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Tax Advice on a Discretionary Trust

Practical Issues
Charlottesquare
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Re: Tax Advice on a Discretionary Trust

#263799

Postby Charlottesquare » November 12th, 2019, 6:14 pm

eisman wrote:A couple of points:

It should be noted that undistributed income of a discretionary trust that has been retained for more than 5 years is now included with capital for the purpose of calculating inheritance tax 10 year anniversary charges arising on or after 6 April 2014. See HMRC manual IHTM42166.

Parky wrote:
One thing I am seriously considering is to convert the Trust to an Interest in Possession trust..

to which Charlottesquare replied:
The possible downside is the party entitled to the income may have the capital value of the trust, or part of the trust providing that income, as part of their estate for IHT purposes when they die.

Not so. Interest in possession trusts created after 22 March 2006 do not now form part of the estate of the life tenant for inheritance tax. They generally* fall (or, if created out of a discretionary trust, remain) within the relevant property regime and are therefore still subject to 10 year anniversary and exit charges.

* There are limited exceptions to this general rule:
- an immediate post-death interest (IPDI)
- a disabled person's trust
- a transitional serial interest


Apologies, of course you are correct, I was thinking about my father's IIP but that of course arose on his death whereas the question referred to lifetime creation.

Gan020
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Re: Tax Advice on a Discretionary Trust

#265484

Postby Gan020 » November 19th, 2019, 3:25 pm

Parky wrote:I have found the book Trusts and Estates, by Iris Wunschmann-Lyall and Chris Erwood, from the Core Tax Annuals invaluable in dealing with Trust matters. It is a dense read, and expensive, but covers most of your technical questions in detail, with example calculations. Cheap second-hand copies from previous years are usually available on Amazon. Mine from 2010/11 still seems more or less up-to date.
Parky.


Firstly I have now had the time to read this book and highly recommend it. I wish I had read it years ago and nearly all of my questions were covered in it.

I have some more questions of course as I seek to do my best with a situation caused by not making sufficient distributions just before the first 10 year anniversary when the exit charge was 0% or worse just before the second 10 year anniversary when the exit charge would have been as close to 0% as to make no difference. Here goes:


I’m trying to understand hold over relief and roll over relief for a discretionary trust and finding the HMRC help guides hard going although I continue to perserve. The uncrystallised capital gain in the Trust is £300k after I net off all the losses and is therefore equivalent to 50 years £6k annual allowance. Of course the Trusts investment decisions aren’t going to be based on tax but it does have an influence. The capital gain mostly relates to 2 shares both quoted on the main market, both of which it seems likely won’t be sold in the next 5 years and possibly much longer.

So, first hold over relief. If the trust distributes some of the shares with the large capital gains to beneficiaries as shares rather than cash (capital advance)
a) Can hold over relief be applied for? So, that the beneficiaries who do not currently use their personal capital gains allowance use this to reduce the overall tax bill or further pay CGT at only 10% as basic rate taxpayers rather than the Trust 20% rate. (subject to leaving a suitable period between the capital advance and eventual share sale so that HMRC do not see this as an avoidance technique)
b) Is the exit charge payable on the market value at the time of disposal or the held-over value?

Next roll-over relief. Is roll-over relief available for AIM shares under BPR. In other words if the Trust sells AIM shares (which it has held over 2 years) with capital gains can it re-invest in other AIM share and put off the CGT bill indefinitely?

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Re: Tax Advice on a Discretionary Trust

#266828

Postby Parky » November 24th, 2019, 7:46 pm

Gan020 wrote:
So, first hold over relief. If the trust distributes some of the shares with the large capital gains to beneficiaries as shares rather than cash (capital advance)
a) Can hold over relief be applied for? So, that the beneficiaries who do not currently use their personal capital gains allowance use this to reduce the overall tax bill or further pay CGT at only 10% as basic rate taxpayers rather than the Trust 20% rate. (subject to leaving a suitable period between the capital advance and eventual share sale so that HMRC do not see this as an avoidance technique)
b) Is the exit charge payable on the market value at the time of disposal or the held-over value?



I was hoping someone with experience would answer this, as I am interested too.
I found this http://www.mercerhole.co.uk/tax-plus-bl ... and-trusts
which states " For example, if Holdover Relief is obtained when assets are distributed from a trust and the beneficiaries receiving those assets later sell them within their own CGT annual exemption, then no CGT will be payable." However, this is from 2014, so may have changed. Can anyone out there confirm this is correct?

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Re: Tax Advice on a Discretionary Trust

#266997

Postby Gan020 » November 25th, 2019, 12:38 pm

Parky wrote:
Gan020 wrote:
So, first hold over relief. If the trust distributes some of the shares with the large capital gains to beneficiaries as shares rather than cash (capital advance)
a) Can hold over relief be applied for? So, that the beneficiaries who do not currently use their personal capital gains allowance use this to reduce the overall tax bill or further pay CGT at only 10% as basic rate taxpayers rather than the Trust 20% rate. (subject to leaving a suitable period between the capital advance and eventual share sale so that HMRC do not see this as an avoidance technique)
b) Is the exit charge payable on the market value at the time of disposal or the held-over value?



I was hoping someone with experience would answer this, as I am interested too.
I found this http://www.mercerhole.co.uk/tax-plus-bl ... and-trusts
which states " For example, if Holdover Relief is obtained when assets are distributed from a trust and the beneficiaries receiving those assets later sell them within their own CGT annual exemption, then no CGT will be payable." However, this is from 2014, so may have changed. Can anyone out there confirm this is correct?


I found this from 2016 https://www.icaew.com/technical/tax/tax ... rusts-faqs
Part extract about two thirds the way down the page Q:If assets pregnant with a capital gain are transferred to a beneficiary then both beneficiary and trustees need to elect for the gain to be held over until sale by the beneficiary. A:To avoid paying CGT then the trustees and beneficiary can elect to hold over the gain until the sale of the asset.

Also the Trust and estates book says on ending a trust... if the asset advanced is sterling cash, there will be no CGT implications but in all other cases where a gain does arise, it must be reported as such on SA905 and again on SA900 with the tax paid by 31 January following the end of the tax year.. Howevever, the trustees may decide to hold over the gain. This could be advantageous where for example the trust had already used it's annual exemption and the inherent gain in the hands of the beneficiary could be realised over one or two tax years and perhaps at the lower 10% rate. It then talks about not selling the asset by the beneficiary on the same day as the transfer as HMRC may/would/could see this anti-avoidance and the assets were really disposed of by the trustees. I won't type the lot but there is no agreed suitable length of time to leave before selling the asset but leaving a gap where some income is received through dividends would be helpful, but maybe not required.


So, I'm hopeful hold over relief may be available and would also appreciate comment from someone with experience in these matters.

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Re: Tax Advice on a Discretionary Trust

#266999

Postby scrumpyjack » November 25th, 2019, 12:44 pm

I thought holdover relief now only applied for business assets & land etc and unquoted shares. It does not apply any more to ordinary quoted shares.

https://www.bkl.co.uk/insights/capital- ... er-relief/

Gan020
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Re: Tax Advice on a Discretionary Trust

#267018

Postby Gan020 » November 25th, 2019, 1:47 pm

scrumpyjack wrote:I thought holdover relief now only applied for business assets & land etc and unquoted shares. It does not apply any more to ordinary quoted shares.

https://www.bkl.co.uk/insights/capital- ... er-relief/


Part of the article says this. But I'm not sure what "gift" means in this context or rather is the transfer of shares from a Trust to an individual for no recompense seen as a gift or a capital distribution/appointment:

Gifts immediately chargeable to IHT
Where a gift gives rise both to a capital gain and to a chargeable transfer for IHT purposes, CGT holdover relief can be claimed. This is the case even where no IHT is actually payable because the transfer, although technically chargeable, is covered by the IHT annual exemption, nil rate band (“NRB”), APR or Business Property Relief (“BPR”).

The most common circumstance in which this is relevant is where an asset is transferred into or out of a trust – but take care: not all such transfers are chargeable. In particular, there is no IHT “chargeable transfer” when an asset is transferred out of a trust within three months of being transferred in or of being subjected to the ten year “periodic charge”: it follows that no CGT holdover relief is available in those circumstances.

This is the only circumstance in which holdover relief is available regardless of the nature of the asset. Accordingly, by passing an asset between individuals via the intermediation of a trust, it may with care be possible to some extent to replicate the effect of the old general holdover relief on a gift between two individuals.

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Re: Tax Advice on a Discretionary Trust

#267921

Postby Gan020 » November 28th, 2019, 12:15 pm

I have spoken to an accountant this morning who confirms that hold-over relief is available on shares existing the Trust.

Therefore my plan is to transfer shares with sizeable capital gains to beneficiaries who will then Bed&ISA and/or Bed&SIPP the shares.

A rough example which doesn't cover the Bed&ISA if shares retained longer. £24k of shares in Trust which have a cost of £12k. If sell in Trust capital gain of £12k at 20%=£2.4k tax (ignoring the £6k allowance as that's already been used up), leaves £21.6k. Exit charge leaving Trust as cash is 6% on x( say 8) quarters = £115, leaves £21,485 for beneficiary

If transfer with hold-over relief, sell £24k of sharest to use up maximum capital gains tax allowance. No CGT to pay but 6% exit charge on x quarters = £288, so £23,712 for beneficiary

Of course, I can only move £20k a year per beneficiary into ISA


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