Part 4 of 4
This is the Finance Act 2013 version of this article. It is relevant for candidates sitting the Paper P6 (UK) exam in 2014. Candidates sitting Paper P6 (UK) in 2015 should refer to the Finance Act 2014 version of this article (to be published in 2015).
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 inheritance tax (IHT) and capital gains tax (CGT) implications of transferring assets to and from a trust.
In this final part we will look at a further example.
Carolyn and Eric
Carolyn and Eric are in their thirties and have been married for 10 years. They have two young children. They run a successful property investment company, Caric Ltd, which generates a significant amount of income and is rapidly increasing in value. They are looking for a way to reduce the value of their estates by transferring some of the shares in Caric Ltd to their children.
Where assets are increasing in value it is advisable to give them away sooner rather than later as the value for inheritance tax 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 is an investment company 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 children.
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, because the trust is not being created on death, 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:
Whilst the shares are in the trust:
On the transfer of assets to the beneficiaries:
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.
Written by a member of the Paper P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.