Gift of reversion and lease into trust by two different people - later PPR

Gift of reversion and lease into trust by two...

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We are dealing with a situation where a lease for life is in place that was created in the year 2000. Son bought the land and paid for the house to be built on it. The funds used were not provided by the parents.

He then (on the basis of poor advice) leased it to his parents for a peppercorn on terms that brings the arrangement squarely within section 43 IHTA 1984. Costs associated with the land and works in 2000 were approx £1M. Current value is approx £2M.

The clients wish to avoid the adverse IHT consequences of section 43 IHTA 1984 whilst continuing to occupy the property as their main residence. The relationship between parents and son is healthy and the parents are in good health but in their 70s. One idea that has presented itself is that son settles the freehold on a relevant property trust (himself and parents as trustees) that is not settlor interested and makes a CGT holdover election. The parents could then choose to surrender the lease knowing that they are beneficiaries under the trust. The parents are prepared to accept IHT risks associated with not surviving for 7 years and may consider insuring this.  However, they are not prepared to contemplate any solutions that involve them paying a market rent for occupying the property.

I think the parents' have made a gift with reservation (or, if not, are caught by the pre-owend assets tax).

When the trustees eventually sell the property, s226 TCGA is relevant. Had the son settled the unencumbered freehold, there would be no doubt that there'd be no PPR relief. However, the trustees will have acquired the reversion from son (who held over his gain under s260), and the lease from parents (who didn't hold over). The trustees are, of course, disposing of one asset. I don't think s226 envisages this situation at all, and I don't think I can guarantee to the client that claim for PPR relief on the part of the gain that arose from the lease would be successful. (If one cold even work out how to calculate that - perhaps on the basis of the trustees' acquisition values).

Does anyone have any views/ideas?

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