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Property traps for the unwary

Author: Elizabeth Peters FCA CTA, Tax Partner, Ballards LLP

Published: 23 Jul 2021

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Liz Peters highlights how easily things can go wrong when property is involved.

Pitfalls to avoid

  1. Transferring Property A to a farming partnership with the partnership then taking out a loan secured on Property A to clear the mortgage on Property B before this is transferred to the partnership. While there is no SDLT on the transfer to the partnership under the legislation in Schedule 15 of the Finance Act 2003 where all of the partners are connected, SDLT becomes payable if there is a withdrawal of capital form the partnership within three years. Clause 17 Finance Act 2003. Clearing a personal loan on Property B is such a withdrawal of capital.
  2. Holding a property co-owned by three siblings as joint tenants – on the unexpected death of the brother, the brother’s third share passed by survivorship to his siblings and not his wife as intended under the terms of his will
  3. Transferring property to a settlor interested trust (trust from which the settlor, settlor’s spouse or settlor’s children while under the age of 18 can potentially benefit) on the advice of solicitors and not taking tax advice:
    a.You cannot hold over capital gains on transfers to settlor interested trusts (S169B TCGA 1992)
    b.There is no uplift in CGT base cost on death of the settlor unless this happens to be an interest in possession trust
    c.This is a gift with reservation of benefit for IHT such that the gift is ineffective as part of IHT planning
    In one case a solicitor advised an elderly woman to transfer three cottages pregnant with capital gains into a trust. One of these was her home and she continued to live in this rent free. The solicitor gave no tax advice and did not mention that tax advice should be sought. The result, a three-year negligence claim with a sizeable settlement that could have been avoided if only the two cottages she was not to benefit from had been transferred to a separate trust.
  4. Not understanding the conditions for main residence relief claims by executors. Under S225A TCGA 1992, executors can claim main residence relief if a legatee or group of legatees:
    a. Occupied the property as their only or main residence immediately before and immediately after the death of the deceased person and 
    b. Are entitled to 75% or more of the net sale proceeds
    The amount of main residence relief is based on the period of post death occupancy by the qualifying legatee or group of legatees.
    In one case I have seen recently, a solicitor advised the executors that there was no taxable gain on the sale of the house of the deceased as she held an 80% interest in the property before and immediately after the date of her death.
    And in another case, the solicitors were about to transfer the deceased’s house out of the estate to the legatees so their lower tax bands and CGT allowances could be claimed to reduce the tax payable by the family, not realising that the majority of the gain was covered by main residence relief if the property was left in the estate and the gain made by the executors.
  5. Not checking legal documents have been signed. I spent years in the offices of the solicitors acting for a family discussing how the rate of APR would be 100% as the land was occupied under a post 1 September 1995 agreement, only to discover that the paperwork was unsigned after the death of the landlord!
*The views expressed are the author’s and not ICAEW’s.