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HMRC internal manual

Capital Gains Manual

Basic terms of trust law as applied to CGT: sub-fund settlements: basic effects for CGT: deemed disposal

Except for the purposes of the annual exempt amount (see CG18115) the sub-fund becomes a new separate settlement on “the specified date” (see the end of TSEM3510).

Otherwise the basic principle is that the tax consequences should be the same as those which would apply if the trustees had exercised their powers to transfer assets to the trustees of a separate settlement. The legislation provides the same possibilities in the case where such powers are not available to them. For example there may only be a power in ‘narrower form’. See the discussion in Bond v Pickford 57TC301, and CG37841.

There is a deemed disposal under TCGA S71(1) by the trustees of the principal settlement at the beginning of the specified date and reacquisition by the trustees of the sub-fund settlement on the specified date. See TCGA92/SCH4Z paragraph 19 and paragraph 20(1) and(2)).

If however a particular asset meets the business asset test or agricultural property test “gifts hold-over relief” may be available under TCGA section 165 or TCGA Schedule 7 paragraphs 1 to 4. See CG66940+.

It is also accepted that if the transaction creating the sub-fund settlement is a chargeable transfer for Inheritance Tax, and the specified date is the same day, the conditions of TCGA92/S260(2)(a) can be met. For example one might have a will trust where currently there is an immediate post-death interest for A, the son of the testator, see CG36542. The trustees exercise a power to declare discretionary trusts for A’s children, B,C and D, in respect of part of the settled property. This is a chargeable transfer for IHT. Assuming the property held on discretionary trusts meets the conditions for there to be a sub-fund, an election might be made under which the specified date is the date of the exercise of the power. In this situation section 260(2)(a) could apply unless any of B,C and D are under 18.