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GAZETTE
SEPTEMBER 1985
Capital Taxation on Settled Property
following the Finance Act 1985
by
David Kennedy, Barrister-at-Law
Introduction
S
ECTIONS 23 to 26 of the Capital Acquisitions Tax
Act 1976 ensure that the potential charge to
inheritance tax on the vesting in possession of a future
interest in settled property is preserved, despite dealings
with the trust property prior or subsequent to the vesting
in possession of the expectant interest. Section 15 Capital
Gains Tax Act 1975 may also impose a charge to Capital
Gains Tax on settled property in these circumstances.
Sections 61 to 63 Finance Act 1985 have introduced
significant changes in the operation of these provisions.
In its simplest form, the type of fixed trust envisaged by
these provisions is a settlement "To LT for life, with
remainder to
R
absolutely". More complex settlements of
this kind may include a succession of life or remainder
interests and may impose conditions and provide for
contingencies, such as the marriage or death before a
certain age of the beneficiaries. Such settlements were
commonly used to ensure that property, particularly real
property, remained in the ownership of the settler's family
from generation to generation. This was done by granting
only a life interest to the person in possession, which gave
him restricted powers to deal with the land. Marriage
settlements often took this form, to protect the parties to
the marriage and their descendants from a wayward or
spendthrift spouse.
1
Nowadays, settlements of this kind
are commonly used as a means of reducing or eliminating
the liability of the beneficiaries of an estate to inheritance
tax.
In the straightforward case of a settlement "To LTfor
life with remainder to
R
absolutely", a charge to
inheritance tax will arise on the death of LT on the full
value of the trust assets.
2
The function of Sections 23 to
26, CATA 1976, is to preserve this charge to tax despite:—
(a) the alienation of his future interest by
R
(Section
23).
(b) the advance termination of LT's limited interest and
the breaking of the settlement by
R
alienating his
future interest to LT or vice versa, or by the agreed
partition of the trust assets (Section 24);
(c) the resettlement of his future interest by
R
(Section
25).
Section 26 sets out the method of computing tax where
R
transfers his remainder interest to LT.
Similarly, Section 15, CGTA 1975, imposes a charge to
Capital Gains Tax in circumstances which may include
dealings with trust property covered by Sections 23 to 26,
CATA 1976. A double charge both to Capital
Acquisitions Tax and Capital Gains Tax may therefore
arise in certain circumstances.
Prior to the passing of the Finance Act 1985, the
application of Sections 23 to 26, CATA 1976, could result
in an excessively severe charge to inheritance Tax on an
estate due to the levying of tax on a series of successions
by different beneficiaries on the same event. However,
Sections 61 to 63, FA 1985, have been introduced with
retrospective effect to mitigate the hardship that could
arise under the old legislation. These new provisions have
resulted in a significant alteration in the basis of capital
taxation of settled property.
Disposal or Devolution of Remainder Interest
1. Capital Acquisitions Tax
A.
Section 23 CATA 1976
If the life tenant of a settlement dies and the trust
property passes absolutely to the remainderman, a charge
to inheritance tax will arise. Section 23, CATA 1976,
preserves this charge where the remainderman's future
interest passes to a third party, whether for full considera-
tion or otherwise, before the interest vests in possession.
Example 1
R
is the remainderman of a settlement in which LT has
a life interest.
R
gifts his interest to a third party, T. T
takes absolutely on LT's death. Section 23 provides that a
charge to tax arises in these circumstances as if
R
had
himself inherited the property.
The charge to inheritance tax and the relevant
exemption are calculated on the basis of the relationship
between the settlor (the disponer) and the original
remainderman. However, the transferee T is accountable
for any tax arising on the death of the life tenant,
3
but
only to the extent of the interest in the trust property
actually taken by him.
4
As regards entitlement to
agricultural relief, the transferee T and not the remainder-
man must fulfil the necessary conditions to qualify.
5
Section 23 (1), CATA 1976, governs both the disposal
and the devolution of the remainder interest. Thus, if
in the above example
R
had died before inheriting and
had left his expectant interest to T who took on the death of
LT, the charge to inheritance tax
6
on the death of LT
would again be preserved.
Section 23 (2), CATA 1976, preserves the second
charge to gift or inheritance tax which may arise on the
gift or inheritance of the remainderman's future interest.
In Example 1 above, T would be potentially liable under
Section 23( 1) to inheritance tax on the death of LT, and to
gift or inheritance tax on the value of the benefit taken
from
R
under Section 23(2). Both charges will arise on the
same property on the event of the death of the life tenant.
If T died before he inherited from LT, and his estate
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