New UK Trusts Rules Could Penalize Under-18s, Says STEP

by Amanda Banks, Tax-News.com, London

07 February 2006

The Society of Trusts and Estates Professionals has warned that new UK tax rules published last week by HMRC may stop families holding business assets in trust for under-18s.

Giving business property to dependent children under eighteen years old could be restricted under draft legislation published last week by the Revenue which is intended to modernise and simplify the tax treatment of UK resident trusts. Arrangements for over-18s would still be allowed.

Says STEP: 'This is a (presumably unintended) consequence of draft legislation just issued by Revenue and Customs, following a two-year consultation process.

'The new legislation would harmonise the definitions of when a trust is treated as one in which a settlor has an interest for capital gains tax and income tax. This in turn would restrict people's ability to give business property standing at a gain to their dependent children under eighteen without triggering a capital gains tax charge.

'However, gifts outright or on trust for the benefit of children who are over 18 or married or in a civil partnership would still not trigger a charge.'

John Riches, Chair of the Technical Committee of the Society of Trust and Estate Practitioners (STEP), commented:

"People thinking of making gifts of business property into trust for their children under age 18 would be well advised to do so before 6 April 2006 in case this anomaly is not corrected.

"This would represent a substantial shift in Government policy. Since 1979, those making a gift into a trust for children under 18 have been able to do so without triggering a capital gains tax charge. It also conflicts with the benign treatment of such trusts for inheritance tax where no distinction is drawn between children under or over 18."

The legislation will be incorporated in the Finance Bill to take effect from 6 April 2006. The document is open for consultation to 17 February 2006. The change to the definition of settlor-interested settlements means that, for a transfer of business assets or a transfer that gives rise to an immediate inheritance tax charge, holdover relief will not be available where the settlor transfers assets into a settlement from which his children under 18, who are not in a civil partnership, are potential beneficiaries.

An individual could still make an outright gift of business assets to children under 18 without triggering a capital gains tax charge. Equally, he could avoid a capital gains charge if he makes gifts either outright or on trust for the benefit of children who are over 18 or married or in a civil partnership.

The new definition will apply to settlements, whenever created, from 6 April 2006 and the concern is that the many settlements which are not currently settlor-interested for capital gains tax purposes will automatically become so on 6 April as a result.

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