CG34320 - Bare trusts: main principles and effects
TCGA92/S60
Infants and other persons under a disability
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Main provision
In certain cases we treat property held by trustees as if it belonged to the beneficiaries directly, see TCGA92/S60 (1). The trustee, for CGT purposes, is disregarded. The simplest case covered by the provision is where one person holds property for another absolutely (that is, as nominee or bare trustee) but Section 60 expressly covers a class of trusts wider than the `bare trust’ of general law.
Absolute entitlement
The primary concept employed is that of `absolute entitlement as against the trustee’, as defined in Section 60(2). Broadly, a person is so entitled where
- the trustee has no control over the property except with the permission of that person, or
- that person can take complete control over the property either immediately or on giving due notice to the trustee.
Comments on the meaning of the expression `absolutely entitled as against the trustee’ may be found in these tax cases. The first three of them were in fact concerned with the question whether the beneficiary had become absolutely entitled. In such a case there is a deemed disposal by the trustees when absolute entitlement occurs. See CG37000 and TCGA92/S71 (1).
- Tomlinson v Glyns Executor and Trust Co 45TC600 at 606B-E and 610G-H,
- Stephenson v Barclays Bank Trust Co 50TC374 at 387D-389D,
- Hoare Trustees v Gardner 52TC52 at 76A-78D,
- Booth v Ellard 53TC393 at 410H-411F and 418F-G.
There are also two cases dealing with executors
- Cochrane’s Executors v CIR, 49TC299, at 305B-I and
- Prest v Bettinson, 53TC437, at 443G-444A.
Charges
TCGA92/S60 (2)
If trustees have to pay duty, taxes, costs or other outgoings, they can generally meet it out of the trust property and may refuse to hand it over to the beneficiary until these liabilities are satisfied. This right to hold on to the property is disregarded in determining whether the beneficiary is absolutely entitled or not. See TCGA92/S60 (2).
In contrast, if trustees must pay an annuity out of property which they hold, then that property is settled property. The annuity is not `outgoings’, see Stephenson v Barclays Bank Trust Co, 50TC374 at 386A-F. Walton J makes it clear that the annuity is a beneficial right under the settlement and therefore not outgoings.
Infants and other persons under a disability
TCGA92/S60 further extends the bare trust concept to embrace the case where a trustee holds property for a person who would be absolutely entitled but for the fact that he is an infant or other person under legal disability (for example, mentally disordered).
This treatment does not extend to an infant whose contingent interest will vest when he attains the age of majority (Tomlinson v Glyns Executor and Trustee Co, 45TC600). The trustee in this case argued unsuccessfully that if the beneficiary had been 21 his interest would have been absolute, therefore he was absolutely entitled but for being an infant. The judge explained that infancy or other disability must be the only bar: in this case the beneficiary had a contingent interest because he had not reached the requisite age.
As regards the possible application before 18 March 1981 of Section 54(1) CGTA 1979, now TCGA92/S71, on the occasion when a beneficiary would have become absolutely entitled but for the fact that he was an infant or other person under legal disability, see CG37700.
Joint entitlement
Section 60(1) refers to two or more persons who are `jointly’ so entitled. In Kidson v Macdonald, 49TC503, it was explained that the word jointly was used in a non-technical sense to cover any situation of joint ownership, whatever legal code was applicable. It was not confined to the limited English concept of joint ownership. In particular it covered tenancies in common, and the equivalent interests in Scottish law.
In Stephenson v Barclays Bank Trust Co the judge discusses in more detail the rights of beneficiaries and the circumstances in which they become jointly absolutely entitled, see CG37000.
In Booth v Ellard, 53TC393, at page 418F-G, Oliver LJ explained that the vital feature is that the beneficiaries concerned should have interests of the same quality, although they are not of the same quantity.
Bare trusts and nominees
TCGA92/S60
In the case of bare trusts, gains should be computed and assessed as if the property were vested in the beneficiary and all the trustee’s acts were his acts: the trustee, and the existence of the trust, should therefore be ignored. This applies to nominees also, see the example below.
Where there are two or more beneficial owners of property held by a `bare trustee’ and there has been no agreed appropriation of the property, no one of the beneficial owners is strictly entitled to any particular asset. It follows that any assets which are disposed of by the trustees should be treated as having been disposed of by the beneficial owners in accordance with their proportionate shares in the property and that chargeable gains and allowable losses accrue directly to the beneficial owners accordingly.
Mr A dies on 1 June 2019. In his will he leaves to X (who is then aged 14 years) 1,000 shares in P Ltd at a market value on A’s death of £8500. Because X is a minor, the legal title to the shares is held by the trustees of the will. In this situation, TCGA92/S60 applies and for CGT purposes we disregard the trustees.
On 1 December 2020, the shares are sold for £10,000.
The gain of £1500 in 2020-21 is charged as a gain of X.
The proceeds are reinvested in shares in Q Ltd which appreciate to a market value of £16,000 on 1 May 2023, which is X’s 18th birthday. The trustee then hands over the shares.
The transfer of the shares in Q Ltd by the trustee to X is not a `disposal’ but if X himself then immediately sells the shares, the gain will be computed by reference to the acquisition price of £10,000.
Allowable expenditure
In the case of a bare trust, when an asset is disposed of, care needs to be taken in determining the amount of the allowable expenditure. It may include whichever of the following is appropriate:
- The value on the death of the previous owner.
- The value on the date on which the beneficiary became absolutely entitled to the asset.
- The actual cost to the trustees, or
- The actual cost to the beneficiary of the asset where it has been transferred subsequently to bare trustees.
Pooling of shares
Shares or securities disposed of by a bare trustee', and any of the same class’, see CG50203, remaining in his possession in the same trust, together with any of the same class' held at the time of the disposal by the person for whom he acts as bare trustee’, constitute a `pool’, see CG50520 for the purpose of computing the gain on the disposal by the trustee.
Sales of interests
The disposal of an interest in a bare trust is not exempt under TCGA92/S76, because it is not the disposal of an interest arising under a settlement. See Harthan v Mason, 53TC272.
Administration
HMRC Trusts and Estates may deal with bare trusts, either as a matter of convenience, where land is owned for a number of individuals or because a trust has become bare. In either case, if the taxpayers agree, it is acceptable for HMRC Trusts and Estates to agree the amounts of any chargeable gains. This is particularly useful where land values have to be agreed, but see in this connection CG74243. Note also that a disposal may take place without any action by the trustees, e.g. because one person sells an interest to another, or dies.