Reply to readers’ queries published by Taxation magazine in August 2023
Reader’s query
I have a new client who jointly purchased a house with his son for £340,000 some years ago with my client contributing £120,000 and his son contributing £220,000. This is the son’s main residence and is now worth £1m.
A few years ago, a declaration of trust was put in place to confirm the ownership position. The declaration of trust states that: ‘The parties declare that they are holding the property and net proceeds of sale and net income until sale upon trust for themselves as beneficial tenants in common as follows:
The parties covenant with each other that in the event of the property being disposed of the proceeds of sale shall be calculated as follows:
Agreed sales price less:
- Legal and estate agents’ charges upon sale.
- Remaining money after above deductions split between the parties in the following shares: i) as to £220,000 to son; ii) as to £120,000 to father; and iii) remaining money after above deductions to son.’
It seems that the father’s beneficial share is restricted to his original investment of £120,000irrespective of the value of the property and the son benefits from all increases in value of the property.
It seems that there has been, or will be, a transfer of value from father to son in respect of increases in the value of the property.
What is the correct legal and tax approach to this arrangement?
Reply to reader’s query
Based on the facts provided by Sonata, it is obvious that the trust arrangement put in place by the father and son appears a sham, because the actual rights and obligations of each party involved do not correspond to what is provided in the covenants.
There are different answers to Sonata’s question, depending on which scenario the facts fall into.
The first scenario. The £120,000 contributed by father bears more resemblance to an interest-free loan from father to son. If so, upon sale of the property, accrued gains in the property are taxable on the son who looks having PPR relief available in full provided that he has occupied the property as his main residence since the date of acquisition. It appears difficult to justify this treatment, as this does not reflect, if at all, the entries already on the property’s Title Deed to say the least.
The second scenario. The £120,000 is a lifetime gift from father to son, for which father needs to survive a 7-year period for IHT purposes. Father holds part of the legal ownership on behalf of son, the beneficial ownership of that part belongs to son. If so, the tax treatment is exactly the same as that in scenario one above. This would have been reflected in the entries of the SDLT form submitted after the conveyance is completed. Based on the provisions in the covenants, it is doubtful that the SDLT form would have had such entries to support the lifetime gift as suggested.
The third scenario. Subject to the findings on the SDLT form, tax treatment simply follows the actual rights and obligations of each party. The proportion of the capital gain that belongs to father is subject to CGT with no PPR relief available. The son’s proportion of the capital gain is also subject to CGT albeit with PPR relief being available in full.
This article is for general information only and should not be relied on as a substitute for specific tax advice.
This article is provided for general information only. It does not constitute tax, legal or other professional advice, and should not be relied on as a substitute for specific advice based on your particular circumstances.
