Please can you explain the tax position of a discretionary trust, which was set up in 1998? It was common, I understand, to create such trusts in those days, prior to the inheritance tax (IHT) nil rate band being transferable between spouses. The nil-rate band (i.e., a portion of family home value) was put into it on the first death, but the spouse has been resident ever since in the same property. When they die, are any taxes due on selling the property and winding up the trust (e.g., IHT or capital gains tax (CGT))? 

Arthur Weller replies: 

Firstly, I assume that the trust asset is a share of the home, and not an IOU or charge representing the value of the half share. Regarding IHT, when any trust property leaves the settlement, an exit charge is computed. Where the value in the trust was never over the nil-rate band, any exit charge is likely to be small. Regarding CGT, if the dwelling was occupied as the main residence by a person entitled to occupy under the settlement, the trustees can make a claim (under TCGA 1992, s 225) for principal private residence relief. In the case of a discretionary trust, HMRC guidance in its Capital Gains Manual at CG65407 states (quoting Sansom v Peay [1976] 52 TC 1) that if the trustees have the power to permit any beneficiary to reside in any trust property, and the trustees exercise that power and allow the beneficiaries to occupy a dwelling house held as trust property, then the trustees can claim private residence relief, under section 225.