Trust CGT liability on a private residence

by **sirp2000** on Thu Jan 19, 2012 5:46 pm

I am dealing with a trust's CGT liability on the sale of a residence occupied by the beneficiary.

The property was bought in 1995 and rented to the beneficiary under a formal tenancy agreement for a peppercorn rent. It was then his second residence.

In 2004 it became his main residence and and was nominated as such.

It was sold in 2010 for a substantial gain so on the face of it 6/15ths of the gain qualifies for Private Residence Exemption.

However, I wonder if I can be very cheeky and claim Let Property Exemption of up to £40000 for the period 1995 to 2004 seeing that it was technically "let" during that period. I doubt I can but I cannot see anything expressly forbidding a claim.

Your views on this would be much appreciated.

Thanks

by **maths** on Fri Jan 20, 2012 1:59 pm

This is not a situation I have come across before and was eagerly looking forward to reading a view from someone who has perhaps dealt with this situation.

My analysis is as follows:

1. Trustees are entitled to PPR relief if a beneficiary is entitled to occupy trust property under the terms of the trust and the property so occupied is the only or main residence of the beneficiary and where necessary an appropriate election has been lodged.

2. I will assume that 1 is satisfied for the 2004 to 2010 period.

3. Trustees are also in principle entitled to lettings relief (LR).

4. The conditions in 1 for period 1995 to 2004 do not appear satisfied; this is because the beneficiary appears to have occupied two properties and no election was made in favour of the trust property (however, an election was still needed re the other property; if no election was made the facts would determine the position in which case, possibly PPR relief would apply to the trust property for this period).

5. If PPR relief was not available for 1995 to 2004 LR would be available if the trust property had been "let" as residential accommodation. Prima facie, this condition appears to have been satisfied; a formal tenancy agreement had been executed. There is no requirement for LR to apply for rent to be at market value.

On my analysis it seems that LR is available although my initial "gut instinct" was that this would not be so.

I look forward to other views.

by **sirp2000** on Tue Jan 24, 2012 3:35 pm

Many thanks for your detailed reply, maths. It seems we are of similar opinions. We feel that the letting relief shouldn't be due but somehow it seems that it is!

I think I must say to the trustee that while I feel the relief is against the spirit of the law, it seems to comply with the letter of the law and it is up to the trustee's conscience whether to claim.

I would expect HMRC to challenge it because:

1 It was not really let as the rent was only a peppercorn and
2 It was let to the person who later occupied it as their home. This cannot apply in a non trust situation.

Could anyone else please comment or give an opinion?

by **section 44** on Tue Jan 24, 2012 3:38 pm

What type of trust is it?

by **sirp2000** on Tue Jan 24, 2012 3:47 pm

Thanks for responding so quickly.

It is a life interest trust set up by the beneficiary's father's will on his death.

Hope this helps.

by **section 44** on Tue Jan 24, 2012 4:18 pm

I'm just throwing this out there to consider, but if:

sirp2000 wrote:It is a life interest trust set up by the beneficiary's father's will on his death.

Does this:

sirp2000 wrote:rented to the beneficiary under a formal tenancy agreement for a peppercorn rent.

Causes any issues with this:

maths wrote:Trustees are entitled to PPR relief if a beneficiary is entitled to occupy trust property under the terms of the trust and the property so occupied

?

by **sirp2000** on Tue Jan 24, 2012 5:05 pm

Yes, I see where you are coming from.

The will contained a clause: "Power to purchase lands...........for the purpose of providing a residence for any beneficiary.................and to permit any such beneficiary to occupy...........upon such terms as to my trustees shall seem fit."

I guess that the terms that the trustees thought fit was to draw up a "Tenancy at Will". This may have been to satisfy the Head Landlords as it is a leasehold flat.

I know that PPR can still be granted to trusts even if the beneficary pays a market rent.

Do you think any of the above jeopardises:

1 The relief due from 2004 to 2011
2 The letting relief due/not due for 1995 to 2004?

Thanks

by **maths** on Tue Jan 24, 2012 8:06 pm

Your comments appear to be contradictory.

Prima facie, it appears the trust is not an interest in possession trust but a discretionary trust.

It is not necessary for a letting to be at market rates to qualify as a "let" for lettings relief purposes.

PPR relief is available to trustees even if the beneficiary pays rent (whether at market rate or not).

by **sirp2000** on Wed Jan 25, 2012 11:57 am

Thanks maths.

The will seems to set up a life interest: "My trustees......shall stand possessed of the residue...............upon trust:
(a) To pay the net income thereof to my son....during his life" etc.

Later on, there is a clause: "My trustees shall have the following additional powers excercisable at their absolute discretion:
(a) Power to purchase lands....." etc as described above.

Does this clause turn the whole will trust into a discretionary settlement? They still have to pay the beneficiary income for life.

If it is discretionary, does this alter the claim to PPR and LR?

Cheers