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We would like to restart the taper relief clock for the loan notes in the trust by making an appointment to our client. Could readers confirm that an appointment of loan notes to the settlor would result in two potential capital gains tax charges as detailed below?
(1) Under section 87, Taxation of Chargeable Gains Act 1992 (which cannot be avoided) on capital payments in so far as the appointment does not exceed stock-piled gains re pre-March 1998 disposals.
(2) On the disposal by the trustees of the loan notes, but with the opportunity to hold over the gain under section 165, Taxation of Chargeable Gains Act 1992.
(Query T16,097) - Clockwatcher.
At one time, offshore trusts of this type were commonly known as 'golden trusts' but their heyday was rapidly terminated after a well-known tax consultant enjoyed a double page spread in the Sunday Times in 1990 (if I recall correctly) detailing tax avoidance through offshore trusts, complete with a photograph of him in the office with feet on the desk! What this was intended to achieve, as opposed to what it actually achieved, was never made clear.
Time has marched on, and all the gains in this trust are now waiting to be visited on the settlor's head. In the meantime, the Government's bizarre and blinkered policy with the taper relief changes effective from April 2000 could, I fear, force these trustees into artificial tax avoidance.
Dealing first with the two questions raised, there is indeed nothing to prevent both sections 86 and 87, Taxation of Chargeable Gains Act 1992 applying to the settlement in one year, and the only provision against double charge is in section 87(3) which basically prevents gains which are taxed on the settlor being included in the amount of gains which can be attributed to beneficiaries receiving capital payments. So an appointment of the corporate bonds out of the settlement to the settlor will be a notional disposal of them for capital gains tax purposes giving rise to a gain assessable on the settlor under section 86.
It will also be a capital payment to the settlor enabling the stockpiled gains to be attributed to the settlor up to the value of the bonds. It may be possible to argue that the capital payment is the value of the bonds less the capital gains tax liability borne by the settlor on that event.
As regards the possibility for holdover relief, almost certainly section 165 holdover relief will not be available. This applies to unquoted shares and securities or to shares and securities in the transferor's personal company. As we are dealing here with a quoted company, this must surely exclude section 165 relief.
So what alternatives are available?
The first point to double check is that the settlor does indeed have an interest in possession in the trust. It was no doubt set up under detailed professional advice, but it would be as well to check that the trustees have no overriding power to accumulate income, under the discretionary power mentioned in the query, otherwise there may in fact be no interest in possession in view of the decision in Pearson and others v Commissioners of Inland Revenue [1980] STC 318.
Assuming that this settlement is not affected by the Pearson decision, the only possibility for holdover relief into a new trust would be by virtue of section 260, Taxation of Chargeable Gains Act 1992. In these circumstances this requires a transfer to a new discretionary trust resident in the United Kingdom. There has in fact been some small doubt about whether section 260 can apply to appointments out of non-resident trusts but, as far as I am aware, in practice the Revenue accepts section 260 claims in these circumstances.
The stockpiled gains would transfer over to the new resident trust under section 90, Taxation of Chargeable Gains Act 1992 and a new taper relief holding period would commence.
The bonds would not, so far one can tell from the limited information given, be a business asset whilst the trust remains discretionary, but an appointment of an interest in possession to the settlor as soon as may be appropriate would not give rise to any capital gains tax notional disposal and the shares would then become business assets. There will still be some tainted taper period, but not as much as in the offshore trust.
The problem with this idea is of course that the transfer into the resident trust would be a chargeable transfer for inheritance tax purposes and so it seems inevitable that an immediate inheritance tax liability would arise. New Melville schemes are not suited here. One would also need to consider whether the appointment of the life interest would be the 'conferring of any other benefit', which is part of the definition of 'capital payment'.
The only other possibility appears to be an outright avoidance scheme. This has become known as the 'round the world' scheme and involves the appointment of trustees located in a suitable double tax treaty régime, such as Mauritius. The bonds would be realised during the period of residence in the relevant treaty country, and the trust then imported into the United Kingdom in the same year. This can be engineered to find a path through all the relevant capital gains tax provisions.
The scheme is provocative, expensive, and not without its uncertainties. As far as I am aware, it is only being operated by some of the major accountancy firms and it is not really feasible to 'do it yourself'. - Big shot.
