A few years ago, our parents died but had put their property into a trust a while beforehand. My brother and I are beneficiaries. I, as trustee, sold the house and bought a bungalow for my brother to live in through the trust. The Council are willing to pay his rent as they know he does not own the bungalow. Is this legal, as he would be the beneficiary? What tax would be owed? What other problems might this create? 

Arthur Weller replies:  

I cannot answer the first question about the council paying his rent while he is a beneficiary of the trust that owns the property. This is a legal question, not a tax question. The trust will have to pay tax on the receipt of the rental income. Assuming that this is a discretionary trust, besides the first £1,000, the rental income will be taxed at the trust tax rate of 45%. However, it is possible that when the property is eventually sold, the trustees can claim principal private residence relief, and pay no capital gains tax. See HMRC’s Capital Gains manual at CG65400 and CG65407.