Writing for Taxation magazine's Readers' Forum, BKL tax consultant Terry Jordan responds to a reader's query about availability of reliefs on a life interest trust.
'Our client, after a divorce in 2005, received a 60% share of the family house and a similar share in 60 acres of land which is contracted out. The remaining shares in the house and land were put into a life interest trust for their four adult children.
The family would now like to move the share of the house owned by the life interest trust into the name of the parent who owns the 60% share and move the land into the name of the life interest trust. Unfortunately, the trust was created before the 2006 legislation was introduced so we do not believe holdover relief under TCGA 1992, s 260 will be available.
We are trying to determine whether exchange relief under TCGA 1992, s 248A would be available on the transactions. We are aware that the legislation talks about individuals but are unsure whether the holders of the life interest would qualify as individuals for this relief. If readers know of any other ways to overcome the problem, their views would be welcome.' Query 19,839 - Forester.
Terry Jordan's reply: Exchange relief under TCGA 1992, s 248A should be available.
'Forester's client received 60% of the family home and a similar share in 60 acres of land following a divorce in 2005. We are told that the land is contracted out and it may be that it would benefit from inheritance tax agricultural property relief. The remaining shares in the home and land were put into a life interest trust for the four adult children. Because this was done before 22 March 2006, the children enjoy 'estate' interests in possession which put the capital value of the trust assets into their hands for inheritance tax purposes. As Forester has identified, the trust property is not currently in the relevant property regime with ten-year and proportionate or 'exit' charges.
It is now wished to move the trust's share of the house to the parent and the parent's share of the land to the trust. The termination of the children's interests in possession in the share of the house would constitute a deemed potentially exempt transfer, so holdover relief would not be available under TCGA 1992, s 260 as an immediately chargeable transfer. So far as the land is concerned, if it does potentially benefit from agricultural property relief, holdover relief might be available under TCGA 1992, s 165 and Sch 7 para 1 and would not be restricted to the agricultural value.
The question that has been posed is whether exchange relief under TCGA 1992, s 248A would be available (before 6 April 2010 relief was provided under the terms of extra-statutory concession D 26.) Forester says the legislation talks about 'individuals', but as far as I can see the relevant term used is 'persons'. TCGA 1992, s 69 (1) provides: 'For the purposes of this Act the trustees of a settlement shall, unless the context otherwise requires, together be treated as if they were a single person (distinct from the persons who are trustees of the settlement from time to time).' Accordingly, the relief should be available. Although a private residence is involved, s 248C is not apparently in point because the trust's share in the house would not benefit from only or main residence relief. It will be necessary to consider the respective values of the interests to ascertain whether a capital gains tax liability nevertheless arises.
If agricultural property relief is in point, the retention rules in IHTA 1984, s 124A will need to be considered regarding the transfer of the land by the parent to the trust unless it is covered by IHTA 1984, s 10 (no gratuitous intent).'
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