Discretionary Trust and Capital Gains implications

cindybagwell

I wonder if anyone can give me any advice, my father died in 2005 and a discretionary trust was set up for his half of the house for myself and my sister. My mum lived in the house and died in 2024 and I am now being told that I am liable to pay capital gains tax on the property. Would this be for his half (ie the profit made on 50% of the property from 2025 until the house was sold in 2026) or on the full amount of the house sale? It was valued at £263,000 in 2005 when the trust was set up and was sold for £790,000 so I am really concerned that it is going to cost thousands. Also, I have ready somewhere that I can deduct expenses (ie solicitors, estate agents) - is this the case?

I am really confused as not sure if I am only paying on my dad's half or on the full amount.

I would really appreciate any help and will probably have to pay someone to sort this out but just wondering if this is more simple than I think and if I can sort this out on my own without more expense.

Many thanks

Cindy

poseidon1

A couple of questions since you may have other problems to address separate from CGT -

1. What happened to the trust when your mother died? ( ie was it terminated or still currently in exsistence?)
2. Did you deal with probate of your mother's estate yourself or assisted by a solicitor?
3. If assisted by a solicitor did they provide any tax advice appertaining to the trust by way of IHT and CGT?

The reason for the questions and especially with regard to professional advice, is I don't believe you are equipped to handle the complexities of the CGT reporting for the trust and your deceased mother's personal estate ( two separate tax calculations with two separate base costs).

Worse still if the trust still exsisted in 2025 ( ie not terminated earlier), it is highly likely there was a 10 year IHT charge at 6% of the value of the trust asset exceeding the £325k nil rate band.

So assuming the trust was indeed discretionary as described ( and not a life interest trust), you not only have two complex CGT calculations following the 2026 house sale, but also a potential 2025 trust inheritance tax return you may have failed to file ( assuming you are the trustee with this responsibility), and a likely IHT liability upon which interest and penalties may now be running on any tax outstanding.

Therefore, confirm whether there is a competent professional tax adviser or solicitor in the background who you can refer to. I fear you will have an extremely steep and stressful learning curve if you attempt to handle these matters by yourself.

cindybagwell

Hi there

Thank you for your in depth reply. When my mum died, we had to fill in forms with an accountant which were for the 10 year charges (Forms IHT100d) and paid 2 x 10 year charges (2005 - 2015 and 2015 - 2025) although the first one didn't have a charge.

We used a solicitor for mum's will and get grant of probate and the same solicitor gave us an accountant to deal with my dad's trust. It had to be registered, the outstanding tax be paid and then deregistered. Our solicitor didn't give us any advice, just put us in touch with the accountant.

The accountant has offered to provide a quote for dealing with this so it may be the case that I will have to use them as it is far too complicated for me to understand.

I basically want to know (as a starter) if I will be liable for CGT on the whole amount of the sale price or just my dad's half. Also not sure if I need a tax adviser rather than the accountant I am currently using.

Thank you Cindy

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81964091#Comment_81964091

I am very pleased to hear there has been comprehensive IHT compliance for the trust via an accountant with obvious competency in this field ( a very rare occurrence on this forum!).

The fact that the trust was later deregistered with HMRC strongly suggests it was terminated.

Do you recall a trust deed executed to this effect in favour of you and your sister?

The CGT effect of such a deed would have been to vest beneficial ownership of the trust's half share of the property in favour of you and your sister free and discharged from the trust, so that a subsequent sale of the property becomes a personal sale from each of you ( bringing into play each of your personal CGT exemptions).

Two things could have happened at date of termination. Either a notional trust gain on the property leaving the trust may have triggered a CGT taxable event, but with any gain calculated to take advantage of the very long period the property was your mother's personal residence (so minimal tax payable if any). Alternatively, the accountant could have made an HMRC CGT hold over election to hold over (defer) any trust gain into your hands so that CGT is calculated on eventual sale, based on that held over gain.

Either way in arriving at any taxable gain on sale, you are permitted to deduct all attributable sales costs from the proceeds ( ie, solicitors/estate agents fees), but if you decide to get the accountant to handle the computations and tax reporting for you, your sister and the estate ( if still in administration), then the accountant's fees are also allowable deductions from the proceeds.

Just for clarity, there is also a possible taxable gain accruing on your mother's personally owned half share at date of death in 2024 until the recent sale, hence a CGT computation required for the deceased estate , unless the estate's half share was assented to you and your sister at some point prior to sale.

Since the accountant has handled all prior tax compliance for the trust so far, I would certainly reccomend you use them to calculate and submit the CGT returns for all involved.

Also bear in mind that in addition to the online CGT returns required within 60 days of the sale, everyone will also have to submit formal self assessment tax returns, reporting the same gains. This enables HMRC to pore over the fine details of the online abbreviated CGT return, so worth discussing this aspect with the accountant also.

Given all these tax complications and subsequent compliance, hopefully the trust did assist in minimising IHT on your mother's residual estate.