Query about tax on trust

seh567

My late husband estate has been left in trust. This is mainly made up of half the value of the marital home which is now owned by myself and the trustees. For probate purposed the house was valued at £300k leaving a 50% share £150k in the trust.

Question I have is if I now sell the house say for £340k does this mean that the trust would be worth £170k increasing the capital by £20k and would this be taxable income?

getmore4less

Is there a life interest? that changes the tax status

Yorkshireman99

seh567 wrote: »

My late husband estate has been left in trust. This is mainly made up of half the value of the marital home which is now owned by myself and the trustees. For probate purposed the house was valued at £300k leaving a 50% share £150k in the trust.

Question I have is if I now sell the house say for £340k does this mean that the trust would be worth £170k increasing the capital by £20k and would this be taxable income?

How was the house valued? Was this done professionally? Who are the beneficiaries of the trust?

seh567

It is currently a discretionary trust but might be changed to life interest trust. Trustees.
are my 2 sons.

The house was valued by 3 estate agents for probate purposes

getmore4less

If that is the only asset in the trust then the only tax would be CGT.
AIUI a life interest give the PRR relief negating any CGT liabilities.

(wills usualy set up life interest)

seh567

It is the only asset in the trust. I don't know what the abbreviations mean. .Step solicitor is suggesting I do a deed of variation to change my husbands will from discretionary trust to life interest trust to màke it easier to administer with regards to taxation on income and to make things simpler for my sons upon my death. That's why I wanted to know if the excess after sale would be deemed as income

SeniorSam

seh567

With half of the house placed in trust, that half has increased slightly, then that is good. It can remain in the Trust, or you could always request a loan from the Trust and hold onto it, giving an IOU to the |TRust and thereby retaining it's value

With yourself and your son's as Trustees, and assuming this is the normal Discretionary Trust, then the three of you control the assets(the house half). The main benefit of this is that the value in the Trust cannot be attacked from outside and it is 'ringfenced' for the beneficiaries.

Should you choose to change houses, there is nothing to prevent this, again assuming that your children are in full support of you, and all Trustees can authorise the change and maintain half the value in the Trust. Taxation will be calculated with the Trust 'effectively' being a person, with a CGT tax allowace and any gain calculated from date of the Trust to date of sale, so doubtful there would be tax to pay.

Don't feel that you are restricted with this Trust, my wife and I have the same arrangement in our Wills and when working (retired 5 years now) I recommended this for all my clients and their Wills were done through their solicitors accordingly.

I trust that your sons are also to be the remaining Executors when you decided to pop off, which is the same arrangement our family have.

Hope this has not confused you but do ask more questions if you wish.

Sam

Be very careful indeed about changing to a life interest Trust.

getmore4less

SeniorSam wrote: »

Be very careful indeed about changing to a life interest Trust.

Why?

A life interest( interest in possession) is a way to protect the capital AND the growth of a residential asset in the trust, no CGT bill and for all other practical purposes retains the discretionary attributes.

SeniorSam

More restrictive than a Discretionary Trust where the Trustees have the Discretion to do far more than a Trust that has a Lifetime Interest.

In this case the value in the Trust is no more than half the value of the home. Not a huge amount that is likely to grow significantly to the extent of needing to consider other avenues.

The widow and her two sons are the Trustees and as long as they are careing and have the interest of their mother before themselves, there should not be any problems.

Why go to the considerable expense of getting a solicitor to arrange a change the original Will by Deed of Variation and then create a Lifetime Trust. He will naturally be rubbing his hands.

If the mother needed capital within the Trust, the Trustees can arrange this and have an IOU to the Trust for anything borrowed. That way the Trust is protected.

If the Wills were originally drawn up by a compent solicitor, why do you think he did not discuss the Lifetime Interest, but perhaps he did and the circumstances warranted the Discretionary Trust.

The whole idea of the way this Trust has been set up, similar to my own, is to have as much flexibility as possible for the surviving spouse and a Discretionary Trust does exactly that.

In the past, I have persuaded clients in similar situations to get out of the Lifetime Interest Trust, particulary where the Solicitors has persuaded the clients to appont themselves as Trustees. Again rubbing their hands at the money they would make and did make from this. At least the clients had the good sense to keep the family as Executors.

That's Why.

Sam

seh567

After another discussion with solicitor I am going to run with the IHT Descretionary Trust. I need the flexibility if I want to sell the house at some point.

The will was made over 11 years ago and at the time we were close to the then inheritance tax threshold because we were both employed and had life insurance with out companies hence the IHT trust just in case. However since then legislation has changed and our circumstances and the solicitor has assured me it is very unlikely we would have to pay tax as there is no income being generated from the trust.

Thank you for all for taking the time to answer my questions

SeniorSam

Well done. Thats the right way to go.

Sam