Settlor Interested Trust and Principle Private Residence Relief

I have been asked to advise on two settlor interested discretionary trusts. Both created on the same day by the one settlor. One of the trusts holds a business premises and the other the settlor’s main residence and a small amount of agricultural land.

My query relates to CGT and the DT with the main residence. On the disposal of the main residence into the trust it was presumed that PPR applied and so nothing was done in relation to CGT and the property. The Settlor continues to occupy the property as her main residence. If when either the property is sold or trust brought to an end (in lifetime of settlor) will the Trustees be able to apply PPR? I appreciate that Trustees have to make a formal claim for PPR to apply to a Trust. It seems quite convenient if PPR can apply on an asset going in to the trust and when coming out or on disposal.

I appreciate that hold over and PPR cannot both be claimed but not sure that that is relevant here.

If the trustees can claim PPR - If the trust continues and the Settlor then dies and the trust is then brought to an end - can the Trustees apply PPR for the period of time it was occupied by the Settlor and therefore if trust ended or properties disposed shortly after Settlors death the likelihood of a taxable gain is minimal?

Thank you in advance.

Kate Handel
Harrisons Solicitors LLP

PPR relief can be claimed on the disposal into the discretionary trust. However, unless the trustees have granted the settlor a right to occupy the property, s.225 TCGA 1992 is not engaged and PPR relief cannot be claimed unless, or until, such a right is appointed to the settlor. Such appointment will not give rise to a CGT disposal.

In Judge (PRs of Walden deceased) v HMRC [2005] STC (SCD) 863, the executors had incorrectly believed the widow had a life interest, whereas they had discretion to allow her to occupy. Due to this misunderstanding, they did not exercise the discretion and the court noted that in the absence of the widow having an entitlement to occupy the property PPR relief was not available.

My expectation is that PPR relief cannot be claimed by the trustees for the period between the property being settled and the date a right of occupation is granted to the settlor. If the property is then sold post the settlor’s death, I believe in these circumstances PPR relief may only apply during the subsistence of the right of occupation, and so the period for which it could be claimed would end on the settlor’s death.

Where assets are settled into a settlor interested trust, hold over relief is not available (s.169B TCGA 1992).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Hi Kate

PPR is available within the trust. No CGT on disposal.

Any IHT benefit the client thinks they may have is void (assuming that’s why it’s in a trust) GWROB will apply. No PET etc. The value of the property is in the estate for IHT calc.

Richard Bishop

A disposal into a settlor discretionary interested trust for CGT purposes (if made on or after 10 December 2003) is not eligible for hold-over relief. In any event no actual CGT charge would arise assuming PPR applied.

If the trustees have a discretionary power under which they may allow a trust beneficiary to occupy the property, on any sale by the trustees any capital gain arising whilst during the trustees’ ownership will be eligible for PPR [TCGA 1992 s 225].

Similarly, if the property is appointed out during the settlor’s lifetime, PPR would apply to any resultant gain on their part.

On the death of the settlor presumably no person at that point becomes absolutely entitled to the trust property and hence no capital gain arises at that point (settlor did not have a qualifying interest in possession). If the trust ends shortly thereafter by way of a trustees’ appointment to one or more beneficiaries at that time a capital gain will arise but PPR would apply to period when settlor occupied the property. In addition, any gain attributable to last 18 months of ownership would also be exempt (probably reduced to 9 months from 6 April 2020).

In fact, CGT hold-over could apply if on appointment out a gain arose despite PPR and the last 18/9 months relief (eg if appointment made a considerable time after settlor’s death).

Malcolm Finney

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On appointing out from a discretionary trust of a property, which was occupied by a beneficiary, who was permitted to do so by the trustees, who had been given such power under the deed, is it necessary to submit a CGT, return solely to claim PRR as there is no tax to pay? I thought it was necessary, but an accountant tells me that it is not.

Patrick Moroney.

s225(1) TCGA 1992: “but section 223 (as so applied) shall apply only on the making of a claim by the trustees”. Words inserted by FA 2004.

There is NO exemption without a claim by the trustees making the disposal. HS283 indicates that anyone filing a return should claim using the CGT summary. If the full exemption is claimed there is no requirement to report online in advance of the return.

The Notes to the summary do not indicate that they are inapplicable to trustees but do say"You do not need to fill in the ‘Capital Gains Tax summary’ pages if you only sell or dispose of:…• your main home, if you qualify for Private Residence Relief on the full amount of the gain". This is true of individuals but not of trustees. They must claim. If they have received a tax return notice they must claim within it. If they don’t they can claim outside a return within the time limit but they have a s7 notification liability which is likely to result in a s8A notice being sent. An individual does not have to comply with s7 if he has “no chargeable gains” or relevant sources of income and s223 applies so that a fully exempt gain under PPR is not chargeable. But it is for trustees if they do not make a claim. They may also have to convert the trust to taxable on TRS which does not absolve them from s7 though it may ensure a return is sent out.

Jack Harper

Presumably the accountant is basing his view on the wording of HS283:
*" If you meet all of these conditions, you will not have to pay CGT on the disposal. *You will not need to complete the Capital Gains Tax summary pages** of your tax return if you’ve made no other disposals or chargeable gains and do not want to make any capital gains claims or elections…"

He has overlooked TCGA 1992 s 225(1) “… but section 223 … shall apply only on the making of a claim by the trustees.”

Malcolm Finney

With apologies in advance (though from one who was an FCA as well as a solicitor) my regrettable regular experience was that many accountants do not read the legislation. Here is an example whereby HS283 and the CGT Summary Notes are not actually wrong but do not tell the whole story and given their purpose and function perhaps one cannot fairly expect them to. Whenever I make a contribution on here I read the legislation again even if for the umpteenth time.

A minor gripe is that HS 283 refers to the Manual but while CG65400 and 65440 mention the need for trustees to claim the relief, they do not elaborate further nor link to the SACM.To be fair the latter would be unusual but I think is merited here because the claim condition is a complete contrast to the treatment of an individual and the statutory distinction was a deliberate procedural change made now some 18 years ago. It is not clear to me why an individual can be trusted to judge that the full exemption is due (and so if appropriate is outside early online reporting, s7 TMA 1070 and having to make a claim) whereas trustees must be made to claim so HMRC can scrutinise it. Nasty Trust Syndrome again.

Jack Harper

Firstly, I note that Kate asked her question 2 3/4 years ago, so may no longer be interested in this thread.

It seems to me that the fiscal landscape has changed since the question was asked by the advent of CGT returns for UK residents. It seems prudent to me that in the case of gains wholly covered by PRR that the election is made within 60 days of completion of any sale and also where the gain is only partly relieved.

At the time I suggest that the election is made, it would seem almost certain that no NTF for the relevant year would have been issued by HMRC and that the election can only be made by, eg, letter. Any assertion by HMRC that the election must be made in a return should be rejected.

A question not asked by Kate, so I ask it: what are the tax consequences of putting the business premises and the agricultural land into the trust?

My answer is: No CGT holdover relief on the way in. No PBR for the business premises as no one has an interest in possession and if there was a relevant IIP, relief at only 50%. Same with the ag land, but that should qualify for APR at 100% after seven years.

A farming family called Bainbridge put their farm into a settlor interested DT and then regretted doing so. The HC allowed rescission of the transfers of the farmland. Bainbridge & Anor v Bainbridge [2016] EWHC 898 (Ch) (22 April 2016).

If the gain is fully covered by PPR there is no requirement to make an online return: para 14(2) Sch 2 FA 2019 and CG-APP18- 2.4.4 “If the whole of the gain will be relieved by PRR, the person does do not need to make a return.” But this is without prejudice to the necessary claim actually needing to be made: para 14(3).

My reading of s42(2) TMA 1970 is that if a claim can be made in a return then it must be but only if a notice to make a return “has been given”. Elections are treated in the same way:s42(10). Duncan refers to an “election”. Does he mean a “claim” for PPR? If so a claim made within 60 days of completion will often precede (and by some distance) a notice to file a return under s8A. Or does he mean what HMRC call a “notice of nomination” under s222(5) TCGA of one residence out of several? This is clearly not an “election” as defined and has its own statutory time limit: s 225 and CG64495. Such a notice (no particular form is prescribed CG64520) can be served at any time within that limit.

I am not sure what HMRC would make of a Sch 1A claim, so made outside a return, which has a prescribed content in para 2, if it was made “in year” and up to nearly 12 months before year-end so well before a s8A return would be issued. SACM is silent. I have never tried it. If the trustees have a UTR they can make a voluntary return with the claim as soon as the trust and estate return form for the year of disposal is available. If not they would have to change their TRS registration to taxable and obtain one.

I have often agreed with clients the necessary entries to be made on the return they will make well in advance of the first date for its submission, and who needs to send it and when, so that it does not get overlooked, as I would have been only advising and someone else would be submitting. Those entries were often a critical component of the advice assignment and for the benefit of all I would want it on record exactly what I advised on the point.

Jack Harper

I am unaware of any requirement for the trustees to make a claim for PPR within 60 days of completion of a disposal of residential property as Duncan seems to suggest where no CGT liability arises.

As Jack points out, where PPR applies to the whole of any gain on disposal (ie no CGT to pay), there is no requirement to file a return under
FA 2019 Sch 2.

However, where a claim for PPR is necessary (as is the case for trustees) TMA 1970 s42 provides that in such cases any such claim must be included in a return but only where a notice to make a return has been issued; failing which TMA 1970 Sch 1A needs to be considered.

Malcolm Finney

More out of an abundance of caution than anything else, I was suggesting that if the claim was unmade as at day 61 then tax would be due and thus a return would be and a penalty for failing to make a timely return would be exigible. The intention to make a claim might amount to a reasonable excuse defence against the penalty, but I am not sure that the eventual making of the claim whether within or without an SA tax return would obviate the requirement to make the CGT return.

In respect of a sale completed today, on Jack and Malcolm’s view no tax and no return would be due between 3/1/23 and 5/4/27 as the trustees intended to make a claim in that window and would be in time to make the claim. If, for some reason, no claim was made in time, then on 6/4/27 a return and the tax would suddenly have become due more than four years earlier on 3/1/23! Which is bizarre.

My concern was that a claim made after day 60 gives rise to an opportunity for the trustees to amend the CGT return rather than having the effect of cancelling the filing requirement. And this gives rise to an interest charge, in effect, at the difference between the rate on late paid tax and the supplement rate for the period commencing on day 61 and ending on the making of the claim on the tax that would be due in the absence of the claim.

Trustees who didn’t appreciate that a claim was needed because they assumed PRR was automatic would probably not give a s 7 notice to HMRC.

If a claim is to be made (and this is appreciated) then to quote the murderer of my namesake “then ’twere well It were done quickly”.

I did mean a claim for private residence relief.

Is it lawful for HMRC to require a non-taxable trust to reregister as a taxable trust or for the trustees to do so? As the information requirements differ between Reg 45ZA and Reg 45 are there data protection problems with doing so voluntarily, especially if the sole reason for reregistering is to obtain a UTR given that the claim can be made other than in a return?

I’m lost here. If a disposal is made in tax year 2023 there is no need to report it online if a full exemption is to be claimed in due course. I haven’t tried this but I would be surprised if the online system allowed you to do so. I have reported a partial exemption but can’t remember. If the trust is non-taxable it will be necessary to convert it to taxable on TRS by October 5 2023: TRSM40030

My view is that the PPR claim must be made in due course in a tax return. Trustees may be all at sea with s7 but ignorance of the law is no defence. If the above TRS deadline is complied with it will be hard for HMRC to levy a s7 penalty but the two obligations are distinct. The trustees may make a voluntary return if they are not sent one and it will be treated as filed pursuant to a s8A notice on the day that the voluntary return was sent to HMRC:s12D TMA. It might be prudent to do so by 5 October. A timely TRS alteration should trigger a s8A notice but a voluntary return obviates the need for one. In theory the trustees can wait until 31 January 2024 for an agent to file online (they can’t do it themselves) or they must file on paper on or before 31 October 2023.

As there is no tax to pay there is no interest running. Unless they are certain that a full PPR is due the trustees should beware of not reporting online and paying any tax by 60 days after the date of disposal.

I have much sympathy with lay trustees of non-taxable trusts who have been unexpectedly ensnared by TRS but trustees who dispose of a valuable asset and fail to realise that tax might be an issue are close to stretching my credulity. They have almost certainly had to engage a professional for the conveyancing who cannot be forgiven for not at least flagging the need for tax compliance. If they do their own tax and conveyancing they deserve everything they get. Volenti non fit injuria.

Jack Harper

Reg 45 requires registration of a taxable trust by 31 January after the tax year in which the trustees were first liable to pay, inter alia, CGT and here no assumption can be made that PPR will be available in full. There is nothing voluntary about it. Failure incurs a fine, in principle, though if no tax is payable HMRC might be generous (!!!) and of course in theory there is the due diligence reasonable steps defence.

You can’t make a tax return without a UTR and if you don’t already have one you have to register on TRS to get it. If you have one already you are likely to get a s8A notice shortly after 5 April of the tax year of disposal. And in that case you are probably now in default if you have not already registered as taxable on TRS. 31 January 2018 will have been the deadline for some taxable trusts.

Jack Harper

For a discussion re Jack’s comment above “My view is that the PPR claim must be made in due course in a tax return”, with which I disagree, see TDF post “Revoking a H/O relief claim” .

Malcolm Finney