CGT query

canarydan

Can someone confirm if I'm on the right track here with my calculations and understanding. I've made some of the figures and dates up because I don't have the exact records to hand but the principle should be the same.

My old family home is currently owned 50% by my Dad and 50% by a Trust created after my Mum passed, of which I'm a Trustee (as is Dad).

Based on the following, I want to double check the CGT implications are what I understand them to be;

1) Purchased in December 1985 for £40,000
2) Lived in by Dad until April 2014
3) Let out from April 2014 until December 2025 (hypothetically)
4) Sold in December 2025 for £400,000

The value increase is £360,000 and there would be an entitlement of 316 months of PPR plus the final 9 months of ownership, so 325 months. So 325 over the 520 months of ownership is 0.625, which when applied to the £360,000 means that £225,000 (so £112,500 to Dad, £112,500 to the trust, plus £20k each of the original purchase price) of the sale price is exempt from CGT.

The remaining £135,000 would also be split two ways, leaving £67,500 liable for CGT to Dad and £67,500 to the trust, but Dad would get £6,000 tax-free allowance as an individual and the trust would get £3,000, leaving CGT applicable to £61,500 and £64,500.

Am I correct so far?

What I then don't get is the tax rate for the trust part. It is a discretionary trust, which I understand makes the trust, not the beneficiaries, liable. I'm seeing 20%, 24% and 28% from different sources.

Furthermore, the house had an extension in 2006, let's say it was £10k (there will be invoices somewhere). Can that be offset against the CGT liability at all?

Thanks for any help.

Bookworm105

cheap extension, but yes, if invoices are available to support that total being all capital then it is a reduction against the 360k gross gain

Dec 1985 to April 2014 is not 316 months, it is either 340 or 341 months depending on when he physically moved out (not the date tenants moved in). You are correct to then add the final 9 months 

the CGT allowance has been reduced to 3,000 and 1,500 with effect from 24/25. (Guesswork if it will be cut again by Dec 25)
Capital Gains Tax: what you pay it on, rates and allowances: Capital Gains Tax allowances - GOV.UK


there is no lower rate tax band for trusts

your father will be taxed at 18% and/or 24% depending on his total income calculation 
the trust will be taxed at 24% on the whole of its share 
Capital Gains Tax: what you pay it on, rates and allowances: Capital Gains Tax rates - GOV.UK

(don't get confused over the 28% applied to "carried interest" - that is not what is meant by your trust)

canarydan

Perfect, no idea how I got 316 months, but that's a decent mistake to make as that's a whole chunk more of PPR to throw into the mix. Though the reduction in CGT allowance might offset that.

Thanks for the help!

Bookworm105

PS Dec 1985 to Dec 2025 is 40 years so 481 months not 520!

PRR (341+9)/481 = 72.7% not your 62.5%

Jeremy535897

While the base cost of your father's share is half the original cost (plus costs of acquisition and his share of the improvements), the trust's base cost will be the market value of the property at the date of your mother's death, adjusted for any improvements the trustees paid for. Whether the trust's gain will qualify for main residence relief will depend on its terms, and it may well not as it is a discretionary trust, but even if it did, the monthly calculation will also be different as the period of ownership is different.
You should look at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65400 and https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65407
The difficulty is whether the beneficiary being given a right to occupy the property creates an interest in possession, which can put the whole of the property back in your father's estate for inheritance tax purposes, but that may not apply if your mother died after 2006. This is a complex area and it would be worthwhile speaking to the solicitors who drafted the wills and trust. Has the trust been going for 10 years yet (your mother's death will be the starting date)?

poseidon1

Jeremy535897 said:

While the base cost of your father's share is half the original cost (plus costs of acquisition and his share of the improvements), the trust's base cost will be the market value of the property at the date of your mother's death, adjusted for any improvements the trustees paid for. Whether the trust's gain will qualify for main residence relief will depend on its terms, and it may well not as it is a discretionary trust, but even if it did, the monthly calculation will also be different as the period of ownership is different.
You should look at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65400 and https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65407
The difficulty is whether the beneficiary being given a right to occupy the property creates an interest in possession, which can put the whole of the property back in your father's estate for inheritance tax purposes, but that may not apply if your mother died after 2006. This is a complex area and it would be worthwhile speaking to the solicitors who drafted the wills and trust. Has the trust been going for 10 years yet (your mother's death will be the starting date)?

I would further add, that assuming the OP is correct and the trust emerging from mother's will was fully Discretionary  ( which would be unusual in these circumstances), then 10 year anniversary IHT reporting  by reference to mother's date of death would be in point, with IHT payable at 6% on the trust value exceeding the prevailing NRB ( although that does not seem to be a problem here). However the IHT reporting is mandatory, whether or not there is a liability - £100 penalty for late submission of the IHT 100 form.

Furthermore, had it really been a discretionary settlement then the rental income would have been taxable at 45%, has that occurred during the tenancy?

Have to wonder if the OP was mistaken about the trust being discretionary, if it is there are additional taxes and compliance to worry about !

Jeremy535897

poseidon1 said:

Jeremy535897 said:

While the base cost of your father's share is half the original cost (plus costs of acquisition and his share of the improvements), the trust's base cost will be the market value of the property at the date of your mother's death, adjusted for any improvements the trustees paid for. Whether the trust's gain will qualify for main residence relief will depend on its terms, and it may well not as it is a discretionary trust, but even if it did, the monthly calculation will also be different as the period of ownership is different.
You should look at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65400 and https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65407
The difficulty is whether the beneficiary being given a right to occupy the property creates an interest in possession, which can put the whole of the property back in your father's estate for inheritance tax purposes, but that may not apply if your mother died after 2006. This is a complex area and it would be worthwhile speaking to the solicitors who drafted the wills and trust. Has the trust been going for 10 years yet (your mother's death will be the starting date)?

I would further add, that assuming the OP is correct and the trust emerging from mother's will was fully Discretionary  ( which would be unusual in these circumstances), then 10 year anniversary IHT reporting  by reference to mother's date of death would be in point, with IHT payable at 6% on the trust value exceeding the prevailing NRB ( although that does not seem to be a problem here). However the IHT reporting is mandatory, whether or not there is a liability - £100 penalty for late submission of the IHT 100 form.

Furthermore, had it really been a discretionary settlement then the rental income would have been taxable at 45%, has that occurred during the tenancy?

Have to wonder if the OP was mistaken about the trust being discretionary, if it is there are additional taxes and compliance to worry about !

That's why I asked if mother died more than 10 years ago.
I doubt there will be any income as father's co-ownership gives him a right to occupy, and I suspect the trust deed does too, rent free. Proper advice needs to be taken.

poseidon1

Jeremy535897 said:

poseidon1 said:

Jeremy535897 said:

While the base cost of your father's share is half the original cost (plus costs of acquisition and his share of the improvements), the trust's base cost will be the market value of the property at the date of your mother's death, adjusted for any improvements the trustees paid for. Whether the trust's gain will qualify for main residence relief will depend on its terms, and it may well not as it is a discretionary trust, but even if it did, the monthly calculation will also be different as the period of ownership is different.
You should look at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65400 and https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65407
The difficulty is whether the beneficiary being given a right to occupy the property creates an interest in possession, which can put the whole of the property back in your father's estate for inheritance tax purposes, but that may not apply if your mother died after 2006. This is a complex area and it would be worthwhile speaking to the solicitors who drafted the wills and trust. Has the trust been going for 10 years yet (your mother's death will be the starting date)?

I would further add, that assuming the OP is correct and the trust emerging from mother's will was fully Discretionary  ( which would be unusual in these circumstances), then 10 year anniversary IHT reporting  by reference to mother's date of death would be in point, with IHT payable at 6% on the trust value exceeding the prevailing NRB ( although that does not seem to be a problem here). However the IHT reporting is mandatory, whether or not there is a liability - £100 penalty for late submission of the IHT 100 form.

Furthermore, had it really been a discretionary settlement then the rental income would have been taxable at 45%, has that occurred during the tenancy?

Have to wonder if the OP was mistaken about the trust being discretionary, if it is there are additional taxes and compliance to worry about !

That's why I asked if mother died more than 10 years ago.
I doubt there will be any income as father's co-ownership gives him a right to occupy, and I suspect the trust deed does too, rent free. Proper advice needs to be taken.

At point 2 of the OP's post he does talk about father vacating the property and then at point 3) it being let out from April 2014 onwards.

Would be helpful if he confirmed mum's date of death and the property probate value at that point, since as you pointed out attempts at CGT calc for the trust share of the property somewhat pointless without that information. 

As to the trust itself, I remain of the view that this type of interspouse arrangement was more likely to be an IPDI  or classic life interest trust rather than discretionary. Hopefully OP will be minded to fill in these blanks if he wants a more accurate view of CGT exposure and any other taxes that may now be relevant 

canarydan

Cheers for the further information. 

The trust was created by a codecile my Mum added to their joint will, which included the words "creates a discretionary trust". She died in July 2010, so well over 10 years ago.

The codecile instructed all assets in Mum's name, including her half of the house (the ownership was changed to tenants in common when she got poorly), to go into trust. Any income from the trust was to go to Dad, but was to be divided between the beneficiaries at Dad's death or when the trustees saw fit. I haven't a clue what the value was at the time, would that have been declared at probate? Dad sorted all that, as you can imagine that period is all a bit of a blur (I'd just had my first child too).

I know I (and my sister and Auntie, the other trustees along with Dad) signed something to say that Dad could have all the rent from the property, which he's been paying income tax on the full amount as an individual, and he has an accountant sort it all.

So from what I'm reading, I've got Dad's liability about right, but the trust would be liable for the gain between the date of Mum's death and the eventual sale price?

I didn't think IHT would be an issue as the sums don't exceed Mum's nil rate band.

Jeremy535897

If any income of the trust went to your father during his lifetime, that indicates that the will is an interest in possession trust with your father as life tenant. It probably becomes a discretionary trust on his death. The fact that he is declaring the income on his tax return agrees with that. The trustees should be able to take into account main residence relief for the four years in which he was resident there, plus (I think) the last 9 months of ownership. Their base cost is the value of the half share at the date of your mother's death, plus any share of improvements the trustees incurred, and the property would have been exempt from inheritance tax in your mother's estate as your father had a life interest. However, you should check the terms of the trust deed with a solicitor.

poseidon1

I agree with Jeremy535897, the way in which you as trustees have administered the trust and the income arising, points to this being an interest in possession arrangement for him.

However you definitely must get professional advice about your mum's codicil which appears to be the operative trust instrument.

I do not like the sound of the expression ' it creates a discretionary trust' 
Hopefully this is something that only occurs on your father's death ( so a problem for another day), but it is perfectly possible for discretionary trustees to carve out intermediary interests in possessions for a particular beneficiary, with the carved out trust capital falling back into the original discretionary trust on the happening of a specific event ( such as death ) - I have personally been involved in such trusts where this was done. Best to make sure this is not case here, your original contention that you are dealing with a discretionary trust is worrisome in this regard.