I advise the trustees of an IPDI trust where the settlor died 18 months ago. The sole trust asset is a property.
The life tenant lived in the property for 10 months, then vacated it and has recently surrendered his life interest to the remaindermen. The property is being sold shortly and the agreed sale price is less than the probate value.
I understand that:
If a residential property is sold at a loss and PPRR would have applied if a gain had been made, the loss will not be an allowable loss in relation to the PPRR period.
PPRR does not apply automatically; trustees need to claim it.
Any capital loss arising can be transferred to the remaindermen on the occasion of them becoming absolutely entitled.
If there was a capital gain, the trustees would of course be advised to claim PPRR.
Does anyone know whether the trustees are obliged to claim PPRR in these circumstances, where it will apply only to restrict the capital losses available?
HMRC’s view is in CG65080. A disposal of a PPR at a loss by an individual is not allowable if a gain would be fully exempt, citing s16(2) TCGA. But this does not apply to trustees of settled property because relief for a gain would have to be claimed.
However where a loss arises on a deemed disposal under s71 (absolute entitlement) the loss is transferable to the acquiring beneficiary but is restricted to gains by him on disposal of the same asset: CG37205. The loss is to be preferentially used against other gains of the trustees before any other losses of theirs and then against any gains by him from the same asset before any other losses of his: s71(2A)-(2D)
Trustees (unlike individuals) are required to claim relief under TCGA 1992 s225.There is no obligation to file such a claim.
The loss which arises under TCGA 1992 s71 on the part of the trustees can be transferred to the beneficiary but only after they have been deducted from gains arising on the deemed disposal of other assets on that date or on gains on disposals made earlier in the same tax year (pre-entitlement gains [TCGA 1992 s71(2)(a) and (2A)].
In any event, any such loss accruing to the beneficiary is restricted to offset against gains made by the beneficiary on the same asset.
You don’t say what the market value was when the remaindermen became absolutely entitled, but the relief is only needed if it was less than the sale proceeds.