Trusts - Practical Uses for All
Trusts: Practical Uses for All
The 2006 Finance Act saw radical changes to the tax treatment of trusts which has led many to believe that the future of trusts is limited to all but sophisticated, aggressive tax planning.
Our view differs. Here are two scenarios that demonstrate how trusts can be used to provide cost effective solutions to everyday scenarios
Holiday Homes
Often the family holiday home has been in the family for a generation or two and was passed down from parents resulting in a low base cost e.g. £50,000. Despite the recent slump, property prices have been buoyant over the last 30 years and this property may now be worth £500,000.
This is a non-income producing asset that may result in an Inheritance Tax bill of £200,000 if nothing is done. Given that the cost of passing it down a generation is £81,000 in Capital Gains Tax, what can be done?
The answer is a trust. Using a trust, the property could be transferred without incurring Inheritance Tax, Capital Gains Tax or Stamp Duty Land Tax.
The benefit is that the owner can remain in control of the property as a trustee, continue to occupy the property by paying a rent (probably equivalent to the cost of the upkeep anyway) and the property could be passed down generations indefinitely without them being faced with significant cost.
University Accommodation
In 1989 a husband and wife had £20,000 for assisting their three children through University. The parents wanted to buy a property but could not do so for all three and indeed, were anxious about losing control of their capital. Instead, they transferred £20,000 into a trust that purchased a property for £80,000 which their eldest daughter occupied throughout university. The daughter let a room which helped cover the mortgage and after three years she moved out.
Over the next 17 years, the property was occupied by tenants and the other two siblings at various stages until the property was eventually sold in 2009 for £380,000. Had the parents bought the property in their own name, the Capital Gains Tax liability might have been as much as £54,000 as they would not have been entitled to Principal Private Residence Relief. Buying the property in their daughter’s name would have reduced the tax bill to around £25,000 because she would have been entitled to Principal Private Residence Relief and letting relief. However, in so doing the parents would have given up control of their investment to their daughter.
By using a trust the parents can retain control, but potentially lower their tax bill to nil because the tax relief available to the trust takes account of the siblings’ occupation. By investing in one property in this way, all the children have been able to benefit, not just one, and the parents can even be beneficiaries and benefit themselves.
Finally, it is worth mentioning that by the time the property is sold in 2009 and the proceeds are distributed to the trust beneficiaries, one of the children might be in a struggling marriage. Rather than distribute the proceeds directly to that child, the trust can make a loan to the couple. Being a loan, the cash is not matrimonial property and can be reclaimed if the marriage breaks down.
Neil Ritchie
neil.ritchie@murraybeith.co.uk