Trust A’s only asset is a debt owed by Trust B. The two trusts have beneficiaries in common. If the trustees of Trust A appoint the trust property to Trust B, S.81 will apply. In effect Trust B ‘inherits’ the unmatched capital payments or trust gains of Trust A.
If instead the trustees of Trust A waive repayment of Trust B’s debt, does S.81 apply? This refers to ‘property moving between settlements’. Certainly the property available to the beneficiaries of Trust B is the same as would follow an appointment, or does this differ, because the asset in Trust A and the liability in Trust B just disappear, so there is no property moving between the two trusts. If S.81 does not apply in such circumstances, the unmatched capital payment and trust gains of Trust A would not be ‘inherited’ by Trust B.
I am not convinced a debt owed to Trust A by Trust B can be legally appointed to the debtor itself viz. Trust B. In general it must be safer in law to obviate that risk and to forgive repayment under seal.
I doubt in the extreme that this could be a “transfer” within s90 TCGA but it could well be “conferring a benefit” and a capital payment from Trust A: s97(2) and (4).
(s81 seems a reference to IHTA but surely the question relates to CGT?)
My question was, of course, concerned with the capital gains tax consequences, not inheritance tax.
I agree that, in the very simple hypothetical situation I described, a waiver under seal is the easy answer. However, if the trustees of Trust A were to make an appointment of a proportion of the trust’s property to be held on the terms of Trust B, I cannot believe the appointment would be invalidated (or impaired) if the property identified were to include a debt owed by Trust B.
Sorry Ray. I do not believe a debtor can own the debt he himself owes although possibly he can be some kind beneficiary of a non-bare trust which owns it. I recall there may be authority on companies being unable to own their own shares but able to be a beneficiary of a trust that does. Where planning is being undertaken in the non-resident trust CGT area it needs to be absolutely watertight as HMRC are so tough on it; or the downsides need to be acceptable and the least worst alternative or the only one and better than doing nothing.
I should have added that an intentional act by a creditor purporting to transfer or appoint to the debtor the debt he owes to the creditor could well be construed in law as operative discharge of the obligation. That is: equivalent to full repayment but without consideration passing in money or money’s worth.
It might be open to either party to challenge or resile from the arrangement but the evidence, particularly if it were express and to the point, might found an estoppel and rule that out. Whether a third party like HMRC could challenge such a conclusion of discharge would seem to depend on whether the transaction per se was legally valid or void (as it might be if a judge found it to be a legal impossibility or otherwise legally invalid, and the two parties cannot by their mutual assent achieve something the law itself does not recognise as feasible or enforceable).
So does the mooted planning work if the appointment from trust A to Trust B of the debt owed by Trust B to trust A is (a) held to be payment in full or (b) a complete nullity? And in either event what may be the separate tax consequences of either outcome, not least for ss80-97 TCGA.
Presumably the debt is evidenced in writing and possibly with detailed terms and conditions which may need to be factored into the analysis.
Although X cannot owe a debt to himself he can it seems owe it to X and Y jointly or to a trust of which he is not a sole absolute beneficiary or to any entity with separate legal personality despite his having full or partial ownership of the entity and so indirectly of the debt e.g. X can owe money to a company in which he owns all the shares. While in theory the company could distribute that debt to him, I do not believe in law it could do so in specie; but rather (provided the company could act legally under the rules permitting distributions within and outside of liquidation, as the case was) it would be held to be a repayment of the debt by set-off against the company’s own debt created by its distribution.
An appointment of trust property comprising the debt does not in principle create a debt but only, if properly executed, an equitable right to the property appointed, but similar reasoning might lead to a similar conclusion: that the conferring of that enforceable right thereby extinguished the obligations of both debtor and the creditor as to the debt. A creditor cannot sue himself (nonsense on stilts).
Whilst under TCGA 1992 s 90 the transferor’s s 2(2) amounts are carried across to the transferee settlement, no capital payments are in fact carried across.
Ray, I am assuming you are referring to TCGA 1992 s 90. The issues you raise are in relation to CGT not IHT.
Isn’t the effect of S.81 that the transferor trust’s ‘history’ survives within the transferee trust?
Assuming you mean to refer to s 90 TCGA 1992, the transferor trust’s history does not survive within the transferee trust wrt capital payments within the transferor trust. Only the s 2(2)/1(3) amounts are transferred.
Hence, why under ss 90(7) and (8) in the tax year of the transfer a possible dual offset is available ie offset of s2(2)/1(3) against capital payments within the transferor trust and within the transferee trust.