45% income tax on property held in trust?

getmore4less

MartinW6 said:

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.

MartinW6 said:

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."

from that I got that the IPDI trust holds just one of the spouses beneficial interest.

I did assume they were joint owners, which may have been wrong, I can't remember if that info was posted. 

Jeremy535897

It wasn't, but I agree you could be right. I assumed that father was the sole owner.

MartinW6

Hi guys.  I can confirm that my mother and father were joint owners and that it's my father's interest in the house that's currently in trust.

I'm not entirely sure RNRB would matter if we came to sell the house early as it's value is likely to be less than the NRB (and no gifts have been given in the last seven years).  None of my father's allowance was used when he passed, so my assumption is that the NRB when mum passes is £650,000.

I do have LPA.

To be honest, we're much more concerned about renting the property and any impact it might have.  I've read the trust and it makes mention of the trustees being able to invest any money from my father's estate as they see fit (I don't know if that covers renting the property), and that if the property is sold and a new one bought that any residual money would go to me (I do wonder if this means that mum buying a portion of our house as security if she were to stay with us long term is a viable option mind you).  However there's no specific point about renting the property.

It was mentioned earlier that if she were to rent, that the trustees might consider her life interest in the house to be finished.  However, from a trustee point of view (my wife and I are the trustees) we're not sure if this is based on how we interpret the situation, or should be based on our interpretation of the law/trust (if that makes sense).

Jeremy535897

Let's get back to practicalities then. We are talking about one half of the house. If your mother's estate, including all the value of the house, is under £650,000, and your father's nil rate band was £325,000:

• her estate is unlikely to become chargeable to inheritance tax, so whether or not the trust property wholly or partly comes to you a bit earlier is not an issue for inheritance tax
• if the property is sold, or leaves the trust, within 9 months of it ceasing to be her main residence, there is no capital gains tax issue, although there will be capital gains tax in the future if its value increases
• if the property is sold and not replaced, the trust comes to an end from what you say, but subject to the above two points, that is not an issue (it might be a deprivation of assets for nursing home fee purposes, but I suspect that is not an issue)

So far as renting it is concerned, if you as trustees have the power to retain the property as an investment, then letting it out should be all right. Indeed, if the trust says that you get the money if the house is sold, it puts you and your wife as trustees in a difficult position, because if you as trustees sell your share of the house you get half the house value now, but it seems that if you as trustees don't sell the house, your mother keeps the benefit of the rent in its entirety (although she may well then choose to give it to you).

I would still have the deed checked out by a competent lawyer, though, because it doesn't really make sense that if the property is sold and replaced with a smaller one, you would receive the difference in value, but if it is rented out, you don't receive anything, even though your mother no longer needs it to live there..

MartinW6

Thanks Jeremy.

My main takes from everyone's advice then, now that I've given more details, are...

1) Income Tax at 45% doesn't come into play when I inherit the property unless I do something with it to generate an income (such as renting it out).

2) Renting the property *probably* doesn't have any knock-on consequences, but worth checking.  It nothing changes, my mother will receive the rental income and can gift it to us if she chooses (and this will be calculated as part of any IHT liability in the future).

3) Selling the property before she passes is possible, but more complex.  The RBRB *might* be jeopardised by selling before she passed, but the NRB of £650,000 will probably be sufficient to prevent any IHT being owed.  However I should seek advice before going down this route if we ever decide to.

4) Generally speaking, Capital Gains Tax will be due once the property is sold, and will be based on the difference between the value of the house at the time of my mother's death and it's value when sold.

Are these key assumptions correct?

getmore4less

If you are living as a single household people can contribute to that household without needing to consider it as gifts.
Although technically spending money on others should be counted as gifts most just ignore the smaller stuff like mum treating the family to a meal out or paying for the weeks shopping.

Jeremy535897

MartinW6 said:

Thanks Jeremy.

My main takes from everyone's advice then, now that I've given more details, are...

1) Income Tax at 45% doesn't come into play when I inherit the property unless I do something with it to generate an income (such as renting it out). Then you will pay income tax at your marginal rate on the net rental income, which might be 45%, but only if your income is £150,000 plus

2) Renting the property *probably* doesn't have any knock-on consequences, but worth checking.  It nothing changes, my mother will receive the rental income and can gift it to us if she chooses (and this will be calculated as part of any IHT liability in the future). If she has surplus income, she might be able to use the normal expenditure out of income relief, but it will not matter if her estate is within the nil rate band

3) Selling the property before she passes is possible, but more complex.  The RBRB *might* be jeopardised by selling before she passed, but the NRB of £650,000 will probably be sufficient to prevent any IHT being owed.  However I should seek advice before going down this route if we ever decide to. That would be wise. There might also be a capital gains tax liability as the property will not have been her main residence for the full period of ownership by her and the trust

4) Generally speaking, Capital Gains Tax will be due once the property is sold, and will be based on the difference between the value of the house at the time of my mother's death and it's value when sold. Unless it is sold before she dies (see above point)

Are these key assumptions correct?

See above comments in bold.

Jeremy535897

I should add that if the trust came to an end on her ceasing to occupy it as her main residence, there would be a capital gains tax disposal by the trustees (covered by main residence relief), and you would acquire half the property (and receive half of any net rent). The same would apply if renting the property triggered the disposal, but if this was more than 9 months after she stopped occupying it, there could be some capital gains tax to pay.

MartinW6

Jeremy535897 said:

I should add that if the trust came to an end on her ceasing to occupy it as her main residence, there would be a capital gains tax disposal by the trustees (covered by main residence relief), and you would acquire half the property (and receive half of any net rent). The same would apply if renting the property triggered the disposal, but if this was more than 9 months after she stopped occupying it, there could be some capital gains tax to pay.

Thanks Jeremy.  If the trust does come to an end by renting it out/it ceasing to by my mother's main residence, when would we have to pay the capital gains tax? 

Would it be still be when I inherit and then sell the property, or are you saying there'd be a capital gains payment required nine months after she begins to rent it?  I *think* you're saying that if there was a nine month gap between her moving in with us and then renting it that a capital gains payment might occur.  Is that right?  Apologies, I don't fully grasp the wording.

Jeremy535897

There is a capital gains tax disposal of the half of the property owned by the trustees on the earliest of:

• her death, but there is a tax free uplift so no tax payable and your base cost is market value at that date (on both halves of the property)
• the trust coming to an end for any other reason (if that is what happens, for example, if it is let), at which point there is a disposal of half the property to you at market value, from which the trustees' base cost would be deducted (presumably the value of half the property at the date of your father's death). Main residence relief will be available in respect of the time she lived there plus 9 months (so there would be no taxable capital gain if the trust ended within 9 months of her living there as her main residence). After that time, a proportion of the gain is taxable, so if it had been in the trust as her main residence for 6 years, and the trust ended a year later, 3 months out of the 84 months would be chargeable (the gain is deemed to accrue evenly over time). Tax would be payable 30 days after completion