Writing for Taxation magazine, BKL tax adviser Terry Jordan responds to a reader’s query on rollover relief and stamp duty land tax on property for a vulnerable persons’ trust.
My client has a buy-to-let investment property with a loan-to-value ratio of 58%. The flat is valued at £450,000 with a mortgage of £262,000. He has decided to sell the flat because he cannot put a mortgaged property into a trust that is being set up for his two children, aged 18 and 12. My client lived in the property for eight years before renting it out, so I understand it would qualify for two reliefs: one for the period he lived in it and a letting relief up to £40,000. I estimate the proceeds from the property would be about £150,000 after all capital expenditure and costs of purchase and sale of the property.
His plan is to set up a vulnerable persons’ trust of £100,000 for his two children. The £100,000 will be used to make a cash purchase of a small buy-to-let flat without any mortgage.
My questions are as follows.
- If the client invests £100,000 of the £150,000 capital gains in the trust for property purchase, will this entitle the investment to a rollover relief for that £100,000 so that he would pay only capital gains on the remaining £50,000?
- Since the trust would be for two children considered first-time buyers, would there be stamp duty land tax arising on the purchase of the buy-to-let investment property?
Can readers please help?
Query 19,171– Trustee.
Reply by Terry ‘Lacuna’ Jordan
Trustee says his client cannot put a mortgaged property in trust for his children. Although there are practical difficulties – the consent of the mortgagees would be required and the assumption of the mortgage by the trustees would rank as consideration and incur a liability to stamp duty land tax (SDLT) – there is no prohibition as such. Capital gains tax holdover relief would not be available because one of the children is under 18 (see TCGA 1992, s 169F).
On the sale of the property, the gain attributable to the eight years the client lived in it together with the last 18-month period of ownership will be exempt from capital gains tax and, as Trustee says, lettings relief will also be available.
If the new trust is for the benefit of disabled persons within IHTA 1984, s 89, the transfer of £100,000 by the client as settlor will be potentially exempt rather than immediately chargeable.
The client has asked whether rollover relief will shelter the £100,000 from capital gains tax. The short answer is no because he has not been carrying on a trade. See ‘Property gains’ (tinyurl.com/y7f5lx2h) and Mark Wallace’s article ‘Should we roll over?’ (tinyurl.com/y86plgnw).
For SDLT, in a disabled person’s trust the beneficiaries do not enjoy interests in possession – although they are treated for inheritance tax purposes as if they do. Therefore, it would seem from HMRC’s Stamp Duty Land Tax Manual at SDLTM09835 that the 3% surcharge would apply to the transaction, resulting in a liability of £3,000.
Because an immediately chargeable transfer would, on the face of it, be within the client’s nil rate band, a better alternative might be an interest in possession trust, amending Trustee Act, s 31 as one child is a minor, and including an overriding power of appointment. On that basis there should be no SDLT to pay.
This article is also available on the Taxation website.
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