Legislative changes in recent years have meant that an increasing number of trusts are within the relevant property regime for Inheritance Tax Purposes (IHT). as such gifts into most trusts are chargeable lifetime transfers for iht and distributions from many trusts generate an IHT charge.
If the transfer is within the IHT nil rate band, there may not be any iht payable. however, it is important to be aware of the opportunity to defer any Capital Gains Tax (CGT) chargeable that arises as a consequence. technically, where a disposal made by an individual or trustees is a chargeable transfer for IHT, then CGT holdover relief is available on the gain.
What is Holdover Relief?
Holdover Relief is a deferral of CGT and it is very valuable in its own right according to the old adage that tax deferred is tax saved. However, through sensible planning there are also opportunities for direct CGT savings. For example, if Holdover Relief is obtained when assets are distributed from a trust and the beneficiaries receiving those assets later sell them within their own CGT annual exemption, then no CGT will be payable. If there are multiple beneficiaries and this process is spread over a number of years then there is potential for a substantial CGT saving.
Claim for Holdover Relief
Holdover Relief is not automatically applied and is subject to a claim. There are some pitfalls to be aware of, two of which are covered briefly here.
The first point to note is that Holdover Relief is not available on an appointment of capital in the first three months after a ten year anniversary. This would otherwise be a tempting option because there is no IHT upon a capital appointment in these circumstances. It may be advisable in the first three months following a ten year anniversary to distribute an exempt asset such as cash from the trust but not assets chargeable to CGT.
A second factor to consider is that where a gain has been held over and the recipient then becomes non-resident within six years, the Revenue may claw back the tax on that gain. If the Revenue cannot recover the tax from the transferee then the trustees become liable to pay the CGT. This can cause problems if the trustees have distributed all the assets. If the trustees are concerned about such a scenario it may be advisable to hold back sufficient funds to pay the tax on any gain. The trustees should of course also consider how much CGT is at stake were they simply not to make a holdover election but to pay the CGT instead. After allowing for any capital losses that may be available this may not be as much as feared.