Capital Gains Tax on sale of a property held by a Protective Trust

Unicornucopia

My mother, in her will, left a sum of money to be held in a Protective Trust for my sister who had mental health issues, the Trust becoming effective upon my mother's death. The will created myself and my brother as Trustees "to hold the income thereof upon protective trusts for the benefit of my daughter xxx for her lifetime" and "subject thereto to hold the capital and income thereof for my sons..." and "... my Trustee may at any time raise capital out of the said [sum] for the purpose of paying it to or applying it for the benefit of my said daughter xxx" 

The Trust was registered with HMRC and subsequently purchased a property costing more than the sum left in the will (I topped it up with personal funds) and the property became the sole asset of the Trust. The property was let to my sister at a peppercorn rent until she died earlier this year. The Trust has now sold the property (December 2025) for a profit. I fully expected to pay CGT at 24% on the profit less £3,000 (vulnerable beneficiary reduction) but came across this Gov.uk guidance: "Private Residence Relief on the disposal of settled property - The Trustees of a settlement may claim relief ... if they dispose of the only or main residence of a person entitled to occupy that residence under the terms of the settlement"

Is CGT payable or not based on the information above? (I fully expect it is but don't want to pay any tax unnecessarily)

poseidon1

It seems you may have complicated your mother's will trust by becoming a co settlor of the trust by virtue of your personal gift to top up the funds needed to buy the house. That said:

1) Did you actually execute a formal deed of gift, which evidenced your voluntary addition to the trust?

2) How much was your contribution?

3) I see the original will trust was registered with HMRC, but did you make a formal report of your gift ( if it was a gift) to the trust at any time?


What has been helpful in addressing the general tax postion of the trust following your sister's demise is your post in 2020 when the property was acquired - see below

https://forums.moneysavingexpert.com/discussion/6184243/stamp-duty-on-a-property-purchase-by-a-trust#latest

You correctly surmised the trust as being a type of life interest trust, that being the case did you complete an IHT 400  notifying HMRC of the market value of the property as part of your sister's estate for IHT purposes?

Did the property valuation exceed your sister's NRB of £325k, if so have you paid the relevant IHT on the excess?

As for CGT, as you know when a life interest beneficiary dies, all property gains are erased at date of death so only the gains accruing after death are assessable.

The question therefore arises with regard to the funds you contributed. If this was intended to be an addition to your mother's settlement and held subject to the same protective trusts, then the entire gain is erased on your sisters death. This outcome seems to be supported by your statement in the above post  ie '' ... (I topped it up with personal funds) and the property became the sole asset of the trust. ''   If this was the case, it begs the question whether your contribution was gifted on the basis of a 'resulting trust' in your favour following your sister's death ( a deed as in question 1) above should hopefully clarify this point).


However, if instead you structured your contribution as you holding  separate beneficial ownership in the property alongside your mother's trust ( ie as tenant in common with the trust), then you have left your defacto share exposed to CGT based on a percentage of the original purchase price with no market value  uplift accorded to that share.  

In passing you further confuse the position by going on to state that the property was let to your sister at a peppercorn rent, which is entirely unnecessary and frankly at odds with the express terms of your mother's will which grants your sister an unrestricted interest in possession (IIP).

 Frankly I would be inclined to treat that so called lease as otiose, in purporting to override her IIP rights, unless it was your intention the lease actually related to your 'separate' interest in the property. If the structuring of this matter was advised on and executed by a solicitor, I would hazard a guess they did not really know what they were doing.

Some further clarification required here, to assess the CGT outcomes for you and the trust.

Unicornucopia

Thanks Poseidon1 for your detailed response.

poseidon1 said:

1) Did you actually execute a formal deed of gift, which evidenced your voluntary addition to the trust?

2) How much was your contribution?

3) I see the original will trust was registered with HMRC, but did you make a formal report of your gift ( if it was a gift) to the trust at any time?
  

1)  I did not
2)  26% of the property purchase price
3)  The amount of the gift was reported on the SA900 for 2020/21, the year the property was purchased.

You correctly surmised the trust as being a type of life interest trust, that being the case did you complete an IHT 400  notifying HMRC of the market value of the property as part of your sister's estate for IHT purposes?

Did the property valuation exceed your sister's NRB of £325k, if so have you paid the relevant IHT on the excess?

Believing the property to be the asset of the Trust and not my sister I did not. It appears I may be incorrect in my belief. Although Zoopla is not necessarily the most accurate of market valuations I did make a note of their valuation as at the date of death. The property was subsequently marketed and sold £24K lower than the Zoopla valuation.

The property (Zoopla) valuation at date of death was well below the NRB

The question therefore arises with regard to the funds you contributed. If this was intended to be an addition to your mother's settlement and held subject to the same protective trusts, then the entire gain is erased on your sisters death. This outcome seems to be supported by your statement in the above post  ie '' ... (I topped it up with personal funds) and the property became the sole asset of the trust. ''   If this was the case, it begs the question whether your contribution was gifted on the basis of a 'resulting trust' in your favour following your sister's death ( a deed as in question 1) above should hopefully clarify this point).

The funds contributed were always intended to be in addition to our mother's settlement and I never expected repayment other than in the sad case of our sister's death at which point it would be split between myself and my brother equally under the terms of our mother's will. 

In passing you further confuse the position by going on to state that the property was let to your sister at a peppercorn rent, which is entirely unnecessary and frankly at odds with the express terms of your mother's will which grants your sister an unrestricted interest in possession (IIP).

My error for misunderstanding the situation. The £10 peppercorn was actually never sought from, nor paid by my sister which does render it, as you say, otiose.

Your follow up comments would be much appreciated. Many thanks.

poseidon1

I note the trust property value was below the NRB. However if it was above £250k then your sister's estate does not qualify as an excepted estate and you are required to submit form IHT 400 - see guidance below


https://www.gov.uk/valuing-estate-of-someone-who-died/check-type-of-estate

The accompanying form for the trust will be IHT 418, and form D36 for the property.

You will be reporting the sale proceeds on the D36, but since you did not obtain a formal valuation at date of death it's possible the sale figure will be accepted by HMRC in lieu, assuming you sold within 1 year of death.

If the flat value was below £250k you can likely getaway with sole  submission of IHT 418/D36 as trustee rather than PR for your sister.

If you do end up with the sale figure as the trust termination property value, then subsequent CGT reporting will either be at no gain or loss, or at a loss equal to your sales costs ( agents /solicitors fees).

As well to note you sold the property as 'bare trustee' on behalf of  you and your brother as absolute owners. Accordingly the CGT reporting is not at trust level but by you and your brother individually. It is in that capacity you each will make a CGT loss claim if that arises from your ultimate CGT computations.

It maybe some time before you hear back from HMRC with regard to the IHT reporting and acceptance of the property valuation figure, so you may end up having to submit estimates for the purposes of the 60 day CGT reporting period.

The final SA900 trust tax return will merely report the termination of the trust at date of your sister's death at box 21.4 at page 11.

Hopefully this covers the main tax compliance and final trust administration points.

Unicornucopia

Hopefully this covers the main tax compliance and final trust administration points.

Many thanks for your most helpful and detailed response, you're a star.