CGT on Discretionary Trust Residential Property

The interaction of PRR

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A mother with 3 sons set up a discretionary trust in 2015, the only asset being a residential property which has been commercially let. (On 01/04/2015 one of the sons became the rent paying tenant). He and the 2 brothers are Trustees. It is planned for the Trust to be wound up, the property to be valued and the rent paying brother to buy out the other 2.  I estimate the gross gain to be circa £180k.  I estimate the Private Residential Relief to be 54 months/102 months x £60k. Can someone indicate if I am on the right track? Also, does letting relief come into the equation?

Thanks

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By Tax Dragon
12th Sep 2023 15:29

I wasn't there, I wouldn't know, but the way you describe it it may well be that no relief is due.

The issue is that the beneficiary has been living in the property as a tenant (he pays rent), not as a beneficiary.

There may be better ways of doing this than that proposed. Do you have a tax advisor you exchange work with? Now might be a good time to bring them in on this one.

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Replying to Tax Dragon:
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By Justin Bryant
12th Sep 2023 15:35

Well spotted. And even if he were a B, you have this issue (which is a non-issue in practice as HMRC are relaxed about it):

LATA 1996 does not help beneficiaries of discretionary trusts. They must derive their entitlement to occupy under the terms of the trust. My understanding is that the settlor must grant these rights when setting up the trust (as in Sansom v Peay). The settlor would have rights of occupation as co-owner and so can pass on those rights through a suitably worded clause in the trust. Without such a clause, it seems doubtful whether a beneficiary can obtain rights of occupation since the trustees could not attempt to create the right themselves. They have no right of occupation which they can transmit to the beneficiary. However, these are points of property law for a suitably qualified person to elaborate on.
It may well be that the terms of HMRC Statement of Practice SP10/79 apply here in any event to give an interest in possession in the discretionary trust. Such an interest would have arisen when the declaration of trust was made, and therefore IHTA 1984, s 144 would apply to create an immediate post-death interest (IPDI) for the beneficiary. It would have been necessary for the executors to take careful steps to prevent this result if they did not wish to create an IPDI. Or, of course, they could contest SP 10/79 and, as a result, give us all an illuminating tax tribunal decision about it. — Tower.

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Replying to Justin Bryant:
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By Tax Dragon
12th Sep 2023 16:07

Not relevant ergo trolling... but that's interesting - thanks JB - and I'm going to join in...

I appreciate that a trust cannot occupy property, but I wouldn't have said that that was the same as not having the right to occupy. (Bit like fighting the oppressors for your right to have babies.) And if it has the right, it can grant that right to a beneficiary.

Or have I misunderstood the point?

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Replying to Tax Dragon:
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By Justin Bryant
12th Sep 2023 16:45

Yes; you misunderstand the point.

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Replying to Justin Bryant:
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By Tax Dragon
12th Sep 2023 17:06

Thank you - that makes sense. (Sometimes solicitors and accountants, or solicitors and tax advisors, or even solicitors tax advisors and accountants, should work together.)

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By More unearned luck
12th Sep 2023 17:49

There is much I don't understand:
Does "A mother with 3 sons set up a discretionary trust in 2015" mean that there are four settlors or one?
If PRR is due, why is it time apportioned?
If PRR is due why does it apply to 1/3rd of the gain only? (If it's a DT then no beneficiary has a fractional share and if its an IIP then presumably the tenant son is the only life tenant).
Re Justin's putative IPDI, who has died?

Check if there was a hold-over relief claim on the way in.

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By hmyers
15th Sep 2023 13:37

My apologies to all respondents to this question. The scenario and PPR calculation originally outlined was incorrect and misleading. The mother was, and still is the only Settlor. The son occupying the property is a Trustee and a Discretionary Beneficiary under the Settlement. He claims :
“I have been paying a modest rent to the trust but this has been essentially to cover basic maintenance and trust administration only. As well as being a trustee I clearly have a beneficial interest in the property. From what I can tell residential relief is available when properties in trust are transferred to a beneficiary, although there are obviously some qualifying conditions.”
In other words, he claims he is entitled to occupy the dwelling not as tenant, but as a Beneficiary. If we accept this, would a PPR claim succeed for the period from 01/04/2015?
Section 225 TCGA 1992 specifically extends PPR relief to allow Trustees to claim the relief on gains accruing to them on the disposal of settled property provided that, during the Trustees’ period of ownership, the property has been occupied as the only or main residence of a person entitled to occupy it under the terms of the settlement.
Does this mean the entire period of Trust ownership or just the period for which a PPR claim is made?
Many thanks

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Replying to hmyers:
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By richard thomas
16th Sep 2023 21:43

The crucial issue is what the trust documentation says about occupation. Do they give the son the right or not?

My puzzle is about why only 54/102 of the gain would be covered by a PRR claim. That suggests that the son, who started to occupy in 2015, hasn't been in continuous occupation, but there's no suggestion of that by the OP.

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By taxdigital
18th Sep 2023 08:20

If the trustees, subject to what is written in the trust documents, have allowed the beneficiary to occupy the property as a beneficiary obviously PPR should be available. However, I don’t understand this reference to the rent again and again in your posts.

hmyers wrote:

(On 01/04/2015 one of the sons became the rent paying tenant).

Thanks

hmyers wrote:

“I have been paying a modest rent

No PPR relief will be available if a relief under s.260 has been claimed (s.226A).

The base cost for the trustees will be the market value as on the date of settlement, subject to s.260(7) if in point.

Edit - as to PPR available this is obviously subject to the period the beneficiary has actually occupied it.

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Replying to taxdigital:
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By Tax Dragon
19th Sep 2023 13:05

taxdigital wrote:

If the trustees, subject to what is written in the trust documents, have allowed the beneficiary to occupy the property as a beneficiary obviously PPR should be available.

You might argue that (subject to not being blocked by s226A) but for me it's a simplification too far. It's not enough to allow - the trustees must have [exercised a power and thus] conceded the right.

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