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At CTT, we continuously meet fellow professionals who deal with tax, both directly and indirectly, throughout different periods of their business.

When we are discussing tax, it is often concerning Trusts. We deal with individuals often involved with trusts from various different viewpoints, most commonly settlors, trustees or beneficiaries.

What surprises us most at CTT is how individuals make decisions regarding taxation. Many decisions made by settlors and trustees often have consequences concerning taxation. Each move can be the difference between being detrimental to a person’s (or group of persons) wealth or being financially profitable. Therefore, when dealing with Trusts and taxation, one has to be strategic with their strategy being based on knowledge and experience. Below we give two examples of scenarios where taxation could be more costly than maybe it needs to be and how we could offer a potential solution.

Scenario 1:

Many of the Trusts that we manage hold assets that yield an income, like a rental property. With this example, there is more than one way of dealing with the rental income, but not all are beneficial. One way is for trustees to collect the rent and pay it out to the beneficiary. However, this creates a complex labyrinth of HMRC returns and complicated reporting for both the trustees and beneficiary. Most importantly, it creates a significant cost burden and therefore inevitable strain on the ‘net’ income ultimately received.

However, if income is to be delivered into a trust, the trustees can appoint an income beneficiary. They can then agree a mandate so that the income is paid ‘from the source’ directly to the beneficiary. This avoids expensive administration costs each year for the trustees, thus increasing the trust’s ‘net’ yield year on year. We encounter so few trusts that operate this way; it’s a simple yet extremely effective trust management solution in many scenarios.

Scenario 2:

A further example is that a potential settlor of a trust wishes to give away an asset (say a share portfolio) to her children to try and reduce the taxable value of her estate for Inheritance Tax (IHT) purposes. However, the problem is that the shares, which she doesn’t want to sell, are laden with capital gain. She purchased the shares for £10,000, and now they are worth £100,000. This means that there will be a hefty Capital Gains Tax (CGT) applicable when her children receive the proposed gift. As the shares are gifted, there will be no sales proceeds from which to pay the CGT, which would likely be in excess of £15,000! She has a few options she can proceed with below:

  • Pay the tax (if she has the resources and willingness to do so)
  • Transfer some of the shares each tax year to use her CGT allowances (but ultimately, she will delay the 7-year Inheritance Tax clock starting)
  • She could use a Trust (or 2)!

In this situation, we would suggest that she could choose to gift a proportion of the shareholding into a Gift Trust to ‘use her CGT allowance’. If this is unused in the tax year of disposal, gains of up to the current CGT allowance (£12,300) could be triggered without any taxation falling due. She could then use a Holdover Gift Trust for the balance of the gift. The latter trust would allow her to transfer all or part of the shareholding into a trust, defer any capital gains and therefore defer any liability for the CGT. She can now gift without having to find the money for the £15,000 tax bill!

It is important to remember that this does not erase the capital gains tax but instead defers it.

However, in the right hands, with the right advice, this method can be an invaluable estate planning option for clients in this position, as it works for secondary and rental properties too (and is available to the trustees when appointing the shares out of the trust too!)

To find out more about the options described and other profitable planning concepts for you and your clients; find the dates of our estate planning courses below and click here for more information:

Complete Guide to the Life Cycle of a Trust – 16th May

Will Writer to Estate Planner  – 24th, 25th, 26th May