CGT and Property left in Trust

[ajandjjmum]

Struggling to understand the implications of this situation, and would really appreciate any advice.

My Aunt had a house that she wanted to sell to an equity firm some years ago. My father thought his sister was being 'ripped off', and offered to pay her what the equity release firm had offered. He did this, and the house was put in a trust for the benefit on his DGC.

Aunt is needing to move to a smaller property, so we need to sell the house and purchase a flat that is more suitable. It costs less than the value of the house.

No problem. Everyone in agreement. But it has been suggested that the beneficiaries of the Trust will be liable for Capital Gains Tax, although pretty much all the money they achieve from the sale will be immediately re-invested in another property.

Seems tough, as we are all trying to do the right thing.

Be grateful for any advice/experience.

Could you clarify? Your Aunt sold part of her house to her brother, or all of the house? He then placed it into trust for the benefit of (only?) his grandchildren? Did your Aunt live there rent free? Or was she a beneficiary with a right to live in the property and it was on her death the beneficiaries were the grandchildren?

Yes, there may well be cgt if the trust didn't give your aunt the right to live there for life. If she is the life tenant (right to live there for life), then the trustees should be able to claim ppr relief (not automatic). Was there some proper tax advice on settling this trust?

Generally houses are only sold free of CGT if they are the principal private residence of the owner. On other sales (eg of buy to let properties) CGT would be due.

Relief is available if a beneficiary occupies the property under the terms of the trust, but not if the trust is merely renting out the property to someone who is not a beneficiary.

www.taxinsider.co.uk/main-residence-relief-for-trustees

www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65407

As there are potentially tax implications beyond a bit of cgt

Thank you so much for the replies - I wasn't expecting anything!

DF purchased the whole property at the price the equity people were offering. It was then put into a Trust of which all his DGC were the beneficiaries (done by solicitors in conjunction with the sale).

There was also a licence which gave my Aunt the right to live in the property until her death.

My Aunt is not a beneficiary (unless having a licence to live there until her death makes her a beneficiary), but is now in her 80's, and a smaller property would suit her better. It is rent free. Upon her death the property becomes available to the DGC.

The sale and Trust/Licence was done legally, although I am not sure that any tax advice was given.

So grateful for your guidance.

There will be cgt on a sale in that case. I'd suggest getting a general review of the structure with an accountant or private client tax lawyer, especially as trusts have ongoing reporting requirements etc now.

Ps does your aunt still have cash from the sale? Could that not purchase a smaller property or has it been used up?

The cash is invested and gives her a small income. It was never at the value of the property, but matched what the equity release people would give her, so would never have bought an equal property.

We would like to use the money from the property to buy a suitable property for her - it would actually be a similar cost.

Seems rotten for the DGC to be liable for CGT as they have never had any benefit. DF was trying to do the right thing for his DSis and his DGC and it looks like it has backfired. My Aunt has as Will which leaves everything to the same kids, so there was no benefit other than to give Aunt a bit of cash to invest, to provide her with an income. I know that DF believed he had set it all up properly, as it went through solicitors.

Another headache to sort!

Thank you for your help @Peeeas.

Can she use the proceeds from the sale to buy the new house and live off rent from her old property?

Sadly not - the amount she received was invested and now provides a small income for her, as she has no private pension.

The idea of renting her house is interesting though. Thanks!

I second getting some advice as there may be some things that could improve the situation. Off the top of my head it may be possible to:
Add your aunt to the beneficiaries of the trust and let her occupy for a while as a beneficiary, which should reduce the CGT due.
Or (more extreme) distribute the house out of the trust to the grandchildren claiming holdover relief on the gain, so the gain then is split between multiple people each of whom have a CGT allowance.

It will depend a lot on specifics though so worth getting advice.

If your aunt is not currently a beneficiary of the trust, she will not be able to benefit from the rent. Likewise, the trustees need to reinvest the proceeds for the benefit of the beneficiaries, not the benefit of your aunt.

Fundamentally, your aunt has sold her property at an undervalue. She does not own it and has no say in it - a very dangerous position to put yourself in - even if your father had the best of intentions.

Adding your aunt as a beneficiary of the trust could have disastrous double taxation consequences - there's a good tax reason why she's not a beneficiary! Please take proper advice!

Maybe rent out the current property, and use the proceeds to rent a more suitable property for your aunt. All dealt with within the trust. (Disclaimer, I have no idea if this is allowed)

I should just say that I am very grateful for everyone who has taken to time to comment/advise - we are getting tax and legal advice but I'm impatient!

@Peeeas My brother and I are determined that our Aunt will not lose out in any way. If she had sold the property to the Equity Release people as planned, she would have nothing now. As it is, the view of the beneficiaries is that any proceeds from the sale must be used for her benefit - to buy another home. We just need to find a way to do this which will not result in the DGC having to fork out CGT when they've seen no money.