I would be very grateful for some guidance on the following scenario;
To summarise;
A property was purchased in 1982 by H&W (married couple) (50%) and their daughters A (25%) and B (25%)
In 2007 H&W transferred their beneficial 50% share to a DT to protect the property against a claim by A’s ex-husband
The trustees were H&W. A and her children were part of the class of discretionary beneficiaries
HOR was claimed on the value transferred to trust in 2007
In 2016 H died leaving his estate to W
In 2016, another sister C was appointed as a new trustee to act with W continuing as trustee.
On the same date in 2016 (prior to the 10 year anniversary) the discretionary trust was wound up as it was considered to have served its purpose and the trustees appointed the 50% beneficial share to A absolutely.
In 2017 W transferred her legal title over to A & B and they currently hold joint legal title and beneficial title to the property as tenants in common in unequal shares, A (75%) and B (25%)
W has since died.
A lives in the property as her main residence. B has her own separate main residence and her 25% interest is an interest in a second property.
A and B’s accountants accountants advised them to transfer the 25% share to another discretionary trust so that HOR can be claimed and to wind up the trust and appoint the 25% share to A absolutely in the next tax year.
I understand that as A lives in the property, the 25% share she originally owned since 1982 will attract PPR relief on a later sale/transfer, so that no CGT is payable. However, in relation to the 50% gifted to her from her parents’ DT and the further 25% to be gifted to her from this new proposed DT, she will not be able to claim PPR on a later sale/transfer.
I understand that the the original acquisition cost will be used to calculate the gain on the sale/transfer of the 50% and 25% share respectively and CGT will be payable at that point by A.
If A holds the property until death, then the CGT will not be an issue, because there will be an uplift at that point on the share to the date of death value.
My query is whether A should have been given an IIP by the trustees of the 2007 DT, and if so, whether the trustees could have claimed PPR in 2016 instead of holdover relief and A could then claim PPR on any future disposal of that 50%?
Similarly, if the trustees of the new DT give A an IIP then can’t they claim PPR when the trust is wound up? And can A therefore claim PPR on a future disposal of that 25%?
Was the DT set up in 2007 “settlor interested” ?
If so, then a H/O claim would not have been possible.
If not, then H/O claim possible but PPR would then be denied on any gain on later trustee disposal.
Assuming A was given an iip in 2007 it would not have been a qualifying iip and hence the trust would be a relevant property trust (basically a DT). Point 1 comments would still apply.
I’m slightly confused about why H/O was claimed in 2007 - the parents would have been able to claim PPR assuming they lived there prior to setting up the trust. Any H/O on set up would preclude a PPR claim by the trustees in 2016 when the trust was dissolved but not for subsequent owners, who get a base cost uplift. Do you mean there was H/O in 2016 and that is what precludes A’s PPR claim in respect of her late parents’ share?
Similarly B may defer CGT on gifting her 25% share to a new DT through holdover, but that precludes a PPR claim on the subsequent appointment of the final 25% to A by those trustees. It should not preclude A from claiming some PPR for all the shares on an eventual sale, although the calculations may be fairly complex!
H/O only defers CGT, it does not remove it and the combined professional fees and compliance costs of setting up and dissolving trusts, IHT and and 30 CGT reporting should also be factored in.
Maxine
It was not settlor-interested. Agreed and noted in relation to PPR not being available for any later trustee disposal.
Thank you for clarifying that. I take it from this that even if an IIP was given then (and now) it will be a relevant property trust, and therefore the same position on PPR would apply.
I understand H/O was claimed in 2007 on set up of the trust, which in turn precluded a PPR claim by trustees in 2016. I understand H/O was also claimed in 2016 when the trust was dissolved and this is what I believe, now precludes A’s PPR claim in respect of her late parents’ 50% share?
I note that B would be able to defer CGT on gifting her share in the 25% to A.
A and B seek to ultimately wind up the DT within one year, appoint the 25% share to A absolutely (as occupant of the property) resulting in A having 100% beneficial ownership in the property and for liability for the held-over gain to be transferred to A.
I wanted to check whether, if A were given an IIP under the new proposed DT, she could then also claim PPR on this 25% share (in addition to her 25% share originally acquired in 1982) on subsequent sale (if indeed she were to sell).
The settling of B’s 25% interest on an inter-vivos iip trust for A would allow a H/O claim under IHTA 1984 s260 (trust being a relevant property trust) but on appointment out to A any gain initially held over plus any gain arising whilst in trustee ownership would not qualify for PPR on the part of the trustees.
However, a further H/O claim could be made on appointment out to A. Unfortunately, any future sale by A will not attract any PPR.
If A had been given an iip initially in 2007 (rather than being merely a discretionary beneficiary) it would have been a non-qualifying iip and a H/O relief claim could have been lodged under IHTA 1984 s260 just as it was in fact made.
On a sale by A in the future she will hold her initial 25% share; the parent’s 50% share; and B’s former 25% (assuming B’s share is settled). A’s base cost of her 100% for CGT is the cost of her initial 25% purchase plus initial cost of parents’ 50% purchase plus B’s initial base cost of purchase (as H/O relief claimed). On the sale by A of her 100% interest separate CGT calculations are not done for each of her 25%, 50% and 25% acquisitions.One calculation only is done.
Unfortunately on a sale by A of her 100% interest, because of the H/O claims no PPR relief is available on the 75% interest acquired from parents and B albeit via trusts but is available on her initially acquired 25% (as she has lived in the property the whole;e time).
As an aside a H/O claim may be revoked (thus allowing PPR) if lodged timely (ie within one year of 31 January following tax year of claim).