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Joshua
Joshua, Lawyer
Category: Property Law
Satisfied Customers: 25358
Experience:  LL.B (Hons), Higher Prof. Dip. Law & Practice
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Twenty one acres of farm land (cost in March 1982: £29,520)

Resolved Question:

Twenty one acres of farm land (cost in March 1982: £29,520) were gifted by a father to his three sons in February 1998, valued at £73,500. The land was transferred to a discretionary trust in April 2003, at a value of £82,000. The beneficiaries are the same three boys, their spouses and descendants. In both of these transactions, the gains of £12,659 and £61,436 were held over.

It is now proposed to distribute the land to the three boys and, hopefully, a further hold over election will be possible. It is likely that the land will be sold for approximately £200,000, next year, with a lower tax liability than if sold by the trust.

Can you see any problems with this proposal?
Submitted: 3 years ago.
Category: Property Law
Expert:  Joshua replied 3 years ago.

Joshua :

Hello and thank you for your question. I will be very pleased to assist you. I'm a practicing lawyer in England with over 10 years experience.

Joshua :

May I ask if the values you refer to valuations based on the land as agricultural land - i.e the value you expect the land to sell for is as agricultural land as opposed to as development land e.g. because planning permission has been obtained to build something please?

Customer:

It's slightly more complicated. The value of the area, as farm land, would be only £20- £30,000.The 1998 and 2006 values were therefore agricultural plus 'hope' for residential development. The transfer now is for 20 acres for agricultural use plus a bit of 'hope' and 1 acre with full residential planning permission.

Customer:

Thanks for your help and I look forward to your reply tomorrow.

Joshua :

thank you. The reason I ask about agricultural values is because there is opportunity for holdover relief to be applied to gifts of agricultural land irrespective of trusts however this holdover relief only extends to the valuation of the land as agricultural land and would therefore not include hope value.

Joshua :

However, there is a further holdover relief exemption available for transfers by trustees to beneficiaries providing the trust is not a bare trust nor a settlor interested trust - i.e. a trust which an owner of an asset places into a trust controlled by and for the benefit of himself. on the basis this is a true discretionary trust, holdover relief should be available in respect of the transfer from the trustees to the potential beneficiaries thereunder

Customer:

The trustees are the settlors and are potential beneficiaries of this discretionary trust. Is hold over relief still available.

Customer:

If the distribution is in this tax year and some or all of the land is sold next year, with the more beneficial tax treatment of the gain on individuals, is the Revenue likely to say that this is tax avoidance?

Joshua :

Sorry for the delay in reverting to you.

Joshua :

What was the purpose of their placing the property into a discretionary trust?

Joshua :

Was there any transfer of the legal title then? Presumably from what you say there was not but rather the trustees simply declared the land was held on a discretionary trust?

Customer:

In all honesty, partly for the better CGT applicable to trusts at the time and partly to protect the proceeds of the assets, should there be a sale, as one of the three brothers has a very domineering wife, who will spend every penny that she can get hold of. Sorry if this seems a bit raw.

Customer:

The trustees simply declared that the land was held in trust

Joshua :

Thanks. Did you take advice when the trust was created>

Customer:

No

Joshua :

Thank you. Have any formal valuations been obtained or recorded by you to underwrite the various values you mention in your original post or are these all estimated?

Joshua :

Has the discretionary trust been notified to HMRC?

Customer:

No formal valuations made

Customer:

Trust notified to HMRC and annual tax returns filed

Customer:

Thanks again for your help. Shall we continue this tomorrow?

Joshua :

Thanks. I am afraid this is rather difficult in that what you have here is a settlor interested trust for which holdover relief cannot be claimed. Accordingly when you declared the trust it would appear that there would have been CGT payable on the disposal into the trust.

Joshua :

However you would have been able to claim your individual annual exemptions. Hold over relief would have been available on the agricultural value of the land.

Joshua :

That said the changes that prevented hold over relief being claimed on transfers of property into settlor interested trusts were introduced in the Finance Act in 2004 and I believe looking back at what you say you created the DT in 2003 and accordingly the trust should not be caught by these provisions. So on the basis I am correct in my belief that you created the DT in 2003 the transfer in would seem to be ok for hold over relief. So what about the transfer out...

Customer:

I'm not sure what you mean by 'So what about the transfer out...'

Customer:

Can we finalise this tomorrow.

Customer:

Thanks

Joshua :

I do apologise I had intended to continue but I thought you had gone off-line for the evening. so the above deals with the transfer into the trust. As regards XXXXX XXXXX transfer out, I cannot see any difficulty with this. Holdover relief should be available by virtue of section 260 of the chargeable gains act 1992 which allows for holdover relief in respect of transfers out of trust. No limitation was introduced by the Finance act 2004 in relation to settle interested trusts for property been transferred out of those trusts.

Joshua :

accordingly, I cannot seem reason that holdover relief cannot be claimed on the basis of the transfer out of trust

Joshua :

Does the above answer all your questions or is there anything I can clarify or help you with any further?

Customer:

I do appreciate the speed with which you have dealt with this and I shall, of course rate this. Since I am a 'just answer' virgin, I'm not sure if a rating now will terminate our discussion, since I hope that you may be able to comment on whether a distribution this year, followed by a sale next year will be regarded as tax avoidance. I have a further question relating to the potential sale of the land. Will this be treated as ancilliary to the original question or should it be treated as a seperate enquiry. If it comes to registering for a new enquiry, can you please continue as my advisor?

Joshua :

Providing a rating does not prevent you returning to ask follow up questions. The thread remains available for you to return to at any time.

Joshua :

I cannot see any difficulty with the transfer out and then subsequent sale. What you propose is a common approach to mitigating CGT.

Joshua :

I makes sense to take advantage of your cgt allowances as individuals rather than the trusts lower cgt allowance.

Customer:
That's very helpful. The other question is 'The trust has incurred nearly £60,000 (as yet unpaid) in professional fees, in an attempt to sell the whole 21acres, for residential development. The only result is planning permission on 1 acre. If just this one acre is sold, I realise that only 1/21 of the land cost will be deductible from the sale proceeds but, since the sale will be made by the three brothers and not the trust, can the trust's costs be deducted from the proceeds? Since the chance of development on the remaining 20 acres is very unlikely, can the whole costs and not just 1/21 be deducted?'
Joshua :

This will be difficult. Under the legislation you are permitted to deduct any 'enhancement expenditure' you incur on an asset sold. However in order to qualify as enhancement expenditure, expenditure must satisfy all the following conditions: have been incurred for the purpose of enhancing the value of the asset










  • be reflected in the state or nature of the asset at the date of disposal.


Joshua :

and be on the asset

Joshua :

In respect of the planning permission fees for the planning permission that has been successful there is no difficulty with this. However in respect of fees for permissions that have not been successful this would fail the above test because it has not enhanced the value of the land.

Joshua :

The Revenue will likely require an apportionment of the fees in respect of the successful and failed applications but you may be able to negotiate on the point as it may be difficult to accurately separate the two.

Joshua :

Is there anything else I can help you with?

Customer:

I think that's all for now. Thanks John

Joshua, Lawyer
Category: Property Law
Satisfied Customers: 25358
Experience: LL.B (Hons), Higher Prof. Dip. Law & Practice
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