If you would like to make a gift of property, you may find that doing so through a trust is an attractive option.
Generally outright gifts of assets may result in a dry capital gains tax (CGT) charge where the asset, such as a residential property, is given away. In addition, an inheritance tax (IHT) charge may arise if the donor does not survive the gift by 7 years.
However, gifting property via a trust is good way to eliminate the dry CGT charge. This is available by way of a claim for holdover relief, which in effect defers any gain on the asset until it is eventually sold.
If the value of the gift is also within the settlor’s available nil rate band (currently £325,000), transferring the asset into a trust is also free of IHT. A jointly owned asset worth up to £650,000, may be transferred into a trust tax free, provided that both settlors did not make any other chargeable transfers in the past 7 years.
Care needs to be taken to ensure that once the asset has been settled into the trust, the settlor and the settlor’s spouse are excluded from the class of beneficiaries and no longer use the asset. If this is not observed, the asset will remain in the settlor’s estate for IHT purposes and the CGT holdover relief will not be available. The trust deed must also exclude from the beneficiaries the settlor’s minor children and stepchildren.
Therefore this type of tax planning is mainly used for transferring a second property, such as a buy-to-let, for the benefit of grandchildren or adult children.
The property can remain in the trust to protect the beneficiaries by providing them with a stable income. Whilst the property is within the trust, new beneficiaries may be added (e.g. additional grandchildren) and existing beneficiaries may be removed (e.g. adult children who are now independent and no longer need the income). The trustees may decide at some stage to appoint the property to the beneficiaries, and, depending on the values, this may be free of CGT and IHT.
At Arnold Hill we offer further tax advice as well as assistance with trust administration. If you are considering passing your property in this way, feel free to contact your tax advisor for further advice and guidance.
Should you have any queries or questions in respect of the above, please reach out to your usual Arnold Hill & Co contact, call our mainline on 0207 306 9100 or email our general address – info@arnoldhill.co.uk
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.