Stockpiled gains in an offshore settlor interested trust

Trusts Discussion
1

Hello

I have a query I was hoping someone could assist with please?

If an offshore trust (settlor interested) were to invest stockpiled gains (pre 1998 gains) into an insurance bond and then make the annual 5% withdrawals would this give rise to a section 87 charge?

I believe that if the stockpiled gains held within the trust were invested in the bond no CGT would arise as technically capital is not leaving the trust, it is simply being held in a different form.

However, if the 5% withdrawals were paid out to the settlor would this give rise to a charge? The settlor is UK dom and res and so falls within s.86, however as these stockpiled gains arose pre 1998 I believe this was before s.86 came into force and they are chargeable on the settlor under s.87. Please correct me if I am wrong.

Could there be argument that with the 5% withdrawals, the settlor is receiving a benefit from the trust and so a liability would arise by way of section 97 (5) (b)?

I have referred to Kessler, Tolley’s and HMRC manuals however I am struggling to find a definitive answer.

Thank you in advance. .

2

Not the easiest of provisions (TCGA 1992 ss86/87) in particular given the history of changes.

TCGA 1992 s86 was I believe introduced in FA 1991 and applied to non-resident trusts set up on or after 19 March 1991. Trusts set up pre 19 March 1991 fell outside the scope of introduced s86 (assuming that no so-called “tainting” occurred); such trusts therefore but continued to fall within the s87 charge.

Hence, gains arising pre 1998 in a post 18 March 1991 trust would fall within s86 whereas if those pre 1998 gains arose in a pre 19 March 1991 trust (untainted) then those gains would fall within the s87 charge.

Invested stock-piled gains in offshore bonds precipitate no gains; this would simply be an (re)investment of trust property by the trustees. It would therefore be the trustees who would receive any 5% withdrawals. Withdrawals of up to 5% are returns of capital and not taxable on the part of the trustees… If this is the case then any “onward” payment of the 5% to the settlor would constitute a capital payment (TCGA 1992 s 97(2): “… payment include references to … the conferring of any other benefit” ) and thus chargeable under s87.

Malcolm Finney

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3

Thank you Malcolm for your reply, it is most appreacited. As I thought the payment of any capital on to the settlor would be caught under ‘the conferring of any other benefit’ rules.