CG37300 - Absolute entitlement: occasions of absolute entitlement
Termination after specific period
Exercise of power to appoint or advance capital
Introduction
There are many ways in which a beneficiary may become absolutely entitled as against the trustee. The common feature in all cases is that the particular beneficiary now has an absolute interest in the particular assets. There is no one else who has any kind of interest in those assets under the settlement apart from, in certain cases, another beneficiary or beneficiaries with interests which are of the same kind. The trustees may hold onto the assets; indeed they may be entitled to, in order to meet their expenses, but this is disregarded.
Termination after specific period
There are basically two types of case.
- The first is where the deed or will provides for the property to be shared among a class of people alive on a particular date in equal shares. No one can tell who is to take a share until that date. Therefore absolute entitlement occurs on that date, because until then no one is absolutely entitled.
- The second is where a prior interest in income is to end on a particular date. There are two beneficiaries, the person entitled to the income and the person entitled to the capital. Their interests are of different kinds; so they are not `jointly absolutely entitled’. After the particular date there is only one beneficiary, who is now absolutely entitled.
Termination of life interest
It is very common for a deed to give a person a life interest, with the property going absolutely to one or more individuals, or to the members of a class of persons, on the death of that person. This gift over (`remainder’) may be absolute, or it may be contingent on an individual or member of the class being alive on a particular date. If it is absolute and a particular individual fails to survive the life tenant, the property goes to that individual’s heirs. If the gift is contingent, and one or more beneficiaries fail to fulfil the contingency, their interest fails and the other beneficiaries get a bigger share, or it goes to a different beneficiary.
Where, on the termination of a life interest, settled property is due to pass absolutely to one or more beneficiaries, the occasion of charge on the trustees under TCGA92/S71 (1) is the termination of the life interest. If, however, the termination is due to the death of the person entitled to the life interest there is no liability except as indicated in CG36450 and CG36510.
Where, on the termination of a life interest, there are limited and absolute interests in the same fund of settled property, for example, where one of two life tenants dies, the treatment outlined in CG37300 should be followed with the appropriate modifications. See also CG37510+.
Exercise of power to advance or appoint capital
A beneficiary may become absolutely entitled as against the trustees on the following occasions.
- The trustees (or possibly another named person) exercise an express power in the trust instrument authorising them to pay capital to some person who would not otherwise be entitled to capital at all or to a beneficiary who would not otherwise be immediately entitled. This is more common in a discretionary trust but in certain cases may be used to override an existing interest.
- The trustees exercise their powers under Section 32 Trustee Act 1925 (the statutory power of advancement for England and Wales) which permits trustees (at their discretion but subject to any specific provisions of the trust instrument and the approval of a beneficiary with a prior interest) to pay or apply one half of a beneficiary’s presumptive or vested share for his or her
advancement' or benefit.Advancement’ for this purpose means some step for furtherance of the beneficiary’s establishment in life (for example, for education or training or for establishment in business), while benefit has a wider meaning and may include a payment made direct to the beneficiary, for example, a payment to discharge his debts. In many cases the deed authorises payment of the full share instead of limiting it to the statutory one half.
In Scotland, the statutory power of advancement (Section 16 Trusts (Scotland) Act 1921) is in more limited terms and covers only payments for the maintenance and education of a beneficiary who is a minor, if the income is insufficient, and the Court gives consent.
Date of absolute entitlement
In some cases it is necessary to establish the precise date of absolute entitlement. In Scotland this will generally occur when the resolution of the trustees is intimated to the beneficiaries. See Stenhouse’s Trustees v Lord Advocate, [1984] STC 195, a case on Capital Transfer Tax. In England and Wales a resolution of trustees is not in itself enforceable. Absolute entitlement will not occur until a deed is executed or property is actually transferred.
Where settled property is due to pass absolutely to one or more beneficiaries on the happening of a contingency, such as the death or remarriage of a particular individual, the occasion of charge on the trustees under TCGA92/S71 (1) is the date upon which the contingency occurs, even though the trustees may have prior charges to meet.
Agreement to terminate trust
Where settled property is held under successive limitations, for example, to A for life and to B and C absolutely, and all the parties are alive and under no legal disability (such as infancy), they may agree upon a scheme of distribution with the trustee(s) or may together direct the trustee(s) to distribute the property in a particular way. When agreement is reached, the property ceases to be settled property, and the occasion of charge on the trustee(s) under TCGA92/S71 (1) is the time when the scheme of distribution has been agreed. This is the proper treatment even if the trustees retain certain assets to cover the potential future Inheritance Tax liability if the life tenant dies within seven years.
Reaching a specified age
It is common for a trust to provide that a beneficiary is entitled to property if he or she reaches a particular age. If there are several beneficiaries who each become entitled to a share if they reach a particular age, determining the moment of absolute entitlement can be complicated. This is covered in CG37700 and CG37510.
Valuation
Where two or more beneficiaries simultaneously become absolutely entitled to unquoted shares held as settled property (for example on the death of a life tenant or on the occurrence of a contingency), the number of shares to be valued, see CG59590, is the total number of shares which are deemed to have been disposed of by the trustees on that occasion, and not the proportionate number of shares to which each beneficiary has become absolutely entitled. If possible you should agree with the trustees what is to be valued before completing the form CG30.
Where, therefore, the total number of shares deemed to have been disposed of by the trustees represents a majority holding, the shares must be valued on that basis even though each of the beneficiaries may have become absolutely entitled to shares representing only a minority holding. The valuation of unquoted shares is a matter for Shares and Assets Valuation, but it is the officer’s responsibility to tell SAV what is to be valued. (As a general rule the value per share increases as the percentage holding increases.)
Where however, on the exercise of a Power of Appointment etc. under a single or successive deeds, two or more beneficiaries each become absolutely entitled as against the trustees to a specified number of shares, the parcels of shares appointed to each beneficiary should be valued separately.
For example, if 50 shares are appointed to A and under the same, or a separate, deed, 50 shares are appointed to B the valuation should be on the basis of two parcels each of 50 shares for the purpose of computing the chargeable gain on the trustees’ deemed disposals of the shares.
If the trustees and the beneficiaries are connected persons, see CG14590+, then consideration should be given to the application of TCGA92/S19, see CG14650+.