Oct 17, 2020

A matter of trust

In this blog, we’re going to look at Trusts – what they are and why they’re so important. We’ll examine how, when correctly arranged, trusts are a legitimate way of saving your loved ones potentially huge sums of money - money that would otherwise be heading directly for the taxman’s pocket.

We’ll examine how putting your property into a trust, with children, for example, as the beneficiaries, can completely wipe out any Capital Gains Tax (CGT) due when they decide it’s time to sell.

We should start with some definitions -

The settlor – this is the individual who sets up the trust; the person who originally owned the assets to be put into trust.

A trust – this is a legal arrangement where the settlor gives property, cash or investments to someone else, the trustee. The trustee looks after them on behalf of a third party - the beneficiary. The beneficiary and the trustee can be 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 is usually a child or someone who struggles to manage money.

What does a trust do? Putting assets into a trust means that, as long as certain conditions are met, they no longer belong to you. When you die, or when you transfer the asset, the value of the trust can’t be included when the Inland Revenue calculates your Inheritance Tax (IHT) or Capital Gains Tax (CGT).

Minimising your tax liability – in two ways

Setting the scene

It’s time to introduce you to our model family - The Smiths.

First, we have Jenny and Darren Smith - in their late 50s. They’re building up a nice property portfolio. They have two children, Emma and Harry Smith. They are in their early 30s.

Back in September 2005, Emma was at university in Manchester. She had spent her first year in ‘hall’. Jenny and Darren 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 three homes.

They bought a flat for £100,000. Emma arranged for two good friends to share the flat with her. Everything went well. Year three saw Emma gain a good degree, followed by an MA. She liked the city and found herself an excellent job. However, ten years later, a promotion led to Emma moving down to London. Jenny and Darren decided it was time to sell. They managed to achieve a price of £300,000.

The Problem

Because they already owned the property they lived in, that profit of £200,000 would attract Capital Gains Tax at 28% - namely £56,000!

What they should have done

At any time between the 2005 purchase of the Manchester flat and selling it, Jenny and Darren should have put it into Trust (in the name of one or both of Emma and Harry. The children would be the beneficiaries). This could have been a simple verbal agreement, as long as it was formalised in writing before the sale. By taking this simple step, the Capital Gains Tax owed at the time of selling would have been exactly £0!

A second and sad scenario

Jenny and Darren are both killed in an accident.

The problem

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 heavy sum, which might not be easy for poor Emma and Harry to come up with.

What they should have done

Just as in the previous situation, if Jenny and Dave had put the house into trust, the Inheritance Tax due would have been just … £0.

Seek advice

The world of Trusts might seem like a maze. However, it’s worth seeking expert advice. If only Jenny and Darren had done. Look at the savings they would have made, just by putting a property into trust!

We are the Leicester Trusts and Wills experts. If you want to protect yourself against unnecessary Capital Gains Tax or your loved-ones against inheritance tax, give me a call on or drop me an email. I’d welcome the chance to help.

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