Passing investment assets down a generation

THE PROBLEM

ABC Engineering Limited is a company that does not qualify for business property relief for IHT, and any attempt to remove ABC from an estate for inheritance tax purposes will be a disposal of assets at full market value for capital gains tax purposes.

It is very difficult to transfer the shareholding in an investment company without triggering a full market value gain.

However, there is a means of taking the value of some of these assets out of the estate of a husband and wife using a UK trust. Section 260 Capital Gains Tax Act 1992 provides that capital gains tax need not be paid on non-business assets transferred into a UK resident trust if the following conditions are met:

• The UK trustees agree to accept the assets at their tax base cost such that they will pay any future gain realised on sale
• The transfer into trust is a chargeable transfer for IHT purposes, attracting a 20% lifetime charge
• Holdover relief will be denied if the beneficiaries of the trust include the minor children (under 18) of the settlor
• On transfers of property to the trust – claiming holdover relief will deny the trustees/beneficiaries claiming CGT exemption on the property as their PPR in the future.

SOLUTION

A transfer below the nil rate band does not create a tax liability.

The arrangement works along the following lines:

1. Create a family trust in the UK with UK resident trustees (this could include husband, wife and another)
2. The terms of the trust are that it is a discretionary trust giving the trustees the power to appoint the income and capital of the trust to whatever member of the family they please, or an interest in possession trust, which means that trustees distribute income to beneficiaries identified by the settlor
3. The trustees’ actions are subject to the settlors’ prior written approval
4. The settlor would retain a power to direct the trustee to do as he says with the assets of the trust, or retain control by being appointed a trustee
5. The shares of ABC Engineering Limited are transferred to the trustees. The transfer is a chargeable transfer for IHT purposes but their value is below the nil rate band (at time of writing, £325,000 per spouse)
6. Investment assets such as property, quoted shares benefit from holdover relief

This client inheritance scenario is designed to assist you in developing your own strategy where appropriate. Among other things, you will need to consider eligibility and timings, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the product(s). This case study does not constitute financial advice or guidance. If you would like to discuss your personal situation, please contact us.