Legitmate measure for CGT - using a trust for 3 months to claim holdover relief

I have a client who has been advised to create a non settlor interested discretionary trust and to transfer over a property into that trust, claiming holdover relief.

He has then been advised to wind up the trust by appointing the property out to his daughter after a 3 month period and claim holdover relief under section 260.

Does anyone know if this is a legitimate measure and accepted by HMRC?

Charlotte Corbyn
Chattertons Solicitors

I can see no problems (claiming h/o) assuming that all requisite formalities are followed (eg that property is actually transferred into the trust being held for the trust beneficiaries).

The trustees must exercise their discretion and when doing so must not be under any obligation moral or otherwise to appoint the property out to the daughter pursuant to some agreement between father and daughter.

I don’t believe any abuse arises. TCGA 1992 ss165/260 legislation is clear and unequivocal.
GAAR provides: “D19.6.2 Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions?” I would say yes.

Malcolm Finney

The key, as Malcolm has highlighted, is that the trustees must exercise their discretion.

The problem is that (a) the trustees have to genuinely keep their options open and (b) HMRC and potentially a tribunal may not believe them, particularly if they distribute the trust fund after just 3 months. Whatever the documentation said, in the absence of any actual reasons for doing this (other than claiming holdover) it does look susceptible to a challenge under Ramsey. If there was no reason to set up the trust other than to claim holdover (x2) then it looks pre-ordained and artificial - however “real” the trust may be. It’s fine under TCGA but I would still consider it high risk under Ramsey principles.

I can’t tell you what may happen in practice.

Andrew Goodman
Osborne Clarke LLP

This sort of planning is typically considered when the disposal of a property pregnant with gain is contemplated, the rationale being that the recipient [the daughter] will be able to realise the gain at a lower rate of CGT. I can’t see any issue with the proposal, but the following points might be worth making:

The initial transfer into trust will be a CLT for IHT purposes and thus potentially trigger a charge to IHT.

The daughter will acquire the settlor’s base cost for CGT purposes upon a subsequent disposal by her.

If the settlor is aged and an imminent sale is not in prospect, then the loss of the CGT-free uplift on death by the making of this lifetime transfer needs to be considered.

Paul Storrie, Storrie and Company

I disagree with Malcolm on the application of the GAAR. The policy behind hold-over relief is that it applies to gifts of business assets under s165 but wrt other assets under s260 only to certain gifts and this clearly excludes PETs. The plan outlined is designed to get round the legislation and in effect make a gift of a non-business asset to an individual without realising a gain by double hold-over relief under s260. It is not in the least on all fours with the gift between spouses to which Malcolm’s citation of D19.6.2 applies.

I appreciate that this can only be achieved by the donor making a CLT and the trustees causing an RPT chargeable event. But if the donor has a nil cumulation and the value of the gifted asset is less than the NRB there will be no IHT payable.

It is for the taxpayer to determine in the first instance whether the GAAR applies. HMRC could then challenge when they are informed by the reporting of the two disposals. They would need to connect them but are almost certain to do so because their instructions with land are to invariably refer values to the VOA. Two disposals within just over 3 months by different taxpayers will probably ring a bell. There is also a possible connection in that there are also 2 IHT reporting requirements and the s260 relief requires the CGT person to liaise with an IHT person… My advice to taxpayers with poor fiscal hygiene (only acting once I have obtained their promise of repentance) is that their incredulity about how HMRC may have found out that they were “at it” is ludicrously naive.

It may take HMRC some time but then there will be interest and up to a 60% penalty of the value of the counteracted advantage. This is regardless of culpability and HMRC say they will only use their mitigation discretion in “exceptional cases”. They may see this plan as a urine extraction operation. Because several different people are likely to be in on it HMRC may see them as conspirators, a greater order of magnitude in iniquity. Attempts to deny the true motivation behind it could be tripped up by incautious nudge nudge wink wink statements not protected by LPP e.g made between donor and donee or to a third party including an accountant. Actual covering of tracks may result in the taxpayer being advised that they “do not need to say anything but…” which may scupper even LPP. In my experience many taxpayers and quite a few advisers are like lambs to the slaughter in this area of tax law.

The GAAR does not exclude the application of Ramsay, as Andrew warns. But it was introduced not only to catch what Ramsay doesn’t but as a cheaper and more expedient weapon to catch situations that overlap. You are not obliged to self-assess exposure to Ramsay but you are with the GAAR (and certain TAARs).

If it is acceptable to keep the property in the trust for some time it may attract less attention. No one can confidently forecast how long is needed. But in principle it is the incipient motivation that triggers the GAAR (failing the double reasonable test) and timescale is not strictly relevant as it is not curative. The acid test is: would I do it myself? The answer is No. But many taxpayers have been known to go where Jack fears to tread.

Jack Harper

Jack states in his opening paragraph:
“The policy behind hold-over relief is that it applies to gifts of business assets under s165 but wrt other assets under s260 only to certain gifts and this clearly excludes PETs. The plan outlined is designed to get round the legislation and in effect make a gift of a non-business asset to an individual without realising a gain by double hold-over relief under s260”.

I cannot agree that the “plan” outlined by Charlotte gets round the legislation. Her proposal falls fairly and squarely within TCGA 1992 s260. S260 specifically provides that any capital gain which would otherwise arise on a gift between individuals of a non-business asset may be deferred (ie held-over) albeit whilst falling within the IHT net (but possibly without an actual IHT payment being made).

If the legislators had wished to preclude such an approach then it presumably would have restricted hold-over relief to only gifts of business assets. Indeed (because I’m old) I seem to remember that initially when hold-over relief was first introduced (circa late 1970’s) it only applied to gifts of business assets but was then extended to include gifts of any type of asset. But memories fade so I may be wrong.

Malcolm Finney

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The plan is an “arrangement”. A direct gift would not be.

An arrangement is a tax arrangement if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was (one of) the main purpose(s) of the arrangement : s 207(1) FA 2013. Why would anyone perform such a convoluted counter-intuitive plan if tax was not at least one of the main purposes?

Is it “abusive”? Tax arrangements are abusive if entering into or carrying out the arrangements cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances : s 207(2) FA 2013. This is the double reasonableness test. In my view the plan, as it is particularly to be implemented, fails the test.

I think Ramsay applies. Like in Furniss v Dawson the donor is to be treated as disposing direct to the ultimate donee ignoring the trustees as intermediaries. (Westmoreland has now held that the element of pre-ordination is no longer an essential ingredient).

Ramsay is authority only for the proposition that tax law is no different to all other areas of law. Its statutes are to be construed by reference to all prevailing rules of construction, and not just formalistic rules. The dictum of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKFCA 46 in relation to the process of purposive construction, namely, “whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically”, was approved by the House of Lords in BMBF.

Where a fiscal advantage has expressly been provided by statute, it is irrelevant whether the taxpayer has a fiscal motive or object. This would be so of each separate leg of the plan viewed separately. In my view the combination of steps clearly and realistically intended at the outset to both occur should be interpreted fiscally as a single step.

A taxpayer might ponder whether if HMRC decided not to challenge under the GAAR or Ramsay that they might regard it as the fiscal equivalent of a non-crime hate incident to be recorded on the blacklist (the existence of which is never admitted!) attracting detailed attention to all future returns and transactions of someone prepared to game the system.

Jack Harper

An interesting discussion. I think Malcolm’s interpretation is ‘brave’ and that a direct flip in and out of a trust after a three month period is extremely aggressive. Ramsay is the clearest risk here, or in fact opening the arrangement to allegation it is merely a sham, but in place for no purpose other than seeking to gain a tax advantage.

That being said I do not think the trust arrangement fails the double reasonable test so that the GAAR would apply. It is not an arrangement so unreasonable that no reasonable person would do it, not least because variations on this arrangement have doubtless been implemented successfully for decades.

A better route may be to investigate the arrangements and consider whether the use of a trust might be justified, e.g. are there concerns about direct access to capital, or protection against divorce or bankruptcy? If so then the combination of these concerns together with the bounteous intent may justify transferring the property into a trust for the long term. The trustees can then meet on an ongoing basis to decide what to do with the trust property and take advice as required. These meetings should be minuted.

Stuart Maggs

I do not think the plan in its short timescale would be a sham provided it gives rise to real rights and obligations. There is no suggestion to the contrary.

If the property is put into trust and kept there it would be absurd for HMRC to suggest, in effect, that there could never be an appointment out to an object of bounty envisaged by the Settlor at the outset (hence included in the eligible class of beneficiaries) without falling foul of the GAAR or Ramsay.

The longer the gap between the two events the weaker the argument that the double reasonable test is failed, If it is passed the tax advantage motive is not enough in itself to trigger the GAAR. Even that may be weakened and the counter argument (from Malcolm) strengthened that each operation is entitled to hold over relief on its own merits as intended by Parliament. The difficulty is in estimating the interval which delivers this result.

Lord Hoffmann said in Westmoreland that Ramsay is not “a broad spectrum antibiotic to kill off all tax avoidance schemes, whatever the tax and whatever the relevant statutory provisions”. The analysis of the two transactions as a single direct disposal is greatly undermined by the intervening passage of time. Although s260 has been around for some time who knows whether it will be when the appointment is made? As ever in tax planning genuine risk of ultimate ineffectiveness assists greatly. With both Ramsay and the GAAR.

Also the choice of trustees. If those chosen are stooges, on a spectrum from the disaster of theSettlor alone to anyone under demonstrable influence, the genuineness of that risk is prejudiced. If the trustees are proper professionals their integrity and the law of trusts should combine to dispel the accusation that the Settlor can be certain that his or her desired appointment will definitely occur. Trustees of the calibre which does not inhibit them from saying no to the Settlor are always a big plus in tax planning with trusts. Nor do I think this is then diluted by a Letter of Wishes as long as it is carefully drafted. Settlors hate trustees of this kind (QED) but perforce must suffer: no gain without pain.

Jack Harper

I agree with Stuart Maggs’ view that the arrangement/plan does not fail the “double reasonable” test and his other comments. I take it that his view that my interpretation is “brave” he feels is a tad worrying!

In my original post I did not mean to suggest that after 3 months and one day (for example) an appointment out of the trust should be made. I, of course, fully appreciate that at the very least the so-called “cosmetics” would not look good. In this regard, as Jack points out, then how much time should be allowed to pass before making such an appointment (how long is a piece of string). No doubt many advisors on this issue would advise “as long as possible”.

Jack asks “The acid test is: would I do it myself? The answer is No. But many taxpayers have been known to go where Jack fears to tread”. For me, the answer is a resounding Yes and I would point out to the client that if, or as and. when, HMRC come a-knocking "We shall defend our hold-over relief claims whatever the cost (interest and penalties) may be, we shall fight on in the tribunals and the courts … we shall never surrender (well we might…) !

Malcolm Finney