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CGT Liability for Gift with Reservation

CGT Question

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I have a case under the following circumstances:- 

Property gifted into trust by grandmother to son and wife to hold as trustees for grandchildren when they reach 21 years old. this was in 1995. 

Title of property was transferred to trustees upon signing the trust in 1995 

declaration signed (by trustees) in 1995 to confirm arrangement that grandmother can remain in property with no rent until death or voluntary vacation. 

grandmother has now passed away

Value of total estate less than 325k so I understand IHT not applicable 

Would there be a CGT liability on the beneficiaries in this instance as I understand HMRC view such matters as substance over form. For all intents and purposes the property belonged to the grandmother just the title was changed in 1995. The trustees or beneficiaries have never benefited from legal ownership or possession/enjoyment of the property. I wonder if for tax purposes the trust may be disregarded and the property pass to the beneficiaries under the terms of the grandmothers will? 

legal title of the property is still in trustees names (it was never transferred out after grandchildren reached 21) 

Physical possession of property is now with trustees/beneficiaries as of 1st April 21 

Any advice on this situation greatly recieved. 
 

 

 

 

 

Replies (13)

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By Tax Dragon
10th Apr 2021 13:01

I've read your OP twice to see if I could spot the CGT question, as I know a thing or two about CGT and could probably help. But... please, what's the question?

Re passing under will not the terms of the trust... that's a legal question but... no, of course not - if the trust was properly constituted, it must be followed. Or, at least, people will have power to sue if it's not followed. (Take legal advice if there's uncertainty.)

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By A D Sharpe
10th Apr 2021 13:08

Quote:

I've read your OP twice to see if I could spot the CGT question, as I know a thing or two about CGT and could probably help. But... please, what's the question?

Re passing under will not the terms of the trust... that's a legal question but... no, of course not - if the trust was properly constituted, it must be followed. Or, at least, people will have power to sue if it's not followed. (Take legal advice if there's uncertainty.)

Thanks

The terms of the will are the same as the terms of the trust (all estate to beneficiaries (the same grandchildren) so there would be no challenges

My question is :- Would there be a CGT liability on the property when the grandchildren take ownership? The actual dates of the property passing to the grandchildren is not clear as they haven’t had legal possession (via title) and have only 1st April 21 received enjoyment and possession

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By Tax Dragon
10th Apr 2021 13:08

Actually I've realised what I think you mean, just you've expressed it in a way that I don't think any accountant would. Answer's still no, but (depending on what the documents say), the same outcome might be provided by legislation. Nothing to do with substance over form, all about the law.

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By A D Sharpe
10th Apr 2021 13:17

Thank you

For CGT calculations towards the beneficiaries - how would this be calculated?

Would this be calculated from the value of property when the trust was set up and title transferred to trustees in 1995 and then the sale price which will occur this year

or

from when they took possession and benefit of the property in April 2021 to when they dispose of the property through sale this year?

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By Hugo Fair
10th Apr 2021 13:53

To save the potential apoplexy at TD's abode ... you've now introduced a completely new 'fact' (the intention of the beneficiaries to sell the property).

So is your CGT question solely as per the two scenarios now outlined (which have nothing to do with "grandmother has now passed away .. Value of total estate less than 325k so I understand IHT not applicable .. Would there be a CGT liability on the beneficiaries in this instance"?

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By Tax Dragon
10th Apr 2021 14:09

No apoplectic reactions here, Hugo. I could tell from the question that the querist was a visitor to this forum. I can be surprisingly polite with and positively helpful to visitors. It's when people that should know better don't that I can choke on my mushrooms.

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Replying to Hugo Fair:
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By A D Sharpe
10th Apr 2021 14:10

Thank you for the reply

Yes the intention of the beneficiaries is to sell the property - I am trying to establish the tax liabilities which will arise from doing this.

The will and trust mirror each other, all estate to pass to the same beneficiaries.

For CGT, should I calculate the start value in this instance for the beneficiaries as when the property was initially gifted (with reservation) in 1995 or should this be calculated from the point of death when the beneficiaries had possession and enjoyment of the property. The later will of course produce less CGT liability, the former significantly more.

The property value in 1995 would have been 40k , today’s value (when somebody would be around 210k

Thank you so much for your advice

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Replying to A D Sharpe:
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By Tax Dragon
10th Apr 2021 14:04

Well, assuming the trust subsisted until grandmother's passing, and assuming her occupation was under the terms of the trust, then there's a deemed disposal by the trustees on her passing. If her passing also terminated the trust, the remainderpersons are treated for CGT as owning from that date.

If the above applies (which I could tell you if I read the trust documentation, but without that I'm hypothesising) the more urgent question concerns the deemed disposal on grandmother's passing. The trustees will need to establish whether this triggers a tax charge. I could tell you that from a read of the documentation too.

Now, I don't suggest that you post the documentation here. Don't be stupid. However it might well be worth engaging an accountant, or preferably a TEP (some of this is a bit niche), to have a read. If my guesses so far (and a couple more I haven't mentioned but have made) are correct, then there should be no tax - but a claim is needed to achieve that outcome, so it's not something to ignore.

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By Tax Dragon
10th Apr 2021 14:23

One last point (for completeness only)... if grandmother did occupy under the terms of the trust, then there is no reservation of benefit. The property would be in her IHT estate as beneficiary if the trust. (It changes how you would fill in the forms, that's all. If there's no tax, I figure you ain't filling in the relevant forms so... not an issue on your case.)

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Replying to Tax Dragon:
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By A D Sharpe
10th Apr 2021 14:33

Quote:

One last point (for completeness only)... if grandmother did occupy under the terms of the trust, then there is no reservation of benefit. The property would be in her IHT estate as beneficiary if the trust. (It changes how you would fill in the forms, that's all. If there's no tax, I figure you ain't filling in the relevant forms so... not an issue on your case.)

Thank you for confirming - this make sense

The trust document confirms transfer of estate from grandmother to trustees

A declaration signed by trustees is then adjoined (signed on same day as trust document) stating grandmother has right to live in the property until death or voluntary vacation without rent charge.

It would lead me to question the actual value of setting this trust up in the first instance and why the acting solicitor did as even with the trust it will form part of her IHT (which will be nil liability as estate value below 325k)

The beneficiaries were worried they would be liable for CGT based on value of property in 1995 vs current market value which would have been substantial, however from comments on here this should not be applicable?

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Replying to A D Sharpe:
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By Tax Dragon
10th Apr 2021 14:45

I can't go so far as to say that without reading for myself. And a claim is needed even if the interpretation is correct. As I'm repeating now, I'll leave you in Hugo's safe hands.

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By Tax Dragon
11th Apr 2021 07:56

Reread this thread this morning. Noticed a couple of points. First, a question... were all the grandchildren 21 when grandmother died? (Obvs all those living in 1995 were, but others may have come along.)

A D Sharpe wrote:

A declaration signed by trustees is then adjoined (signed on same day as trust document) stating grandmother has right to live in the property until death or voluntary vacation without rent charge.

I skipped over that before. I don't quite know why it'd be done that way, but what it suggests to me is that the trust was set up as discretionary. The question then - and this is key, I think - is whether the same-day declaration created an interest in possession for grandmother. No offence, but you do not demonstrate the understanding to be able to answer that by yourself. I'll repeat my recommendation to have a TEP give the docs a once-over. (In fact, if you are acting in your professional capacity, I'd suggest you really don't have a choice about that. If this is your own family you are talking about, you are one of the trustees and there's been a personal loss, I'm sorry for your loss. I would still encourage you to see a TEP, but ultimately that's up to you.)

A D Sharpe wrote:

It would lead me to question the actual value of setting this trust up in the first instance and why the acting solicitor did as even with the trust it will form part of her IHT (which will be nil liability as estate value below 325k)

This is a very good and interesting question. (It's what brought me back to this thread, as I think it must have lodged itself at the back of my mind.) What would possess someone who appears to be at no risk of IHT to carry out what one might presume to be IHT planning? If it was IHT planning, what was it supposed to achieve? The GWROB rules existed in 1995. The IHT treatment of IIP trusts had not been overhauled (that was in 2006). Lady Ingram was I think still going through the courts (btw, if this was Lady Ingram planning, then you can ignore most of what I've said, vis-à-vis your scenario).

Was it instead care home fee planning? Was grandmother worth a lot more in 1995 than when she died? What happened to the rest of her wealth?

A D Sharpe wrote:

The beneficiaries were worried they would be liable for CGT based on value of property in 1995 vs current market value which would have been substantial, however from comments on here this should not be applicable?

Yes, subject to the questions and points in this post, I think the beneficiaries are treated as acquiring at market value when the property comes out of trust - whether that was on grandmother's death or another time. The trustees of course have a disposal when the property comes out of trust. It is the tax treatment of that disposal that you, or at least the trustees, need to establish.

I'd be interested in the answers to some of these points, if you do take advice and would be happy to post back. Or PM me [first time I've ever said that! I must be finding this interesting], if you would like to carry on the discussion one to one.

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Replying to Tax Dragon:
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By A D Sharpe
11th Apr 2021 09:43

Thank You - I have sent you a DM with further information

Thank you again for your help!

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