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Gift House?
There has been a cunning plan available for many years which made it possible to make capital gains exempt on your second home. You could give the house away to a trust, which allowed a beneficiary to live in the house - the trustees then enjoyed the exemption of gains on a 'main residence', even though the money might be returned to the person who originally owned the building as a very chargeable second property.
It is surprising that it took so long for the Revenue to close this down, but they have finally done so with effect from 10 December 2003. Now, if you transfer a second home to a trust, you will have a choice - you can pay tax on the gain up to the gift into trust, and then the trustees can enjoy the 'main residence' exemption on any gains they make after that; or you can transfer the gain to date into the trust, but the trustees won't enjoy any exemption at all. So you pay tax upfront but less overall; or you pay tax later, but more of it.
There is a hidden catch in this change. Some people used a variation of the cunning plan which involved the house leaving the trust and going out to a beneficiary, who would then live in it and qualify for the main residence exemption personally. Anyone in this position should take urgent advice, because they could find that their house is no longer exempt from CGT from December 2003 onwards. Trustees hoping to benefit from the exemption also need to take advice about how the change affects them. We will be happy to fill you in on the details.
The changes in the Finance Act 2004 (s.117 and Schedule 22) took effect on 10 December 2003 (the date of the Pre-Budget Report). They clearly affect arrangements entered into after that date - if a settlor claims gifts relief on transferring a house into trust, the trustees cannot claim the exemption after that; and if trustees claim gifts relief on transferring a house to a beneficiary, the beneficiary cannot claim the exemption either.
The rules also apply to arrangements that were entered into before that date. If someone now occupies a house as main residence, and the acquisition of that house before December 2003 was affected by a gifts relief claim, the final gain will have to be time-apportioned before and after December 2003 to find out how much can be exempt.
For example, suppose parents bought a second home for £100,000 in 1990. It was transferred to a child in December 2000 by putting it through a discretionary trust, claiming gifts relief on the way in and also on the way out. The house was worth £250,000 at the time, but the gifts relief claim avoided any tax charge. Relief for inflation up to April 1998 meant that the CGT cost to the child is £125,000.
If the child lives in the house throughout, and sells it for £400,000 in December 2006, the gain might be expected to be exempt. But the new rules require time apportionment of the 16 years' gain (£400,000 minus £125,000 equals £275,000) before and after the change of rules (3 years/3 years), meaning that £137,500 would be a chargeable capital gain before taper relief.
Someone in this position should probably try to trigger the capital gain as soon as possible, before the time apportionment counts too heavily against them. For example, if in this case the house is worth £350,000 in December 2004, and a gain is triggered, the chargeable amount would only be a quarter of £225,000 rather than half of £275,000. But it is still likely to be an unwelcome charge, and it will be important to look at all the options. |
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