CG17965 - Taper relief: trusts and beneficiaries: eligible beneficiaries

TCGA92/SCHA1/PARA6, TCGA92/SCHA1/PARA7

TCGA92/SCHA1/PARA7 defines for the purposes of TCGA92/SCHA1/PARA6 the beneficiaries of a settlement who are to be treated as eligible beneficiaries.

An eligible beneficiary is defined as a person who at any given time has an interest in possession in the whole of the settled property, or in part of it which consists of or includes the shares or the asset in question. For these purposes `interest in possession' does not include a right to an annuity or a fixed term entitlement except where the beneficiary will become entitled to the property at the end of the fixed term.

Where trustees make a disposal, there are various tests for determining whether an asset is a business asset. In the case of shares, see CG17949, if an eligible beneficiary is a full time employee etc. the trustees only need 5 per cent of the voting rights for the asset to qualify as a business asset. In the case of other assets, see CG17938, some of the tests for identifying a business asset operate by reference to the activities of an eligible beneficiary. So it is important to be able to determine whether someone is an eligible beneficiary. The simplest case is where a particular beneficiary has a life interest in the whole of the settled property.

• EXAMPLE

The trustees hold 4 per cent of the shares in a listed trading company acquired on 10 April 2000. Under the terms of the settlement, A has a life interest in the whole income under the settlement and on the termination of that life interest B will have a life interest. A is an employee of the company from 10 April 2000 to 10 April 2002. A retires and surrenders his life interest so now B's life interest takes effect. B does not work for the company. Therefore, although he is now an eligible beneficiary, the trustees do not meet the test in CG17949. The trustees sell the shares on 10 April 2010. A gain of £20,000 is made on the sale of the shares.

Over the 10 years of ownership, the shares have been a business asset for 2 years (2000- 2002). So the gain of £20,000 arising on the trustees will be apportioned as follows

2/10ths of the gain will qualify for business asset taper by reference to 10 whole years in the qualifying holding period. Therefore, of £4,000 of the gain, 25 per cent will be included in the taxable amount: £1,000.

8/10ths of the gain will qualify for non-business asset taper by reference to 10 whole years in the qualifying holding period. Therefore of £16,000 of the gain, 60 per cent will be included in the taxable amount: £9,600.

The aggregated amount chargeable is £10,600.