45% income tax on property held in trust?

MartinW6

Thanks Jeremy, I very much appreciate your advice.  Thanks Purdy too.

Final couple of questions, if I may.

My mother has moved into my house, and we're preparing to rent out her property.  If she were to give me the rental income  presumably this would count as a gift(s) and therefore be liable to inheritance tax in the future?

If my mother sells the house in the near future and give some of the proceeds to me - again, would this count as a gift?  My main concern is that the IHT threshold only goes up to £1 million if property is being passed on, and that if the property is sold prior to mum passing, that the threshold would revert to the standard £650,000.

getmore4less

There are other considerations that deal with downsizing and disposals for the residential nil rate band.
Where there is a IPDI trust involved it get more complicated as assets are released from the trust early. 

You also have to consider gift with reservations and preowned assets. 

MartinW6

getmore4less said:

There are other considerations that deal with downsizing and disposals for the residential nil rate band.
Where there is a IPDI trust involved it get more complicated as assets are released from the trust early. 

You also have to consider gift with reservations and preowned assets. 

In terms of the renting aspect, is there anything in particular I need to consider?  Does the above solely relate to selling the property?

Ultimately, is there anything stopping my mother from renting the property and gifting me the rental income (I'm assuming that if she does, it'll be considered a gift for IHT purposes).

Jeremy535897

I would be concerned. Who are the trustees? Might they consider that your mother's life interest terminated when she ceased to use it as her main residence? I guess that will depend on all the terms in the trust, but I suggest the matter is investigated urgently, as it would mean that you would own the property, and there would be a potentially exempt transfer by your mother (and I fear the RNRB would be lost). There would also be a capital gains tax disposal at market value, but it should be covered by the main residence relief.

If your mother is advised that she still retains a life interest in the trust, her moving out into your house may not be such a problem, because I think the RNRB would remain available (as she has lived in it). If it is sold before her death by the trustees, though, I believe the RNRB is lost. Your mother cannot sell the house and give you the proceeds, because the legal interest in it is held by the trustees. If the trustees sold it, they would be subject to capital gains tax on some of the gain once the property has ceased to be her main residence for 9 months (and would have to pay it within 30 days of completion). The sale itself may bring about a termination of the trust, depending on the wording, with the consequences I mentioned earlier. If it doesn't, the trustees cannot make a gift to you of any sale proceeds (unless the trust allows this, and again there would be a termination of at least part of the life interest). It may be simpler for all concerned, if it is possible, to wind up the trust and appoint all the assets to your mother, but it may not be possible (and she could then choose to give or leave the trust property to anyone she chose).

I doubt the gift of the rental income would be a problem, as it would be likely to be covered by the normal expenditure out of income exemption, unless your mother is living off capital. It would be best to take advice on this before doing it. As the trust is designed to give her a life interest, any income arising in the trust belongs to her.

I didn't bother mentioning earlier the 30 day rule for paying capital gains tax referred to by Purdy, as I had assumed it would be a bit far off at the moment (mother has to die first and then you have to sell at a profit of more than your unused annual exemption). I had not considered a sale before her death (and I think it would be the least of your problems). I did not mention gifts with reservation or pre-owned asset rules, because I cannot see how these could be relevant.

MartinW6

Thanks Jeremy.

It sounds like selling the property before mum passes is a bit of a minefield, and best avoided if possible (to potentially preserve the RNRB).  It's not something we've seriously considered; we'd really only mooted the idea.  However, it sounds like we should take advice if we were to consider going down this route.

Just to alay my fears - if my mother simply rents the property, her life interest wouldn't be considered terminated would it?  From what you said, it sounds like renting/gifting the income is the safe option (for want of a better word).  This was our original intention.  Would her renting the property make me the de-facto owner and endanger the RNRB?

I don't know if this makes any difference, but I'm both an executor and a trustee of the will.

Jeremy535897

MartinW6 said:

Thanks Jeremy.

It sounds like selling the property before mum passes is a bit of a minefield, and best avoided if possible (to potentially preserve the RNRB).  It's not something we've seriously considered; we'd really only mooted the idea.  However, it sounds like we should take advice if we were to consider going down this route.

Just to alay my fears - if my mother simply rents the property, her life interest wouldn't be considered terminated would it?  From what you said, it sounds like renting/gifting the income is the safe option (for want of a better word).  This was our original intention.  Would her renting the property make me the de-facto owner and endanger the RNRB?

I don't know if this makes any difference, but I'm both an executor and a trustee of the will.

Who are the other executors and trustees? I can't answer your question, as it will depend on the precise terms of the trust. If it was well drafted, I would hope not. I have seen a lot of very badly drafted trust deeds in my time. I am not a lawyer, but I have spent many hours over several decades telling lawyers why their trust deeds were inadequate.

MartinW6

Thanks Jeremy.

The other executor/trustee is my wife.

Would it be wise to consult a solicitor regarding renting the property and it's potential impact on RNRB?

I'm quite confused/concerned.  I didn't think that if my mother moved in with us and rented out the house that it could - potentially - have far reaching consequences.

Jeremy535897

I am not saying it will, but it does need to be checked. Firstly, read every line slowly and carefully yourself, so you are fully familiar with it (you should do so as a responsible trustee). If you have doubts, talk to the solicitor who drew it up. They should know their way around their own documents. There may well be no problem at all. There should be no problem at all. But you should check, as the consequences of doing something not envisaged by the trust deed could be significant.

getmore4less

I would check  the downsizing/selling rules around the RNRB as currently she has the full beneficial interest in the property even though 1/2 is held in the trust. and  you are a qualifying close relative.

I suspect there is a good chance the RNRB(s) will continue to be available if sold early


Another option which could be explored, if this is a long term plan for her to live with you, is she does sell and buys a share of your place  or any future place and retains the life interest element of any surplus, this gives her more security but you would need LPA in place and it would get complicated to move if she lost capacity.

Just read the terms of the will again you probably need LPA urgently because if she loses capacity she can't give consent to a sale while alive.

Jeremy535897

My understanding is that all the property is in the trust. I agree that there may still be some RNRB available if the house is sold, due to the downsizing rules, and perhaps I am being over cautious, but the rules are complicated. HMRC suggests professional advice is sought if the downsized house is in a trust. See https://www.gov.uk/guidance/how-downsizing-selling-or-gifting-a-home-affects-the-additional-inheritance-tax-threshold