Malcolm Finney considers if and when a capital gains tax charge arises on certain disposals relating to trust property.
Capital gains tax (CGT) is levied on capital gains arising on disposals (e.g. sales, gifts) of chargeable assets.
Although an equitable interest in trust property is a chargeable asset, specific provision is made pursuant to which (except in certain circumstances) no chargeable gain is to be treated as arising on the disposal of such an interest.
No chargeable gain arises, assuming the disposal is made by the beneficiary for whom the equitable interest was initially created or by a beneficiary who did not acquire the interest for consideration, whether in money or money’s worth (i.e. purchase the interest).
Example1: Fixed interest trust
Bill set up a trust under which his brother, Tom, was entitled to the trust income during his lifetime and on Tom’s death, the trust property was to go to Bill’s sister, Mary, absolutely.
If either Tom or Mary disposes of their respective interest (interests initially created for them by Bill) precipitating a gain, no CGT charge would arise.
Precipitating a CGT charge
However, if Tom or Mary had disposed of their interest for money or money’s worth, on a subsequent disposal by the purchaser, any gain then arising would fall subject to CGT.
Example 2: Disposal of a purchased equitable interest
Mary (in Example 1) possesses a remainder interest. Until Tom dies, she receives no income or capital from the trust. Tom is fit and healthy.
Mary decides to sell her interest to her nephew, Peter, for £50,000; no CGT charge arises on Mary’s disposal. Three years later, Peter sells his acquired interest to his best friend, Norman, for £75,000.
Peter has made a capital gain of £25,000, and as he acquired his interest for money (i.e. the purchase from Mary) his gain is subject to CGT.
Wasting asset treatment
A not dissimilar consequence to that shown in Example 2 would arise if (in Example 1) Tom was to sell his interest (a life interest) to (say), Wanda who then sometime later sold her acquired interest to (say) Wendy.
A CGT charge would arise on any gain made by Wanda, but not on Tom’s gain. Note, a life interest may qualify as a wasting asset.
Market value of nil?
Trustees may possess a power of appointment or advancement, the exercise of which could determine (i.e. terminate), for example, an individual’s life interest.
In such cases, the market value of the life interest may be extremely low, if not nil.
Settlor-interested trust
Where a trust is settlor-interested (i.e. the settlor may benefit from the trust after set up) and a beneficiary disposes of an equitable interest, the trustees are deemed to have disposed of, and re-acquired, the trust assets at their then market value. This charge falls on the trustees but they have the right to seek reimbursement from the beneficiary who sold the equitable interest.
The possibility of a double CGT charge arising in such circumstances is avoided by providing that any charge is based on the higher of the two gains (i.e. the gain arising on the part of the beneficiary and the gain arising on the part of the trustees).
Practical tip
Any beneficiary wishing to dispose of their equitable interest would be wise to check (amongst other things) whether their interest could be immediately determined by the trustees (effectively de-valuing its value to nil).
