Transferring property into a trust as a gift or to children

We provide property accountancy services for property companies, landlords and property investors to minimise tax.

When it comes to property, up-to-date specialist accountancy knowledge is required to keep you on the right side of the law while maximising your tax relief and minimising capital gains tax. No one wants to be paying more tax than they need, and most landlords, no matter how long they have been in the business, need some help keeping on top of their financial and administrative obligations and duties.

Some of the services we provide:

  • preparing rental accounts
  • preparation of tax returns
  • landlord specific reliefs
  • advice on property tax
  • looking at your expenditure to ensure you maximise tax deficiencies
  • improve profit levels

What is a trust

A trust is a way of managing your assets by transferring them to another person, either a child or a family member. Technically the property will no longer be in your name but you will still have some control over how the property is used. There are several reasons for setting up a trust.  These include preparing for inheritance tax, controlling or protecting the family property, or in the case that the trustee is too young or incapacitated to manage their affairs. 

There are 3 main parties involved in the process of transferring property into a trust. The settlor establishes the trust by transferring their property. The trustee is the person in charge of managing the trust. The beneficiary is the one who will benefit from the trust. As the new legal owner of the property, the trustee manages it according to the settlor’s wishes as detailed in the deed. 

 An example is where the beneficiary is a child who will be able to gain the control of the trust when they reach a certain age or in some cases, upon the death of the settlor.

What are the 2 main types of trusts?

Interest in possession trust

In this case, the entitlement is fixed and the beneficiary must receive the income or entitlement of the trust.

Discretionary trust

This type of trust depends on the discretion of the trustee. They have control as to when or whether any income or capital of the trust is granted to the beneficiary. It is often advisable to have a minimum of one independent trustee who is not a beneficiary.

What are the tax implications of a trust?

Transferring property into a trust has tax implications and each type of trust is taxed differently and for each party involved. In a discretionary trust, for example, trustees are required to pay tax on any income accumulated by the trust. The amount changes depending on the number of trusts the settlor has. Trustees don’t qualify for dividend allowances either for a discretionary trust.

Trustees pay tax on interest in possession trusts. Dividend-type income is paid at 7.5% and other income is paid at 20%. The trustee can pass these responsibilities to the beneficiary who will need to record them in their self-assessment tax return.

Advantages and disadvantages of a trust 

One of the main advantages of a trust is to ensure the control and protection of your assets. As a settlor, you will decide on how you want them to be dealt with and how your family member’s will benefit. It’s also a way to set up certain conditions. For example, your child is able to receive the property but only when they reach a certain age. A trust is also a way to minimise inheritance tax liability thereby protecting the future finances of your family. 

The main drawback is that the settlor must relinquish legal title to the trust property. As such the decision should not be taken lightly. However, by setting up a trust you will also be able to control the terms in the deed, which will give you peace of mind, even though the asset is no longer in your name. 

Another disadvantage of transferring property into trust as a gift or to children is that all settlors, trustees and beneficiaries are likely to incur related taxes and other charges, these may include:

Capital Gains Tax

 If the property that’s put into a trust increases in value then capital gains tax will be charged against this gain. The person who is responsible for paying capital gains tax depends on the structure of the deed. Once the property is put into a trust, capital gains tax is paid by the person selling the property or the settlor. If the trustee then transfers or sells the property on behalf of the beneficiaries, they need to pay capital gains tax. Once the beneficiary becomes completely entitled to the property, they are then responsible for capital gains tax based on the current market value.

Inheritance tax 

Inheritance tax is due at the time of transferring property into a trust. When the trust ends inheritance needs to be paid again in the form of exit charges. Trusts also incur 10-yearly inheritance tax charges.

Potentially exempt transfer (PET)

Transferring a property into a trust as a gift or to children is a means to securing your assets, but it’s also important to account for these additional costs. There is a way to avoid inheritance tax in particular. If the settlor survives the gift for seven years after they will be entitled to transfer assets free of inheritance tax.

Seek financial advice

As discussed above, it is an important issue with many tax implications and therefore should not be taken lightly. A financial adviser will be able to align all the tax implications related to transferring property into a trust and to explain any necessary costs. If you like to discuss the tax implications of setting up a trust, getting in touch with us today.

Contact us now for a free informal discussion.

We can help advise clients who are considering transferring their property to their children or as a gift.
We are experts in preparing tax returns for all parties to a trust deed.   Please contact us at Accurus Accountants for an informal discussion.
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