CGT settled property and absolute entitlements

At the time of writing, the property and investment markets have fallen significantly from their peak values, and may go even lower. For investment managers, advisers and their trustee clients the scenario is bleak and frightening. However, even these clouds may have some silver linings. Do the depressed markets, with the correspondingly depressed ‘market values’ used for tax purposes, possibly offer opportunities for reorganising, or even ending, settlements that would previously have been inhibited by prospectively heavy capital gains tax (CGT) liabilities on a beneficiary becoming absolutely entitled to the settled property? In the case of assets that would not have qualified for taper relief at the business assets rate, and where there will have been little or no indexation allowance, there may be felt to be two factors mitigating prospective CGT liabilities. One, inevitably not very welcome factor will be the loss in the value of trust assets. It will be for trustees to consider whether it will be tactful to draw too much attention to this. The other factor will be the reduction in the CGT rate to 18%, for trustees as well as other taxpayers. Possibly the time is becoming ripe for trustees to consider whether capital advances should be made out of interest in possession settlements, to remaindermen with a view of saving IHT (prospectively chargeable at 40%) on the death of the life tenant. Alternatively, it might be appropriate to consider a partition of the trust fund, under which some of the trust assets end up in the hands of the life tenant, while others end up in the hands of the remaindermen. Assuming that the life interest is commenced before 22 March 2006, is a transitional serial interest or an immediate post-death interest, s49 (or s49A) IHT Act 1984 will apply. The trust assets will be deemed to have been owned, beneficially, by the life tenant. Consequently, for IHT purposes, the transfer of some of the trust assets to the life tenant will be a non- event, while the outright transfers to the remaindermen will be potentially exempt transfers (PETs) that may become chargeable transfers if the life tenant dies within the following seven years. The position for CGT will be quite different. As all the beneficiaries will have become absolutely entitled to the trust assets, as against the trustees, they will be deemed to have been disposed of at market value under s71 (1) TCGA 1992, giving rise to chargeable gains, or possibly allowable losses in the hands of the trustees.