Trusts - CGT Liability/PPR Relief

MrAnalogy

Just looking for confirmation really.

I am a trustee of an Interest in Possession Will Trust and trying to find a definitive answer on the potential CGT liability in the following situation...

A property was sold which was owned %60 outright by my brother-in-law. The other %40 was held in an Interest in Possession trust, with my b-in-l being the Life Tenant of the %40 as well. This was his only property and his full time residence.

There was a small capital gain on the sale. Obviously my b-in-l was not liable for CGT as this was his only residence, but my query is relating to the %40 share held in trust for his lifetime usage.

This %40 share was the Trust's only asset, and I have been advised that as the property sold was a sole residence that the Trust holding is also eligible for Principal Private Residence Relief.

Before I close the Trust early (at the Life Tenant's request) and disburse all the funds to the Remainderman (to allow declaration of cessation of Trust to the HMRC (Trusts)) I need to ensure that I am unlikely to be hit by a CGT bill after the Trust has been closed.

Can anybody confirm one way or the other please, or would it be safest to assume liabilty and retain the amount (just in case) ring-fenced as owing to HMRC (to allow cessation) - but if it transpires that there is no liability then pay the residue to the Remainderman at a later date?

Sorry if it is a bit of a complicated question - I have been researching on the 'net and it appears as though the relief is applicable (for an I in P Trust) but I would be much happier if someone is able to confirm (or otherwise!)

Many thanks

John_Pierpoint

Whose death created the IIP trust (spouse?)
What year?
What is the objective of busting the trust early?
How is BiL keeping a roof over his head these days?
What tax year was the year of sale of the house?
How big was the capital gain for the whole property?

I don't really know the answer for certain BUT I had to make decisions in a similar situation with my mother having the life interest. In the event we decided to keep her where she was and that turned out to be exactly the right decision with the benefit of 20:20 hindsight.

If you don't get a sensible answer here, have you tried
www.taxationweb.co.uk/

xylophone

http://www.hmrc.gov.uk/trusts/types/iip.htm
Start here and make a formal enquiry of HMRC if unsure - do nothing before you have definitive guidance.

MrAnalogy

Thank you for your responses.. The link xylophone provided was just the one I needed...

Private Residence Relief

This relief exempts people from Capital Gains Tax when they sell or transfer their main home. For trustees it applies to any property - including up to half a hectare of land - that's owned by the trustees. The property must also be the main residence for someone entitled to occupy it under the trust's terms.
Trustees who transfer or dispose of this type of property should complete the SA905, Trust and Estate capital gains supplementary pages, to claim this relief.

I looked at SA905 - 8 pages of it basically to say I am claiming PPRR on the sale!

I will be contacting HMRC tomorrow and will of course double check with them first before taking any course of action (also to ask which are the critical boxes in the 8 pages of SA905!).

Just for information - the trust was created by the spouse about 10+ years ago - the gain was modest - the trust share was put into another property for a planned short period of time but as a fixed amount (no danger of CGT!). The Life Tenant wanted to end the Trust early as his personal and domestic circumstances were changing - planning to remarry, fiancee buying out trust share of his property. Also by doing so his IIP becomes a PET rather than adding to his estate on death (unlikely but potential IHT issues) provided he survives long enough.

Thanks once again - tomorrow - an encounter with HMRC (Trusts) - wish me luck!

John_Pierpoint

I just asked about the IIP trust, because had it been a very old spouse one and also involved buying a home for a dependant parent (the very fact of buying the home proved the dependency) it could be free of IHT and CGT on death - a bit like the new spouse relief but even more valuable.

Good luck

MrAnalogy

In fact the gentleman I spoke to at HMRC (Trusts) was extremely helpful (and patient!). Hopefully I have fully understood what needs to be filled in on the SA900/905 for last year and this to the beginning of this month - although it will take a while for the forms to come through.

I must admit I will be very relieved when it is all over (as will my co-trustee). I think anybody thinking of creating a trust, but making lay-people trustees, should be aware that there are many facets to it that most people will not be overly familiar with.

I suppose we could have taken recourse to employing more professional advice - but at some level as a trustee you feel that it is your job to minimise any drain on the value of the trust.

Over the years I have learned far more about tax issues, portfolios and investments, land title deed restrictions and various other things than ideally I would have wanted to know

As it is we still needed the services of solicitors for various trust actions over the years - and an IFA for investment advice and guidance - but only to satisfy ourselves that we were operating with due diligence and even-handedness with regard to our responsibility.

Good luck to any non-professional trustees out there - all you can do is your best!

Best Regards

SeniorSam

As you have found, that giving up the IIP will count as a gift (PET) from the life tenant even though they did not actually own it. If the life tenant wishes to protect the 40% value of the gift (only needed if his estate would be likely to IHT), he could consider an inter vivos life policy to protect that for the next 7 years.

Just thought this may help you, or anyone else in similar circumstances.

Sam

MrAnalogy

Thank you for that thought. I would not have anticipated that IHT would be likely to be a problem for the ex-Life Tenant - but then I do not have an intimate knowledge of his financial circumstances

I will gently mention this to him when I next see him, and if he thinks there might be an issue I would be pleased to tell him about your possible suggested solution.

Thanks and Best Wishes