CG35700 - Trusts and Capital Gains Tax: Gifts in settlement
Introduction
When property is settled, or transferred into an existing settlement, there is a disposal of the whole asset which thereupon becomes settled property.
The most important questions that arise on such an occasion are:
- Is hold-over relief due?
2 When did the gift occur?
3 Is it actually settled property?
Transfer into settlement
TCGA92/S70
When assets are put into trust, either on the formation of a trust or by way of addition to trust property, TCGA92/S70 provides that there is a disposal at market value by the disponor of the property to the trustees, with a consequent gain or loss to the person making the disposal [“the disponor”], notwithstanding that
- the gift is revocable, or
- the disponor retains an interest in the property, or
- the disponor is a trustee of the settlement.
The whole property is deemed to be disposed of at market value, notwithstanding that the disponor has some interest as a beneficiary in the settlement. For example, he or she might have disposed of a freehold dwelling-house by gift to trustees but have reserved for themselves a life tenancy of it. In this case the whole of the property becomes settled property and in valuing it on that occasion the life interest retained must be disregarded.
Where, however, all that the disponor owns is the lease of a house which is given to the trustees, the `whole property’ is the lease. The same applies where the disponor grants a lease to the trustees. This is a part disposal. See CG70950.
Hold-over relief
Provided the relevant conditions are met it may be possible for the person making the disposal [“the disponor”] to claim hold-over relief on the disposal of an asset to the trustees of a settlement. Details are to be found in CG66880P for gifts of business assets and CG67030P for gifts subject to Inheritance Tax. Because the conditions have been restricted on various occasions it is important to be sure that the relevant set of conditions are being considered. In this situation the claim is made by the disponor only. The trustees are not required to be parties to the claim.
Other reliefs
As regards gifts or partial gifts made after 6 April 1976 to trusts set up for the benefit of employees on certain conditions, see CG36000.
The Capital Gains Tax aspects of gifts of to charities are dealt with in CG67515.
Gifts of heritage assets are dealt with in CG73300+.
Date of gift
Although in many cases the deed of settlement is also the document which transfers the legal title to the trustees, it is quite common for property to be passed to the trustees before the settlement is drawn up, or for the settlement to be drawn up before the assets are transferred to the trustees.
In the former case the date of gift is the date of the settlement. Until then the trustees hold as bare trustees for the settlor.
The latter case is more complicated. In general, under the law of England, Wales and Northern Ireland, an agreement to settle property is unenforceable, because of the lack of `consideration’. The commonest exception is the case of a marriage settlement where it is common for the deed to specify that property is to be transferred in consideration of the solemnization of the marriage. In such a case TCGA92/S28 (2) applies, see CG14250+. Otherwise there is no disposal until the date upon which the person making the disposal has done everything in his power to effect the transfer. In the case of land this is the date of the conveyance. In the case of shares this is the date when the share transfer form is sent to the company, see Re Rose, [1952], an Estate Duty case. In some cases the settlor may declare by deed that he holds a particular asset in trust. In this case the date of gift is the date of the declaration.
Whether settled property
There may be difficulty in deciding whether assets transferred to trustees have become settled property or whether the transferor remains absolutely entitled as against the trustee. In Booth v Ellard, 53TC393, see CG34380, shareholders in a company who transferred shares to trustees to be held for their collective benefit were held not to have made any disposal for Capital Gains Tax purposes. See also Warrington (or Jenkins) v Brown 62TC226 see CG34380, which concerned a property sharing arrangement. There may be other circumstances in which an apparent transfer to trustees is treated as a transfer to individuals because of their absolute entitlement, see CG34300+.
Sales involving trustees
TCGA92/S70
The wording of Section 70 was amended in 1981 to make it clear that any transfer of assets into settlement on or after that date is a disposal. The old wording used the words `gift in settlement’. Clearly a sale is not a gift. This was considered in Berry v Warnett, 55TC92. As an avoidance scheme the taxpayer transferred assets to trustees, reserving a life interest for himself. The reversionary interest was assigned to a Jersey company for market value. The House of Lords considered that the argument that it was not a gift was irrelevant, because there was a disposal of the entirety of the assets and not a part disposal.
TCGA92/S17 (as introduced by FA81/S90), provides that the consideration for such a gift or transfer is the market value.