CGT on downsizing in respect of main residence in settlor interested trust

I have a situation where a client set up a trust but retained a life interest. The only asset was the client’s main residence making PPR available on setting up the trust. The trustees wish to sell the property and purchase a smaller property for the settlor (life tenant). Will there be CGT when they sell the property given that they are replacing it with another property, albeit a cheaper one. They will retain the excess proceeds in the trust. The argument I am thinking is that there has been no disposal as far as the trust is concerned because the trust still has assets of the same value as before even though some of it is now in cash. Is that a valid argument?

Remi Aiyela

Surely PPR will apply on sale and will continue to apply to the replacement property.

Patrick Moroney

It will be a disposal by the trustees - so in principle CGT needs consideration - but if it has been the principle residence of the life tenant throughout the ownership by the trust then as Patrick says private residence relief will apply.

The trust accounts will show the change in value from the acquisition cost to value on disposal as a gain (or loss if that had happened) the new property’s acquisition cost and the cash balance. Its a good idea to record in that way in case of a later cessation in the life tenant’s occupation of the new property or even a change in the PRR rules.

(If there was no life interest (aka interest in possession) ie a discretionary trust, then PRR would only be available if the relevant beneficiary’s right of occupation under the terms of the trust could be evidenced, which would usually need a trustee resolution to permit that occupation. But on the facts that isn’t an issue here)

Simon Leney
Cripps LLP