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I have a daughter in her 30s who is single and will only ever earn the minimum wage.
To take her out of the poor standard of housing provided by housing benefit, I invested my savings in a modest flat for her 12 years ago.
In 2002 I put the flat into a discretionary trust. My daughter, my other daughter and my wife and I are trustees. The legislation, at the time, allowed for the flat to be transferred at a subsequent date to my daughter without there being a Capital Gains Tax (CGT) charge, owing to the residential relief allowed.
We have now decided to do this but have discovered that, unbeknown to us, the Chancellor abolished this CGT-free transfer in the 2003 Finance Act. Because of the increase in house prices I now find that I will have to pay upwards of £20,000 in order to transfer the flat to her. Am I correct and is there any way in which this can be reduced?
Maggie Fleming:
This was a well-known loophole before the Chancellor plugged it in December 2003. A property which did not qualify for principal private residence relief and which would attract a large CGT bill on sale was gifted into a discretionary trust and an election made to hold over the capital gain until eventual sale by the trustees. After a decent interval, the trustees would decide to let one of the original owner's adult children occupy it. A few years later, the trustees would sell the property and the capital gain (including that held over) was wiped out, because it had been the child's main residence.
There are transitional rules which mean that, for a property already under trust at December 10, 2003, part of the gain is still exempt. Provided that the trust arrangement was structured properly and your daughter has had the right to occupy the property under the trust deed, some of the gain would be wiped out. For example, if you put the flat into trust in January 2002 (holding over the gain accrued since 1994) and the trustees were to sell it in January 2007, roughly two-fifths of the gain would be exempt; ie the part relating to the period from January 2002 until December 2003, when the law changed.
You need expert advice but, given that the main residence relief no longer applies to the trustees but would apply if the property were owned directly by your daughter, it may be better in the long run if she is given the flat now, especially if property prices continue to escalate. You may just have to bite the bullet and pay the tax.
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