Replies to Queries

Readers' Forum

Replies to Queries — 4

Mansion manoeuvres

In 1987, Mr and Mrs S transferred a half share of their central London residence to an accumulation and maintenance trust for their two children who are now aged 19 and 21. The children are now at university, but at all times the property has been used by the whole family as their principal private residence (the parents as to their half share and the children as beneficiaries).

It is likely that in, say, four years' time the property will be sold and the parents will purchase a smaller house using their half share of the proceeds. The trust could either be wound up or continue as an interest in possession trust.

Do readers agree that there should be no capital gains tax liability on disposal of the London property? And should any particular steps be taken, such as the appointment of life interests for the children or action under section 225, Taxation of Chargeable Gains Act 1992? Could any form of clearance be obtained from the Revenue in advance or could the Revenue argue that the children are not entitled to occupy?

With regards to inheritance tax, notwithstanding the new 'pre-owned assets' charge, presumably the property sharing (the costs are shared equally by the parents and trustees) should give rise to a satisfactory position? Do readers agree that under section 102B, Finance Act 1986, there should be no inheritance tax, gift with reservation or pre-owned assets problems while the accommodation sharing lasts under co-ownership? Of course, if the children left home that would be altogether different.

Readers' comments and views on whether my analysis is correct would be reassuring.

(Query T16,451) — Les Successful.

It is of the essence of an accumulation and maintenance trust that, until the specified age (which must be between 18 and 25 depending on the accumulation periods available), section 71(1)(b), Inheritance Tax Act 1984 requires the income to be accumulated 'insofar as not applied for the maintenance, education or benefit of' the minor, unless an interest in possession subsists. It is unlikely that one would be created for a minor.

At the time the half share was settled, the beneficiaries were aged four and two. In the absence of a 21-year accumulation power from the date of settlement, income becomes payable automatically to a child prospectively entitled at 25 from the age of 18. It must follow from this that, for the first 13 years, the whole and, for the following two years half, of the half share would not have been held upon trusts under which one of the children could be said to be 'entitled to occupy it under the terms of the settlement'. And yet, in order to obtain principal private residence relief, section 225, Taxation of Chargeable Gains Act 1992 makes this a pre-requisite. It is, furthermore, possible that, because the use of a 21-year accumulation period could have been engrafted into the qualifying age provisions of the settlement, neither child has yet attained an interest in possession. It must follow from this that principal private residence relief has not yet started accruing.

In order to do so, the trustees will have to accelerate the acquisition of interests in possession and then exercise their powers to ensure that the children have the entitlement to share occupation of the property under section 12, Trusts of Land and Appointment of Trustees Act 1996. Under Bull v Bull [1955] 1 QB 234 such an entitlement would have been presumed. It is possible, however, that the circumstances surrounding the creation of the settlement in 1987 were not such, in retrospect, as to give its beneficiaries section 12 rights at all under the wording of the 1996 Act.

Even if they were, the Inland Revenue might contend that, nonetheless, section 13(7), Trusts of Land and Appointment of Trustees Act 1996 must have been deemed to have had the effect of giving the parents prior occupation rights in 1997. At that date, the children were aged 14 and 12 and the parents would have been under a legal obligation to house them.

Turning, then, to the inheritance tax issue, the first point which needs to be appreciated is that section 102B, Finance Act 1986 is not in point. Section 102B(1) provides, in terms, that it only applies where the gift was made after 8 March 1999. Before that date, the Parliamentary Statement, which it replaced, held sway by way of concession. It was in much narrower terms and does not appear to be applicable in circumstances such as these. It must follow that, Munro v Stamp Duties Commissioner [1934] AC 61 notwithstanding, the current arrangement could be seen as coming within the gift with reservation concept by virtue of one or both of the limbs of section 102(1)(b), Finance Act 1986.

It is also possible that the Courts would regard section 102(1)(a) as being in point as well if the property has remained vested in law in the parents since 1987: see Attorney-General for Alberta v Cowan [1926] 1 DLR 29.

If either provision turns out to apply, then there will be no pre-owned assets income tax charge from 6 April 2005.

Issue: 3968 / Categories: