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A matter of Trust

Oct 1, 2018

In this and the next two blogs, we’ll be discussing Trusts and how, when properly set up, they can legitimately save vast sums of money - money that would otherwise be heading for the taxman’s pocket.  Below, we’ll look at how putting your property into a trust, with children, for example, as the beneficiaries, can wipe out any Capital Gains Tax (CGT) due, when it’s time to sell.

But first - meet our model family - The Savers.  There’s Gran & Grandad Saver, now retired and in their early 80’s.  Jean and Dave Saver - in their late 50s and building up a handy property portfolio.  They have two children, Emily and Joe Saver, in their early 30s.

Let’s begin with some definitions -

A Trust is a legal arrangement where you give cash, property or investments to someone else, the trustee, so they can look after them for the benefit of another, the beneficiary.  The beneficiary and the trustee can be one and the same person.

The Trustee is the person who owns the assets in the trust.  It’s the trustees’ legal responsibility to run and manage the trust.

The Beneficiary is the person who the trust is set up for.  This could be a child or someone who struggles to manage money.

What does a trust do?  Putting things into a trust means that, provided certain conditions are met, they no longer belong to you.  So - when you die, or when you transfer the asset, the value of the trust can’t be included when your Inheritance Tax (IHT) or Capital Gains Tax (CGT) is calculated.

Minimising your tax liability - on two fronts

The scenario
Back in late September 2003, Jean and Dave drove up to Liverpool.  Their car was packed with posters and CDs of dubious taste, books, clothes plus a sad-looking spider plant.  There was just enough room for their eldest daughter, Emily, who was starting her second year, studying history at University.

The first year had been a happy one, spent in ‘hall’.  Jean and Dave had long ago planned that, with accommodation expenses being so high, year two would provide an excellent opportunity to save on rental costs, whilst at the same time, adding to their property portfolio - currently standing at 3 homes.

Jean and Dave bought a property for £100,000.  Meanwhile, Emily arranged for two good friends to take two of the rooms.  All went well.  Year three saw Emily gain a good degree, followed by an MA.  She liked the city and found herself an excellent job.  However, ten years following the purchase, a promotion led to Emily moving down to London.  Jean and David decided it was time to sell.  They managed to achieve a price of £300,000.

Problem No. 1
Because they already own their family home, the profit on the Liverpool property of £200,000 would attract Capital Gains Tax at 28% - namely £56,000!*

The Solution
At any time between the 2003 purchase of the Liverpool property and selling it, Jean and David should put it into Trust (with Emily and Joe being the beneficiaries).  This can be a simple verbal agreement, provided it’s formalised in writing before the sale.  If they take this simple step, then, when they sell the house, the Capital Gains Tax they owe is a grand total of £0!

Problem No. 2
An alternative, and tragic, scenario.  Jean and Dave both die.  With the house valued at 300,000 and their estate totalling over £650,00, then the Inheritance Tax due on the property will be £120,000 - a punitive sum, which might not be easy for poor Emily and Joe to raise.

The Solution
Just as in the previous scenario, as long as Jean and Dave have put the house into Trust, the Inheritance Tax due would also be … £0.

Seek advice

The world of Trusts might seem complex, but it’s worth seeking expert advice - just as Jean and Dave did.  After all, just look at the potential savings!  Trusts are our speciality.  So, if you want to protect yourself against unnecessary Capital Gains Tax or your loved-ones against Inheritance Tax, call on 01234 713021 or drop me an email.  I’d welcome the chance to help.

*This calculation excludes any CGT exemption allowances.

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