTA). On that same basis, no charge to IHT will have arisen on the expiry of the accumulation period.

Simon Northcott has made a good point – that the Frankland Trap may have blocked the ability to claim CGT holdover relief if the first grandchild attained age 21 within 3 months after a “ten anniversary” of the creation of the trust. However, I believe that only applies if the trust is within the relevant property regime, and not if it is an 18-25 trust (as Frankland can then only bite if the beneficiary’s interest vests within 3 months of their 18th birthday).

In order to determine the IHT treatment, and then if CGT holdover may validly be claimed, it will be necessary to determine if the trust fund qualified as an 18-25 trust on 6 April 2008, or became subject to the relevant property regime on that date.

Paul Saunders

On reflection-answer in haste!-I agree hold over will apply to the second grandchild whether it is a RPT or 18-25.

There remains the issue of hold over for the first grandchild and whether it is a RPT or 18-25.

I had assumed that this was looked into earlier, as the question says it became a RPT in 2008 as no variation was made then. Most old style A&Ms had overriding powers of appointment, which would mean it could not be an 18-25. It is only if the grandchildren had a fixed half share, vesting at 21, with no overriding powers that it would be an 18-25.

Simon Northcott

It is also necessary that none of the income of the half shares can be used for the benefit of the other beneficiary before the vesting age, for it to be an 18-25 trust.

Simon Northcott