Where one beneficiary “buys out” another beneficiary from a Trust, where the only assets within the Trust is real property (which has a gain from the date it was settled into trust), would this be deemed as a disposal for CGT purposes? The property would remain in trust - there is a Power of Appointment within the Deed. If so, who would be liable for the gain, and would there be any SDLT consequences? What would be the best way to document the buying out element.
A starting point is what type of trust was established?
Have you established if any reliefs are available?
Richard C. Bishop
Discretionary, no reliefs (apart from usual AEA).
I assume you are referring to a purchase of a beneficiary’s interest by another beneficiary. If so, no CGT arises assuming the exemption in TCGA 1992 s. 76(1) applies.
I assume the DT is not settlor interested and all persons are UK resident.
Malcolm Finney
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I agree with Malcolm - I questioned the structure as my understanding is there is no CGT when a life tenant of settled property makes a payment to the original remainderman.
The HMRC guidance refers to IIP.
Richard C. Bishop
Tombridge- did you get to the bottom of this? I have the same situation and have gone round in circles with it.
What is V selling and P buying, when it is only a potential interest in a Discretionary Trust. You said the property will remain in trust as Trustees have a Power of Appointment, but what are they appointing and to who?
P can’t give the cash to V outside the trust (maybe on the basis that V will retire as a Trustee and be removed as a Beneficiary?). That must have issues as it seeks to avoid CGT, SDLT and hides the real Settlor of the purchase money effectively added to the trust.
I think P would have to put the money in to the Trust to fund the buyout, and then the Trustees appoint the cash to V? V retires as a Trustee and Trustees remove him as a Beneficiary, if they have the power? P thus becomes a Settlor of the Trust, which may defeat what they are trying to do, and makes the tax status of the trust difficult.
The CGT in my case is not an issue as Settlor lived in the house until her death and we have PPR. In your case, can the reliefs mentioned by Malcolm F and Mr Bishop apply if it remains as a Discretionary Trust and there is no interest to be purchased?
I believe SDLT is due on the effective purchase of V’s half. I posted that question earlier and had a positive response.
For me with no CGT, I think we are better appointing V’s half to him, P can buy it, pay SDLT, and then settle it afresh if that is what he wants to do. The other half stays in the original settlement of which P is not a settlor. V retires his Trusteeship as part of the deal. It is an expensive ending but everyone gets what they should, including HMRC.
If anyone is still awake, what do they think, please?
I will have to go through what was agreed, but I recall that it was structured in a similar way to how you proposed in your penultimate paragraph. A deal was done to retire Trusteeship and walk away. It was largely driven with the help of accountants though.
Perhaps you would get a better response to your question, which is technically all over the place BTW, if you did not insult potential responders.
Jack Harper
“If anyone is still awake, what do they think, please?”
I responded in kind to this and my post was flagged and has been hidden. Once again I have had to cease posting. I do not accept censorship. I post here as, long retired, I just enjoy problem-solving. I have no objective of marketing my expertise. May I suggest Chatbot GT which will be more politically correct,
Jack Harper
I was only suggesting that I had gone on a bit and meant no offence. I would very much like to see your response, Mr Harper. I would like to have my problem solved. I would also like to hear further from Tombridge when he has the time please.
Someone cancelled me by flagging. Anonymously as it must be. As an FSU member, when I am cancelled I fight back. I myself don’t even know how to flag a post and I would rather respond in my inimitable abrasive style. As in primary school if the culprit does not own up and apologise the whole class loses out
That still doesn’t help me solve my problem. Abrasive response beats no response so I have lost out for sure. Maybe someone thought my grip on the planning was tenuous but I am sure I am not alone, so there must be others in the class who have lost out too. Thanks
Mr Oates and I have had a direct conversation. My post has been restored. He did not raise the flag. Because I can dish it out I expect to take it. The next time a would-be secret flagmonger thinks he or she is on social media have the courage to post your objection on this Forum in clear or send me a direct message. I have apologised to Mr Oates, because the Administrator considers I may have misinterpreted his post, but the person who (still anonymous) flagged my post owes both of us an apology. Only they and the Administrator know who they are.
Jack Harper
I was not the flagger.
I don’t dish it out as I can’t take it. I am a polite Yorkshireman and I don’t hold a grudge.
You kindly asked for more information-
S created a trust in 2020. The precedent is Kessler Interest in Possession Trust for Adult Beneficiary, but with S as the IIP and without the exclusion of Settlor clauses. The Trustees have overriding powers. After S’s death the Trust becomes Discretionary. So, I think that is what you said, post-2006 lifetime trust with a NQIIP-owning LT, that contains a house within CGT PPRR.
S wanted to hand over control of her house to her two children but retain security for herself, maintain PPR and keep flexibility for son and daughter’s future planning.
There are no IHT issues. We live in a cheap area!
Her son, R, is on means tested benefits and likely always will be.
Daughter, A, is financially independent.
S is now not in good health and R, his wife W and child have been living with her for two years to help her. R and W have now decided to sell their own house and would like to buy out A’s future interest in the trust. The sums add up nicely. They anticipate receiving the other half within the Trust after mum’s death.
As R is on benefits, they need to put the proceeds of their house in to this house to maintain the exemption from assessment. Also if S dies, R and W may have to sell the big house as they may not be able to afford to live there without S and so we would like R’s original anticipated half share to stay in trust at that stage.
All parties have agreed then that R and W pay A half of the property value. I have made comments on the fairness of that but they are all happy. All have been advised to take independent advice.
So, how do R and W buy out A’s interest?
I am not worried about IHT on the way in or on S’s death as house is worth £280k and S, with two Nil Rate Bands, has few other assets.
Not worried about CGT as we have S’s PPR.
A has nothing to sell to R and W, as a Discretionary Beneficiary.
It is the Trustees who make the disposal. What are they disposing of?
What are the SDLT consequences? You have already answered that one.
How do we show the DWP that R and W are paying for an interest in the property they live in?
I can’t see any way to do this and keep the whole property in the trust, which is why I latched on to Tombridge’s original post as I think that is what he wanted to do. I wanted to know if he had achieved it and how. My conclusion was that you can’t do it. There was no way to get the money to A, keep all of the house in the Trust, convince DWP that R and W had bought half a house and not pay SDLT.
I think either-
a) The Trustees appoint half the property to A and then she sells it to R and W or
b) the Trustees sell half the property to R and W and then appoint the proceeds to A,
either way, R and W will pay SDLT on half the value.
A will retire as a Trustee and appoint W in her place. Deed of Appointment and Retirement sent to HMLR to change the title, with a restriction protecting the Trust’s interest in half the property.
Is there a better way?
I am sorry if my question is technically all over the place, BTW. I am here to learn.
Thank you for that clear exposition. I have mysekf used the Kessler precedents since they were first published, relishing the modern language approach that sacrifices no essential legal accuracy.. Though long a Red Rose exile I am proud of being a Bermondsey Boy from when it was still full of real people, as Widnes still is. I fear however that I remain largely untouched by civilising influences and to boot am a barely reconstructed Old Fenian and Pro-Treaty Collins Free Stater; so generally against the Government whoever is running it and Authority, commencing with my father.
I will answer your query forthwith after some research.
I note that IHT is not an immediate concern in that the house is worth £280k. You do not say what the selling price might be of the RW house but as “the sums add up” it seems likely about half that. It is a cheap area but house price inflation anywhere must be just kept in mind especially given the freezing of thresholds. The IHT NRB has been £325k since 2009. She will I think have TNRB too.
1 The transfer of the house into the trust in 2020 was a CLT. This because the trust was a RPT from the outset and not only after the death of S and S had a NQIIP. The TOV was presumably less than £280k. The trust began its journey towards its 10 year charge in 2030. It seems likely that the transfer was excepted from reporting obligations (IHTM06104). It may or may not be excepted from reporting in 2030 (even the current threshold is £260k: see IHTM06124) but the chargeable threshold is £325k. I assume S had a nil cumulation before the transfer,
2 It was also and remains a GROB. The Double Charges Regulations will apply (IHTM13711-2) and is likely to disregard the CLT which will probably be lower and retain the GROB charge which will be the value of the house at the death of S or its sale proceeds/assets representing either: para 5 Sch 20 FA 1986. The Regs do not exempt RPT IHT charges if any (14732).
3 For CGT the disposal in was exempt via PPRR. You do not state who the beneficiaries are save obviously the settlor and you do mention A. The trust is therefore settlor-interested but while its only asset is eligible for PPRR loss of hold-over relief will not be an issue.
4 I assume that a key objective will be to preserve R’s entitlement to means-tested benefits. You do not say which they are but the UC Regulations 2013 adopt what is probably a consistent approach and it is mirrored in the Care and Support Regulations 2014. R and W’s home is disregarded capital. I hope it is still disregarded on the footing that it remains R’s “home” despite the facts.
Income or capital in a trust made by S is disregarded unless distributed, even if income arises and is accumulated or paid to anyone other than R (even to W but that might be tempting fate—I am not an expert in this field). I take it no income has even arisen in the trust to date.
As R and W plan to live in the trust property having another property to look after may be a nuisance. They could sell it and buy a share in the trust property, reasonably confident that the disregard of their current home would continue, even if they move out of it as it extends to “Premises that a person is taking reasonable steps to dispose of where those steps have been commenced within the past 6 months.”
I imagine that owning at least a part of a property would add to their security. There will only be a 2% SDLT charge on the price above £125k. The price should be market value but that should not be troublesome to ascertain I imagine. As S has lived in the property since it was settled full CGT PPRR should apply to any gain. An early return would not then be necessary under CGT PPD but s225 (1) TCGA requires a claim to be made so either a return or a claim is required by the due date. A discount for the part share of 15% is due in arriving at market value. A price adjuster clause in the contract may be prudent: £X or such other sum as HMRC shall agree to be open market value.
S will not have RNRB. Her GROB does not confer it as the gift was into a RPT and not direct to an individual outright. The trust property confers no eligibility on her. This may not matter.
5 After the trustees’ sale, which presumably will occur after completion of the sale by R and W, the trust property will comprise the other half of the existing trust property plus the sale proceeds of the couple’s present house.
Technically there may be a chargeable IHT event because arguably sale of part is a depreciatory transaction, the retained part dropping in value by the corresponding discount and the discounted sale price. It sounds that it will be neither chargeable nor reportable.
The couple will probably want to enter into a purchase contract conditional on the completion of their own sale contract.
R and W are not I think trustees so there will be no need to consider whether the Admin Provisions relax the self-dealing provisions as the STEP standard does. I presume R at least is an eligible beneficiary, although strictly the transaction itself confers no benefit on him.
6 that the other half of the property is destined in the trustees’ minds for R and W after S’s death I can see why they have the cash earmarked for A. I see no tax reason why it should not be distributed to her unless she is content anyway to wait, leaving it outside her taxable estate, certainly while she is a trustee, but it would save the trustees the nuisance of investing it. She may have a near-term use for it. I suppose it will always be sensible for R and perhaps W too not to be a trustee; not in law but in the suspicious official case it might be argued that he controls the trust fund. This is even more remote if half the property is the only asset and would be disregarded if he owned it personally.
7 So I think your plan b) is the most straightforward as plan a), though workable too, involves A unnecessarily in a contrived additional operation, again possibly attracting the unwanted attention of the official pygmy intellect. It also prevents her from leaving the money in the trust until needed.
Jack Harper