Extension of TCGA 1992 s 225

Extension of TCGA 1992 s 225

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We have a client who sold a property (in her own name) in October 04. The property was transferred to her in two parts - one half under the terms of her father's will in August 2001, the other half was gifted to her by her mother in January 2002. Her mother continued to reside there up until the property was sold. Our client has never resided there, hence no automatic PPR for last 3 years. However, as the mother had an interest in possession in the property by virtue of her living there (which will mean that the property will remain in her estate for 7 years following the sale), does a constructive trust exist and s 225 apply, exempting the gain on sale? Isn't our client effectively granting mother a licence to occupy the property by letting her live there rent free.
My worry is that if s225 does not apply, CGT will be payable on the disposal and IHT payable if mother dies (as is highly likely) in next few years.
Additional info: Fathers will was varied after his death to sever joint tenancy with mother, create tenancy in common, and pass his interest in the property directly to our client. In the original will, the mother became absolutely entitled to the whole property.
Ian Myers

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By michaelblake
10th Aug 2005 17:08

Complex area

This is a very complex area, and I would suggest that a correct analysis may not be possible without knowing what the terms of what was agreed between mother and daughter when the arrangements were put in place and having a legal opinion as to whether the terms of that agreement amount to an implied trust.

For inheritance tax purposes the value of a half share in the property will fall into mothers estate because of the gift with reservation provisions, unless she paid a market rent for her occupation. She would have to live for seven years after that reservation comes to an end before the gift falls outside of her estate. The resrvation would come to an end when the property was sold, but might continue if the sale proceeds were used to purchase another property that she occupied. The Pre Owned Assets legislation could also apply in this situation if the GWR rules do not. Whether or not she has an "interest in possession in settled property" within the meaning of IHTA 1984 Section 49 is irrelevant, therefore (and could be a matter for some debate).

It is possible that the value of the property could be included in mothers estate without there being any relief due under s225. If there is no formal trust document governing mothers occupation then a trust may only be implied by reference to the facts, and law. The law governing implied trusts is complex and you would need to take advice from a lawyer suitably qualified in land and trust law.

There is guidance on how the Revenue view the position, at CG 34401 and CG65410, although the latter is not terribly clear in my view and as the guidance itself notes is only trying to give a broad outline of some very complex topics.

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