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Use of Discretionary Trust to mitigate CGT

Use of Discretionary Trust to mitigate CGT

The scenario: Husband & Wife own a house which they bought 10 years ago that they have never lived in. The house is currently let to their son. The parents wish to sell the house and pass the proceeds to their son.

As the parents are not entitled to any PPR relief the tax on the gains is going to be significant.

I have an idea in my head how to mitigate the tax but it seems too easy so I'm sure I'm missing something. Here goes'..parents transfer the house to a discretionary trust, the market value of the property is less than the IHT threshold and there has been no transfers in the last 7 years so no immediate charge to IHT. The parents elect to holdover the gain, i.e. the trust inherits the base cost of the asset, and nominates their son as the beneficiary.
After a period of time the trust passes ownership of the house to the son and again elects for holdover. The son sells the house as his PPR and incurs no CGT.

Problem, I feel the revenue could look at these as linked transactions designed to avoid tax and could overrule the use of the discretionary trusts and the holdover relief.

Should the house be held in the trust for a particular minimum period of time?

Any thoughts?

Robert Barr


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By NeilW
04th Jul 2005 13:18

There comes a point
When clients have to pay some tax.

This is probably one of those times.


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04th Jul 2005 16:19

Not necessarily...
What if the parents and the children were to swap houses for a period prior to sale.

You may get the benefit of 3 years PPR relief + a possibility of doubling up on this with let property relief. With 30% taper on top this may reduce the gain significantly.

The parents could even say gift half of the property to the son pre 5/4 and the other half post 5/4 to get 4 annual exemptions.

Its very aggressive but could work?

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By rwbarr
04th Jul 2005 10:32

any other ideas.
Thanks for your comments.

This route obviously is not an option. As far as I can determine there is no way round this problem. Any ideas?

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By NeilW
01st Jul 2005 16:03

Settlor Interested Trust
Isn't this a settlor interested trust, which prevents the initial holdover?

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01st Jul 2005 16:36

December 2003
The scenario which you outline was common practice before 10 December 2003. On that date the 2003 Pre-Budget report(subsequently in the Finance Act 2004) included legislation which restricted the ability to claim holdover relief and PPR. Where the beneficiary (in this case the son) obtains the property with the benefit of a holdover claim, he cannot then claim PPR relief on his disposal.

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