Discretionary trust queries

PoGee

I know trusts are difficult and there are potential taxes to pay but what if.....
 a property is gifted to a child within trust and is valued less than £325k at £210k? Am I correct in thinking that there will be no IHT to pay at the trust set up, nor after 10 years, as it's valued less than 325k?
Would there be cgt to pay at the trust set up? Would there be IHT to on the trust, on death?
Child would live there rent free and inherit property on my death, so no income.

If a trust is set up, would I lose the £175k nil band relief, for my main residence?

Keep_pedalling

Based on you previous thread this is a second property rather than your home so you will almost certainly lumber yourself with a CGT liability on the transfer, 

What are you trying to achieve here? If this is not your home then why complicate things with a trust rather than an outright gift? 

If you do this it will not effect your RNRB, 

PoGee

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

More_complicated_than_that

PoGee said:

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

Any chance of letting me have a link?  Definitely don't want to do this but looking at dodgy schemes is a kind of hobby of mine.

Jeremy535897

More_complicated_than_that said:

PoGee said:

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

Any chance of letting me have a link?  Definitely don't want to do this but looking at dodgy schemes is a kind of hobby of mine.

I suspect it is simply creating a discretionary trust, and gifting the property to it, holding over the capital gain under section 260 TCGA 1992, both into and out of the trust. The beneficiary inherits the original base cost. Also, if the beneficiary uses the property as their main residence, section 226A TCGA 1992 denies main residence relief completely, not just on the gain held over.

More_complicated_than_that

Jeremy535897 said:

More_complicated_than_that said:

PoGee said:

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

Any chance of letting me have a link?  Definitely don't want to do this but looking at dodgy schemes is a kind of hobby of mine.

I suspect it is simply creating a discretionary trust, and gifting the property to it, holding over the capital gain under section 260 TCGA 1992, both into and out of the trust. The beneficiary inherits the original base cost. Also, if the beneficiary uses the property as their main residence, section 226A TCGA 1992 denies main residence relief completely, not just on the gain held over.

You might be right.  But I've also seen s239 TCGA (and, indirectly, s28 IHTA if the value was higher).  Hence the interest.

PoGee

Jeremy535897 said:

More_complicated_than_that said:

PoGee said:

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

Any chance of letting me have a link?  Definitely don't want to do this but looking at dodgy schemes is a kind of hobby of mine.

I suspect it is simply creating a discretionary trust, and gifting the property to it, holding over the capital gain under section 260 TCGA 1992, both into and out of the trust. The beneficiary inherits the original base cost. Also, if the beneficiary uses the property as their main residence, section 226A TCGA 1992 denies main residence relief completely, not just on the gain held over.

Yes, the 260 thing was quoted. I still don't understand - in this scenario, is there any cgt to pay when putting the property into trust? The cgt I refer to is the increase in value from when I purchased it (lived there around 6 years, then rented out). Child would live there rent free so no income tax. (But think there is a yearly cgt calculation on the yearly increase in value of the property.)

PoGee

More_complicated_than_that said:

Jeremy535897 said:

More_complicated_than_that said:

PoGee said:

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

Any chance of letting me have a link?  Definitely don't want to do this but looking at dodgy schemes is a kind of hobby of mine.

I suspect it is simply creating a discretionary trust, and gifting the property to it, holding over the capital gain under section 260 TCGA 1992, both into and out of the trust. The beneficiary inherits the original base cost. Also, if the beneficiary uses the property as their main residence, section 226A TCGA 1992 denies main residence relief completely, not just on the gain held over.

You might be right.  But I've also seen s239 TCGA (and, indirectly, s28 IHTA if the value was higher).  Hence the interest.

I don't think it's a dodgy scheme.

More_complicated_than_that

PoGee said:

More_complicated_than_that said:

Jeremy535897 said:

More_complicated_than_that said:

PoGee said:

The dangers of online advice - there is an article on an online 'property buying' website which seems to imply that a person can completely remove cgt liability by gifting a rental property to a child, via a trust.

Any chance of letting me have a link?  Definitely don't want to do this but looking at dodgy schemes is a kind of hobby of mine.

I suspect it is simply creating a discretionary trust, and gifting the property to it, holding over the capital gain under section 260 TCGA 1992, both into and out of the trust. The beneficiary inherits the original base cost. Also, if the beneficiary uses the property as their main residence, section 226A TCGA 1992 denies main residence relief completely, not just on the gain held over.

You might be right.  But I've also seen s239 TCGA (and, indirectly, s28 IHTA if the value was higher).  Hence the interest.

I don't think it's a dodgy scheme.

You might be right.  But I don't believe anything to do with tax on "property buying" websites.  You only have to look at the trouble Property118 has got into with HMRC sending them a "Stop Notice".

More_complicated_than_that

I've found various property company websites that talk about s260 TCGA.  So some comments without going in to the tax legislation too much:

1. Discretionary trusts are often sold because someone gets commission out of it.  Sales people are sales people.  Just because they sound confident, etc doesn't mean that they know anything about the detailed tax rules or whether it "works".

2. The social media "property people" who advertise these things get commission / kickbacks.  For example,  the individual in https://taxpolicy.org.uk/2023/10/13/ranjan/ has made a lot of money and now finds that it will be a criminal offence to keep promoting (e.g. https://taxpolicy.org.uk/wp-content/assets/20250717-P118-POTAS-Stop-notice-CAR-FOR-EMAIL-redacted.pdf)

3. One of the hallmarks of this type of scheme is that professional tax advisers are rubbished by the sales people.  They say they just don't understand things propery.  But that often turns out not to be the case (e.g. https://www.gov.uk/guidance/property-business-arrangements-involving-hybrid-partnerships-spotlight-63 and https://taxpolicy.org.uk/2024/07/14/property118-more-hopelessly-wrong-tax-advice-for-landlords/). Sometimes, even resorting to physical threats against people who call them out.

4. There have been lots of posts of various forums where the implementation has been poorly done, where it is not what they really want or where people don't understand things properly.  Get independent advice from someone who is a professional tax adviser and who regulary works with trusts.  There are very few tax professionals who do that.  Look for someone who is a member of STEP: https://www.step.org/directory/members  

5. IHT rules are complicated.  They are also not static.  Some people say that the 6% after ten years IHT rate for relevant property trusts is too low.  While I am not really interested in politics, there is a press speculation that the government will tweak the IHT rules.

6. As Jeremy said, there can be massive downsides of claiming holdover relief (s260 TCGA), as PPR relief cannot be claimed.  So much more tax ends up being paid in the end.

7. If there are other motives (e.g. divorce, avoiding care home fees, still benefiting from the property - e.g. by living in there still) then there it adds a whole heap of complexity.

Jeremy535897

More_complicated_than_that said:

I've found various property company websites that talk about s260 TCGA.  So some comments without going in to the tax legislation too much:

1. Discretionary trusts are often sold because someone gets commission out of it.  Sales people are sales people.  Just because they sound confident, etc doesn't mean that they know anything about the detailed tax rules or whether it "works".

2. The social media "property people" who advertise these things get commission / kickbacks.  For example,  the individual in https://taxpolicy.org.uk/2023/10/13/ranjan/ has made a lot of money and now finds that it will be a criminal offence to keep promoting (e.g. https://taxpolicy.org.uk/wp-content/assets/20250717-P118-POTAS-Stop-notice-CAR-FOR-EMAIL-redacted.pdf)

3. One of the hallmarks of this type of scheme is that professional tax advisers are rubbished by the sales people.  They say they just don't understand things propery.  But that often turns out not to be the case (e.g. https://www.gov.uk/guidance/property-business-arrangements-involving-hybrid-partnerships-spotlight-63 and https://taxpolicy.org.uk/2024/07/14/property118-more-hopelessly-wrong-tax-advice-for-landlords/). Sometimes, even resorting to physical threats against people who call them out.

4. There have been lots of posts of various forums where the implementation has been poorly done, where it is not what they really want or where people don't understand things properly.  Get independent advice from someone who is a professional tax adviser and who regulary works with trusts.  There are very few tax professionals who do that.  Look for someone who is a member of STEP: https://www.step.org/directory/members  

5. IHT rules are complicated.  They are also not static.  Some people say that the 6% after ten years IHT rate for relevant property trusts is too low.  While I am not really interested in politics, there is a press speculation that the government will tweak the IHT rules.

6. As Jeremy said, there can be massive downsides of claiming holdover relief (s260 TCGA), as PPR relief cannot be claimed.  So much more tax ends up being paid in the end.

7. If there are other motives (e.g. divorce, avoiding care home fees, still benefiting from the property - e.g. by living in there still) then there it adds a whole heap of complexity.

As a professional who has been involved in the creation and administration of discretionary, life interest, and accumulation and maintenance trusts set up under English law for nearly 50 years, I have seen all types come and go, used for different purposes like capital transfer tax/inheritance tax planning, trusts exported offshore (in one case alone saving over £30 million in capital gains tax), and providing for school fees, I can flesh out some of your comments.
Trusts, done properly, are expensive. We spent days perfecting trust documents, and a decent trust document will run to 30 pages or more. The shorter the document, the more problems it causes in the long run. That sort of investment, by people like me who charged £500 an hour forty years ago, is not cheap.
Someone who wants to transfer a let property (never used as the individual's main residence) worth £300,000 to an adult child, say, not to be used as a main residence for the child, might well consider using a DT as a "conduit." If the property cost £100,000, gifting it to the child costs capital gains tax on £200,000 of gain. Gifting it to a DT costs no capital gains tax, and the trust takes over the base cost of £100,000. In due course, most definitely no earlier than three months plus one day later (for holdover to apply), but preferably a year or so later at least, the trustees appoint the property to the child, holding over the gain again, and the child now owns the property with a base cost of £100,000.
The initial gift to the DT is a chargeable transfer for inheritance tax, but if the settlor's nil rate band of £325,000 is available, it does not matter. There is also normally no exit charge, where there was no entry charge, if the property is appointed out in the first 10 years of the trust (but after 3 months).
If the property has a mortgage on it, and the settlor transfers the property to the trustees for a sum equal to the mortgage, there may be a restriction on the amount of gain held over. More importantly, the trustees have to have a power to borrow and be happy to exercise it, and the mortgage lender must be happy. The trustees must also properly exercise their discretion to appoint the property to the child, and if there is a mortgage, that will complicate things. Generally speaking, it is probably best to avoid having non-family members as trustees, because of the indemnities they will require.
Ideally you need the combination of a good private client lawyer who specialises in trusts, and a good accountant who knows about the taxation of trusts and their use for tax planning. I was one of the founder members of STEP, and it may well be that, like me, they would have a TEP qualification on top of their chartered/certified accountancy qualification or their legal qualification as a solicitor. Off the shelf solutions are simply a disaster waiting to happen, as this type of planning rarely fails on tax technicalities, but rather on inadequate documentation and implementation.