Primary residence relief on a property in trust.

nightsky224

Looking for some advice re CGT/Private residences relief/trusts

House was put in to trust by brother of Mrs A in 1999. Beneficiaries were Mrs A’s children but it stated in the trust that Mrs A was entitled to live there during her life unless she consented otherwise. 

Mrs A lived in the house for that whole time, with all bills etc in her name and has now died. 

House is sold but family have been told that they need to pay CGT and that primary residence relief is not applicable as there is not a document signed annually between trustees and Mrs A allowing her to live there? 

Does this make sense? Are there any alternatives that will be accepted to prove it was her primary residence?? She was not living at or associated with any other property!

thanks 

poseidon1

So is there an actual trust document ( in writing ) executed by Mrs A's brother which set out all the terms of the trust you have outlined ( ie trust for life  of the property for Mrs A with remainder to her children on death)? If there was no such document , how does anyone know there was a trust in first place?

Assuming there is a properly executed trust document, ( please confirm and provide the precise wording) - was a market value of the property conducted at date of Mrs A's death and was this value included on her IHT return to determine any IHT payable ( if any ) by the trustees?

It should be noted in this regard, that whether or not IHT would actually be assessable ( value dependent) the fact that IHT could be charged is sufficient to erase all accrued property gains which arose during the trust period.   In short the main residence exemption on eventual sale of the property would be an irrelevancy, all you are concerned with for cgt purposes is any gain arising between date of death and eventual sale.

I am assuming the conveyancer that handled the sale on behalf of the trust is the person who has raised this matter. If so did the same firm handle Mrs A's estate for IHT reporting purposes,?

By the way in saying all the above, I have taken you at your word that this was a properly documented life interest trust for Mrs A.

If it was instead a discretionary trust, and the trustees allowed Mrs A to occupy at their discretion, that would be  an entirely different kettle of fish, so please provide further and better particulars, to determine what should be happening here from a tax point of view.

nightsky224

poseidon1 said:

So is there an actual trust document ( in writing ) executed by Mrs A's brother which set out all the terms of the trust you have outlined ( ie trust for life  of the property for Mrs A with remainder to her children on death)? If there was no such document , how does anyone know there was a trust in first place?

Assuming there is a properly executed trust document, ( please confirm and provide the precise wording) - was a market value of the property conducted at date of Mrs A's death and was this value included on her IHT return to determine any IHT payable ( if any ) by the trustees?

It should be noted in this regard, that whether or not IHT would actually be assessable ( value dependent) the fact that IHT could be charged is sufficient to erase all accrued property gains which arose during the trust period.   In short the main residence exemption on eventual sale of the property would be an irrelevancy, all you are concerned with for cgt purposes is any gain arising between date of death and eventual sale.

I am assuming the conveyancer that handled the sale on behalf of the trust is the person who has raised this matter. If so did the same firm handle Mrs A's estate for IHT reporting purposes,?

By the way in saying all the above, I have taken you at your word that this was a properly documented life interest trust for Mrs A.

If it was instead a discretionary trust, and the trustees allowed Mrs A to occupy at their discretion, that would be  an entirely different kettle of fish, so please provide further and better particulars, to determine what should be happening here from a tax point of view.

Thank you so much for your quick response. 

Yes there is an actual trust document (and noted on the property’s deeds) 
“The trustees nearby declare that they hold the property upon trust to sell the same and hold the net proceeds of the sale and the net income until the sale thereof in trust for the beneficiaries absolutely in equal shares 
The trustees further declare that no step will be taken to enforce the trust for sale upon which the property is held in the life of Mrs A without her consent in writing and until the property shall be sold Mrs A will be allowed to exclusively occupy the property as her residence so long as she desire but upon the terms that she shall continue to pay all outgoings” 

Market value/IHT - no I don’t believe they put it on her return (FYI with or without it, it falls under threshold) I am however making a assumption with the return as I have not seen it. 

I’m not sure that I understand your 3rd paragraph sorry. We have been told that the CGT payable will be on the difference in value from when the house was put in trust to now (which is significant given 1999 house prices!) 

It was raised by an accountant now in place not conveyancer (that is all complete) I believe but is an assumption that IHT was done by Trustees as they did probate. 

Thanks so much 🙏

poseidon1

nightsky224 said:

poseidon1 said:

So is there an actual trust document ( in writing ) executed by Mrs A's brother which set out all the terms of the trust you have outlined ( ie trust for life  of the property for Mrs A with remainder to her children on death)? If there was no such document , how does anyone know there was a trust in first place?

Assuming there is a properly executed trust document, ( please confirm and provide the precise wording) - was a market value of the property conducted at date of Mrs A's death and was this value included on her IHT return to determine any IHT payable ( if any ) by the trustees?

It should be noted in this regard, that whether or not IHT would actually be assessable ( value dependent) the fact that IHT could be charged is sufficient to erase all accrued property gains which arose during the trust period.   In short the main residence exemption on eventual sale of the property would be an irrelevancy, all you are concerned with for cgt purposes is any gain arising between date of death and eventual sale.

I am assuming the conveyancer that handled the sale on behalf of the trust is the person who has raised this matter. If so did the same firm handle Mrs A's estate for IHT reporting purposes,?

By the way in saying all the above, I have taken you at your word that this was a properly documented life interest trust for Mrs A.

If it was instead a discretionary trust, and the trustees allowed Mrs A to occupy at their discretion, that would be  an entirely different kettle of fish, so please provide further and better particulars, to determine what should be happening here from a tax point of view.

Thank you so much for your quick response. 

Yes there is an actual trust document (and noted on the property’s deeds) 
“The trustees nearby declare that they hold the property upon trust to sell the same and hold the net proceeds of the sale and the net income until the sale thereof in trust for the beneficiaries absolutely in equal shares 
The trustees further declare that no step will be taken to enforce the trust for sale upon which the property is held in the life of Mrs A without her consent in writing and until the property shall be sold Mrs A will be allowed to exclusively occupy the property as her residence so long as she desire but upon the terms that she shall continue to pay all outgoings” 

Market value/IHT - no I don’t believe they put it on her return (FYI with or without it, it falls under threshold) I am however making a assumption with the return as I have not seen it. 

I’m not sure that I understand your 3rd paragraph sorry. We have been told that the CGT payable will be on the difference in value from when the house was put in trust to now (which is significant given 1999 house prices!) 

It was raised by an accountant now in place not conveyancer (that is all complete) I believe but is an assumption that IHT was done by Trustees as they did probate. 

Thanks so much 🙏

Seems to me the wording used in the trust document although a little unusual for a classic life interest, should suffice for it to be treated as such for the purposes of completing Mrs A's IHT return.

So your first course of action is to obtain a copy of any IHT return submitted to obtain the grant of probate  for Mrs A and see what market value was declared therein. If it transpires the trustees did not include the value of the house on her return, then this should be addressed and amended forthwith, or they should give their reasons for any omission. Certainly I can see no justification for an omission here given  Mrs A's express powers of veto over any future sale of the property during her lifetime.

I am somewhat surprised the accountant has not taken the initiative to have a dialogue direct with the Trustee/executors on this precise point, which makes we wonder whether he has the requisite knowledge of trusts and their interaction with deceased  estates for IHT /CGT purposes. The fact that he told you that any CGT is calculated  by reference to the original gift in 1999, suggests he is lacking competency in this area.

I do hope you do not have an unfortunate  combination of an accountant out of his depth and trustee/executors who have failed to fulfil their duties properly in fully reporting Mrs A's asset position at death.

Whether or not this is the case, the surviving beneficiaries should not have a cgt exposure by reference to 1999 acquisition cost, market value at Mrs A's death is your starting point for any calculation. If need be, get a second opinion from a STEP qualified lawyer or accountant. STEP is the Society of Trust and Estate Practitioners, whose members have undergone extensive specialist training in this area.

See below a link to the STEP directory to help find a suitable firm near to you ( if needed ).

https://www.step.org/about-step/public

nightsky224

poseidon1 said:

nightsky224 said:

poseidon1 said:

So is there an actual trust document ( in writing ) executed by Mrs A's brother which set out all the terms of the trust you have outlined ( ie trust for life  of the property for Mrs A with remainder to her children on death)? If there was no such document , how does anyone know there was a trust in first place?

Assuming there is a properly executed trust document, ( please confirm and provide the precise wording) - was a market value of the property conducted at date of Mrs A's death and was this value included on her IHT return to determine any IHT payable ( if any ) by the trustees?

It should be noted in this regard, that whether or not IHT would actually be assessable ( value dependent) the fact that IHT could be charged is sufficient to erase all accrued property gains which arose during the trust period.   In short the main residence exemption on eventual sale of the property would be an irrelevancy, all you are concerned with for cgt purposes is any gain arising between date of death and eventual sale.

I am assuming the conveyancer that handled the sale on behalf of the trust is the person who has raised this matter. If so did the same firm handle Mrs A's estate for IHT reporting purposes,?

By the way in saying all the above, I have taken you at your word that this was a properly documented life interest trust for Mrs A.

If it was instead a discretionary trust, and the trustees allowed Mrs A to occupy at their discretion, that would be  an entirely different kettle of fish, so please provide further and better particulars, to determine what should be happening here from a tax point of view.

Thank you so much for your quick response. 

Yes there is an actual trust document (and noted on the property’s deeds) 
“The trustees nearby declare that they hold the property upon trust to sell the same and hold the net proceeds of the sale and the net income until the sale thereof in trust for the beneficiaries absolutely in equal shares 
The trustees further declare that no step will be taken to enforce the trust for sale upon which the property is held in the life of Mrs A without her consent in writing and until the property shall be sold Mrs A will be allowed to exclusively occupy the property as her residence so long as she desire but upon the terms that she shall continue to pay all outgoings” 

Market value/IHT - no I don’t believe they put it on her return (FYI with or without it, it falls under threshold) I am however making a assumption with the return as I have not seen it. 

I’m not sure that I understand your 3rd paragraph sorry. We have been told that the CGT payable will be on the difference in value from when the house was put in trust to now (which is significant given 1999 house prices!) 

It was raised by an accountant now in place not conveyancer (that is all complete) I believe but is an assumption that IHT was done by Trustees as they did probate. 

Thanks so much 🙏

Seems to me the wording used in the trust document although a little unusual for a classic life interest, should suffice for it to be treated as such for the purposes of completing Mrs A's IHT return.

So your first course of action is to obtain a copy of any IHT return submitted to obtain the grant of probate  for Mrs A and see what market value was declared therein. If it transpires the trustees did not include the value of the house on her return, then this should be addressed and amended forthwith, or they should give their reasons for any omission. Certainly I can see no justification for an omission here given  Mrs A's express powers of veto over any future sale of the property during her lifetime.

I am somewhat surprised the accountant has not taken the initiative to have a dialogue direct with the Trustee/executors on this precise point, which makes we wonder whether he has the requisite knowledge of trusts and their interaction with deceased  estates for IHT /CGT purposes. The fact that he told you that any CGT is calculated  by reference to the original gift in 1999, suggests he is lacking competency in this area.

I do hope you do not have an unfortunate  combination of an accountant out of his depth and trustee/executors who have failed to fulfil their duties properly in fully reporting Mrs A's asset position at death.

Whether or not this is the case, the surviving beneficiaries should not have a cgt exposure by reference to 1999 acquisition cost, market value at Mrs A's death is your starting point for any calculation. If need be, get a second opinion from a STEP qualified lawyer or accountant. STEP is the Society of Trust and Estate Practitioners, whose members have undergone extensive specialist training in this area.

See below a link to the STEP directory to help find a suitable firm near to you ( if needed ).

https://www.step.org/about-step/public

Thank you so much again. 

- I will ask re the IHT submission for Mrs A. Apologies from re reading your comment you meant the value of house in 1999 re the threshold. It is now substantially over the threshold. Does this mean IHT will be payable? That will be substantial I would imagine!
- Apologies if I have not explained well. The CGT calculation they have done is on the house value on Mrs A’s death minus the value of the house in 1999
- from the information given does it sound like private residence relief would be applicable? 

- I will ask if the current accountant is STEP qualified thank you and see if I can encourage a second opinion. 

Keep_pedalling

Sounds horribly like a dodgy trust to avoid care costs. As stated above the house forms part of MrsA’s estate and as the trust was set up prior to 2017 her estate will not be able to claim the residential NRB reducing her IHT exemptions to £325k (up to £650k if she was a widow). The trustees should definitely take professional advice. 

poseidon1

nightsky224 said:

poseidon1 said:

nightsky224 said:

poseidon1 said:

So is there an actual trust document ( in writing ) executed by Mrs A's brother which set out all the terms of the trust you have outlined ( ie trust for life  of the property for Mrs A with remainder to her children on death)? If there was no such document , how does anyone know there was a trust in first place?

Assuming there is a properly executed trust document, ( please confirm and provide the precise wording) - was a market value of the property conducted at date of Mrs A's death and was this value included on her IHT return to determine any IHT payable ( if any ) by the trustees?

It should be noted in this regard, that whether or not IHT would actually be assessable ( value dependent) the fact that IHT could be charged is sufficient to erase all accrued property gains which arose during the trust period.   In short the main residence exemption on eventual sale of the property would be an irrelevancy, all you are concerned with for cgt purposes is any gain arising between date of death and eventual sale.

I am assuming the conveyancer that handled the sale on behalf of the trust is the person who has raised this matter. If so did the same firm handle Mrs A's estate for IHT reporting purposes,?

By the way in saying all the above, I have taken you at your word that this was a properly documented life interest trust for Mrs A.

If it was instead a discretionary trust, and the trustees allowed Mrs A to occupy at their discretion, that would be  an entirely different kettle of fish, so please provide further and better particulars, to determine what should be happening here from a tax point of view.

Thank you so much for your quick response. 

Yes there is an actual trust document (and noted on the property’s deeds) 
“The trustees nearby declare that they hold the property upon trust to sell the same and hold the net proceeds of the sale and the net income until the sale thereof in trust for the beneficiaries absolutely in equal shares 
The trustees further declare that no step will be taken to enforce the trust for sale upon which the property is held in the life of Mrs A without her consent in writing and until the property shall be sold Mrs A will be allowed to exclusively occupy the property as her residence so long as she desire but upon the terms that she shall continue to pay all outgoings” 

Market value/IHT - no I don’t believe they put it on her return (FYI with or without it, it falls under threshold) I am however making a assumption with the return as I have not seen it. 

I’m not sure that I understand your 3rd paragraph sorry. We have been told that the CGT payable will be on the difference in value from when the house was put in trust to now (which is significant given 1999 house prices!) 

It was raised by an accountant now in place not conveyancer (that is all complete) I believe but is an assumption that IHT was done by Trustees as they did probate. 

Thanks so much 🙏

Seems to me the wording used in the trust document although a little unusual for a classic life interest, should suffice for it to be treated as such for the purposes of completing Mrs A's IHT return.

So your first course of action is to obtain a copy of any IHT return submitted to obtain the grant of probate  for Mrs A and see what market value was declared therein. If it transpires the trustees did not include the value of the house on her return, then this should be addressed and amended forthwith, or they should give their reasons for any omission. Certainly I can see no justification for an omission here given  Mrs A's express powers of veto over any future sale of the property during her lifetime.

I am somewhat surprised the accountant has not taken the initiative to have a dialogue direct with the Trustee/executors on this precise point, which makes we wonder whether he has the requisite knowledge of trusts and their interaction with deceased  estates for IHT /CGT purposes. The fact that he told you that any CGT is calculated  by reference to the original gift in 1999, suggests he is lacking competency in this area.

I do hope you do not have an unfortunate  combination of an accountant out of his depth and trustee/executors who have failed to fulfil their duties properly in fully reporting Mrs A's asset position at death.

Whether or not this is the case, the surviving beneficiaries should not have a cgt exposure by reference to 1999 acquisition cost, market value at Mrs A's death is your starting point for any calculation. If need be, get a second opinion from a STEP qualified lawyer or accountant. STEP is the Society of Trust and Estate Practitioners, whose members have undergone extensive specialist training in this area.

See below a link to the STEP directory to help find a suitable firm near to you ( if needed ).

https://www.step.org/about-step/public

Thank you so much again. 

- I will ask re the IHT submission for Mrs A. Apologies from re reading your comment you meant the value of house in 1999 re the threshold. It is now substantially over the threshold. Does this mean IHT will be payable? That will be substantial I would imagine!
- Apologies if I have not explained well. The CGT calculation they have done is on the house value on Mrs A’s death minus the value of the house in 1999
- from the information given does it sound like private residence relief would be applicable? 

- I will ask if the current accountant is STEP qualified thank you and see if I can encourage a second opinion. 

Firstly I am convinced the maket value of the house on death should have been included on Mrs A's IHT return and too the extent this value coupled with her personal assets exceeded the NRB then IHT will indeed be due.

I tend to agree with Keep_pedalling with regard to the disallowance of the Residence nil rate band. Mrs A is not a lineal descendent of her brother ( the creator of the trust) within the meaning of the relief, but does not hurt to get a second opinion on that point.

Looks as if the Trustee/ executors may have been negligent if no IHT has been declared and paid within the the requisite 6 months after death, so HMRC penalties are already in point. Were any of them professionally advised when dealing with Mrs A's estate? If so I would assert the professional was negligent and its the firm and not the trust fund who should be responsible for any HMRC penalties arising from this oversight . Also to be noted that daily HMRC interest is running on the unpaid tax, from the sixth month after death.

Once the IHT issue has been settled, CGT on the property sale should disappear, unless there was any gain between date of death and date of sale. This is due to the fundamental interaction between IHT and CGT on death - the same asset cannot be liable for both capital taxes arising on the same event (death). IHT takes priority and accordingly eliminates CGT.

It's a pity the people entrusted  to deal with various tax events related to the trust, have so far appeared to have failed miserably. A second opinion from a properly qualified professional now appears to be long overdue!

Jeremy535897

Whether Mrs A is entitled to her husband's nil rate band needs to be considered. Was she a widow or divorced? Did her husband leave his estate to her?
Brother setting up the trust in 1999 is probably to do with ensuring a future husband of Mrs A could not inherit, rather than care home fees, but it doesn't matter.
I don't see why the fact that the trust was set up before 2017 affects the RNRB, but I don't pretend to be an expert in this area.
The property is uplifted to market value capital gains tax free at the date of death, and this should be the base cost the legatees inherit.