In a recent blog we looked at using a company to hold property investments, however an alternative (and sometimes overlooked) vehicle for ownership of all family investments, property or otherwise, is through a trust structure.
Some people are immediately put off by the mention of a trust, they perhaps perceive that trusts are the domain of the very wealthy. They are certainly very popular with the rich, however they are increasingly being used for other purposes.
There are in fact many benefits of using a trust, some of which are listed below.
One of the most popular applications for a trust structure is to provide protection of family assets. Once in a trust those assets do not belong in anyone’s estate so they cannot be taken into account in divorce proceedings nor are they available to any creditors, such as in a bankruptcy. This is a very desirable way of preserving the family wealth down the blood line.
Inheritance tax saving
Most trusts have their own nil rate band for inheritance tax purposes. That means you are effectively adding a nil rate band, worth a saving of £140,000 in tax terms, for every family trust you set up. There are of course restrictions to the number you can have; in broad terms each person can usually set up one trust every seven years without any adverse tax consequences, provided the value of the asset going into the trust does not exceed the nil rate band (currently £350,000).
Tax-free passage of assets through the generations
Where assets are passed down the generations they are usually done so free from inheritance tax (IHT). That’s because gifts between individuals are potentially exempt transfers – no IHT is payable provided you survive seven years from the date of gift. For gifts into trust the rules are different. Instead of being a potentially exempt transfer a gift into a trust is classed as a chargeable lifetime transfer. It is potentially subject to IHT but there will only actually be IHT to pay if the asset going into the trust is valued at more than the nil rate band. For that reason most lifetime trusts are set up with assets worth £325,000 or less.
More of an issue with transferring assets between individuals is that it often gives rise to a capital gains tax (CGT) liability. Disposals of chargeable assets (most assets other than cash) triggers a CGT liability if there is a difference between the value when the asset is transferred and the base cost.
For example, if a father gifts an investment property to his daughter which he bought for £140,000 and is now worth £300,000 the tax would be calculated as follows:
Deemed sale proceeds (market value) £300,000
Base cost (purchase price) £140,000
Annual exemption £ 12,300
Chargeable gain £147,700
Tax at 28% £ 41,356
As you will see there is quite a large tax bill in this circumstance. However if the same property were put into a trust instead of being gifted outright there would be NO TAX PAYABLE. That is because the gain can be held over, meaning no immediate CGT liability but the trust acquires the property at the original base cost so more tax will be due when the property is eventually sold.
Once in the trust the property could at a later date be appointed out to one of the beneficiaries. As long as it was within ten years of setting up the trust no tax would be payable. This is a neat way of passing assets down the generations in a tax efficient manner.
Income tax savings
Trust income is taxable at 45% so it seems strange to be advocating trusts as a way of saving income tax. However where trust income is distributed to beneficiaries it becomes taxable at their income tax rates – any trust tax paid over and above the amount due will be repayable to the recipients. This is a great way of lowering the overall tax rate on family investments by using the personal allowances, savings allowances and dividend allowances of the beneficiaries – often the younger members of the family who have little or no other income.
Beware that trusts set up for the minor children of the settlor will not attract the tax benefits mentioned. However grandparents can set up trusts for their grandchildren and use these tax breaks.
Stamp duty land tax saving
Where property is put into a company there will nearly always be stamp duty land tax (SDLT) to pay and this includes the additional 3% where the property is residential. For a residential property worth £300,000 the SDLT payable to put it into a company is £14,000. However transfers into a trust are treated as a gratuitous gift for SDLT purposes therefore to put the property into a trust would COST NOTHING.
Care home fees
You may have come across companies or individuals who try to sell trust products with a view to reducing assets in your estate so that you do not have to pay towards your care fees should you need to go into a home. The cost of care is something that worries a lot of elderly people and trusts are popular for this purpose. In the right circumstances having assets in trust can successfully preserve family assets from care fees, however you need to be cautious as the council will take into account any assets given away deliberately to avoid care home fees when calculating the support they can give.
Using trusts as part of will planning is increasingly popular. It can be done to keep assets protected, to make future IHT savings or to put half the value of the family home legitimately out of the reach of care fees. If you are considering using a trust in your Will we recommend you speak to your accountant who will liaise with your solicitor to ensure the planning is right for you.
How much will it cost?
As with all planning there are downsides to creating a trust. Firstly there are legal costs for setting up a lifetime trust and to dismantle one. This varies but would usually be in the region of £1.5 – £2k + VAT per event. The trust needs to be registered with HMRC and there may be annual accounts and trust tax returns to submit if the trust assets produce income. We would usually charge £300 + VAT for the trust registration and between £1,000 and £1,250 + VAT annually for accounts and tax return. However when you consider the tax savings available they would invariably more than compensate for the additional professional fees.
To incorporate a trust into your will would usually add to the cost of the will itself but not by very much as straightforward will trust drafting is commonplace. There may be additional fees for the planning carried out by your professional advisors to ensure that the trust is exactly what you want and you are aware of the implications.
All in all we consider there is definitely a place for trusts in family tax planning. If you are interested in exploring this contact Jan Friend who will happily advise you.
The content in this blog is correct as at 21 June 2022. See terms and conditions.