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Malcolm Finney, author of 'Personal Tax Planning: Principles and Practice' highlights a potential pitfall in respect of 'settlor-interested' trusts for Capital Gains Tax purposes.

Care is required where a trust is ‘settlor-interested’. Gifts made on or after 10  December 2003 into a settlor-interested trust do not qualify for hold-over relief either under TCGA 1992 s 260 or s 165. However, transfers out of such trusts may still qualify for hold-over relief.

A trust is ‘settlor-interested’ for this purpose if any trust property is or may be used for the benefit of the settlor or his spouse. On or after 6 April 2006 a trust is also settlor-interested if any minor unmarried child of the settlor may benefit. The extension to include such children applies to trusts whether created before or after 6 April 2006 (TCGA 1992 ss 169B to 169F; and FA 2006 s 88).

Gifts into trusts which are not at that time settlor-interested (and thus qualify for hold-over relief) but subsequently become such within six years of the end of the tax year in which the gift is made causes any hold-over relief to be withdrawn (TCGA 1992 s 169C).

The effect of the extension of the definition of a settlor-interested trust, together with the other IHT changes to trusts introduced by FA 2006, is to increase the probability that a trust is settlor-interested and that a transfer into such a trust by the settlor will precipitate both a charge to CGT (as no gift relief is available as the trust is settlor-interested) and a charge to IHT (as the transfer is, post-21 March 2006, a Chargeable Lifetime Transfer). No relief for any IHT charged on the transfer is available for offset against any CGT charged thereon.