Right to reside

[temple]

Our sons recently purchased a modest property for the use of my wife and I. They have been advised that it would be prudent if they instrructed a solicitor to draw up a formal agreement giving us the right to reside in the property for our lifetime. The purpose would be to ensure that in any unanticipated situation that might befall them our right to reside in the property would be protected.

They were further advised that this could also be advantageous to them, as such an agreement might mitigate their liability to any capital gains on the sale of the property on our eventual demise.

Have they received valid advice?

[pawncob]

Can't see it affecting the CGT position as sons will always own the house until parents' death. Life tenancy agreement should cover all eventualities

[limoges]

We made a similar life occupancy agreement for our parents several years ago, and were informed by the solicitor who drew up the right of lifetime occupancy agreement for our parents, that in effect we had created a trust which would qualify us as Trustees, for “principal private residence relief” from paying capital gains tax on a property which had been the only or main residence of persons entitled to occupy the property under a settlement: when we eventually sell the property on the demise of our parents
Have we been misinformed?

[bd6759]

Have we been misinformed?

Maybe

The exemption applies to settled property. This is property that is held in trust (but excludes a bare trust). There are different types of trust. Granting a right to occupy does not cretae a trust.

[maths]

It can be difficult to determine whether the nature of arrangements is contractual or constitute a trust.

A simple right to occupy would I suggest be contractual.

If the sons settled (ie transferred) the property under which parents are entitled to occupy the property then any future disposal by the trustees would be CGT exempt.

The settlement creation is a chargeable transfer for IHT (may or may not precipitate an actual IHT charge) and a disposal for CGT (no hold-over, settlor interested).On death of parents possible IHT charge on appointment of property out to sons but no CGT due to PPR.