Capital Gains Tax - Inherited property (Trust)

roseview

My father recently passed away. Property was owned Tenants in Common with spouse. His half has been left in trust for my sisters and I with step mother having a life interest. I am also trustee/executor.

When my step mother dies will the trust be liable to pay CGT on the increase in value of 50% share since the date of my fathers death? Or will the 3 beneficiaries be liable for this? Or is CGT not going to be chargeable up until death of life tenant due to the fact that the beneficiaries have not had the option of disposing of the property beforehand?

xylophone

http://www.hmrc.gov.uk/helpsheets/hs294.pdf
This is an IPDI trust? (Immediate post death interest)?
Page 6
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem6361.htm might apply?

Ring HMRC and enquire?

roseview

I did ring them and was told that as it was not happening at the moment there was no need to do anything and to just contact them when my step mother dies!!

xylophone

I think the links above would apply but I am no expert- I suggest you check with the solicitor who drew up the will.

http://www.crippslaw.com/guidance/a-brief-guide-for-trustees.pdf might be worth a look.

jimmo

I am no expert in trusts either and whilst it all sounds terribly complicated, it may not be that bad.

http://www.hmrc.gov.uk/manuals/cgmanual/cg36541.htm

A quick look at the above link shows that there are 10 classes of trusts and, quite frankly, trying to read through the following instructions without a precise knowledge of all the circumstances of the case is quite mind-boggling.

However the long and short of all that is that the case will fall to be treated either under “the new rules” or under “the old rules”.

Under the new rules the step mother is regarded as if she owns the entire property until her death, the full market value of the property at the date of her death is taken into account in her Inheritance Tax assessment and the beneficiaries of father’s estate are treated as acquiring their interest in the property on the date of the step mother’s death at open market value at that time.

In other words the full value of the property is chargeable to IHT but nobody is liable to CGT.

Under the old rules father’s half share passes to his beneficiaries at the date of his death at open market value and is not included in the step mother’s estate for IHT purposes.

Father’s beneficiaries will then only become potentially liable to CGT when their interest is disposed of, normally when the property is sold. However, because step mother has been occupying settled property as the beneficiary of the trust created by father’s will, then father’s beneficiaries will be entitled to main residence relief for the period of occupation since father’s death.

http://www.hmrc.gov.uk/manuals/cgmanual/CG65400.htm

To summarise that, provided the property is sold reasonably quickly after step mother’s death nobody is going to be liable to Capital Gains Tax.

However there is some danger that the full value of the property will be included in step mother’s estate for Inheritance Tax purposes. Will this be an issue?

roseview

Thanks you, that makes sense.

No her estate is not likely to exceed IHT levels.