Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from December 2005. Older articles are accessed through our main Property Tax page.

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My wife and I are 62, married for 39 years and retired. Living together was difficult so we have sold the big semi and bought two small semis of about the same value near to each other. We expect to live in each house for many years. It works for us and we are more friendly. The separation is likely to be permanent but we have taken no legal action to formalise it.

What is the Capital Gains Tax (CGT) situation on the houses? We live as sole occupiers of separate properties; there is no marital home and we spend each night apart. Are we both allowed private residence relief for CGT purposes? The properties are owned in joint names. Should we each hold one in one name?

Maggie Fleming writes:

It is a well-known fact that a married couple, living together, can have only one exempt residence between them - and this rule will now apply to registered civil partners also. However, from what you have said, you fit the Revenue and Customs definition of "separated", in that you are living apart in circumstances such that it is likely that the separation will prove permanent. The fact that you have taken no legal action is irrelevant. If either or both of you completes tax returns, you should indicate your marital status on the forms as "separated". You should advise your tax district of your change of status. They will accept a date of separation agreed between you. As a separated couple, you can each have your own residence which qualifies for Principal Private Residence relief.

You should each wholly own the property you live in. As you are no longer married, you cannot take advantage of the inter-spouse exemption in order to transfer your share of the "wrong" properties to each other taxfree. However, there is a little-known extra-statutory concession (ESC D26) which may be of use to you. The concession operates where two people jointly own two properties which are their main residences and would qualify fully for PPR relief if each property were in the sole ownership of the person who lives in it. Using this concession, you can exchange interests, so that each of you ends up owning your own home solely, without a potential CGT problem.

One of my golfing buddies was telling me the other day that trusts are a great way to sidestep Inheritance Tax (IHT). Is he correct?

Not quite. People have very hazy notions about trusts. It is a popular misconception that a trust is a way of paying next to no tax. In fact, however, many of the tax advantages of trusts have been eroded over the years. But they are still useful in estate planning for flexibility and for retaining control over assets.

Can you give a good example of the benefits?

In estate planning for married couples or civil partners, a Nil Rate Band Discretionary Trust is extremely useful. That way, an amount equivalent to the IHT nil-rate band (currently £275,000) passes to a trust on death, rather than to the surviving partner, so that it is not taxed on the second death. But the survivor is a beneficiary of the trust and a separate letter of wishes to the trustees ensures that his or her monetary needs are to be satisfied from the funds. It is a simple way of saving £110,000.

Well, that alone is worth the accountant's fees. Any other good examples, perhaps specifically involving property?

A Reverter to Settlor trust can be useful where the family home is the main asset. The joint tenancy could be severed and replaced by a "tenants in common" arrangement. This permits each partner to will their share away from the other. When one dies, a 50 per cent interest in the house could be passed to the children, who then use a trust to settle it back on the remaining parent for life - this provides security of tenure. On the survivor's death, it reverts to the children, free of IHT.

There has got to be a catch, surely. The Inland Revenue would not let all this money slip through its grasping hands...

Yes, beware: over-sophisticated planning with trusts can easily backfire. Many people who invested in expensive "double trust" schemes in order to gift their homes while continuing to live in them are likely to be caught by the Pre-Owned Assets legislation, which applies to all such transactions entered into since March 1986. It is better to avoid the really complex plans - it is possible that HM Revenue and Customs will challenge them at some point in the future. Keep it simple!