Using a Discretionary Trust to "delay" CGT

A wealthy client has been recommended by his Accountant to transfer an investment property to a child. The transfer would be a deemed disposal so the recommendation is to create a Discretionary Trust and to transfer the property into the DT with a hold over relief claim. Then after a period of say 6 - 12 months, the Trustees appoint the property out of the Trust to the child.

Am I right to feel slightly uneasy about this? The “scheme” is perhaps not avoidance for CGT because the child’s base cost for CGT will ultimately be the original base cost of the donor.

Does anyone have similar concerns?

Justin Wallace
Brewer Harding & Rowe

I would have thought it falls squarely within Furniss v Dawson if the time frame was that tight. If it was longer, opening up the real possibility that the trustees could act in a different way, the risk would be reduced.

Assuming child is not a dependent, it is fine under the legislation but if HMRC were to challenge it on F v D grounds, I would have thought resistance would be difficult (a regular ray of sunshine, me).

It is possibly also caught by GAAR but I would discount that on the basis it is unlikely to be targeted (I’m assuming the value is relatively low or IHT would be an issue).

I’m not 100% sure where that leaves you for self-assessment purposes - possibly at further risk if the settlor did not describe the plan in the whitespace but fairly indicative of being pre-ordained if he did.

Andrew Goodman
Osborne Clarke LLP

It all seems pre-arranged. A decade ago I would probably not have given it too much thought as it is all technically ‘legal’. In the current climate, it does seem something that HMRC could challenge. I would have less of a concern if the transfer was made into a discretionary trust, and then a decision was made to transfer out say 6 months or a year later. Is it guaranteed that son will receive the same in 6 months time? If not, then I would advise the client of the potential risk of HMRC challenge.

Haroon Rashid
I Will Solicitors Ltd

I remember my lecturer describing this arrangement many years ago while studying my tax exams. It was an early introduction to the possibilities of tax planning and at the time I, and the other students, thought it very clever indeed (we still had a lot to learn!). I think it probably sits on the ‘right’ side of what is acceptable tax planning although, in these days of GAAR it is not easy to be entirely sure. I have certainly carried out some similar arrangements a few times over the years.

Paul Davies

The outcome is pre-ordained in reality and the position is not helped by the Accountant spelling this out in his advice letter to the proposed settlor.

My intention was to proceed but endeavour to exclude any “tax advice” from my retainer on the basis this is being given by the Accountant.

Justin Wallace
Brewer Harding & Rowe

Dangerous I would say-fairly and squarely F v D, pre-ordained/extra step for no commercial reason………

Simon Northcott

I am less pessimistic. The legislation clearly provides for CGT hold-over relief in the circumstances postulated.

There is no abuse and i cannot see GAAR applying, in particular when looking at the CGT examples provided in Part D.

Prima facie F v D may be in point but it would not seem to me to be something HMRC would pursue in particular given it is relatively standard planning and no CGT is avoided merely deferred.

I also do not think that there is any need for white space comments in particular given the need for relevant claims for hold-over to be lodged.

Malcolm Finney

Thank you all for your views. I would agree on balance, the arrangement seems pre-ordained for no commercial reason other than the avoidance of tax so will be declining instructions.

Interestingly I spoke to the Accountant who recommended it. He is fully aware of F v D case and sees no problem with the arrangement having done it many times before.

Justin Wallace
Brewer Harding & Rowe

This may be a case so common nowadays where lawful action is deterred by the very real fear of attracting the cost and hassle of an HMRC investigation. Any tax adviser must advise with this in mind.

Even worse as totally unconstitutional for solicitors is the fear of the SRA punishing them for their clients’ activities. In terrorem but no adviser could ignore.

I used to tell clients that their apples coukl not be caught by a tax on oranges.I have become less confident that HMRC will regard an apple as such and even that a judge will do so. They and the SRA seem to believe they have a divine mission to vilify and financially harm those who evade the oranges tax by holding apples.

We should be taxed by law not by HMRC discretion nor by the fiat of others who unlike them have no statutory role at all in relation to the tax system.

Jack Harper

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