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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, points out that gifts holdover relief and private residence relief can still be a useful combination in appropriate cases.

Context

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 TCGA 1992, s 260 and main residence relief for the trustees under TCGA 1992, 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.

Furnished holiday accommodation (FHA) is a business asset for s165 purposes

It would be pretty unlikely (although possible) that a second property owned by one or both of a couple had throughout the period of ownership been used as FHA, so as to qualify for complete hold-over under s 165. Of course, if the property had been used as such for only part of the period, the amount of the gain which can be held over is cut down under Part 2 of Sch 7.

The definition of FHA (formerly in TA 1988 ss 503 and 504) has been replaced for non-corporate taxpayers by new ITTOIA 2005 s 325. The accommodation will satisfy ‘the availability condition’ by being available for commercial letting as holiday accommodation for the public generally for at least 140 days; the letting condition is that it must be commercially let as holiday accommodation to members of the public for at least 70 days (for which purpose a period of longer-term occupation is not such a letting); and the ‘pattern of occupation condition’ is that during the relevant period not more than 155 days fall during periods of longer-term occupation. A ‘period of longer-term occupation’ is a continuous period of more than 31 days during which the accommodation is in the same occupation other than because of circumstances that are not normal.

The ‘relevant period’ is defined by s 324 as, broadly, the tax year, subject to a special rule which operates when the accommodation first becomes let as furnished accommodation.

Application

In the more normal case, a person (let us say individually) owns a second property used by the family generally as a holiday home. There is an in-built gain. Suppose that he is married. Husband transfers the property to wife by way of gift. For CGT purposes this happens on a no gain - no loss basis under TCGA 1992 s 58. She then lets the property as FHA for a decent period – i.e. for at least a year.

The wife could choose subsequently to give the property to a trust from which both she and her husband are excluded from benefit. The gain is held over under s 165. Because the hold-over is under s 165 (and not s 260), the trust need not be discretionary – and so the value can exceed the nil-rate band. The trustees 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.

July 2005

Matthew Hutton

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.

Matthew Hutton’s Autumn Series of Estate Planning Conferences resume on 15 September 2005 in Stratford-upon-Avon. The dates and venues are listed below.

Matthew Hutton’s Autumn Series of Conferences

Thursday 15 September - Stratford Manor, Stratford-upon-Avon

Tuesday 20 September - Lord Haldon Hotel, Exeter

Tuesday 27 September - Spa Hotel, Tunbridge Wells

Tuesday 4 October - Wood Hall, Wetherby

Tuesday 18 October - Renaissance Hotel, nr Derby

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