Mark McLaughlin looks at capital gains tax principal private residence relief when a house is held in a trust for a beneficiary to occupy.
Principal private residence (PPR) relief is probably the most well-known and commonly used capital gains tax (CGT) relief. In many cases, it exempts a gain on an individual’s disposal of a dwelling house which is an only or main residence.
PPR relief applies not only to disposals by individuals; the relief also applies to trustees, on gains from the disposal of settled property. A trust can be ‘express’ (i.e., by a trust deed) or ‘implied’ (i.e., by a person’s intentions and actions); this article focuses on the former.
PPR relief for trustees
PPR relief is available where, during the trustees’ period of ownership, the property was a dwelling house occupied as the only or main residence of a person entitled to occupy it under the terms of the settlement.
If those requirements are satisfied, the PPR relief rules generally apply to the trustees as they do for an individual. However, the PPR rules require the trustees (unlike individuals) to claim the relief.
Example: Trust property for daughter
Parents wish to buy a house for their adult daughter to occupy. They set up a trust to own the property. The parents buy the property and then transfer it to the trustees. The trust deed allows their daughter to occupy the property as a beneficiary. She lives in the house throughout the trustees’ period of ownership.
Some years later, the trustees sell the house and advance the proceeds to the daughter, who uses the funds towards buying a property with her boyfriend.
The trustees claim PPR relief in full on the capital gain arising on disposal of the property. No CGT liability arises, and the proceeds pass to the daughter.
In the above example, the trust was set up during the parents’ lifetime, but it is also possible for a trust to be included in a parent’s will.
Which trust?
PPR relief is available to the trustees of an interest in possession trust (i.e., broadly where the beneficiary has a ‘present right to present enjoyment’ of trust property: Pearson v IRC [1981] AC 753).
In addition, HM Revenue and Customs (HMRC) accepts that PPR relief is available if the trustees are exercising a discretionary trust power to permit a beneficiary to occupy the trust property (Samson v Peay [1976] 52 TC 1).
HMRC distinguishes between the trustees’ ‘managerial’ and ‘dispositive’ powers. The latter power is consistent with an entitlement to claim PPR relief, whereas the former is not. HMRC provides an example (in its Capital Gains Manual at CG65407) where trustees own a farm and allow a retired farmworker (who is not a trust beneficiary) to occupy a farm cottage rent-free. The trustees are entitled to allow this occupation, but it is the exercise of a managerial (not a dispositive) power, so no PPR relief is due.
Practical tip
If the trustees charge a beneficiary rent for occupying the dwelling this does not, of itself, affect a PPR relief claim on a later disposal of the property, where there is an entitlement to occupy under the terms of the settlement. For example, the trustees may charge rent where there are several trust beneficiaries, only one of whom occupies the property as their residence, so that the other beneficiaries do not miss out on the rental income that the trustees would otherwise have received from letting to property to a third party.
