Malcolm Finney examines why it matters whether property is ‘settled’ or not.
The importance of ascertaining whether property is settled property or not lies in the fact that this dictates who is liable for any capital gains tax (CGT) charge on a disposal of the property, and at what rates of CGT the charge is levied.
Settled property
Believe it or not, despite the importance of identifying whether a settlement exists, the term ‘settlement’ is nowhere defined in the CGT legislation, although ‘settled property’ is defined. ‘Settled property’ is defined as ‘any property held in trust’. Therefore, on the face of it, to ascertain if property is settled simply requires checking whether property is held in trust. Unfortunately, not all property held in trust constitutes settled property.
Bare trust
For example, Brian holds the legal title to 26 Acacia Avenue on bare trust for his brother Tommy. Prima facie, the property is held in trust. The CGT consequences will, it may be thought, thus be determined according to the CGT rules applicable to trust held property (i.e. settled property). However, this is not in fact correct, and for CGT purposes the property is treated as not being settled property (see Example 1 below).
So, when is property not treated as settled property?
Absolute entitlement
Property is not settled property if it is held by trustees for another person (typically, an individual) who is absolutely entitled as against the trustees. By ‘absolute entitlement’ is meant that the person in respect of whom the trustees hold the property can direct how the property is to be dealt with. A bare trust is a classic example of this.
Example 1: Bare trust
Brian holds the legal title to 26 Acacia Avenue on bare trust for his brother Tommy.
Accordingly, Tommy can, for example, direct Brian to sell the property and transfer the proceeds to him; or, Tommy can direct Brian to transfer the legal title to himself, thus removing the bare trust entirely.
Another example is that of a nomineeship.
Example 2: Nominee company
Tommy has purchased shares in a listed company (Bloggins Plc) through his broker, Hardup Broker Ltd.
Tommy asks if his broker could hold the shares for him, which they agree to do, registering Tommy’s shares in the name of their nominee company, Hardup Broker (Nominees) Ltd.
In Example 2 above, Tommy can direct how Hardup Broker (Nominees) Ltd is to deal with (e.g. sell) the shares in Bloggins Plc, and is thus absolutely entitled to the shares, which means that the shares in Bloggins Plc are not settled property.
The CGT effect of the above two examples is that it is Tommy who is treated as owning the beneficial interest in 26 Acacia Avenue and the shares in Bloggins Plc, not Brian as trustee, or Hardup Brokers (Nominees) Ltd as nominee. Hence, on a disposal (e.g. gift or sale) of 26 Acacia Avenue and/or shares in Bloggins Plc, it is Tommy who is liable for any CGT charge on gains, and the rates of CGT applicable are those applicable to Tommy’s circumstances.
Perhaps the classic example of a bare trust is where property is held by parents or grandparents for children/grandchildren who are minors (i.e. under aged 18).
Example 3: Bare trust for minor granddaughter
Mr and Mrs Rich have purchased a property for cash, which they want to give to their granddaughter Susan. Susan is aged 12.
As a minor, Susan cannot hold legal title to land. Her grandparents therefore register the legal title in their own names at the Land Registry, but declare that they hold the beneficial interest on trust for Susan absolutely.
In Example 3, the property is not settled property, despite the fact that Susan is not in fact absolutely entitled to the property as against her grandparents. However, the only reason Susan is not absolutely entitled is because she is a minor, and in such circumstances for CGT purposes the property is not treated as settled property. Thus, on any sale (whether effected whilst Susan is under age 18 or not) any CGT liability is Susan’s, not her grandparents’.
However, contrast the following.
Example 4: Contingency condition
Mr and Mrs Rich have purchased a property for cash, which they want to give to their grandson Sam. Sam is aged 12.
As a minor, Sam cannot hold legal title to land. His grandparents therefore register the legal title in their own names at Land Registry.
On declaring that they hold the beneficial interest on trust for Sam they also state that this is contingent on Sam attaining age 18.
The effect of the ‘contingency’ condition is that the property is now held in trust and constitutes settled property. In which case, any CGT liability arising on, for example, a sale of the property (prior to Sam satisfying the contingency) is a liability of the trustees (i.e. Sam’s grandparents) not Sam; in addition, the rates of CGT applicable are those applying to trustees.
Practical Tip:
Legal advice needs to be sought to ensure that settled property does not inadvertently arise if this is not the intention.
