Principal private residence relief is a term commonly used to refer to the exemption from capital gains tax (CGT) of any capital gain made on the sale of an individual’s primary home i.e. typically, the home in which the individual lives most of the time. But what happens when that property is held in trust?
Principal Private Residence Relief (PPR)
The exemption for most people is a complete exemption, although in some cases (e.g. where the house is let out for long periods of time) some part of the gain on sale may fall subject to CGT (at a rate of either 18% or 28%). Indeed where an individual owns more than one home, the exemption only extends to the gain arising on one of them, typically, referred to as the “main” residence.
However, a private residence may also be owned by trustees of a trust which has been set up either in lifetime (a so-called ‘inter-vivos’ trust) or under a will (a so-called ‘will trust’).
The question arises as to whether the exemption for CGT is also available to trustees on sale of the property.
Trustees
In short, exemption from CGT is in principle available to trustees.
However, the trustees themselves are unlikely to occupy the property and it is thus necessary for one or more beneficiaries to occupy it.
More specifically, one or more beneficiaries of the trust must occupy the property as their only or main residence and must be entitled to occupy the property under the terms of the trust.
Entitlement to occupy under the terms of the trust is satisfied where either a beneficiary has an interest in possession in the property (broadly, a right to occupy the property) or where, under the terms of a discretionary trust (i.e. a trust where the trustees decide who benefits from the trust), the trustees have power to allow a beneficiary under the terms of the trust to occupy the property.
The trustees must make a claim for the relief from CGT to apply (i.e. it is not automatic).
Examples
Examples where a property may be owned by trustees, for occupation by one or more beneficiaries, might arise in any of the following scenarios:
- On death, a favourite uncle leaves his house on discretionary trust for any of his nephews and/or nieces to occupy whilst attending university or whilst saving up for their own home;
- A husband owns a home in which he and his second wife live, which on his death he leaves to an interest in possession trust under which his wife can by right continue to live in the house until her death (or remarriage), following which the house is to be sold and the proceeds divided amongst his children from his first wife;
- Parents purchase a property which is put into a discretionary trust for their children to occupy as and when they leave home pending purchase of their own property.
Until a few years ago a trust could also be used to avoid a CGT charge on the sale of a ’holiday home‘ which, if sold by the individual, would have given rise to a CGT liability; however, this ’loophole‘ has now been closed.
Why Use a Trust?
Ownership of property may be outright by an individual or on trust for beneficiaries. In the case of the former the individual owning the property can, amongst other things, simply sell it; give it away; charge it against a borrowing; or lose it on a bankruptcy or divorce. However, by utilising a trust, the trustees effectively have control over the property not the beneficiaries.
Thus, in each of the examples above the uncle, husband and parents by putting the house into trust prevent any of the beneficiaries (i.e. the nephews, nieces, second wife and children) from selling the property and depriving others of somewhere to live in the future.
In effect, the trust acts as a protective device.
Taxation
As indicated above, any gain arising on sale by the trustees qualifies for exemption from CGT.
If the trustees charge a rent for occupation of the property, an income tax charge arises on their part although no such charge need be made or such charge could be simply sufficient to cover expenses (producing no tax charge).
The transferring of the property into trust (or cash to purchase the property) in principle gives rise to an inheritance tax charge (IHT) although if the nil rate band (currently £325,000) is available a nil charge arises if the property value does not exceed that amount (or the use of an interest in possession trust set up by will for the surviving spouse (second wife in the example above) produces no IHT charge).
Similarly, an IHT charge may arise as and when the trust terminates at some point in the future.
Practical Tip
Trusts require administration and professional fees may be incurred. And remember, once settled, it is the trustees who make the decisions not you.
By Malcolm Finney
