The sole beneficiary of a disabled trust settled by the Criminal Injuries Board has died and the assets pass to his parents under his intestacy, as per the deed. The capital fund will be taxable to IHT as part of his estate, but what happens to the income fund? We are beyond the 21 year accumulation period and income was distributed to him regularly to meet his needs, but there is a balance as at the date of death. Under Counsel’s guidance, this continued to be taxed to the trust rate as the trustees could decide WHEN to pass the income to him. A vulnerable person election is in place, but I don’t think it can be used in the tax year of death. Do I complete a 2022/23 trust return, apply the trust rate and then distribute it to the parents with a 45% tax credit? Also I think that CG36551 indicates that there is NO tax-free uplift to market value on death for CGT but s71 TCGA92 gives Trustees a CGT disposal. S165 does not seem to help and S260 does not apply. Is this the worst of both worlds with IHT AND CGT on the death of this disabled beneficiary??? Any help gratefully received!
I thought post 2013 the CGT uplift was available wrt vulnerable beneficiaries and TCGA 1992 s260 could also apply?
Malcolm Finney
Yes, I thought there was something positive, but I am struggling to locate it. I can only find CG36551, which says chargeable with no uplift and only shows S165 being available and not s260 for a Disabled Trust with a deemed IIP and not passing to spouse. .
The availability of the CGT uplift on the disabled beneficiary’s death is ascertained by a reading of TCGA 1992 73 (applicable for s71) which under subsection (3) cross refers to s 72 in particular subsection (6). Subsection (6) confirming that a disabled interest under IHTA1984 sS89B/89 is to be treated as if it were an interest in possession for s71 purposes.
In short, s73 applies to a disabled person’s interest for IHT which is deemed to be an interest in possession for CGT under subsection (6).
Malcolm Finney
I would just add that the CGT uplift became available wrt deaths occurring on or after
5 December 2013.
Malcolm Finney
Thank you, Malcolm. I think you’ve cracked it!! I was totally distracted by CG36551, but thought there was something to overrule it. Thanks! I think I have resolved the Income Tax aspect too.
I’ve learned that HMRC Manuals, of course, have a value but often they are by their nature general in content and sadly it’s often necessary to have to resort to the legislation (convoluted though that often is).
Malcolm Finney
Very wise words! I looked at s71, but didn’t delve deep enough
Your comment re the election not being capable of use in the tax year of death is not I think strictly accurate. An election can be applicable for only part (ie not the whole) of a tax year in which case the special tax treatment can apply for that part of the tax year.
Malcolm Finney