As an only child, our property was owned by my mother and my late father. My father's estate was allocated to a discretionary will trust, including 50% of the property. I subsequently bought 50% of my mother’s share such that we each owned 25% and the trust, 50%, as tenants-in-common. We live there and combine our finances. The property has subsequently been invested and redeveloped with differing additional funds invested by my mother (higher amount) and myself (lower amount). The result is that the ownership of the new property based on sources of funding is now significantly less than 50% to the trust, resultant from new money entering the equation. Two questions: (1) is this an acceptable perspective; and (2) how can this be demonstrated to HMRC’s satisfaction in the event of a future nil-rate band consideration under IHT rules? 

Arthur Weller replies:  

I don't know the details of your case, but before addressing your questions, I would suggest that you speak to a tax adviser about the possibility of the trustees of the discretionary trust appointing out to the beneficiaries their 50% of the house. Normally, this would trigger capital gains tax, but maybe the trustees could claim principal private residence (PPR) relief; see HMRC’s Capital Gains Tax Manual at CG65407 (NB it is true that there is a restriction on claiming PPR relief when holdover relief has been claimed (see CG64933), but I don't see any claim for holdover relief here). Additionally, just in case you are still within the two year window of death, you could do an Instrument of Variation. Assuming all the above is not relevant, the following may be. If there is a written agreement between yourselves and the trustees stating that your investment in improvements will result in equity or ownership shares, then possibly this could establish your 50+% ownership of the property. You need to take legal advice.