Posted by Simon Misiewicz on 11th September 2013
Are you looking to sell properties in the future?
Are you thinking about passing your property onto a loved one?
Here are the 5 keys to Asset planning
- Selling Properties As A One Off & Capital Gains Tax (CGT)
- Selling properties as a trade (Income tax V Corporation tax)
- Using trusts and inheritance tax planning
- Transferring assets between spouses
- Residency / Domicile – UK & International tax
So without delay let us get into Part 3.Using trusts and inheritance tax planning
What is a trust?
A trust can hold assets – such as land, money, shares or even antiques – for the benefit of one or more ‘beneficiaries’. Trustees are the legal owners of trusts. Sometimes trustees can make decisions about how the assets in the trust are to be used (1).
A trust will need to pay CGT if it makes a gain (1) on transfer or on sale (disposal in other words) (2). The important numbers to be aware of for trustees are for 2013-14:
- 28% CGT
- £5,450 Annual exception for trusts
CGT applies where (2)
- The person transferring the asset into trust and they make a claim:
If you claim “hold-over relief” then you can mitigate the tax for the transferring person, however, the trust will pay more tax upon disposal.
- Someone that dies and leaves the assets in a trust, does not pay CGT.
- The trust sells the asset for a gain.
- Trustees that leave the UK. They will need to pay CGT based on the market value of the property at the time of leaving the country.
What types of trust are there?
- Bare Trusts (7)
- A bare trust is one where the beneficiary has an immediate and absolute right to both the capital and income held in the trust. Bare trusts are sometimes known as ‘simple trusts.’
- Someone who sets up a bare trust can be certain that the assets (such as money, land or buildings) they set aside will go directly to the beneficiaries they intend. These assets are known as ‘trust property’. Once the trust has been set up, the beneficiaries can’t be changed.
- Gary leaves his sister Juliet some money in his will. The money is to be held in trust. Juliet is the beneficiary and is entitled to the money and any income (such as interest) it earns. She also has a right to take possession of any of the money at any time.
The recipient of a bare trust is liable to income tax because of the earnings they receive and CGT if the assets are disposed of.
If the original owner puts an asset into trust and they die after seven years then there is no IHT. If the person dies within seven years, the recipient of the trust is liable to IHT.
- Interest in possession trusts (8)
- From an Income Tax perspective, an interest in possession trust is one where the beneficiary has an immediate and automatic right to the income from the trust, after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.
- The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. The trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income. However, this will depend on the terms of the trust.
- Tax tip: If the assets are disposed of then the trustee is responsible to ensure that CGT is paid.
- Discretionary or accumulation trusts (9)
- In a discretionary trust, the trustees are the legal owners of any assets – such as money, land or buildings – held in the trust. These assets are known as ‘trust property’. The trustees are responsible for running the trust for the benefit of the beneficiaries.
- The trustees have ‘discretion’ about how to use the trust’s income. They may also have discretion about how to distribute the trust’s capital. The trustees may also be able to ‘accumulate’ income – add it to capital.
- Nina puts money into trust, to be held in trust for twenty years for the benefit of her two ten-year-old grandchildren. The trustees can decide how to invest or use the money and any interest it earns to benefit the grandchildren. So, when the children are young, the trustees might decide to pay for piano lessons for them. As they get older, the trustees might pay towards a wedding.
Tax tip: The trustees are responsible for the calculation & payment of income tax and CGT.
Tax tip: If any discretionary payments are made to the beneficiary. then those payments will be received less 45%. Tax may therefore be claimed back from HMRC on the tax return.
There are additional reliefs that can be claimed. If you would like more details about the below reliefs then please contact Simon at your earliest convenience:
- Private Residence Relief (4)
- Hold-over Relief (5)
- Entrepreneurs’ Relief (6)
If you need to contact HMRC about trusts and deceased estates you can do so by calling 0845 604 6455 (3)
For more information please contact us on 0115 946 1991 or Click Here To Email>
(1) Trusts and Capital Gains Tax
(2) Introduction to trusts and Capital Gains Tax
(3) Trusts – Contact HMRC
(4) HS283 – Private Residence Relief (2014)
(5) HS295 – Relief for gifts and similar transactions (2014)
>(6) Entrepreneurs’ Relief
(7) Bare trusts
(8) Interest in possession trusts
(9) Discretionary or accumulation trusts