Treatment of Trusts

Treatment of Trusts

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Do any of the proposed changes have any bearing on the Trustees of a Discretionary Trust claiming PPR under section 225 TCGA, where a beneficiary is allowed to occupy a property under the Trust Deed.

If the Trust was classified as a Settlor Interested Trust, due to minor children being included in the class of beneficiary, does this change the position in any way.
PAUL WRAY

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By wdr
05th Apr 2006 13:10

My brother tells me it is a brave woman who would assume anythin
But on the face of it there is no connection btween the IHT rules[including the now largely discredited SP 10/79] and the provisions of TCGA s225.

But have you considered the consequences of a change in the identity of beneficiaries who occupy a trust property. Trust owns house worth £500 K. Beneficiaries include borther and sister Adam and Betty.
Adam occupies the house today and wants to move out on 6th April 2006. Under the new Alice in Wonderland world in which we live, when Adam moves out , there is an immediate IHT charge of about £43,000. What good is your CGT exemption then?
Why the IHT charge?
Under BN 25, the cessation of an interest in possession is the creation of a new 'relevant property' trust. That is chargeable to an immediate charge of 50% of the death rate. The nil Rate band is £285,000, so the immediate charge just because Adam moves out is £500.000 minus £285,000 @20% is £43,000.
It gets worse. It takes seven months to redecorate before Betty moves in.

Now there is an exit charge?
You have been warned.

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By Paul Soper
06th Apr 2006 11:32

Not so fast there grumpygit's daughter
Exit charges anticipate principal charges and are time apportioned from 6 April 2006 in any event.

The house is worth £500,000, the exempt band is £285,000 leaving £215,000 chargeable. This is charged at 30% of 20% - 6% = £12,900 and scaled down on a time basis - if it occurred after a year in 2007 this would be 4/40ths of that figure - £1,290, and in any event if Adam moves out and takes his sshare the liability would be further limited, and why, in any event, in any event, is moving out deemed to be a cessation of interest anyway - that would only apply where funds are extracted from the settlement.

I know the rules are incredibly horrid but lets not create problems where there aren't any.

What may be more serious is that where a settlor retains an interest the gains may now be regarded as his rather than the trusts and that WOULD prevent relief under s225. That is something to worry about.

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By User deleted
06th Apr 2006 12:16

Sorry Paul, I don't agree.on either point
This is an entry , not an exit charge.

You need to look at the rules for the creation of a 'relevant proprty' trust in IHTA.


When the IIP ends[when Betty leaves the house in my example], that is a transfer of value by the individual who had the IIP.

The confusion is that although the decennial charge [the 6% charge]is based on the original date of the settlement, that has no bearing on the charge under s2, which is the transfer of value which takes place on the ending of the IIP.

The creation of a relevant property trust is the occasion of a full life time charge.

Sadly this has already happened to one client, even without the new BN 25 rules , where an elderly widow who lived in a house owned by a discretionary trust[which incidentally did enjoy TCGA s225 relief-the subject of the original query] had to leave it and enter a nursing home

I don't agree on the s77 point either. The first stage is to compute the chargeable gain as if it had accrued to the trustees, who can claim s.225 relief. Once they have made that claim then the gain[now presumably reduced to nil]is treated as a chargeable gain accruing to the settlor- but it is still 'nil'.

Nothing in s77 denies the Trustees the right to make the s225 claim, even if the benefit flows to the settlor

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