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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Gifts: Inheritance Tax: accumulation/maintenance trusts

TCGA92/S260 (2) (d)

TCGA92/S260(2)(d) allows hold-over relief when a beneficiary of an Accumulation and Maintenance trust becomes absolutely entitled to trust property and that occasion is exempt from Inheritance Tax because IHTA84/S71(4) applies.

The definition of Accumulation and Maintenance Trust is in IHTA84/S71(1). There must be no interest in possession when the trust is settled but one or more persons must become entitled to the settled property or an interest in possession in the settled property on or before attaining a specified age not exceeding 25. IHTA84/S71(4) provides there is no charge to Inheritance Tax if this happens on or before the specified age.

The Finance Act 2006 changes to Inheritance Tax have significantly reduced the impact of this relief. It is not possible to settle a new Accumulation and Maintenance Trust any time after 21 March 2006 and existing Accumulation and Maintenance Trusts lost their status on 6 April 2008 unless they changed their terms so that the beneficiary became entitled to the trust property at 18.

Even before the Finance Act 2006 changes the impact of this relief was limited. This is because in many cases the terms of the settlement are that the beneficiaries become entitled to the capital when they are 25 but become entitled to the income at 18. This will happen if the trust deed does not exclude the effects of section 31 Trustee Act 1925. That section provides that a beneficiary with a vested or contingent interest in the trust becomes entitled to his or her share of the trust income at 18. This will give the beneficiary an interest in possession at 18 and trigger the relief from Inheritance Tax in section 71(4) Inheritance Tax Act 1984. But there is no disposal for CGT purposes. There will be a disposal for CGT when the beneficiary becomes entitled to the asset at 25 but hold-over relief is not available because this is not an occasion when section 71(4) Inheritance Tax Act 1984 applies.

It is possible to exclude section 31 Trustee Act 1925 such that the income is accumulated beyond the beneficiary’s 18th birthday. In that case relief under section 260(2)(d) will be available if the event which triggers section 71(4) Inheritance Act 1984 is a disposal for CGT purposes.