When a transfer of a residential property is contemplated into a discretionary trust when the property value at the time is in excess of the Inheritance Tax nil band currently £325,000, serious thought will need to be given before any transfer is undertaken as to the implications of Capital Gains Tax and the availability or not to the trustees the claim for Principle Private Residents Relief (PPR) when selling the property in the distant future.
A transfer into a discretionary trust is a chargeable lifetime transfer for IHT purposes this means that the transfer would be immediately chargeable to IHT on the amount over the IHT nil rate band (£325,000) and would be taxed at 20%. If the settlor were to die within 7 years of the transfer into the discretionary trust an additional 20% could be payable as the IHT rate on death is 40%.
As far as capital gains tax is concerned a claim under TCGA 1992 s260 could be made to hold over the gain on the way into the trust because this is a chargeable lifetime transfer within the meaning of the Inheritance Tax Act 1984 and is not a potentially exempt transfer (PET).
The trustees could be eligible to claim principle private residence relief under section 225 of TCGA 1992 if they meet the normal qualifying conditions.
The qualifying conditions under TCGA 1992 s225 is that the beneficiary is permitted to live in the property under the terms of the trust deed, Principle private residence relief cannot be claimed when an s260 claim has been made, I.e.. the trustees cannot claim relief on a disposal (the later disposal) if the acquisition cost of the property has been reduced by a gift hold-over relief claim under s260 made by any person on an earlier disposal.
Special transitional rules may allow some private residence relief to be claimed by the trustees if gift hold-relief under s260 is given in respect of a transfer to the trustees which was made before 10 December 2003
The information contained in this article is for general information purposes only and does not constitute advice, Whilst we endeavour to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose. We recommend that professional advise should be taken from a suitably qualified expert before undertaking any action.