Hello everyone
H & W transferred 25% of the main residence they live into a family trust nine years ago and continue to live in the property. Beneficiaries are adult children. Trustees are H, W, and adult children.
Now the trustees decided to appoint settlors as new beneficiaries and appoint 25% of the main residence held by the family trust back to the settlors.
Can the trust claim holdover relief on the appreciation of the value of the trust property when appointing back to settlors who are now beneficiaries?
1 Presumably hold-over was not claimed on the way in because PPR would have been due.
2 I am assuming that it is not breach of trust for the settlors to be added as beneficiaries e.g. there is no settlor exclusion clause. Given 1, hold-over can be claimed on the way out.
3 There might be an argument that full PPR would apply if the settlors have occupied as such since the house went into trust. s225 TCGA requires that for full relief the property or part must have been resided in as " the only or main residence of a person entitled to occupy it under the terms of the settlement". s223(2) TCGA (amount of relief) does not require that person to have been a beneficiary for all that period. This is a saucy argument and might precipitate the wrath of GAAR. Exceptionally HMRC could raise breach of trust, if relevant, because the the appointment of a non-eligible person as a beneficiary would be void. As would a transfer of trust property to them.
It is hard to see how what is proposed could not reasonably be regarded as a reasonable course of action within the GAAR. But this is a truly odd arrangement and much may depend on why it was set up and why the appointment of the settlors as beneficiaries and a partial distribution to them is now contemplated. The occupation is no doubt totally genuine-a positive. There should be a “decent interval” between the two events or GAAR will surely descend upon them.The trustees would have to claim PPR so there would be no going under the radar. I always used to make a deliberately clear entry in the white space, to set up the defence under s29(6) if HMRC did not open an enquiry in time. Cards on the table is desirable here as HMRC may be so annoyed that they will activate s29 within extended time limits, plus penalties and interest, and, of course, horrid costs and intimidatory hassle.
4 There was probably a GROB for IHT on the way in and certainly will be after the appointment of beneficiaries unless para 6 Sch 20 FA 1986 applies. At least that will have prevented a pre-owned asset charge. But there will have been an IHT chargeable transfer on the way in and an IHT chargeable event on the way out, though not yet a 10 year anniversary, all subject to double charges relief.
This is a strange trust, worthy of an exam question. It may well not pass the HMRC sniff test but they must apply the law (despite their delusion that they are not so constrained if it does not suit them).
No holdover relief was claimed when the property entered the trust as it was their main residence.
No clause that restricts the settlors to be added as beneficiaries.
thanks for letting me know that holdover relief can be claimed when the property is appointed back to the settlors in spite of being settlor interested trust. Settlors have no plan to sell the property during their lifetime and I presume PPR will be an issue if we claim holdover relief and dispose of the property during their lifetime. Also, I understand on death the whole property will be uplifted to market value and the holdover gain automatically disappears. Please correct me if I am wrong.
H & W are elderly and they were not told IHT consequences at 10-year anniversary /market rent assessment etc at the time they transferred the property to the trust. This can be explained to HMRC.
The 75% in the trust will not benefit from the uplift on the death of the Settlors, only their 25%. Do note that after an earlier hold-over relief claim s226A denies PPR on a subseqent disposal but does not prevent the tax-free uplift to market value on death.
Any capital gain arising on a disposal out of a settlor interested trust is eligible for CGT hold-over relief even though any initial settlement of property on such a trust is not so eligible.
However, where the trust property is eligible for PPR relief whilst held in trust such relief cannot be combined with a claim for hold-over relief on initial settlement.
On appointment out to the original settlors of their initial 25% interest in their main residence which they settled, hold-over relief is available on any gain accruing on the 25% interest whilst held by the trustees despite the settlor interested nature of the trust. However, TCGA 1992 s 225 may be in point wrt any gain accrued whilst held by the trustees.
Once the 25% has been appointed back out to the settlors, they will own 100% of the property which will be uplifted to MV on their deaths.