A further related issue is where a sole individual beneficiary also becomes the sole individual trustee.
Previous posts have explained how section 104-10 of the Tax Act provides that the change of a trustee is not a CGT event of itself.
There is however in these circumstances effectively a merger of the legal and beneficial interest.
Ford and Lee on Trusts confirms this outcome as follows:
‘’Where legal ownership of trust property passes to a person who is absolutely entitled as beneficiary to the beneficial ownership, the beneficial ownership is extinguished in the legal ownership: Selby v Alston 30 ER 1042; (1797) 3 Ves Jun 339; 341; Re Douglas; Wood v Douglas (1884) 28 Ch D 327; Fung Ping Shan v Tong Shun [1918] AC 403 at 411….While arguably complex, the CGT consequences of the merger depend on whether the sole beneficiary was absolutely entitled at all relevant times. If the answer is yes, then there should be no CGT triggered.
The true reason for extinguishment of the beneficiary’s equitable interest is not merger but the impossibility of a supposed sole trustee being subject to any obligation to himself or herself as a sole beneficiary. This is recognised in judicial dicta which treat merger as a consequence of the absence of an obligation. See, for example, Re Turkington [1937] 4 All ER 501 at 504 where Luxmoore J said:
“…where one finds the legal and equitable estate equally and co-extensively united in the same person or entity, the equitable interest merges in the legal interest, on the footing that a person cannot be a trustee for himself’’.”
Another example of this trust law rule is under the superannuation laws which prohibit self managed funds having a sole individual trustee and sole member.
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** For the trainspotters, the title of today's post is riffed from the Church song ‘Destination’. Listen here: