CGT and Trusts

canarydan

Afternoon.

I've got a complicated CGT query and it'd be great if anyone could give me some advice.

My Mum died in 2010 and her will created a discretionary trust that held her half of her home. The beneficiaries of the trust are myself and my two sisters and my Dad, the trustees are myself, one sister, an auntie and my Dad. The trustees have all agreed that one the sale of the property, myself and my two sisters will each receive 1/3 of Mum's half of the property.

My Dad owns the other half of the home and lived there until 2016. Since then, the house has be let out with all the rent going to Dad in accordance with Mum's will.

The current tenants are likely to look to move out in 2023 so we're looking into the implications of selling the property. What would the CGT liability be? My understanding is that Dad's CGT would be very straightforward; he would pay CGT on the increase in value from 2016 to the point of sale, minus his personal allowance.

However, what would be the CGT liability for the trust? Could us beneficiaries use our own CGT allowances for our individual share of the house (1/6 each) or are the beneficiaries irrelevant when it comes to the sale of the house, as it is the trust selling its half of the property (and therefore only the lower trust CGT allowance applies to the half of the sale price)?

Also, can the trust benefit from the residency relief accrued by Dad living in the property until 2016, or would the gain be calculated from the date the trust acquired its half share of the property?

Inheritance tax isn't an issue as the amounts don't get anywhere near the nil rate band.

I'd be grateful for any help, I'm clueless about all this.

Jeremy535897

You need to talk to a solicitor about the trust. For example, if the trust is a discretionary trust as you say, the statement "all the rent going to Dad in accordance with Mum's will" has to be wrong. The whole point of a discretionary trust is that it is  discretionary in terms of who gets income and capital The trustees may choose to give Dad all the income each year, but cannot be obliged to.

There would have been a ten year inheritance tax charge in 2020 on the trust. I assume that was nil? The trustees should have completed tax returns annually in respect of the rent, and paid tax accordingly. Dad should then have declared the income distribution and the associated tax credit.

So far as Dad's half of the house is concerned, his base cost is what it cost when they bought it (or March 1982 value if bought before then). That, plus his share of acquisition costs and any improvements, is deducted from his half of the sale proceeds (less his share of selling costs). The gain is then reduced on a time apportionment basis by the main residence exemption for the period he lived in it as his main residence, plus the last 9 months of ownership.

Depending on the amounts involved, advice should be taken on whether it is better for the trustees to appoint the house to the beneficiaries and hold over the capital gain, or sell the house while it is still in the trust and pay the 28% tax. I suspect the former is the better option, although the trustees will no doubt seek indemnities in respect of the held over gain.

Keep_pedalling

Are you sure it is a discretionary trust? A life interest would have been sensible approach as that would have avoided any CGT issues.

canarydan

Jeremy535897 said:

You need to talk to a solicitor about the trust. For example, if the trust is a discretionary trust as you say, the statement "all the rent going to Dad in accordance with Mum's will" has to be wrong. The whole point of a discretionary trust is that it is  discretionary in terms of who gets income and capital The trustees may choose to give Dad all the income each year, but cannot be obliged to.

There would have been a ten year inheritance tax charge in 2020 on the trust. I assume that was nil? The trustees should have completed tax returns annually in respect of the rent, and paid tax accordingly. Dad should then have declared the income distribution and the associated tax credit.

So far as Dad's half of the house is concerned, his base cost is what it cost when they bought it (or March 1982 value if bought before then). That, plus his share of acquisition costs and any improvements, is deducted from his half of the sale proceeds (less his share of selling costs). The gain is then reduced on a time apportionment basis by the main residence exemption for the period he lived in it as his main residence, plus the last 9 months of ownership.

Depending on the amounts involved, advice should be taken on whether it is better for the trustees to appoint the house to the beneficiaries and hold over the capital gain, or sell the house while it is still in the trust and pay the 28% tax. I suspect the former is the better option, although the trustees will no doubt seek indemnities in respect of the held over gain.

Keep_pedalling said:

Are you sure it is a discretionary trust? A life interest would have been sensible approach as that would have avoided any CGT issues.

Thank you both for your contributions. It is definitely a discretionary trust, (the Will is worded, "If my husband...survies me, my Will creates a discretionary trust"). With regards to the rent, Jeremy535897, it is exactly as you say. My Mum left a statement of wishes to the executors and trustees of her will which asks (not compels) the trustees to allow Dad to "augment his resources out of capital and income" from the trust. We've interpreted that as rent being the income to which it refers, so as far as we're all concerned, the rent is all his. When this was agreed, a Deed of Appointment was set up (whatever that means) which we were advised would "avoid the complications of completing tax returns moving forward".

Apologies to pick your brains again, but my old man lived in the property for 450 odd months and has let it out (or had it sat empty) for 72 months. With the 9 month rule, that would make it a % of 86% since purchase he'd lived in it, so he would be entitled to deduct 86% of the gain?

I hadn't considered the idea of appointing Mum's half to the beneficiaries, I assume that is essentially passing the ownership of the half of the property from the Trust and to the beneficiaries, so that they could each individually use their annual CGT allowance in the event of a sale? If that was the case, would a similar calculation need to be carried out to ascertain how much main residence exemption is applicable, as all the property has been the main residence of the beneficiaries at some point, although the property was acquired before myself and my younger sister were born, which may further complicate things.

All in all, it sounds like we're going to have to swallow it and pay a solicitor for some advice.

Jeremy535897

If the deed of appointment means that the house was appointed out of the trust to your father, it is all in his possession. You need to understand what precisely has happened. Alternatively, the deed of appointment may have given him a life interest in the trust.

If the property is still in a discretionary trust, and the trustees appoint the house to you as beneficiaries, your base cost will be the value at the date of your mother's death. That is also the date on which the question of you using it as a main residence starts.

If it was your father's main residence for 450 months out of 522, then the exempt part of the gain is 459/522, in respect of the half he always owned. If he acquired half of it on a deed of appointment, the gain on that half will be based on the value when your mother died (assuming the gain then was held over), and the main residence exemption will I think be based on the same fraction as for the share he always owned (although this is a tricky technical question). If he has a right to the income of the trust, the 28% rate applies to the trustees, and they cannot hold over the gain they would make if they appointed it to him first.

See https://www.gov.uk/government/publications/trusts-and-capital-gains-tax-hs294-self-assessment-helpsheet/hs294-trusts-and-capital-gains-tax-2020

Keep_pedalling

Is the trust registered with HMRC? If so, has the trust been paying tax on the rental income?

Do you know who advised her to set up a discretionary trust rather than life interest one? They would seem to have a lot to answer for.

Jeremy535897

My guess is that a discretionary trust was used originally because at the time the will was written, there was no residential nil rate band exemption. It probably pre-dated the transferable nil rate band that was introduced in 2007. The question is not important.

The more I think about this, the more I think that the likely scenario is that, once the residential nil rate band came in, the discretionary trust stopped being useful from an inheritance tax point of view, and cost too much to administer when there was no real benefit. Accordingly father was given a life interest in it. That means it now forms part of his estate for inheritance tax, but the trustees no longer had to complete tax returns as he would declare the rental income personally.

If I am correct, then the analysis I gave for father's half owned personally remains correct. The trustees then have three choices:

• sell their share of the house when father sells his half
• appoint their half of the house to father and he sells all of it
• appoint their half of the house to the children, and all parties sell it

The first option means the trustees pay 28% capital gains tax based on the increase in value from mother's death. At least I think this is the result, although a technical argument might be made to give some element of main residence relief, as father owns half of it and used to live in it, but the legislation doesn't really envisage this scenario.

The second and third options crystallise the same gain (assuming that the value at the date of transfer is the same as the value achieved on sale, although there may be some discount applicable) and the same 28% charge.

Whatever happens, the 60 day reporting rule will apply to any transfers to beneficiaries, and any sale:
https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax

If father does have a life interest, and the property or proceeds of sale end up with the children, father will make a PET for inheritance tax at that time.

canarydan

Great help so far, I'm definitely starting to get a clearer picture.

One question I do have, if the house was sold whilst half was still owned by the Trust, am I right in thinking that the Trust would only enjoy a £6,150 CGT allowance. However, if the Trust appointed its half of the house to myself and my sisters prior to the sale of the property, then all three of us would be able to use our own CGT allowance on our share? Is it a relatively straightforward process for a Trust to relinquish its share of an asset to the beneficiaries?

With regards to inheritance tax, Mum's assets did not total anywhere near the £325,000 threshold so I don't think that will be an issue.

Jeremy535897

If I am correct that the trust has become a life interest trust in favour of Dad, then if the trust appoints the house to the children, the trustees are treated as selling the half share of the house at its market value at that time. There would therefore be relatively little gain when the children actually sell the house.

canarydan

So would there be a tax implication at the point the trust appointed the house to us children? And then a further tax implication when the house is actually sold on to a third party?

Jeremy535897

Yes, because they are treated as two separate transactions. However, any gain by the children would be modest, as their base cost would be the value used to compute the trustees' gain.

A discretionary trust's trustees can hold over the gain, so the children then make the gain when they sell, but from what you have said, I think the deed of appointment gave your father a life interest, as presumably it had become clear that there was no longer an issue, but you need to confirm it.