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Replies to Queries - 2 - University challenge

11 September 2002
Issue: 3874 / Categories:

Parents, who have their own private residence in which they have lived for many years, are contemplating buying through a discretionary trust a property for their sons to live in whilst the sons are at university and which will be many miles from the parental home.

Parents, who have their own private residence in which they have lived for many years, are contemplating buying through a discretionary trust a property for their sons to live in whilst the sons are at university and which will be many miles from the parental home.

The parents do not at this stage wish to deprive themselves entirely of the purchase price and the easiest mechanism of doing that is for the parents also to be beneficiaries of the discretionary trust, so that when the property is sold, in perhaps four or five years' time, the parents can take all of the profit, or some of it, and either give none or some to the sons as they desire at that time.

Section 77, Taxation of Chargeable Gains Act 1992 charges tax on the settlors on the gains achieved by trustees if the settlor is a beneficiary of the trust. What is not entirely clear is whether section 225 of the Act (exemption for gain on trust residence occupied by beneficiary) will have reduced the chargeable gain on the trustees to zero and that therefore it is zero which is chargeable on the settlors. Or is it the case that section 77 takes precedence over section 225, so that the whole gain is chargeable on the settlors who, not having themselves lived in the property, would not be able to claim any relief?

(Query T16,073) - Home and Away.

 

Section 225, Taxation of Chargeable Gains Act 1992 extends the individual's capital gains tax private residence relief of sections 222 to 224, Taxation of Chargeable Gains Act 1992 to trustees of a settlement where the house was the only or main residence of a person entitled to occupy it under the terms of the settlement.

Section 223(1) provides that 'no part of a gain … shall be a chargeable gain'. Section 77, Taxation of Chargeable Gains Act 1992 applies to a chargeable gain accruing to trustees; but, because of the principal private residence relief, no chargeable gain arises.

Therefore it must be considered if the conditions in section 225 are met, i.e. will the flat be 'the only or main residence of a person entitled to occupy it under the terms of the settlement'(my italics)? If they are met, no chargeable gain and no capital gains tax liability will arise, provided of course that all the normal conditions of principal private residence relief are complied with.

To fulfil the trust conditions, it will be necessary for the trust deed to include as a trust purpose the provision of land for occupation by a beneficiary and for the trustees to be empowered to hold land for this purpose.

I turn now to the position of the beneficiaries. The situation would be straightforward in an interest in possession trust where the life tenant occupied the property, but in this case a discretionary trust is envisaged. Provided that the trustees are empowered to grant occupation to one or more of the beneficiaries and they then occupy it as their only or main residence, the exemption should be available as there is no requirement that all beneficiaries should occupy.

It is important that the beneficiaries occupy as of right as against, for example, under a licence requiring them to pay rent. - Clube.

 

Section 225, Taxation of Chargeable Gains Act 1992 applies the principal private residence relief rules where, during the period of ownership by the trustee, the dwelling has been the only or main residence of a person entitled to occupy it under the terms of the settlement.

This provision was favourably considered in Sansom v Peay [1976] STC 494. The trustees were empowered to permit one or more beneficiaries to reside in the subject property upon such terms as they in their discretion might think fit. Section 77 has nothing to bite on.

In that case the occupants were husband and wife and their two small sons. Accordingly, the first point to consider is whether students at university have their main residence in the city where that place of learning is situated, rather than in the parental home which it has hitherto been. It would appear that section 222(3), Taxation of Chargeable Gains Act 1992 is among the rules applied by section 225 so that each son would do well to deliver to the Inspector a notice of the change of residence, soon after taking up abode there.

Such a notice is not absolute, but hinges on there being a reasonable possible choice as to which of two available residences is the main one (see Readers' Forum replies to Query T15,868 in Taxation, 6 September 2001 at pages 586 to 587). Change of the address for tax returns and other official communications is among recommended precautions. - Lane.

Issue: 3874 / Categories:
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