TQOTW: Interaction of PPR and S260 holdover relief
The trustees of a discretionary trust have transferred a residential rental property to a beneficiary and held over the arising gain under s260 TCGA1992. There was no holdover claim made when the property was transferred into the trust ten years ago. The beneficiary plans to live in the property for a few years and is then likely to sell it. Will he be entitled to claim Principal Private Residence Relief (PPR) on the eventual disposal? 

The trustees and the beneficiary, as you state, were able to claim holdover relief under s260 TCGA 1992 on the transfer out of the trust to the beneficiary. As a discretionary trust falls under the relevant property inheritance tax regime, when property leaves the trust there is an immediate charge to Inheritance Tax (an exit charge), which may or may not result in an Inheritance Tax charge. Due to this IHT charge, a claim may be made to holdover the gain arising on the transfer out of the trust. On transfer, the trustees are treated as disposing of the property at its then market value under s71 TCGA 1992. Due to claiming holdover relief the gain is then treated as reducing the beneficiary’s acquisition cost by the same amount, he effectively has the same base cost as when the property was originally transferred into the trust.

An Individual who sells his main residence can normally claim PPR under s222 TCGA1992 as long as the property has been his main residence at some point during his period of ownership. In the circumstances above though, this would mean that no capital gains tax (CGT) would have been paid on either the disposal by the trustees or the subsequent disposal by the beneficiary thus escaping any CGT liability.

This ‘arrangement’ however was ended by the introduction of s226A TCGA1992. For property disposals made on or after 10 December 2003 it is no longer possible to claim holdover relief under s260 and then PPR on any later disposal. This not only affect the beneficiary who receives a property from a trust subject to the holdover relief claim but also the trustees who receive a property subject to a holdover relief claim – the trustees cannot claim PPR under s225 TCGA 1992 for occupation by a beneficiary.

A choice between the reliefs has to be considered at the time of the transfer. S226A(6) allows the holdover relief claim to be revoked. However, in practical terms this is more commonplace where the settlor who is transferring the property into a trust has the choice between a small or affordable CGT charge in order that the trustees can claim PPR if they permit a beneficiary to occupy the property. A revocation after a transfer out of a trust would also require the permission of the trustees i.e. it cannot be made unilaterally by the beneficiary. Furthermore, a holdover claim is usually made in a SA Tax Return and by virtue of s42(2) TMA 1970, a withdrawal of the claim would have to be made within the usual 12 months amendment window of s9ZA TMA 1970.

Transitional rules were also introduced for certain disposals made on or after 10 December 2003 where holdover relief was claimed prior to that date. Details can be found at CG64933.

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Marsha began her career in tax 13 years ago working in the personal tax departments of 2 small accountancy firms where she mainly dealt with sole traders, partnerships and OMBs. Having gained the ATT and CTA qualifications she then moved to a firm of Chartered Tax Advisers working for the last 8 years as an Assistant Tax Manager in the private client department where the majority of her clients were high net worth individuals.

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