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HMRC internal manual

Capital Gains Manual

Direct demergers: trustees: interests in possession: England Wales/Ireland

If the demerged shares are received as income of the trust, the life tenant (or any other person with an interest in possession) of a trust governed by the Law of England and Wales, or either part of Ireland, is immediately entitled to those shares, subject to the right of trustees to meet their expenses. This follows from the decision of the House of Lords in the case of Archer-Shee v Baker 11TC749. The demerged shares are therefore never settled property for Capital Gains Tax purposes, and there is no disposal for Capital Gains Tax purposes from the trustees to the life tenant. The allowable cost to the life tenant for any future disposal is the market value of the demerged shares at the date of the distribution, by reason of TCGA92/S17 (1), the disposal by the company being the corresponding disposal for the purposes of Section 17(2). See CG14550. So far as the trustees are concerned, the allowable cost of the shares in the distributing company, which they continue to hold, is unaffected by the demerger. If the trustees retain the demerged shares, then there has been a disposal by the life tenant to the trustees, and unless the life tenant has been paid the cash value of the shares, he or she is the settlor of them.