I am an experienced tax person but am not a lawyer. When it comes to certain legal interactions with trust matters, I am not qualified to advise, I recommend they get a legal view.
However I thought I would ask a question as to whether there was anything feasible planning to assist in the following situation (because I don’t think there is) this is based on a real scenario and if there is I will refer to an expert to carry out the necessaries.
The scenario is a settlor interest IIP trust established long before 2006. The only beneficiary over the years has been the settlor as life tenant. No holdover was necessary on entry. A sale of the valuable trust investment asset is imminent and would create significant CGT. The settlor has significant capital losses in their own right . I cannot see how the two can be matched. Any thoughts …
The settlor cannot possibly the only beneficiary or there would be no trust at all. You do not say what powers the trustees have. If they have powers to distribute the fund to the settlor this might be possible free of IHT under s 53 IHTA. Your problem might be hold-over relief under s260 TCGA because you would need to create a chargeable transfer for IHT which a direct distribution would not be. It might be possible to convert at least part of the trust into an RPT using the NRB against the CLT and then distributing to the settlor with CGT hold-over.
Especially if the gain is a high proportion of value, The IHT NRB is lost for 7 years but the loss could be covered by insurance. The saving could be 20% or 28% on up to £325k but using the losses less the insurance premium unless he wishes to take the risk on and the costs of drafting and compliance. Seems like a big fandango to me for a maximum saving of £65-91k but I have had tax-averse clients who would do this sort of thing to save £1.
emphasized text Thanks Jack The settlor cannot possibly the only beneficiary or there would be no trust at all. - is this so ?
The trust was set up for any potential issue (no spouse or not spouse) was my understanding but I am not sure that ever occurred though I have yet to be provided with those details. So if there have never been any other actual beneficiaries…
The trustees do have powers to distribute. I get that he could establish a RPT so saving CGT on 325K and if the trust ends whilst s 53A is in point there is still CGT.
The only thing that would really dent tax bill here would be the ability to match personal capital losses against gains so am interested in this statement that a trust may never have existed ?
There is no s53A in IHTA or TCGA. Can you please explain how your settlor is the sole beneficiary of your trust? I was referring to powers of appointment and advancement which will have objects. They can include the settlor but if the original intention was to benefit the settlor it could be a sham trust, although HMRC would only argue that if it favoured them. The trick is to create a RPT without a CGT disposal, see CG37800P to 37880P.
For example, was the pre 2006 trust a trust set up by X (the settlor) on trust for himself for life and with remainder to his children (ie on his death his children effectively inherit the trust assets)?
Th/e setting up would have precipitated no IHT charge and no reservation of benefit issues would have arisen.
On or after 2003 CGT hold-over relief would not have been available if the trust was for CGT settlor-interested.
Thank you both for your comments on this so far. I had to abandon proceeding with any potential advice as the trust was not registered so I could not proceed. It now is and I have examined the trust deed…
I had already understood, settlor own capital losses could not be set against settlor trust gains so the real question that was being asked was whether the trust could be changed / unravelled to achieve the objective and my view was that there is no solution, but wanted legal steer…
The trust was established pre March 2006 (1989 in fact) and was for the benefit of the settlor for life and then to children. There was provision for for the ultimate proportions to children to be varied during lifetime or Will by the Settlor.
There are also Trustee discretionary powers to apply income or capital to any beneficiaries (children and grandchildren) with Settlor consent.
No changes have occurred and the settlor continues to and needs all the trust income.
There is no settlor revocation clause.
The substantial asset is investment in nature so APR/ BPR not available and for CGT s165 holdover relief not in point.
My understanding is that as the settlor owns the underlying trust assets for IHT (ie the trust is a TSI) that a termination of interest by him if the trust were to end would be a PET but no gift relief as s165 not available.
If the trust were to continue a CLT as the trust would become an RPT. S260 though would not be available if he retains ANY interest and he states he needs the income.
Notwithstanding the fact that this settlor has an IHT problem which has not been addressed, the question is solely about action for CGT mitigation and I cannot see a solution unless he excludes himself!