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A matter of Trust - Protecting the Gain

Dec 1, 2018

In this third blog, we’ll be discussing the of Family Holdover Gift Trusts to protect your inheritors against punitive CGT or Inheritance Tax.

This is the third 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.  The second was also concerned with Property Trusts, but for a different generation.

In this third blog, we’ll advise you to use Family Holdover Gift Trusts to protect your inheritors against punitive CGT or Inheritance Tax.

But first - let’s re-visit 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.  Today’s blog specifically deals with Dave’s brother, Peter.  He is widowed and has three adult children.

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.

Now - back to Peter.  You’ll recall he is widowed and has three children.  He inherited from his wife a property - a Buy-to-Let in the Lake District.  He was considering the option of selling, but this would have landed him with a considerable Capital Gains Tax to pay against a £200,000 increase in value.  So - Peter decides to stick with the property. 

Here’s Peter’s situation in a little more detail -

1.     He’d like to make a gift of his second property to his children so that when he dies, he reduces his Inheritance Tax liability.

2.     He wants to provide something for his children while he’s still alive.

3.     Peter wants to kick-start the 7-year clock but doesn’t want his children to have control of the asset yet.

4.     He’s understandably keen to avoid the risks that could occur, should any of his children divorce or suffer bankruptcy claims.

Family Holdover Gift Trust

So, what’s the solution?

What Peter must do is to place the property into a Trust - known as ‘conveying’ the property to trustees - in Peter's case, his three children.

The £200,000 gain in the value of the property can then be ‘held over’ or deferred until it’s passed on again or sold.  This is called a ‘Family Holdover Gift Trust’.

There’s just one proviso - there are certain parties who can’t become beneficiaries of the trust.  This would be Peter himself, his new spouse, or civil partner, any children below the age of 18.

It’s OK for Peter - he’s the Settlor of the Trust - to keep control of the gift, simply by becoming one of the trustees himself (there has to be more than one trustee).  In this way, Peter can control his children’s access to the Trust.

A further benefit is that the children would be able to receive the rental income from the property, without penalty. 

Maximum Protection

The great benefit of this arrangement is that the Trust gives maximum benefit to his children in case he re-marries, suffers bankruptcy or incurs long-term care fees.

Remember - for a Family Holdover Gift Trust to work, and for the children to avoid paying Inheritance Tax on the gain in value of the property, Peter has to survive 7 years.

Seek advice:

The world of Trusts might seem complex, but it’s worth seeking expert advice - just as Peter 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.

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