CGT - Principal Property Relief when a Life Interest Trust exists

thingswerentthisbadinmyday

Morning all

Having read several articles and forum posts, it would be really helpful if any fellow member(s) could confirm (or otherwise) my understanding of the following situation;

Residential Property - Tenants in common 50/50. Husband/wife.

Individual wills - Life interest Trust created in favour of the surviving spouse.

Remaindermen (in both wills) are adult children.

On first death, surviving spouse continues to live alone in house (matrimonial home) and we'll assume, doesn't ever go into care or downsize.

On second death, Life Interest Trust ends and assets of both parents distributed  in line with their respective wills.

Am I correct in my understanding that irrespective of any increase in the value of the house after the first death, no Capital Gains Tax would be payable on either estate because the Trustees of the Life interest Trust could claim PRR under TCGA92/S225 and the beneficiary of the Life Interest trust (the 50% co-owner who was the second to pass away) claims PRR under S222?

I found these references on the HMRC website and it would be helpful to know if I am understanding them correctly without having to refer back to solicitors.

Many thanks.

Keep_pedalling

The life tenant is the beneficial owner and the whole house forms part of their estate for IHT purposes and is covered by PPR so no CGT on any rise in value between the two deaths.

poseidon1

thingswerentthisbadinmyday said:

Morning all

Having read several articles and forum posts, it would be really helpful if any fellow member(s) could confirm (or otherwise) my understanding of the following situation;

Residential Property - Tenants in common 50/50. Husband/wife.

Individual wills - Life interest Trust created in favour of the surviving spouse.

Remaindermen (in both wills) are adult children.

On first death, surviving spouse continues to live alone in house (matrimonial home) and we'll assume, doesn't ever go into care or downsize.

On second death, Life Interest Trust ends and assets of both parents distributed  in line with their respective wills.

Am I correct in my understanding that irrespective of any increase in the value of the house after the first death, no Capital Gains Tax would be payable on either estate because the Trustees of the Life interest Trust could claim PRR under TCGA92/S225 and the beneficiary of the Life Interest trust (the 50% co-owner who was the second to pass away) claims PRR under S222?

I found these references on the HMRC website and it would be helpful to know if I am understanding them correctly without having to refer back to solicitors.

Many thanks.

A claim for relief under TCGA92/S225 would only be in point in the event of  either a sale of the principal residence during the lifetime of the life tenant, or a voluntary termination of the trust by the life tenant in favour of the remaindermen.

There is no CGT arising by reason of the death of the life tenant due to the fundamental requirement that all assets personally owned by the life tenant or in which they have a life interest  and where  IHT maybe chargeable thereon, will receive a CGT free uplift which erases all accrued gains up until death.

This provision also applies to the death of the first spouse where their 50% interest in the house receives a CGT free uplift to market value on first death, leaving the 50% trust interest in the house with an elevated base cost for CGT purposes.

So two separate reasons why the private residence may avoid CGT either during the life tenant's lifetime ( s225) or termination of the trust on death where IHT is then in point.

ahfat41

My understanding is whoever inherited the property and decided to sell on second death, there will capital gain tax. Ask ChatGPT.

ahfat41

You might find this useful unless the info is not correct.I was led to believe there will be no CGT with IPDI. Also found out on second death the whole property will be calculated for IHT not 50%.

Upon the death of A, the full ownership of the residential property (previously held 50/50 between M and A will pass to the children named as remaindermen in both wills.

The property is inherited at its full market value as of the date of M death (the ‘probate value’). No Capital Gains Tax (CGT) is due at this point.

2. If the Children Sell the Property in Future:

If the property is sold in the future, CGT will be calculated on the difference between the sale price and the market value at the time of inheritance (probate value). This gain is taxable.

As the property is not the children’s main residence, Principal Private Residence Relief (PPR) will not apply

thingswerentthisbadinmyday

poseidon1 said:

This provision also applies to the death of the first spouse where their 50% interest in the house receives a CGT free uplift to market value on first death, leaving the 50% trust interest in the house with an elevated base cost for CGT purposes.

Thank you for taking the time to reply.

I hope you don't mind me clarifying this particular point/comment with you, particularly in view of the subsequent reply from another forum member,

I now understand that on the first death, there is a CGT uplift to market value of the house. I think I was already aware of this but thank you for confirming.

If we assume that the house is worth (say) £600k on first death and is owned tenants in common 50/50, then the market value of the deceased's share would be £300k (at the time of first death).

If the Life Interest tenant (also 50% co-owner) then lives in the house for (say) 5 years and at the time of the second death, the house's market value has increased from £600k to £800k, (the first deceased's share of the house now having increased from £300k to £400k), I am unsure as to whether there is a potential CGT liability of £22.5k - being CGT of 24% on the "gain" of £100k - less Trustees' annual CGT limit of £1500.

Does this look correct or I have completely misunderstood?

Thank you again for taking the time to engage in this discussion.

Keep_pedalling

thingswerentthisbadinmyday said:

poseidon1 said:

This provision also applies to the death of the first spouse where their 50% interest in the house receives a CGT free uplift to market value on first death, leaving the 50% trust interest in the house with an elevated base cost for CGT purposes.

Thank you for taking the time to reply.

I hope you don't mind me clarifying this particular point/comment with you, particularly in view of the subsequent reply from another forum member,

I now understand that on the first death, there is a CGT uplift to market value of the house. I think I was already aware of this but thank you for confirming.

If we assume that the house is worth (say) £600k on first death and is owned tenants in common 50/50, then the market value of the deceased's share would be £300k (at the time of first death).

If the Life Interest tenant (also 50% co-owner) then lives in the house for (say) 5 years and at the time of the second death, the house's market value has increased from £600k to £800k, (the first deceased's share of the house now having increased from £300k to £400k), I am unsure as to whether there is a potential CGT liability of £22.5k - being CGT of 24% on the "gain" of £100k - less Trustees' annual CGT limit of £1500.

Does this look correct or I have completely misunderstood?

Thank you again for taking the time to engage in this discussion.

No, there is no CGT liability as for tax purposes the whole house is beneficially owned by the surviving spouse. The uplift in value could however take the surviving spouses’ estate into IHT territory. 

poseidon1

Keep_pedalling said:

thingswerentthisbadinmyday said:

poseidon1 said:

This provision also applies to the death of the first spouse where their 50% interest in the house receives a CGT free uplift to market value on first death, leaving the 50% trust interest in the house with an elevated base cost for CGT purposes.

Thank you for taking the time to reply.

I hope you don't mind me clarifying this particular point/comment with you, particularly in view of the subsequent reply from another forum member,

I now understand that on the first death, there is a CGT uplift to market value of the house. I think I was already aware of this but thank you for confirming.

If we assume that the house is worth (say) £600k on first death and is owned tenants in common 50/50, then the market value of the deceased's share would be £300k (at the time of first death).

If the Life Interest tenant (also 50% co-owner) then lives in the house for (say) 5 years and at the time of the second death, the house's market value has increased from £600k to £800k, (the first deceased's share of the house now having increased from £300k to £400k), I am unsure as to whether there is a potential CGT liability of £22.5k - being CGT of 24% on the "gain" of £100k - less Trustees' annual CGT limit of £1500.

Does this look correct or I have completely misunderstood?

Thank you again for taking the time to engage in this discussion.

No, there is no CGT liability as for tax purposes the whole house is beneficially owned by the surviving spouse. The uplift in value could however take the surviving spouses’ estate into IHT territory. 

Concur with Keep_pedalling on this. The market value uplift on 1st death is only relevant in the event of a sale during Life tenant's life time in which case s225 comes into play to eliminate all CGT.

On 2nd death the life tenant's beneficial interest in 100% of the home ( inclusive of the trust) receives the CGT  free uplift to £800k ( in your example).

Remaindermen only have CGT exposure thereafter in the event of any further capital appreciation beyond the £800k uplift. A pretty generous provision all things considered.

thingswerentthisbadinmyday

Keep_pedalling said..

No, there is no CGT liability as for tax purposes the whole house is beneficially owned by the surviving spouse. The uplift in value could however take the surviving spouses’ estate into IHT territory. 

Many thanks for the clarification. I appreciate your taking the time to reply.

thingswerentthisbadinmyday

poseidon1 said:

Keep_pedalling said:

thingswerentthisbadinmyday said:

poseidon1 said:

This provision also applies to the death of the first spouse where their 50% interest in the house receives a CGT free uplift to market value on first death, leaving the 50% trust interest in the house with an elevated base cost for CGT purposes.

Thank you for taking the time to reply.

I hope you don't mind me clarifying this particular point/comment with you, particularly in view of the subsequent reply from another forum member,

I now understand that on the first death, there is a CGT uplift to market value of the house. I think I was already aware of this but thank you for confirming.

If we assume that the house is worth (say) £600k on first death and is owned tenants in common 50/50, then the market value of the deceased's share would be £300k (at the time of first death).

If the Life Interest tenant (also 50% co-owner) then lives in the house for (say) 5 years and at the time of the second death, the house's market value has increased from £600k to £800k, (the first deceased's share of the house now having increased from £300k to £400k), I am unsure as to whether there is a potential CGT liability of £22.5k - being CGT of 24% on the "gain" of £100k - less Trustees' annual CGT limit of £1500.

Does this look correct or I have completely misunderstood?

Thank you again for taking the time to engage in this discussion.

No, there is no CGT liability as for tax purposes the whole house is beneficially owned by the surviving spouse. The uplift in value could however take the surviving spouses’ estate into IHT territory. 

Concur with Keep_pedalling on this. The market value uplift on 1st death is only relevant in the event of a sale during Life tenant's life time in which case s225 comes into play to eliminate all CGT.

On 2nd death the life tenant's beneficial interest in 100% of the home ( inclusive of the trust) receives the CGT  free uplift to £800k ( in your example).

Remaindermen only have CGT exposure thereafter in the event of any further capital appreciation beyond the £800k uplift. A pretty generous provision all things considered.

Thank you for the confirmation. It’s only for background info at the moment - falls into the “good to know - just in case” category.
Our circumstances mean we could one day be faced with a situation where the “Life Interest Tenant” only has a “Life Interest” for a fixed period of time, but that is an issue for another day.
Thanks to both @poseidon 1 and @keep_Pedalling for their input.