s260 Holdover relief on FHL transfer only for CLT?

Can an absolute trust be used for a transfer of a second home to avoid IHT etc

Didn't find your answer?

I've gone back and forth on this and it's not my everyday work so hoping someone can confirm.

A client has a second home worth approx £275k which although never previously rented or occupied as PPR, it has been owned for many years and is "pregnant with gain". They want to pass it on to children as part of estate planning.

It could be let as a FHL if required which might facilitate holdover relief or BADR however I think I'm right in saying that both BADR and s165 sch7 will restrict relief substantially due to the relatively short time it would be let as an FHL compared to the period of ownership as a second property. 

The property owner previously used up £100k of the available nil rate band on a CLT into a DGT so the remaining sum isn't quite enough to cover the value of the property.

I'm aware that a gift to a discretionary trust represents a CLT and so full relief is available under s260, however "CG67033 - Relief for Gifts Subject to Inheritance Tax: Qualifying Disposals" also mentions "exempt transfers". Presumably however that doesn't extend to a potentially exempt transfer into an Absolute trust which would get around the problem of nil rate band?

Assuming not, I can't see any other option to get the property moved besides a partial transfer into a discretionary trust followed by another after the requisite years have passed since the previous CLT? Am I missing anything? Grateful for any feedback.

 

 

Replies (20)

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By Tax Dragon
09th Jun 2022 15:13

Is this like a holiday home?

It'd be a shame to go through all those hoops and then fall foul of reservation of benefit rules.

But you're right - if you want to understand CG67033, you have to read the text, not just the headline. (And, probably, if you want to give good service here, you need to buy in some help - or refer your client (for this task only) to a local specialist.)

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Replying to Tax Dragon:
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By norstar
09th Jun 2022 15:45

Hi TD.

Yes - exactly that - a holiday home never previously let.

I'm aware of the gift with reservation of benefit pitfalls but that shouldn't be an issue as the client in question is getting to the point where they can't use the house - it's a long way away. If they did it would need to be paid for @MV.

I did read the text and suspected that the headline appeared more generous than the detail - but was just looking for confirmation of that - thanks.

Point noted about buying in help. I'm not looking to execute the arrangements myself or obtain freebies but so far I've not managed to find a specialist in this sort of area who can actually advise beyond "leave it as it is and let the IHT threshold take care of the values". The client also wants to protect this particular property from care costs etc as well, hence the desire to do something along these lines.

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Replying to norstar:
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By More unearned luck
09th Jun 2022 15:52

The admitted motive may well render the gift whether it is into trust or otherwise ineffective.

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Replying to More unearned luck:
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By norstar
09th Jun 2022 16:03

I wouldn't necessarily agree with that if the client is in good health with no current exposure to that risk but yes, point taken if it's executed too close to said care. I don't see why it wouldn't be a considered issue along with other areas however.

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By The Dullard
09th Jun 2022 15:49

And it hasn't just been just transfers into discretionary trusts that are CLTs, ooh, since about March 2006 ish. IIPs are much more effective since the intended beneficiary(/ies) can enjoy the income from the property at their own marginal rate(s) of tax.

You're also wrong about there being a restriction to BADR. It will either qualify for BADR (2 years plus as an FHL) or it won't.

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Replying to The Dullard:
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By norstar
09th Jun 2022 15:51

But that doesn't solve the issue of getting some or all of the value of the property outside of the Estate of the current owner?

Under the circumstances and pending Rishi pulling the rug, my understanding was that a tax planning approach to this sort of cirumstance was a gift into a discretionary trust which being chargeable, enabled an s260 holdover, then after a reasonable amount of time, distribute the asset to the beneficiary again with holdover. That being so, the base cost of the asset would pass to the next generation.

Without income arising from the asset, I didn't think an IIP structure was relevant.

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Replying to norstar:
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By The Dullard
09th Jun 2022 15:53

Er, are you not familiar with the 2006 changes either?

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Replying to The Dullard:
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By norstar
09th Jun 2022 16:21

You're quite right about BADR of course. On the other side of things, I've been quite clear it's not my everyday field and although I have a working knowledge of these areas and the changes that restricted some of the tax planning benefits of a trust, I don't deal with trusts every day. I was still under the impression - perhaps errantly - that there was still a tax planning opportunity along the lines of that which I've said using holdover where the asset going in was a CLT within the nil rate band. Happy to be told "nope" however.

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By More unearned luck
09th Jun 2022 15:45

Since Budget 2006 most types of lifetime settlements are chargeable transfers; You don't need to narrow your options to a discretionary trust if a trust is the right way to go. Perhaps this is one of TD's points.

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By norstar
09th Jun 2022 15:53

With thanks to responders so far, if anyone has a recommendation as to a specialist accountant/tax consultant who can help with assessing the circumstances and making a recommendation, please do let me know - perhaps via a PM.

I was hoping to form & consolidate an idea before taking it to someone but will certainly refer in due course.

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Replying to norstar:
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By Tax Dragon
09th Jun 2022 16:14

Are you part of the Manchester gang?

@Dulls (and MUL)... this question is a hangover from a previous thread, but I have a different Manual reference this time. Pre 2006, IHTM42254 would not have applied re an IIP trust. The 2006 changes run pretty deep; what stops IHTM42254 applying to a post-2006 IIP?

[In the previous thread the IIP was even in favour of the settlor! Would that really not be caught?]

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Replying to Tax Dragon:
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By The Dullard
09th Jun 2022 16:36

I decided against pursing that possibility. The whole thread became rather hazy for me and I just didn't have the time.

I thought you were probably correct, that if there were a settlement there would have been a GWRoB, and that Justin was probably correct ,that there was no settlement for IHT purposes, but I was disinclined to put any further effort into it. IRL I'd just have to, I suppose, making your respective thoughts useful.

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Replying to The Dullard:
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By Tax Dragon
09th Jun 2022 16:44

Thank you.

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By Paul Crowley
09th Jun 2022 16:20

The care cost bit is relevant
Deliberate action to avoid contributions can have consequences but honestly never heard of any. But then IANAL
Solicitors and other operators used to call it 'estate planning'
A big gap needed between disposal/gift and needs financial assessment
But it must be at least 10 years since attending any of those type courses, so I would be out of date.

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By Justin Bryant
10th Jun 2022 10:02

You just need to wait 3 months to bounce it out of the RPT. See:

https://www.taxinsider.co.uk/hold-on-watch-the-cgt-relief-traps

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Replying to Justin Bryant:
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By norstar
10th Jun 2022 10:21

Yes - that's the article I read initially which reminded me of the process I was outlining in my original post. The client's intention isn't necessarily to bounce it out immediately anyway but point noted with thanks.

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By Tax Dragon
10th Jun 2022 12:36

Three children, you say?

1/3 to child 1 this year, 1/3 to 2 next and 1/3 to 3 the year after?

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Replying to Tax Dragon:
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By TASG
14th Jun 2022 10:54

Some grey area risks to be drawn to client's attention:

1) HMRC could say transactions were linked by initial implicit contract at the outset and the entire property is disposed of at the outset.

2) If there is a mortgage against the property this would likely be a breach of covenant or otherwise require consent of lender.

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Replying to TASG:
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By Tax Dragon
14th Jun 2022 14:49

A gift is never contractual.

Though, if a mortgage is being taken on by the recipient, it's not purely a gift.

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By Lawskills
14th Jun 2022 15:19

Is 'the client' married or a civil partner? As you talked about 'they' I was not sure if it was one client or a couple. I am sure you have thought of transferring the property into joint names of husband and wife/civil partners and then utilising both available NRBs by making a chargeable gift into a Discretionary trust and holding over the gain as you suggest under s.260 TCGA 1992.

I do not understand your reference to an 'absolute trust'. Do you mean a bare trust or an interest in possession trust. The former is not a settlement for IHT whereas the latter is and (as has been mentioned) any transfer to it during lifetime will be a chargeable transfer now. I don't favour a transfer to interest in possession trusts during lifetime when dealing with property as any income (say from letting) belongs to the life tenant and cannot be accumulated to help meet any IHT 10 year anniversary charge.

It sounds like you need to refer the matter to a member of the Society of Trust and Estate Practitioners (STEP) near you. You can find a member here: www.step.org.

Gill Steel

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