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
PFEP

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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