Trust Funds for IHT planning

Ninbi

My 65 year old mother-in-law is planning on putting aprox £300,000 of her rental property in a trust fund in the names of my two daughters (currently aged 5 and 6). The property is currently worth about £1.7m and has been rented out by her for 35 years. She has full IHT allowance from her deceased husband. She does not want to sign over the full ownership of the property to either of her children; and I'm happy for her to skip a generation and go straight to my children too.

I will be a trustee along with another family member (and my m-i-l). I have asked for the Fund not to be accessible directly by the children until they are each aged 25.

But what are the pitfalls? What happens when the property is sold? Do they only ever receive the initial amount or do they receive a proportion of the increase in property value? Will they be hit by prohibitive tax (CGT or IHT or other) bills at 25 or when the property is sold?

She has a IFA but as her attention to detail isn't great she's now asked me to take charge of setting it up - including assessing what the risks are - it feels like a big responsibility, and I want to make sure I do it right, for my children and for her.

SeniorSam

Is this the capital from the property? The Trust(Discretionary may be best, as the Trustees have the discretion as to when to make gifts/loans), will be subject to the Trust taxation laws and benefits can only be distributed by full agreement of all trustees. Benefits can be gifted or loaned, if that may be more tax efficient.

The beneficaries of the Trust can be named, but should be administered by two or three Trustees. Trust life can be up to 80 years.

Growth within the Trust will be outside the value of the Mother in Law's estate.

Sam

Laurajo_2

Assuming it will be set up as a relevant property trust t - If the property is sold whilst in the trust, I believe the trustees will be responsible for cgt currently 28 percent. There is an annual allowance of around 5.5k (or half the personal annual allowance) assuming this is the only trust set up by the settlor.

When the property is taken out of the trust, this is also a chargeable event so cgt will be due on the increase in value for this time.

Your mother will also be liable to cgt for the gift into the trust however maybe able to claim holdover relief which effectively defers the gain. on the flip side, this means there will be a higher liability when the cgt is triggered when the kids reach 25 as they will inherit your mothers base cost.

If it's rented out, will the trust also be entitled to the rental income? If so, they will be tax at 45 percent of this, however this can be reclaimed by paying distributions to your daughters up to their personal allowance.

You really need to take professional advice on this - the wrong move can end up costing '000s in needlessly wasted tax.

There will be a ten year charge to IHT which is calculated as a percentage of the value above the nil rate band available, I believe, although IHT is really not my forte.

But I must reiterate, seek professional advice - preferably from someone who is STEP accredited.

Laurajo_2

Also, she may want to watch the wording - is there a possibility of any more kids in the future? Just thinking on my feet.

Also, the trust will run for approximately 20 years, given your daughters current ages meaning mil will be 85. Is it possible she may not be in a position, or inclined to sell? What are her plans for the property? What do you envisage happening when they get to 25 and does this tie in with your mils expectations - of course, no doubt the kids will have there own plans by that point too.

Just things to consider.

John_Pierpoint

Will mil survive 7 years to avoid the gift being subject to IHT.?
I doubt that mil can roll over the CGT but I will leave that to jimmo.
Beware of the value of the trust increasing to no longer be a "nil rate band trust", when it goes over the IHT nil rate band of 325k it will be subject to regular levies of capital tax. You may want to create more than one trust (Google "pilot trust").

http://www.blplaw.com/expert-legal-insights/articles/changes-to-inheritance-tax-charges-on-trusts/

Woops it is looking like HMRC is closing this loophole. Can mil give property to someone else who then creates the trust ?

Presumably the intention is to pay out the rents as income for the grandchildren and thus utilise their income tax nil rate bands (personal allowance).

Got anyone in the family who has the attention to detail to manage the property and do the accounts and self assessment for HMRC each year?

https://forums.moneysavingexpert.com/discussion/comment/56932507#Comment_56932507

(It looks like the income tax rate for trusts follows the top income tax rate for individuals ie 40% -> 50% -> 45%.)

Laurajo_2

I understood that gifts which are chargeable transfers (this is, as if the amount gifted was over 325k it would be chargeable to IHT) could be held over?

The usual rules re holdover relief restricting what assets it applies to don't apply to gifts into a trust.

xylophone

Make certain that your MIL consults a solicitor who is expert in trusts. http://www.step.org/

http://www.hmrc.gov.uk/trusts/types/index.htm

John_Pierpoint

Laurajo wrote: »

I understood that gifts which are chargeable transfers (this is, as if the amount gifted was over 325k it would be chargeable to IHT) could be held over?

The usual rules re holdover relief restricting what assets it applies to don't apply to gifts into a trust.

Thanks for that, you are right, unlike giving assets to an individual (who that is not a spouse or legal partner), giving wealth to a trust does allow a hold over; provided that it is a genuine gift, where the benefits cannot come back to the giver:

It should be possible to avoid any liability to CGT either on the creation or on the
termination of a Discretionary Trust. The
liability may be deferred irrespective of the
nature of the assets, by an election for holdover relief.

http://www.ts-p.co.uk/uploaded/publications/information_sheets/Wills_and_Sucession/Discretionary_Trusts.pdf

There is usually no grand underlying design to tax, just a rats nest of the interplay of ad hoc rules - however it seems to me that the best way to think of this situation, is as am elective death at life time rates of IHT. (As against a gift to an individual in the hope of surviving the PET period - though surprise surprise there is an interplay, if the donor tries to do both).

MrsMouth

If she has owned the property for 30 odd years before gifting, there must be a serious amount of CGT in there, which you will crystallise by following this process.

If she wants to give something to the grandchildren now, I would always have said that gifting into a Trust was the best way to do this. However, does she not have assets that are not pregnant with gain that she could look to do this with? Cash for example, that could then be invested and income distributed to the children the Trust using the their personal allowances (so very tax efficient).

John_Pierpoint

As explained above setting up a trust is a bit like dying while you are still alive.
It is IHT that is the tax risk.

insured

It is difficult to research IHT and trusts on the internet as the HMRC manuals are quite difficult to follow.
Some of the answers you have been given already have bits of information in them so I will fill in the blanks and summarise the information for you, but you really must see a STEP solicitor. If they also instruct your IFA they will probably share the commission with the IFA and they will return it to you via a cheque or deduction from their bill.

1. The trust is called a relevant property trust. It will probably be discretionary (assuming that is what you want), so you can have the trust say what you want. ie get the capital at a particular age, get the income at a particular age, you can make both of these discretionary, so you and the other trustees can decide when the time is right.

2. Regardless of what the trust says in terms of powers of the trustees etc, there will be an immediate charge to IHT. The IHT will be 20% of the capital of the trust over the nil rate band. MILs husbands nil rate band is not available for this. Nil rate bands are only transferable on death. There will also be a disposal for capital gains tax. This can be held over till the later sale of the property.

3. Every ten years there will be a further charge to IHT. This will be at 6% of the capital value of the trust less the nil rate band.

4. When the capital of the trust leaves the trust to go to the beneficiaries there will be a further charge to IHT. There will be no capital gains tax as this can be held over till the eventual disposal.

5. Capital gains tax is payable in the trust if the property is disposed of. (28%) The trusts annual exemption is half of the individuals.

6. Income tax is payable by the trustees on the rent. This will be at up to 50%. If the income is paid to the beneficiaries and they are non taxpayers, the tax paid by the trustees can be reclaimed.

The biggest charge of this will be the IHT.

IHT can be avoided by setting up a series of pilot trusts with, (say £100) which will mean that you have multiple nil rate bands. This is done quite a lot and the pilot trusts are then amalgamated for ease of administration.

Pilot trusts do not mean you get multiple annual exemptions for CGT.

As I said, this is an extremely complicated area to research and most accountants or solicitors do not deal with it. You need to see a STEP solicitor or accountant.