IIP Trust and CGT Holdover Relief

We have a client who settled 2 rental properties on a Life Interest Trust (c2017). The trust deed confirms that the trustees shall pay the income of the trust fund to her during her life.

The trustees have recently appointed the 2 properties to her. It is my understanding that as she was entitled to an IIP then any inherent capital gains cannot be held over.

I’d be grateful for confirmation on this and whether anything can be done.

Hold-over relief is in principle available on the appointment out of a settlor interested trust (although not on disposals into such a trust).

Malcolm Finney

I am wary of disagreeing with Malcolm, but I can see no reason why hold over relief should not be due on transferring the assets into the settlement. TCGA 1992, s 260 allows relief where an individual makes a disposal which is a chargeable transfer for IHT and the assets are acquired by the trustees of a settlement. A chargeable transfer is a transfer of value (IHTA 1984, s 1). A transfer of value is one as a result of which the value of the transferor’s estate is reduced (s 3). The value of a life interest in an asset must be worth less than the beneficial ownership of that asset, so the transfer to the trustees reduces the value of the transferor’s estate. IHTA s 49(1) which treats the interest in possession as beneficial ownership does not apply to a lifetime transfer after 21 March 2006 (s 49(2)). Nor does IHTA s 80 (initial interest of settlor) apply as the transfer was made after 21 March 2006 and is not a “postponing interest”.

See s169B TCGA 1992 which states neither s165 or s260 apply on a transfer of property to a settlor interested trust.

Duncan McGowan
Stevens & Bolton LLP

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Re Robert’s post:

I interpreted the post by Andrew as meaning that the settlor acquired a life interest in the trust following transfer of the rental properties and hence the trust was settlor interested for CGT hold-over relief purposes.

I suspect Robert may have interpreted the original post differently.

Malcolm Finney