CGT reverter to settlor settlements and the death of the life tenant

The Briefing above discusses the CGT problems which may arise on the death of the life tenant when a CGT hold-over relief was claimed on the making of the settlement. A discussion of quirky rules applying on the death of a life tenant would not be complete without covering the provisions of Section 73 (1) 3() TCGA 1992. This applies where, on the death of the life tenant, the settled property “reverts to the disponer”, an expression which taken to meant the settlor. “Reverter to Settlor” Settlements enjoy special treatment for IHT purposes. Under Section 53 (2) of the IHT Act 1984, there is no IHT charge on the death of the life tenant so it is hardly surprising that there is no CGT-free “uplift”.There is no immediate CGT charge either. Section 73 (3) TCGA 1992 provides that the disposal (and corresponding reacquisition by the trustees, as nominees for the settlor as remainderman) takes place on a no gain/no loss basis.

“Reverter to Settlor” Settlements are seen as providing a useful mechanism for tax planning following a death. For example, if a husband dies, leaving a share in the matrimonial home to the children, to make use of his IHT “nil rate band”, the widow may wish to continue living in it. If the children grant her a life interest under a “reverter to settlor” settlement, the value of that interest in the house will escape IHT on her death. Similar considerations may apply if eg, the husband leaves farmland, qualifying for Agricultural and Business Property Reliefs to the children, but provision needs to be made for her to use this property, and it is known that it will have to be sold. A reverter to settlor settlement made by the children for the widow will secure the IHT and Agricultural Property reliefs on the death of the husband, without the possibly non qualifying reinvestments being subject to IHT on her death. This IHT-saving strategy was discussed in the Briefing on page 5 of the August/September 2001 issue of Trusts and Estates. Could the no gain/no loss basis disposal by the trustees, on the death of the life tenant, throw a CGT spanner in the IHT planning works?