CG65455 - Private residence relief: settled property: trusts for minor children

You may come across a trust over a dwelling house which purports to be the only or main residence of minor children. Typically the family would have two residences. One is retained while one is transferred into a trust for the benefit of the minor children. The parents main residence is said to be the residence they own directly. As the children do not have a legal interest in their parents' residence there is no need for them to nominate the trust residence as their main residence. The aim is to utilise the trust relief of Section 225 to obtain private residence relief on both of the family residences at the same time.

Transfer to discretionary trust

You may also see the transfer of a dwelling house to a discretionary trust. Typically a dwelling house which does not qualify for private residence relief, usually a second residence, is gifted to a discretionary settlement for the benefit of the settlor's children. This is a chargeable transfer for Inheritance Tax purposes, see Appendix 4, so hold-over relief continues to be available, see CG67030+.

The aim of the scheme is to obtain full relief under TCGA92/S225 on the sale of the residence. The relief `washes out' the chargeable gain which would have accrued if the sale had not been routed through the settlement. The scheme may involve a charge to Inheritance Tax but the transfer is usually within the nil rate band.

In these cases it is important to fully establish the facts. The children may not in fact have occupied the house as a residence. In cases involving minor children there may be some doubt as to whether they can live anywhere except by their parents permission, and not therefore under the terms of any settlement. Capital Gains Technical Group can give advice in cases of doubt or difficulty.