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Trust House Conundrum

Author: Keith Phillips, Chartered Accountant, Duncan & Toplis and Elizabeth Peters FCA CTA, Tax Partner, Ballards LLP

Published: 02 Nov 2021

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Tax planning for farming families.

An elderly farmer’s wife dies, having sometime previously settled a farm cottage into a discretionary trust for her four grandchildren. Her letter of wishes and family expectation was that the income and asset should be shared between her grandchildren as equally as possible.

The property was rented out for many years with rent paid out to the grandchildren pretty much equally each year, but time came, all the grandchildren became adults and one of the grandchildren was about to marry. The couple wished to buy the house as their future home. All family were in agreement with this and it was agreed the trust would be broken and house sold to the one grandchild, with him taking a mortgage and buying out his cousins.

It was calculated that the trust would have a significant gain with only half a personal allowance as relief.

The trustees were mindful of the potential problem with holding over the gains on the appointment of the farm cottage out of the discretionary trust with the gain held over, and the anti-avoidance legislation in S226A TCGA92 (HMRC manual paragraph CG65441) – if a claim is made to hold over the gain under S260 TCGA 1992 on the appointment of the quarter share to the grandchild who wants to live in the property as their main residence, they will not be able to claim main residence relief if they sell the  property in the future. Such a course of action would also go against the principle in the letter of wishes that all the grandchildren should benefit equally.

The idea was postulated that to reduce a significant Capital Gains Tax charge, the trust should be broken first. The property would then be passed out to all the grandchildren. Any gain in such a circumstance can be held over to the three cousins who would then sell their interest to the fourth cousin. In this way, the family would achieve three full personal allowance on the sale and some of the gain would in fact be taxed at the reduced rate of 18%, as most of the beneficiaries had the basic rate band available to them.

All the above is perhaps reasonable and well understood tax planning and common in farming families.

BUT one consideration almost missed was that the three cousins all had advantageous “Help to Buy” ISAs and none had ever owned property before, so the family is faced with the conundrum of paying higher tax in the trust now but preserving the Right to Buy ISA benefits and any first time buyer discount from lenders in the future, or paying less CGT now?

The message was clear. Look at all the factors in such cases not just the base tax differences. In this case, the three remaining cousins could well have a significant cost in the near future that the buying cousin will not!

*The views expressed are the author's and not ICAEW's.