A matter of Trust - Gran & Grandad Saver
This is the second of three blogs, each looking at a different aspect of Trusts. When properly set up, they can legitimately save vast sums of money. This is money that would otherwise be heading for the taxman’s pocket.
The first blog covered the benefits of putting the property into a Trust, with children, as the beneficiaries. Today’s blog looks at a similar scenario but, this time, the focus is on a different generation.
In the third blog, we’ll advise you how to handle your Property Portfolio and protect your inheritors against punitive CGT or Inheritance Tax.
But first - let me re-introduce you to our model family - The Savers. There’s Gran & Grandad Saver (Liz and Bob), now retired and now in their 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
Jean and Dave both enjoyed happy, secure childhoods. Each is proud of their working-class roots, having been brought up on separate council estates at opposite ends of the country. Dave’s parents, Liz and Bob, spent their working lives in a council house in Salisbury. In the early 1980s, the opportunity arose to buy the house for themselves. Dave and Jean were already doing well in their careers and had the spare cash and the foresight to pay the mortgage.
Fast forward to 2018. Enjoying their retirement, and now in their early 80s, Liz and Bob decided they’d like to move down to Worthing to be nearer Dave, Jean and the grandchildren. So - it was time to put the Salisbury house on the market.
When Jean and Dave started paying the mortgage, the house was valued at £30,000. The years since had seen a succession of house price ‘booms’, so, in 2018, the house sold for £275,000.
Because Liz and Bob didn’t own the property they lived in, that profit of £245,000 attracted Capital Gains Tax at 28% - namely £68,600!*
At any time between the original purchase of the council house and the date they sold it, Jean and David should have put it into Trust (in the name of one or both of Liz and Bob). By the way, arrangements like this can be a simple verbal agreement, as long as it’s formalised in writing before the sale goes through. If Jean and David had known about the benefits of Trusts, they’d have taken that one simple step. Then, when it was time to sell, the Capital Gains Tax they owed, would have been exactly £0!
Problem No. 2
Suppose tragedy had intervened. What if David had died some 10 years ago? Jean had re-married but after a few years, had herself died? In theory, her second husband could have inherited the former council house in Salisbury and removed Bob and Liz from the house. Unlikely and certainly cruel … yet perfectly possible.
Again, placing the house in trust would have been the answer. Liz and Bob would have remained secure for as long as it suited them to stay.
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