45% income tax on property held in trust?

MartinW6

I am the beneficiary of a property held in a trust.  When I inherit the property will I have to pay 45% income tax on the sale price when I come to sell it?  If so, will that be on the full sale price?

Thanks in advance for any advice you give.

Jeremy535897

You need to provide more information, but an income tax liability is extremely unlikely. There are more likely to be capital gains tax and inheritance tax issues.

MartinW6

Thanks Jeremy.  I believe I've got a handle on the capital gains tax and inheritance tax issues, but I recently read that "trustees are likely to be liable for Income Tax at a rate of 45% and capital gains tax at 28%."  My concern is what that 45% would be applied to.  Could it be applied to the total income I receive from selling the house itself, or income I generate by renting the house (for instance)?   

Jeremy535897

It depends on the type of trust. You say that you are "the beneficiary of a property held in a trust". You cannot be. You can be a beneficiary of a trust that holds property. You also cannot "inherit" anything from a trust. A property may be appointed to you as a beneficiary, at which point the trustees are deemed to sell the property at market value for capital gains tax (but that may not be payable), and there may be inheritance tax. There would only be income tax if some sort of trade, development or tax avoidance scheme were involved. Once the property is yours, any gains and rental income will be taxed in the normal way. What sort of trust is it, and what is causing the appointment to you?

MartinW6

This is from the will.

"I give my beneficial interest in the house **** to my trustees to hold them on trust for sale in accordance with the following directions:

When this trust ends my beneficial interest in the house shall pass to my son." < me.

It doesn't specifically mention what kind of trust it is.

Does this shed any more light Jeremy?

Thanks again.

Jeremy535897

It won't. The wording you quote in the first sentence is standard (maximise trustees' flexibility to sell rather than keep assets if they so choose). There must be something between that and "when this trust ends". It sounds as if one parent has died (I shall assume your father) owning a property, and lived there with someone (your mother?), and placed it into a life interest trust for her under his will, remainder to you. If that is the case, it should be treated as part of her estate for inheritance tax purposes on her death, and be free of capital gains tax when she dies. Does the trust say something like she has the right to live in the property rent free during her lifetime?

MartinW6

Sorry, yes, there are two directions between the text I mentioned above.

"(a) my wife ('the Occupant') may live in the House and use it as her principal place of residence and have the use of the Effects in connection with it for as long as she wishes."

"(b) Until the Occupant has in the opinion of my Trustees ceased to be entitled under (a) to use the House as her principal place of residence neither it not the Effects shall be sold without her consent but she shall pay all outgoings and keep it in good repair and insurance to the satisfaction of my trustees."

Jeremy535897

My guess was spot on then, and the consequences are as I mentioned. Basically:

• no inheritance tax arose on your father's death in respect of the house, as it was an exempt transfer to a spouse
• to the extent not used on his death, your father's nil rate band and RNRB can be transferred to his wife (depending on when he died). I am assuming she is your mother?
• when your mother dies, if she hasn't remarried, her entire estate is chargeable to inheritance tax, but at current rates up to £1 million can pass tax free (see https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold)
• when your mother dies, the house is revalued to market value for capital gains tax purposes, but no capital gains tax is payable by the trustees

When you receive the property, and assuming you choose to keep it and let it:

• you will pay income tax on any rental income received, less allowable expenses
• you will pay capital gains tax on the eventual sale, on the proceeds, less sale costs, less improvements you make, less the value when your mother died, less any available annual exemption.

MartinW6

Your guess was indeed correct Jeremy.

Dad passed in April, 2014, and yes, she's my mother.

Presumably if I sell the property after receiving it (rather than renting it out) there's no income tax liability and any capital gains will be negligible (assuming it doesn't take a long time to sell)?

Jeremy535897

Yes, you are right.

[Deleted User]

And, as Jeremy usually advises, the gain must be reported and any tax paid within 30 days of the sale.

https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax