highlights

  • Holding a property in trust can be a flexible and protective way of making provision for beneficiaries
  • Trusts can be managed in order to be tax efficient
  • Trustees can take advantage of holdover relief and/or principal private residence relief to reduce capital gains tax
  • Income can be distributed to utilise the annual allowances/lower tax rates of certain beneficiaries

I receive a telephone call today from Mrs Clarke to say that her daughter, Mary, is getting married to Tom in September and their first child is due in February next year. Mrs Clarke set up a discretionary trust in 2002 which holds an investment property worth £200,000. She would like to surprise Mary and gift the benefit of the property to her and her husband on their wedding day. This would certainly be a lovely surprise and a very generous wedding gift!

Although Mrs Clarke likes Tom, she is aware that many marriages end in divorce, and is concerned about a possible division of the property if this should happen. She is also worried that the gift may result in a large tax bill, as the property has doubled in value since it was purchased in 2002.

I tell Mrs Clarke that the planning she undertook in 2002 was very sensible as it has left her with a number of options for how to structure the gift.

I advise her that the property could remain in trust and Mary could live there as a beneficiary, which would offer protection from divorce, creditors etc. Mary could live at the property rent free, so there would be no income to report, and the trust would become dormant.

If or when the property is sold, the trustees would be able to apportion the total capital gains between the time it was let and the time Mary lived at the property. The trustees would be eligible for the main residence relief on the gains during Mary’s occupancy. In addition, there is a very generous extension to main residence relief to the period when the property was let. The trustees may be able to claim lettings relief of up to £40,000 in addition to the main residence relief. This would significantly reduce the capital gains tax bill.

I also mention to Mrs Clarke that, if Mary and Tom decide to let the property again before sale, provided the property has at some time been their main residence, the last three years of ownership will always be exempt when calculating the main residence relief.

If Mary and Tom decide not to move into the property, the net rental income could be paid direct to the new grandchild. In this way, there would be little or no net income tax cost, and the property would still be protected. The rental income could also be redirected at any time to any of the other beneficiaries.

Alternatively, Tom could be added as a beneficiary under the terms of the trust, and the property then advanced outright to Mary and Tom. It is possible for any charge to capital gains tax to be deferred so that it would only become payable on the eventual sale. Mary understands that the property would then lose the protection of the trust wrapper, but there would be no immediate tax to pay.

I have managed family trusts for over 20 years and, although there have been many changes in trust and tax legislation, carefully structured trusts still provide protection for family wealth. Trusts today are extremely flexible and provide opportunities to maximise benefits for children/ grandchildren and minimise taxes.