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Capital Tax Review by Matthew Hutton MA, CTA (fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, considers what planning opportunities remain in the context of second residences following Finance Act 2006.

Context: the FA 2004 restriction on hold-over relief

As is well known, FA 2004 Sch 22 put paid, as from 10 December 2003, to the traditional device of the combination of hold-over relief under s 260 and main residence relief for the trustees under s 225 on disposal of the residence following occupation by a beneficiary under the terms of the settlement. Interestingly, however, although hold-over (whether under s 165 or s 260) is no longer possible into a settlor-interested trust, the combination of s 165 hold-over and s 225 relief remains possible with a non settlor-interested trust.

What is interesting about FA 2004 Sch 22 is that it is only the combination of s 260 hold-over and s 225 relief which has been barred

That is, it remained open to employ the combination of s 165 hold-over (business assets) and s 225. Among qualifying business assets for this purpose is furnished holiday accommodation (FHA) as defined in ITTOIA 2005, s 325 and following.

It therefore became possible, at least until Budget Day 2006, to shelter a gain on a second home owned let us say by husband. He would transfer the property to his wife by way of gift, on a no gain no loss basis for CGT purposes under TCGA 1992, s 58. She would let the property for a decent period – ie for at least a year. She could then give the property to a life interest trust from which both she and her husband were excluded from benefit. The gain would be held over under s 165. The trustees then allow one of the children to occupy under the terms of the settlement and on subsequent disposal the whole of the gain, including that arising before the date of settlement, is effectively ‘washed’ under s 225.

Section 165 relief on business assets can be claimed only where s 260 relief is not applicable: see TCGA 1992 s 165(3)(d). This therefore, rather sadly, scuppers this particular idea.

Unfortunately, following Finance Act 2006, virtually all settlements are brought within the ‘mainstream trust regime’, so that gifts to them are eligible for hold-over relief under s 260 – whether or not such relief is claimed.

Application

On the other hand the point made above about husband and wife transfers still applies, to ensure that throughout the wife’s period of ownership the property qualifies as FHA (ensuring that the full amount of the gain can be held over without having to be cut down under part 2 of Sch 7, for example). Second, however, the idea still works where the property is given either to an individual child or to bare trustees for one or more children, so ensuring s 223 relief for them on ultimate disposal.

Bear in mind that property which attracts APR for Inheritance Tax can also be the subject of an s 165 hold-over claim – see TCGA 1992, s 165(5) – and there is no restriction to agricultural value or for the fact that the property may attract only 50% relief. Accordingly consider a cottage occupied by a current or retired employee which attracts APR. Once the occupation comes to an end, a gift of the cottage could be made to one of the children who then occupies, with the whole of the gain washed under s 223.

Matthew Hutton MA, CTA (fellow), AIIT, TEP
July 2006

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

THE FIFTH ESTATE PLANNING CONFERENCE: CURRENT ISSUES 2006

West
Thursday 14 September
Bailbrook House, Bath

North
Tuesday 3 October
Weetwood Hall, Leeds

London
Tuesday 31 October
The Law Society’s Hall

For further details, brochures and booking forms please contact Matthew Hutton: email – mhutton@paston.co.uk or telephone – 01508 528388 (Ref: TaxationWeb).