Part 3 of 3
This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).
So far in this article we have looked at the reasons why it may be beneficial to use a trust, the different types of trust and the tax implications of using trusts. In this final part we are going to look at an example.
EXAMPLE
Carolyn and Eric
Carolyn and Eric are in their thirties and have been married for ten years. They have no children of their own, but they have two young nieces. They own Caric Ltd, which carries on an investment business but does not trade. Caric Ltd is rapidly increasing in value. Carolyn and Eric are looking for a way to reduce the value of their estates by transferring some of the shares in Caric Ltd to their nieces.
Where assets are increasing in value it is advisable to give them away sooner rather than later as the value for IHT purposes is the value at the time of the gift. This is often not an issue with unquoted shares due to the availability of 100% business property relief. However, Caric Ltd does not carry on a trade and therefore does not qualify for business property relief.
Carolyn and Eric will want to retain control over the shares in order to retain control over the future of the company. This can be achieved by transferring the shares to a trust and appointing themselves as trustees. The trust will then hold the shares for the benefit of the nieces.
The type of trust to use will depend on what they want to achieve. For example, they may need to use a discretionary trust if they wish to accumulate income or retain a degree of flexibility over its distribution. However, the tax implications will be the same regardless of whether the trust is discretionary or subject to an interest in possession.
Carolyn and Eric would need to be advised that on the transfer of the shares to the trust:
- the transfer will be a chargeable lifetime transfer
- gift holdover relief will be available, even though Caric Ltd is not a trading company, because the transfer is immediately chargeable to IHT.
Whilst the shares are in the trust:
- the trustees will be subject to income tax and CGT on the income and gains arising in respect of the trust assets; a repayment of income tax paid may be available where income is distributed to non-taxpayers or those paying tax at the basic rate
- IHT will be charged every ten years on the value of the assets within the trust at a maximum of 6%.
On the transfer of assets to the beneficiaries:
- an exit charge will arise for the purposes of IHT, again at a maximum of 6%
- gift holdover relief will be available even though Caric Ltd is an investment company, because the transfer is immediately chargeable to IHT.
Conclusion
Trusts can be used to solve practical problems where there is a desire to transfer wealth whilst protecting the capital or retaining a degree of control over the assets. They also represent a sophisticated tax-planning tool.
When advising on the tax implications of using a trust you should consider all three relevant taxes, income tax, CGT and IHT, unless the question requirement states otherwise. Apply the fundamental rules of these taxes to the precise circumstances of the question in order to maximise the marks obtained.
