Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a query on the tax treatment of a UK land sale for Portuguese resident.
An English father gifts his daughter a percentage of agricultural land through a bare trust of which he is a beneficiary. Four months later it is sold with planning permission for building development, with a substantial capital gain.
The daughter has been a Portuguese tax resident for three years. What is her situation regarding paying tax on the land?
I look forward to receiving Taxation readers’ assistance on this matter.
Query 19,028 – Madeira.
Reply by Terry ‘Lacuna’ Jordan, BKL
The English father has apparently made an outright gift to his daughter of part of a holding of agricultural land by means of a declaration of bare trust setting out the proportion passing to her and that retained by him. On the face of it, a written document would have been required to satisfy the requirements of the Law of Property Act 1925.
The father’s gift constituted a disposal for capital gains tax purposes and, although holdover relief would have been available under TCGA 1992, s 165 and Sch 7 had the daughter been UK resident, it would not be available in view of the provisions of TCGA 1992, s 166.
Section 166(1) states:
‘Subject to s 167A, s 165(4) shall not apply where the transferee is not resident in the UK.’
If the daughter remains non-UK resident for five consecutive tax years, she would not have a UK liability on the profit arising on the disposal of the land. Note that she may well have a liability in Portugal and local advice would need to be sought.
If the daughter resumes UK-residence within the five-year period, under TCGA 1992, s 10A the gain would be assessable here in the tax year of her return.
For inheritance tax purposes, the father’s gift would have constituted a potentially exempt transfer and it may be that agricultural property relief (limited to the agricultural value of the land and excluding any development or ‘hope’ value) would have been available at the time.
However, if the father dies within seven years of the gift, the relief would be revisited and denied on the basis that the land has been sold.
In such a case, primarily, the daughter would be liable for any inheritance tax on the failed potentially exempt transfer.