Property left to children & life tenant

CGT position of property sold with a life tenant

Didn't find your answer?

Mrs A owned a property in her own name but lived there with her husband, Mr A.  She died and the probate value was £655,759.  The property was left in Trust to the four children of the marriage with Mr A having the right to live there until his death. He has now died and the property is being sold for £980,000. I'm clear on the normal CGT rules but I'm led to believe that because Mr A lived in the property as his main residence (neither he nor Mrs A owned any other property), there is a free CGT uplift in value at the date of Mr A's death so that it's the value of the property at that date that I need to use as the base cost for my client's CGT calculation. There is some sense to this as the four siblings couldn't sell the property.

My theory has been upheld by a Trust solicitor but one of the other siblings has confirmed with her accountant that it's the value at the time of Mrs A's death that is the base cost. 

There is a slight complication in that Mrs A's will implies that the estate (really only the house) was held by the 4 children within discretionary trusts and that when Mr A died the house would be split in the same way.

Any thoughts as the 60 day reporting timelien has just started and a dislcosure may (or may not) need to be made.

Replies (16)

Please login or register to join the discussion.

avatar
By cathygrimmer
30th Oct 2023 13:26

You need to establish whether Mr A had a right to live in the property (an interest in possession) or was a discretionary beneficiary allowed to live there by the trustees as that will determine the CGT and IHT implications. Either way, CGT is unlikely to be much of an issue if the gap between Mr A's death and sale isn't long but how the gain is calculated and reported and what claims need to be made will depend on the terms of the trust and the type of occupation (by right or discretionary) so the terms of the trust set up on Mrs A's death need to be examined.

I do a lot of trust work and often find that the trustees'/beneficiaries' understanding of the trust terms doesn't always reflect what the trust deed/Will actually says!

Thanks (0)
Replying to cathygrimmer:
avatar
By mbee1
30th Oct 2023 13:39

cathygrimmer wrote:

You need to establish whether Mr A had a right to live in the property (an interest in possession) or was a discretionary beneficiary allowed to live there by the trustees as that will determine the CGT and IHT implications. Either way, CGT is unlikely to be much of an issue if the gap between Mr A's death and sale isn't long but how the gain is calculated and reported and what claims need to be made will depend on the terms of the trust and the type of occupation (by right or discretionary) so the terms of the trust set up on Mrs A's death need to be examined.

I do a lot of trust work and often find that the trustees'/beneficiaries' understanding of the trust terms doesn't always reflect what the trust deed/Will actually says!

Yes he did have the right to live in the property - apologies I had already established that fact and forgot to mention it.

Thanks (0)
Replying to mbee1:
avatar
By cathygrimmer
30th Oct 2023 13:48

You did say that - but you also said 'There is a slight complication in that Mrs A's will implies that the estate (really only the house) was held by the 4 children within discretionary trusts and that when Mr A died the house would be split in the same way.' which appears to say something different. Have you read the Will and are sure it is an interest in possession trust and not a discretionary trust? It is the terms of the Trust as set out in the Will that are important. If the Will says the estate went into a discretionary trust, why do you believe it is an interest in possession trust? Has the property been included in Mr A's estate for IHT on his death?

Thanks (0)
Replying to cathygrimmer:
avatar
By More unearned luck
30th Oct 2023 13:56

Some wills provide that on the death of the LT the trust doesn't terminate but becomes a DT. Such drafting is bad news as regards the RNRB as the condition that the property has to pass to a direct descendent is failed.

Thanks (0)
Replying to More unearned luck:
avatar
By cathygrimmer
30th Oct 2023 13:58

Very true!

Thanks (0)
avatar
By mbee1
30th Oct 2023 14:08

This is what the will said;
1 My husband, Mr A, may live in the house and use it as his principal place of residence during his lifetime
2 The house shall not be sold during the lifetime of Mr A without his consent
3 When this trust ends I give all my estate and interest (if any) in the house to be bequeathed as in clause 7

Clause 7 says;

To be divided as follows;
25% to my Trustees to hold upon the following Discretionary Trust

The Trustees shall mean my son Mr B (my client)
His sibling Mrs C
Another sibling Mrs D
Another sibling Mr E

The wording of the will for each beneficiary is then identical in that the trsutees shall hold the trust fund

1 for not more than 125 years following Mrs A's death
2 to apply the capital for the benefit of the beneficiaries as they think fit
etc etc

As far as I am aware the value of the property hs not been included in the IHT for Mr A.

Thanks (0)
avatar
By More unearned luck
30th Oct 2023 14:09

If it was an IIP during Mr A's lifetime* then the property is deemed to be in Mr A's estate and therefore it will (or should) appear in the IHT account and possibility therefore IHT was paid on it.

If so the base cost is the MV on Mr A's death. This is so even if no IHT is due.

If was a DT (during Mr A's lifetime*) then the property doesn't feature in Mr A's IHT account and the base cost is the MV on Mrs A's death.

I'm not sure how a DT is merely 'implied' by a will, I think that any DT would be explicitly stated.

*That part of it that commenced on Mrs A's death, I mean.

Thanks (0)
avatar
By mbee1
30th Oct 2023 14:15

It has been confirmed that the property was NOT included in the IHT of Mr A on the basis that he didn't and never had owned it. Excluding the property, his assets were no more than £50K at death so it was thought there wouldn't be an IHT Return necessary.

Thanks (0)
Replying to mbee1:
avatar
By cathygrimmer
30th Oct 2023 14:56

Well if it was an interest in possession trust - and the Will could be interpreted that way as it appears to give the husband a right to live in the trust (though it isn't as clear as it could be!) - then it should have been included in his IHT estate at death and that will need to be rectified. Was it treated as spouse exempt when Mrs A died - that would certainly suggest it was treated as an IIP trust at that point? If it was treated as a discretionary trust on Mrs A's death and IHT paid on the value at that point, and the bit about Mr A 'may' live in the house was treated as a wish rather than an instruction, then you need to consider IHT on the trust when the property or value leaves the trust and/or on the tenth anniversary, there's no automatic uplift for CGT on Mr A's death and a PPR claim will have to be made on the disposal (PPR isn't automatic for trustees and has to be formally claimed). But it does sound as if the intention was to create an IIP trust as the Will says 'when this trust ends'. And the discretionary trusts created on Mr A's death do preclude the RNRB being used, as MUL says.

You can't have it not falling into Mr A's estate and have a CGT uplift/no IHT implications for the trust.

I provide tax consultancy services to accountants and can't tell you how often the tax implications of trusts are misunderstood or dealt with incorrectly by trustees - sometimes for years!

Thanks (1)
Replying to mbee1:
avatar
By More unearned luck
30th Oct 2023 15:59

"It has been confirmed that the property was NOT included in the IHT of Mr A on the basis that he didn't and never had owned it."

Confirmed by whom? It doesn't sound like the reasoning of a lawyer. It is undisputed that Mr A didn't own the house as it was owned by a trust, so that is a silly reason to give for excluding it. I think that a valid answer to the question would consider if Mr A had an interest in possession and thus is deemed for IHT purposes to have been the owner.

I think that the executors need to take legal advice as they seem to be out of their depth.

Thanks (0)
avatar
By Tax Dragon
30th Oct 2023 18:48

I would love cathygrimmer's client base. My kind of work - but I get less of it these days.

Of course I agree with her analyses (base cost uplift to H's dod, because the property is in his IHT estate) from the info provided. I'd read the whole Will, and any imported provisions, if advising - anyone familiar with this kind of client base will know the type of errors that can arise if you don't.

My usual AML/LoE/PII point: you say one of the heirs is your client, but don't say the will trust is a client. You should not advise the trust(ees) without doing AML on the trust. Well done for obtaining the Will; you need to do the rest - which includes obtaining TRS verification etc.

Thanks (0)
Replying to Tax Dragon:
avatar
By cathygrimmer
31st Oct 2023 09:15

It is interesting work. I enjoy reading trust deeds (how sad is that!). Also it often involves working alongside the lawyers - who make me look incredible value for money!

Thanks (0)
Replying to cathygrimmer:
paddle steamer
By DJKL
31st Oct 2023 10:07

I know, in one hour's time I am meeting one property solicitor, three corporate solicitors, a tax director from a decent size firm of Chartered Accountants and one retired solicitor for a two hour meeting then lunch and have since yesterday been trying to work out a suitable collective term for the solicitors, the best I have managed is a ker-ching of solicitors but someone might have a more apt term.

Of course I cannot really complain about legal fees especially trust fees as that was one of my father's niches alongside estate conveyancing and it paid for my sustenance and school fees- he described a trust as a dripping roast, fees creating, fees running and fees winding up. (I suppose sometimes even bigger fees trying to vary)

Thanks (0)
avatar
By FrankTax
31st Oct 2023 09:57

To me it sounds like:
IIP Trust created on death of Mrs A
No IHT due to spouse exemption
Mr A dies and IIP property is part of his estate for IHT - assume 2 x RNRB available
Children's CGT base cost being Mr A probate value, presumably around £980K
If there's no CGT, no 60 day reporting required

Thanks (0)
Replying to FrankTax:
avatar
By Tax Dragon
31st Oct 2023 10:39

Maybe you read the OP but not the thread? It's likely still in trust, but now without an IIP.

Thanks (0)
Replying to Tax Dragon:
avatar
By FrankTax
31st Oct 2023 10:51

Yes fair comment, not as clear cut as I first thought.
I feel the terms of the Will are a little ambiguous. IIP vs DT

Thanks (0)