Interest in possession trust

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Client is entitled to income from an interest in possession trust which was created on the death of her husband in 2006.

The cash is invested in a mixed investment portfolio with the income directly remitted to my client who reports it on her SA.

Client doesn’t need the income and has decided that half of it can be sold, and passed onto those who would benefit when she dies.  

From a tax point of view, IHT position I am happy with, but for CGT I have go into a muddle about who is paying what, and how its computed and can’t seem to find the right references or at least understand them.

It is simply that the trust pays CGT based on any gains in the portfolio, calculated with reference to the purchase values of those stocks?  [which have been bought and sold periodically by the broker so is minimal] Or do we need to consider the value when entering the trust?  Or indeed does my client pay any CGT personally?  I have been reading too much and understanding too little. 

Replies (19)

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By Tax Dragon
16th Nov 2023 14:44

Get AML etc in place ON THE TRUST if you are going to advise the trustees.

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Replying to Tax Dragon:
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By More unearned luck
16th Nov 2023 14:55

And assure yourself that the trust is on the TRS (but this might be included within TD's 'etc').

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By ireallyshouldknowthisbut
16th Nov 2023 14:52

I'm not advising the trustees & I dont act for the trust.

The client just wants to know what is happening.

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Replying to ireallyshouldknowthisbut:
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By More unearned luck
16th Nov 2023 14:57

Then she should ask the trustees and not some random person who she happens to know.

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Replying to More unearned luck:
By ireallyshouldknowthisbut
16th Nov 2023 15:16

More unearned luck wrote:

Then she should ask the trustees and not some random person who she happens to know.

Not very random, I have been filing her SA return for about 15 years.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
16th Nov 2023 16:42

Nevertheless, your client should discuss her thoughts/wishes with the trustees.

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By More unearned luck
16th Nov 2023 15:06

She could instead simply make normal gifts out of surplus income. No legal fees involved in doing that!

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Replying to More unearned luck:
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By Tax Dragon
16th Nov 2023 16:43

Agreed - after she has paid tax on the income as appropriate.

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By ireallyshouldknowthisbut
17th Nov 2023 08:56

Well they could so many things, but this is not one of them that makes any sense.

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By FrankTax
16th Nov 2023 22:08

Does she have the power to sell?
She could relinquish her life interest allowing investments to fall to the remainderman.

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Replying to FrankTax:
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By Tax Dragon
17th Nov 2023 07:04

What happens if she does that depends on the terms of the trust. That's a matter for her to discuss with the trustees. She's gone as far as she can at the moment with her accountant - and vice versa.

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Replying to FrankTax:
By ireallyshouldknowthisbut
17th Nov 2023 08:54

FrankTax wrote:

Does she have the power to sell?
She could relinquish her life interest allowing investments to fall to the remainderman.

The trustees are quite happy with the proposal, its just the clueless accountant knows enough to know they dont know whats going on and is going to be calling their tax support this morning.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
17th Nov 2023 09:54

It's good to know your personal limits.

It's also good to know the limits of your engagement and responsibilities.

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By cathygrimmer
17th Nov 2023 10:14

The trust will be liable for any CGT on sales of the shares or if they are appointed out to other beneficiaries (if the trust deed allows that, which it may well do). The gains are calculated in the usual way looking at the actual costs of each holding - nothing to do with the value of the trust when it started, unless shares are being sold now that entered the trust at that point. So if the brokers have been buying and selling to use the trust annual exempt amount, there may be minimal/no gains.

The transfers from the trust to other individual beneficiaries will be PETs of the life tenant for IHT.

But the trustees should really be the ones seeking tax advice!

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Replying to cathygrimmer:
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By Tax Dragon
17th Nov 2023 10:58

IF it's a QIIP - which is a reasonable assumption but very far from certain.

Knowing the full history [of the trust] in these situations is vital. We're told husband died in 2006 and OP started acting for the widow around 2 years later. I don't believe the OP has enough knowledge of the history to advise the trustees through the medium of the beneficiary - even were this permitted, which it's not.

From beneficiary's (/client's) point of view, the interest in the trust is an asset in its own right, but any gain that might arise on the disposal of this asset is not chargeable - if s76 is satisfied.

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Replying to cathygrimmer:
By ireallyshouldknowthisbut
17th Nov 2023 11:52

cathygrimmer wrote:

The trust will be liable for any CGT on sales of the shares or if they are appointed out to other beneficiaries (if the trust deed allows that, which it may well do). The gains are calculated in the usual way looking at the actual costs of each holding - nothing to do with the value of the trust when it started, unless shares are being sold now that entered the trust at that point. So if the brokers have been buying and selling to use the trust annual exempt amount, there may be minimal/no gains.

The transfers from the trust to other individual beneficiaries will be PETs of the life tenant for IHT.

But the trustees should really be the ones seeking tax advice!

Brilliant Cathy, that is what my advice folks said, but as above I am never quite sure about this type of area.

My client just wants to know the implications of her proposal before its actioned which does not seem unreasonable to me. I am unsure why it is implied I am advising the trustees.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
17th Nov 2023 12:25

So you ARE planning to discuss the taxation of the trust with your client?

Say W acts on your advice. Either the trustees will just do what she says on the strength of her having taken your (possibly correct, possibly not) advice. Or they take their own advice (as they should) and maybe find out what you told the widow about the taxation of the trust was wrong. I don't see how in either situation you have done your job well.

2006 - and then 2007, TNRB - were big years in trust tax. It's entirely possible the trust was created by variation in the first big year - and then exercised powers in the second (or subsequently).

Unless you KNOW what happened, and when, you cannot KNOW that Cathy's answer applies. It's a plain vanilla answer - but the trust might be rum and raisin.

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Replying to Tax Dragon:
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By cathygrimmer
20th Nov 2023 10:10

I have to say that I read the statement 'Client is entitled to income from an interest in possession trust which was created on the death of her husband in 2006.' as it being an interest in possession will trust for the widow which is, of course, very common. I would have expected the OP to have explained it differently if it wasn't an IIP for the widow at commencement. But you could be right - it could, unusually, be a trust which wasn't an IPDI for the widow when it commenced on the husband's death and later became an interest in possession trust for the widow. So I am happy to caveat my comment to it applying only if it was an IIP for the widow set up on the husband's death under the terms of his Will.

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Replying to ireallyshouldknowthisbut:
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By More unearned luck
17th Nov 2023 15:43

"My client just wants to know the implications of her proposal before its actioned which does not seem unreasonable to me. I am unsure why it is implied I am advising the trustees."

This is because your question went beyond asking about the incidence of CGT and asked computational questions such as "...do we need to consider the value when entering the trust? ". How can the 'we' in that question not include both you and the trustees?

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