Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about disposal of assets on the death of a trust’s life tenant.
‘I act for a trust whose life tenant died in May 2020. I appreciate that gains up to the life tenant’s death are chargeable on the trustees who benefited from a vulnerable beneficiary election. On the life tenant’s death, the assets are rebased to probate value, and the remaindermen become absolutely entitled against the trustees. I have always assumed this meant that future disposals would be chargeable on those remaindermen, because the trustees would then hold the assets on bare trust.
However, I am no longer confident of this analysis in respect of the assets which will have to be realised to pay the inheritance tax chargeable on the death. Those assets are surely not sold for, or on behalf of, the beneficiaries so I assume that any gains (calculated with probate value as the starting point) must be assessable on the trustees.
Is that correct? And, if so, what annual capital gains exemption applies, given that there was a vulnerable beneficiary election in place, but that person is now deceased? Taxation readers’ views would be very welcome.’ Query 19,687 – Baffled.
Terry Jordan’s reply: Capital gains are charged to tax on the remaindermen.
‘The rebasing of the trust assets to ‘probate value’ under TCGA 1992, s 73 occurs only if the life tenant enjoyed an ‘estate’ interest in possession for inheritance tax purposes and such interests comprise: an interest that arose before 22 March 2006; an immediate post-death interest within IHTA 1984, s 49A; a transitional serial interest within s 49B; a disabled person’s interest within s 89B; or a bereaved minor’s trust with the beneficiary dying under the age of 18.
In other words, if the trust is within the inheritance tax relevant property regime there will be no uplift for capital gains tax on the death of the life tenant.
HMRC explains that: ‘Trustees are responsible for paying any capital gains tax due. If the trust is for vulnerable people, trustees can claim a reduction, which is calculated like this:
- They work out what they would pay if there was no reduction.
- They then work out what the beneficiary would have to pay if the gains had come directly to them.
- They can claim the difference between these two amounts as a reduction on what they have to pay in capital gains tax using form SA905.
‘This special capital gains tax treatment does not apply in the tax year when the beneficiary dies.’
The trustees are primarily liable for any inheritance tax on the life tenant’s death (IHTA 1984, s 201(1)(a) and the remaindermen are also potentially liable (s 201(1)(c)). As Baffled says, the trustees are now holding as bare trustees for the remaindermen with a lien for unpaid taxes and other costs. TCGA 1992, s 60 covers nominees and bare trustees and, on my analysis, any gains realised by the trustees after the life tenant’s death would potentially be charged on the remaindermen with their annual exemptions, basic rate band balances and any personal losses being available for offset.
This analysis is supported by HMRC’s Capital Gains Manual at CG37000: ‘When the trustees actually transfer the property to the beneficiary … this is disregarded for capital gains tax purposes. If they sell it on behalf of the beneficiary, that is treated as a disposal … and the gain or loss is the difference between the sale proceeds and the market value on the occasion of the deemed acquisition.’
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