Special Cases
24.A44. Three cases that would be caught by the foregoing rules require special consideration.
24.A45. The first case relates to the situation where a taxpayer settles property on himself for life with the remainder to other persons. Where the life interest is in the whole of the settled property, the property will be taxed on the death of the settlor or on an earlier dealing by him with the life estate and no tax need be imposed when the settlement is created. If the life interest is not in the whole of the settled property, then the value of that part to which the interest does not relate should be taxed as a gift at the time of the settlement.
24.A46. The second case is where an existing interest is enlarged. For example, assume that A, B and C are each entitled to a third of the income from Blackacre during the life of C and that A and B are entitled to half of Blackacre on the death of C. Under the Committee's recommended rules, the whole or a fraction (greater than a third) of the value of Blackacre would be brought to tax on the death of C, half on the death of A and half on the death of B. The Committee recommends that where
- (a) an interest (whether for life, for a term of years or for the life of another or as a potential beneficiary under a discretionary trust) is determined, and
- (b) the whole or any part of the corpus is taxed to the person who was the holder of that interest, and
- (c) that person is absolutely entitled to the whole or a fraction of the corpus,
the amount of the corpus brought to tax should be limited to the amount by which the corpus deemed to have been
disposed of by that person exceeds the amount of corpus to which that person is actually entitled. Under this
exception, in the example given above, a third only of Blackacre will be brought to tax on the death of C, and a
half on
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each of the deaths of A and B. The exemption ought not to be available if the entitlement to
corpus is contingent or can be defeated by some means.
24.A47. The third case is the protective trust. Such trusts are established for the benefit of a beneficiary (herein called the ‘protected beneficiary’) who is unable to manage his affairs properly or may be unduly influenced to his own disadvantage. Generally the trustee has a discretion as to distribution of income. If, on the death of a protected beneficiary who has had a life estate, three-quarters of the income derived during the life of the protected beneficiary has been distributed, three-quarters of the corpus will come to be taxed under the provisions recommended in paragraphs 24.A27 and 24.A31. In the meantime, the accumulated income will have resulted in tax being imposed by virtue of the provisions recommended in paragraph 24.A40. Such treatment, in the Committee's view, is inappropriate. In the case of a protective trust, the whole of the assets subject to the trust should be taxed on the occasion when the interest of the protected beneficiary is taxed under the provisions recommended in paragraph 24.A27. No tax should be imposed prior to this occasion by virtue of the provisions recommended in paragraph 24.A40.
24.A48. In this discussion of limited interests it has been assumed that the holder acquired the interest in circumstances that did not involve his giving any consideration for the interest: he may have acquired the interest under a will or in an inter vivos settlement. If purchased interests are excluded from the proposed provisions, opportunities for tax avoidance will be created. Assume, for example, that a grandfather is near death and is giving instructions in regard to his will. If, by his will, he leaves a life estate in property to his son with remainder to the grandson, estate duty will be paid on the full value of the property on the death of the grandfather and again on the death of the son. If, instead, the son acquires, by purchase, a life estate in the property from the grandfather, and the grandfather leaves a legacy to the son of the amount paid for the life estate and the remainder interest to the grandson, estate duty will be paid on the full value of the property (the value of the remainder plus the amount paid by the son for the life interest) on the death of the grandfather but no estate duty will be paid on the value of the property on the death of the son. In the Committee's view the treatment should not be varied merely because consideration was in fact given.
24.A49. Where a life estate or an estate for the life of another or an interest in a discretionary trust is assigned, the estate or interest will be taxed at that point. No further tax need be charged on the expiry of the estate or interest or on any further dealing with it for adequate consideration.
24.A50. The notion of limited interest is very wide and will include interests, for example that of a lessee of property, which arise in ordinary commercial transactions. It will be necessary to exclude from the operation of the proposed provisions interests that have been acquired by persons dealing with each other at arm's length in ordinary commercial transactions.