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Income Tax, Trusts

Trustee shareholders

It is important when dealing with trustee owned shares to appreciate how these might be treated for tax purposes.  The following question from the CCH/TEO Q & A Service considers how and in specie distribution of share should be treated in the context of a distribution and a resettlement.
Company shareholder continuity

QUESTION:

Trust B owns 80% of the shares in Company A. Two individuals own the remaining 20%.

Trust B is to be wound up, and the shares in Company A are to be either distributed to a beneficiary under Trust B or resettled on a new trust.

1. Is shareholder continuity for tax loss purposes breached if Trust B makes an in-specie distribution of the shares to a beneficiary?
2. Is the answer the same if the Company A shares are resettled on a new trust?

ANSWER:

1. For shareholder continuity purposes, trustees are treated as holding the voting interests in the company rather than the trust. Therefore, if the trustees distribute the shares to the beneficiaries of Trust B, this will result in a change in the person holding the voting interests in Company A. This will breach the shareholder continuity of Company A.

2. A resettlement of the Company A shares on a new trust will be a disposal of the shares and result in a change in the person holding the voting interests in Company A.  This is the case even if the trustees of Trust B and the new trust are the same individuals, because those individuals are treated as being different persons in their capacity as trustees of Trust B and as trustees of the new trust.

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