CG37000 - Absolute entitlement
Stephenson v Barclays Bank Trust
Introduction
TCGA92/S71
In the lifetime of a settlement, there must eventually be one or more occasions when beneficiaries become entitled to some or all of the trust property. In due course the trustees will normally transfer the property to the beneficiaries.
- by executing a conveyance if it is land,
- by executing a share transfer and sending it to the company if it is shares, and
- by handing the property over if it is a chattel such as a picture.
In some cases however they may sell the property and hand over cash to the beneficiaries.
For Capital Gains Tax purposes, it is necessary to establish when the disposal takes place. If there were no provision in the legislation to cover it, the disposal for CGT purposes would take place when the trustees actually transferred the assets to the beneficiary. This would enable liability in many cases to be postponed, because often the beneficiary would be quite content to let the trustees hold on to the property in question.
TCGA92/S71 (1) provides therefore that there is a deemed disposal by the trustees when the beneficiary of a settlement `becomes absolutely entitled to any settled property as against the trustees.’
On the occasion of absolute entitlement
- The trustees are treated as disposing of that property at market value. There is therefore potentially an occasion of charge to CGT, depending upon the assets concerned and whether any exemptions or reliefs can be claimed.
- The trustees are deemed to have reacquired the property in question at market value as bare trustees. CG34300+ explain how CGT applies where property is held by bare trustees. The basic principle is that the trustees are disregarded. The beneficiary is treated as the owner of the property and anything done by the trustees afterwards is treated as if it had been done by the beneficiary.
When the trustees actually transfer the property to the beneficiary entitled to it, this is disregarded for CGT purposes. If they sell it on behalf of the beneficiary, that is treated as a disposal by him or her, and the gain or loss is the difference between the sale proceeds and the market value on the occasion of the deemed acquisition
Absolute entitlement: meaning
TCGA92/S60 (2)
The meaning of absolute entitlement is considered in CG34320. The basic principle is that a person is absolutely entitled if they have the exclusive right to direct the trustee how to deal with the property, see TCGA92/S60 (2). One question which you can ask yourself is whether anyone else is still, or could be a beneficiary under the settlement, with a different kind of interest in that particular asset. If so then absolute entitlement has not yet occurred. If however two or more beneficiaries have similar interests in an asset, and there are no other actual or potential beneficiaries, they are jointly absolutely entitled.
For the purposes of Capital Gains Tax a beneficiary who would be absolutely entitled but for being an infant (under 18 in UK law) is treated as absolutely entitled,.
The right of the trustees to hold on to assets in order to meet taxes, costs and other outgoings is disregarded in determining whether beneficiaries are absolutely entitled,.
Stephenson v Barclays Bank Trust Co
The case of Stephenson v Barclays Bank Trust Co Ltd, 50TC374, illustrates the general principles for determining when absolute entitlement occurs.
The facts (simplified) are as follows. Under the will of W, his daughters C D and E were entitled to annuities of £300 a year during widowhood. Subject to the annuities the property was to be held in trust for such of his grandchildren as should reach the age of 21. There were two grandchildren, A and B, who both reached 21 before CGT was introduced in 1965.
In 1969 the trustees, the daughters and the grandchildren entered into a deed under which specific funds should be set aside to meet the annuities and the rest of the property should be paid over to the grandchildren. In fact however the trustees held onto this property.
The Revenue argued that A and B became absolutely entitled when the deed was executed.
The trustees’ arguments were
i) that absolute entitlement had occurred before 1965, because the annuities were merely `outgoings’ under TCGA92/S60 (2), see CG34320. The judge rejected this argument. The annuities were interests under the settlement. The grandchildren were not then absolutely entitled because there were other beneficiaries with different interests.
ii) that absolute entitlement would only occur when the assets were distributed. This was held to be incorrect because Section 60(2) is clearly referring to a time when the settled property is still in the trustees’ hands. Therefore absolute entitlement must precede the actual transfer.
iii) that an individual grandchild had to be entitled to specific property. The judge considered that the two grandchildren together were entitled to the whole of the settled property. Therefore they were `jointly’ absolutely entitled as against the trustees when the deed was executed.