A trust is a legal arrangement where by a person (a settlor) can introduce an asset such as money, investments or property to be managed in a particular way for a beneficiary. There are many different types of trusts and each have their own specific tax treatment. The trust itself is managed by an appointed trustee which can be the settlor.
If you are considering gifting assets in your lifetime or on death, a trust may be a suitable option for you.
Some trusts such as a “discretionary trust” will give the trustee the power to manage the asset for the beneficiary and decide how and when income and capital are appointed to the beneficiary.
In addition to this, a trust can have favourable tax treatments to otherwise outright gifting an asset to a beneficiary.
a case study...
Andrew is a wealthy entrepreneur in his early fifties. He is a widower and has one daughter, Sophie, age 19, who is currently at university. Her only income is from part-time and holiday jobs, amounting to around £3,000 per annum. He is very keen to ensure that his daughter will be well provided for, in particular as he has recently been reading about the difficulties faced by her generation in obtaining a foot on the property ladder. He is also concerned that he is her only surviving parent and, although he believes he is in good health, would like to ensure that she has at least some capital in case anything happens to him (or his business interests). Andrew has a couple of residential properties in Manchester that he holds as an investment and lets out. The mortgage on one of them has been paid off, and he is considering transferring the property to his daughter. The property was acquired some years ago for £120,000 and he has recently had it valued at £300,000. It generates rental income of £8,000 - £9,000 per annum.
If Andrew was to outright gift this property to his daughter then he would be liable to capital gains tax at 28% on the difference between the market value at date of gift less the purchase price after use of his CGT annual exemption (2021/22 £12,300). This would amount to a tax bill of £46,956 that would have to be paid 30 days after transfer under the CGT payment window rules.
Andrew could introduce the property into a life interest trust for his daughter’ benefit and non-business asset gift relief would be available to hold over any capital gains tax charge. The transfer into the trust will be a chargeable lifetime transfer for IHT purposes but, as it does not exceed the amount of the nil rate band, there will be no tax payable. At some point in the future the property could be appointed to Sophie absolutely by the trust. Again this transfer would be subject to IHT (exit charge) but again no IHT would be payable as the IHT charge would be based on the initial principal charge rate 0% as the initial value was below £325,000. If Andrew then survives seven years from the date of the gift, it will be outside of his estate for Inheritance Tax purposes. Sophie’s base cost for subsequent disposal would be Andrew’s original £120,000 but the transfer will have been achieved without a CGT liability.
Complexities of using a trust
Depending on the type of trust executed, each will have its own reporting duties and tax treatment. HMRC will require the trustee to register the trust via the “trust registration service” within strict deadlines. The trust register also has to be updated regularly for any changes or have an annual declaration that no changes have been made.
A trust normally has to complete a trust tax return each year by the 31st January to declare any income tax or capital gains tax on the assets being operated within the trust. It may be possible for a beneficiary to reclaim some or all of the tax the trust pays depending on their tax status.
Inheritance tax can also be payable on assets being transferred into or out of a trust and so specific advice should be taken before doing this.
Finally, trusts can be subject to a 10 year anniversary IHT charge at up to 6% on value of the assets above the nil rate band.
How we can help
At Elite we can advise you on the many different types of trusts available for you to potentially gift assets to you loved ones in life and on death.
If you decide to set up a trust you will need to use a legal professional to do this as it is a reserved legal activity. However, we have strong connections with legal and trust corporations and so we can help you choose a reputable firm and access reasonable rates for service.
We are agents of the HMRC trust registration service and so we will be able to register the trust and keep it updated within the strict reporting deadlines.
We can competently prepare the trust accounts and tax returns as required by HMRC and confirm any tax for the trust to pay as it becomes due.
Finally we can advise you on the tax planning opportunities for putting assets into trust to help mitigate against any inheritance tax bill in the future.