Trusts and Wills – Planning for the future.
Our guest blog is from Paul Hutchinson of Hutchinson Legal & Associates Limited, experts in Wills, Trusts and Tax planning. Any landlords with several properties will find Paul’s blog on Capital Gains and Inheritance Tax and the use of a Trust very useful:
“One of the key concerns of anyone with a significant property investment portfolio, is how to avoid the large inheritance tax charge when you ultimately ‘meet your maker’. Of course you could simply give it away, but the problem with investment property is that it may well be showing a large gain since you purchased it. If you transferred it to your children or grandchildren, although you’d avoid IHT after 7 years you could be faced with a large capital gains tax (‘CGT’) charge on the transfer.
One way to ‘have your cake and eat it’ could be to use a trust to hold the property. Whether it’s established as a discretionary trust or an interest in possession trust doesn’t really matter now. Most lifetime trusts will still be ‘relevant property trusts’ and as such will be subject to the tax regime usually reserved for discretionary trusts. This means that:
•You can transfer properties into the trust free of CGT. Note that it’s important the trust isn’t for the benefit of you, your wife or minor children, and also that it isn’t to be used as a main residence of a beneficiary under the trust.
• The trust can transfer property to beneficiaries in the future free of CGT (as they could make another holdover relief election).
•You can transfer in amount up to your remaining nil rate band free of IHT. If the nil rate band is £325,000 and assuming you’ve made no previous transfers when you also take account of the annual exemption(s) this means you could transfer in property with a value of £331,000. For a couple this therefore allows inheritance tax free transfers of property up to £662,000.
The trust does not completely avoid inheritance tax. Instead it would be subject to the special regime that applies to discretionary trusts. In particular there would be a tax charge after 10 years in the trust. This would however, be much less than the rate of inheritance tax if owned personally and would be based on the growth in the value of the trust assets over the nil rate bands.
The rate of tax in the trust would be in the region of 3-6%. There could therefore be a huge tax saving from using a trust to pass on investment property.
The beauty of this arrangement is that your nil rate bands renew every 7 years, so you could make a transfer of £662,000 in 2014 (with your spouse). No IHT would be paid and you could make a further substantial settlement of investment property to the trust in 2021.
By using a trust in this way it could allow you to transfer investment properties to family members, whilst avoiding any immediate capital gains tax charge. The eventual beneficiary would hold the property with your base cost. Therefore they would crystallise the tax charge when they sell but it’s a useful method of avoiding any immediate CGT on any transfer to avoid IHT.”
For advice on Trusts, Wills and Tax planning contact Hutchinson Legal on: 01454 300600. hutchinson-legal.co.uk