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In the third of a series of articles, Malcolm Finney, author of 'Personal Tax Planning: Principles and Practice', looks at Private Residence Relief for trustees.

Trusts and Sole or Main Residence Relief

Sole or main residence relief is not restricted to ownership by individuals but may be extended to ownership by trustees (TCGA 1992 s 225).

The relief applies in the case of trustee ownership where one or more beneficiaries of the trust occupy the property as a residence and are entitled to occupy under the terms of the settlement. Entitlement to occupy under the terms of the settlement is satisfied where a beneficiary has an interest in possession in the property or where, under the terms of a discretionary trust, the trustees have power to allow a beneficiary under the trust to occupy the property.

The trustees must make a claim for the relief to apply (TCGA 1992 s 225).

The property occupied by the beneficiary must thus constitute his sole or main residence; where such beneficiary has more than one residence any election in favour of the trust property is to be signed by both trustees and beneficiary (TCGA 1992 s 225).

Where one or more beneficiaries possess interests in possession in the property, for main or sole residence relief to apply, it is sufficient that only one of the beneficiaries occupies the property as his sole or main residence (i.e., occupation by all of them is not necessary).

Trusts, Sole or Main Residence Relief and Hold-Over Relief Claims

For hold-over relief purposes UK resident trusts are settlor-interested if the settlor or the settlor’s spouse may benefit under the trust or, from 6 April 2006, dependent children of the settlor may also benefit (TCGA 1992 s 169F). A dependent child is a child who is under 18 and unmarried (TCGA 1992 s 169F).

The effect of including dependent children of the settlor in the definition of "the settlor-interested" probably caused many trusts already in existence at that time to become settlor-interested from 6 April 2006, not having so qualified prior thereto.
 
The effect of a trust qualifying as settlor-interested is that transfers into trust by the settlor are not eligible for hold-over relief (i.e., hold-over relief under TCGA 1992 ss 165 and/or 260 cannot apply, TCGA 1992 s 169B) although transfers out of such a trust may so qualify.

This applies to transfers into trust on or after 10 December 2003.

However, even where a trust is not settlor-interested, and thus any capital gain arising on a transfer into trust by the settlor may in principle qualify for hold-over relief, it is not possible to combine such hold-over relief with sole or main residence relief on the capital gain accruing to the trustees on a future disposal (TCGA 1992 s 226A).

Thus, it is not possible for the trust to claim sole or main residence relief on the disposal of the trust property if a hold-over claim is lodged on the transfer of the property into the trust (TCGA 1992 s 226A). Such a claim to sole or main residence relief is only possible where no prior hold-over claim has been lodged (i.e., there are two options: no hold-over claim but sole residence relief; or hold-over claim but no sole or main residence relief).

The above applies to transfers into trust occurring on or after 10 December 2003. Transfers effected before this date qualify for partial sole residence relief (i.e., sole residence relief is available for the period up to 9 December 2003 but not thereafter (not even for any part of the 36 months which falls after 9 December 2003)).

The provisions referred to are primarily designed to prevent ‘second homes’ (which typically do not qualify for sole or main residence relief) being sold without any CGT charge arising.

Example

Joe Soap owns a house which qualifies as his main residence and a holiday cottage (any capital gain arising on the sale of the latter precipitating a CGT charge).

He accordingly transfers the cottage into a discretionary trust (non-settlor interested) and the trustees allow his adult son (one of the trust’s beneficiaries) to occupy the cottage as his sole residence.

On transfer into trust Joe claims hold-over relief (TCGA 1992 s 260).

In due course, on sale by the trustees, the capital gain arising (which in fact comprises the held-over gain plus any gain which has arisen whilst the trustees owned the cottage) is exempt as sole residence relief applies (under TCGA 1992 s 225).

Thus, complete avoidance of a charge to CGT is achieved even though the property does not qualify for sole residence relief when owned prior to the transfer into trust.

However, this form of planning is no longer available for transfers into trusts effected on or after 10 December 2003 (transitional relief applies, for transfers before this date where the disposal by the trustees occurs after this date).