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Is there a sweet solution?
Bonbon is the beneficiary of an accumulation and maintenance trust and becomes absolutely entitled to the capital at age 25. She is now aged 21 and has been entitled to the income since she became 18. The aim is to avoid the capital gains tax liability at 25 by making a holdover election under section 260(2)(d), Taxation of Chargeable Gains Act 1992 (the trust fund consists of investments).
Is there a sweet solution?
Bonbon is the beneficiary of an accumulation and maintenance trust and becomes absolutely entitled to the capital at age 25. She is now aged 21 and has been entitled to the income since she became 18. The aim is to avoid the capital gains tax liability at 25 by making a holdover election under section 260(2)(d), Taxation of Chargeable Gains Act 1992 (the trust fund consists of investments).
The obstacle is that Bonbon now has an interest in possession and is no longer an accumulation and maintenance beneficiary.
It has been well publicised that section 260(2)(d) can be made to apply by Bonbon (as settlor) assigning, from an 'effective date' and without apportionment, all her income interest under the trust to be held by the trustees on different terms and in particular with powers to accumulate, i.e. it will revert to an accumulation and maintenance trust. This would continue until Bonbon reaches 25.
My only doubt is that Bonbon has already had some income, i.e. since she became 18. Is it sufficient that the assignment of the income is irrevocable from now and that, at 25, section 260(2)(d) can apply and the gain be held over?
(Query T16,167) - Nobnob.
Aspects of accumulation and maintenance trusts were considered in the article 'Trusting Trusts - I' by Ralph Ray in Taxation, 31 October 2002 at pages 109 to 111.
In line with what is put forward by 'Nobnob', the beneficiary can resettle her income interest under the trust to be held by the trustees on new accumulation and maintenance trust terms, with powers of accumulation and/or maintenance, etc.
The outcome would be to synchronise the termination of this new trust with the original maturity date of the underlying trust, so that Bonbon would become entitled to capital and income at the same time. This brings into play section 260(2)(d), Taxation of Chargeable Gains Act 1992, opening up the opportunity for Bonbon and the trustees to claim hold over of the gain on the trustees' disposal.
The above suggestion (settlement or assignment from an effective date) appears in the article mentioned as an alternative to the more usual method of satisfying the gains tax requirement, that is, arranging for the capital to be advanced at the same time as, or before, entitlement arises to the income.
Section 260(2)(d), Taxation of Chargeable Gains Act 1992 is geared to section 71(4), Inheritance Tax Act 1984 which would exclude inheritance tax on the occasion of Bonbon becoming beneficially entitled to, or to an interest in possession in, settled property on attaining age 25. The earlier receipt of income is rendered irrelevant. - Elder.
