Anti-avoidance ― traps for the unwary

Produced by Tolley in association with Paul Davies at DWF

The following Trusts and Inheritance Tax guidance note Produced by Tolley in association with Paul Davies at DWF provides comprehensive and up to date tax information covering:

  • Anti-avoidance ― traps for the unwary
  • Residence status of trustees
  • ‘Exhaustive’ trust appointments
  • Problems arising out of claims for hold-over relief
  • Emigration of beneficiary
  • Trust becoming settlor-interested
  • Residential property
  • Slips involving relevant property trusts
  • Disposals of trust interests
  • Disposals of assets used in trade carried on by another person

The decision of the Supreme Court inFutter and another v HMRC established that it will be much more difficult for trustees and other fiduciaries to set aside actions they have taken that have had unfortunate tax consequences. In the Futter case, trustees acted upon professional tax advice which turned out to be incorrect, and they were obliged to accept the consequences. Accordingly, it is more important than ever that the trustees avoid such consequences and that advisers are alert to the problems that might arise from the actions of the trustees.

This note highlights some of the more common issues from a capital gains tax (CGT) perspective; however, it is not a comprehensive list of the possible traps that may give rise to unanticipated tax liabilities.

Residence status of trustees

The trustees are treated as a single continuing body of persons and therefore a change of trustees does not normally have any CGT consequences. However, if a change inthe identity or residence status of one or more of the trustees causes the trust to become a non-resident trust, then this will give rise to a deemed disposal of all of those trust assets which would be outside the scope of CGT within a non-resident trust. On a change of residence, assets such as shares and investments would become liable to CGT based on their value at that date, notwithstanding that they have not actually been sold. This is the so-called ‘exit’ charge.

See the UK tax position of non-resident trusts guidance note.

For property which remains within the scope of CGT, such as UK land or assets used ina UK branch or agency, the CGT charge may be postponed until the actual disposal. See the CGT on non-resident trusts guidance note.

Bear inmind that the rules determining the residence status of the trustees take effect differently depending on whether the settlor was UK resident or domiciled when the settlement was made.

Some examples of how

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