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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Private residence relief: settled property: common intention constructive trusts: nature of interest

TCGA92/S225

Having established a common intention and detrimental reliance on that common intention it is necessary to establish the nature of the interest held by the occupier. In the extract from Lady Hale’s opinion in Stack v Dowden quoted in paragraph CG65421 she refers to the parties showing in what way their beneficial interests differ from their legal interests. A claim under TCGA92/S225 requires the property sold to be occupied under the terms of the settlement. Merely agreeing that a person can occupy the property doesn’t mean that the property is held on constructive trust. If relief under TCGA92/S225 is claimed on the basis that the property is held on constructive trust the trustees have to say what the terms of the trust are. Usually it will be that the occupier had a life interest in the property. The parties must take account of the other tax consequences of the occupier having a life interest.

The first you are likely to hear of the claim that the property is held on constructive trust is when the property is sold. If the occupier is still alive the parties must have dealt with the sale proceeds in a way that is consistent with the occupier having this interest, see CG65426. If the property is sold by the legal owner/settlor after the occupier has died you will need to consider the effect of TCGA92/S73. See CG36454+.

TCGA92/S73 deals with position in which a person becomes absolutely entitled to the trust property because of the death of a person with an interest in possession in that property. If the property reverts to the settlor the trustees are treated as having disposed of the property at the date of death for no gain/no loss. This will give the acquisition cost of the property at the date of death. No relief under TCGA92/S225 is available because the property has not been occupied as a private residence from the date of death. This treatment may not apply if the settlement was created on or after 22 March 2006. See CG36457.

A claim under TCGA92/S225 also requires the property sold to be held as settled property. There are no CGT consequences on the creation of a constructive trust if the settlor effectively settles cash by buying the property. If they already own the property the transfer into settlement will be a disposal. See TCGA92/S70 and CG35710. It is possible the settlor may be able to claim private residence relief themselves on this disposal or that they can claim hold-over relief under TCGA92/S260. See CG67030+. There are time limits for claiming hold-over relief. Also it is unlikely that the conditions for hold-over relief will be satisfied if the settlement was created before 22 March 2006 as the terms of the settlement would give the beneficiary an interest in possession. See CG67041.