Interest in Possession Trust

Interest in Possession Trust

Didn't find your answer?

Trading company is owned 50% by father and 50% by son.  If father dies, the business will be transferred in full to son.  However, the father is re-marrying and the son is concerned as to future position with shares if they are divorced or father dies and will is contested.

They propose to set up an Interest in Possession Trust.  The father will maintain his right to the dividend income during the lifetime and, in the event of death, the shares will pass to the son.

Presumably, the dividends will continue to be taxed on the father and the transfer of shares into the trust will not attract CGT or IHT as they can be gifted and will qualify for BPR.   When the father dies, the shares should still qualify for BPR.

Does this proposal seem fine?  Just wondering if I'd missed anything from a tax viewpoint?

Thanks for any assistance

Replies (11)

Please login or register to join the discussion.

avatar
By dropoutguy
06th Nov 2014 16:09

The settlor


of the trust is father, who is retaining an interest in the shares by receiving dividends.

This means the trust will be settlor interested, which will deny holdover relief.

Thanks (1)
avatar
By KungFuKipper
06th Nov 2014 19:47

And therefore a CLT...
Why not a buy/sell agreement at a value of £1.00?

The fact it is an option and not a binding contract would not disallow BSR. It isn't being transferred into a trust therefore not a CLT.

Seems to work OK?

Thanks (0)
Portia profile image
By Portia Nina Levin
07th Nov 2014 10:54

Whiskey Tango Foxtrot

Giving it to the frigging trust would not prevent BPR being available.

The problem is that there is CGT, which is not avoided by your half-arsed suggestion. You appear to have clients in danger of losing money because you are not competent to act for them.

Thanks (0)
avatar
By KungFuKipper
07th Nov 2014 12:57

Whose half arsed suggestion
SD Green's or mine?
I thought mine was quite good..

Thanks (0)
Portia profile image
By Portia Nina Levin
07th Nov 2014 13:04

Yours!

Perhaps you might care to enlighten us all what it achieves over the OP's original plan

Thanks (0)
Replying to timothyvogel:
avatar
By KungFuKipper
09th Nov 2014 11:05

What's up, was I right?

Portia Nina Levin wrote:

Perhaps you might care to enlighten us all what it achieves over the OP's original plan

Or was I wrong - I actually ask/debate questions because I am not 100% certain that I know the answer and like learning stuff. And you?

Thanks (0)
avatar
By KungFuKipper
07th Nov 2014 13:21

Further requirements for lifetime transfers
Include a failed PET requiring beneficiaries to have owned the asset throughout the period of the gift. I couldn't be certain that the successive settlements into and out of the trust would meet this so I would pay for confirmation (happy to be told otherwise, but for a client I would still pay my favourite CTA).

Now use of a Buy/Sell agreement on death would achieve the same thing wouldn't it (probably cheaper and where's the CGT on that?)....

Thanks (0)
avatar
By Stuart.thomson
09th Nov 2014 19:52

Using a £1 purchase option wont worked as there will be CGT at full market value being a transfer to a connected person. Putting a CP of death on it may change that but surely then it forms part of a PET transfer for IHT. Yes?

Why not reclassify the shares into alphabet shares with the son's shares having a casting vote on distributions to the classes. This means the son has the dividends in case of a fallout which renders the fathers shares worthless. They can have a shareholders agreement which does not survive death so that the fathers retains his 50% during his life. Control issues post death can be wrapped up later with discussions around minimal value as there are no dividends. No CGT as effective interests are unchanged but will be IHT but based on what value (£nil?)

Does this not work?

Thanks (0)
avatar
By nick farrow
10th Nov 2014 09:57

Portia

where is your comment re "Shoot me" - I searched for half an hour it made me laugh so much but I couldn't find it?

Thanks (0)
Portia profile image
By Portia Nina Levin
10th Nov 2014 10:45

A few points

@ Nick: It is here: https://www.accountingweb.co.uk/anyanswers/question/business-entertainme...

@ the Kipper: I must apologise. What you suggest does work, possibly better than the OP's suggestion. Your suggestion was not particularly well expressed though.

The idea is not that anything at all happens currently but that the son is granted (for a nominal consideration, if there is not a corresponding sale option) an option to buy dad's shares from his executors (perhaps for a nominal amount) in the event of dad's death. Dad might be granted a corresponding option for his executors to sell the shares in the event of his death.

That does not constitute a binding agreement to sell that would prevent BPR from applying, and there would be no CGT (whilst the disposal of the shares would still be deemed to take place at MV, there would be an uplift on death).

The one problem is the exchange of options or grant of the option at undervalue. If the option is to acquire the shares for a nominal amount the option has a value, and that is itself a CGT disposal.

If the option would involve paying market value on death, the option would have little, if any, current value though.

Altering the rights of the shares (so that value flows out of the father's shares and into the son's shares) as suggested by Stuart Thomson is still a CGT part disposal of the father's shares..

Thanks (0)
avatar
By Stuart.thomson
10th Nov 2014 11:52

Portia, how is the value of the part disposal going to be calculated? If there is a shareholders agreement which means that the rights are effectively unchanged then the value transferred is nil. The only difference is that the shareholders agreement is not binding on new shareholders only the original so the outcome of the will/ divorce is irrelevant. But although it is documented differently there is no impact at the moment of these arrangement.

Any value transfer in my view would be small as it is based on actuarial option values and unless he is about to pass over to the other side would be heavily discounted. So. CGT on a very small value may be preferable.

Is there anti-avoidance on this specific area? No not looking for bullets this time, just "constructive advice" so if I get in this situation I know the answer (not just call Portia every time!)

Thanks (0)