21/12/23
“Oh, we’ve got to be talking millions!” says Spencer Tattam, CTT’s Technical Director. “If this one instance in Brighton saved the family from a £134,000 tax bill, then over the last 15 years, we must have saved millions in tax for our members’ clients.”
He’s talking about CTT’s Trust of Land, another ingenious bit of collaborative drafting from the group’s estate planning and financial advisory teams. This particular trust, unique to CTT, tackles the sticky issue of Inheritance Tax and Capital Gains Tax on secondary properties. And it’s the secret weapon many advisers – and their clients – are searching for.
Oldie but a goodie
The Trust of Land relies on a single piece of legal statute – the Law of Property Act 1925. It’s nearly 100 years old, but that doesn’t stop it being an effective tool for a cutting-edge tax-savings trust.
The Law of Property Act 1925, Section 53 1b stipulates that a person can establish a trust relating to land verbally. However, the trust must be formalised in writing before the next event, such as a sale or transfer. The Trust of Land is a retrospective piece of drafting that acknowledges the date of the original verbal agreement at commencement of the trust.
“Verbal trusts are perfectly valid under England and Wales law. But with land, it’s not valid in terms of tax law until it’s evidenced in writing. That’s what a Trust of Land is. It evidences a historical verbal agreement that’s already in place before the trust is drafted,” explains Spencer. “It’s not loophole planning,” he asserts, “but some people believe it to be such. That’s why so few companies offer this type of trust.”
Applying Trust of Land
There are various scenarios where a Trust of Land could save clients hundreds of thousands of pounds in tax.
“In the Brighton example I mentioned, mum and dad owned a house in Warwickshire,” Spencer recalls. “They’d bought a second property in their names in Brighton for their son to live in while he was studying down there. Over the period they’d owned it, the property had gone from £250k to £750k, which could have landed them with a huge tax bill when it came time to sell it.”
“But in buying the house for the benefit of their son, they’d already created a verbal trust when they made the purchase. There was already a trustee/beneficiary relationship in place there. As the son never paid any rent, and mum and dad never had use of the property themselves, they’d effectively held it as an asset in trust for their son. All they had to do was put the arrangement in writing with a Trust of Land.”
“When they sold the place in Brighton, the Trust of Land allowed them as trustees to claim it as their son’s main residence, because he’d lived in the trust property. And everything they’d gained during that time was treated as if it was his, so the £500,000 profit was tax free.”
Useful in deed
Another instance where Trust of Land can be useful is when clients have put their children on the deeds to their property. As Spencer explains:
“People do this because they’re advised it’s good for Inheritance Tax – which it’s not. And it’s good for protecting the house from care – which it isn’t. Mum and dad might have put their kids on the deeds to their home 15 years ago or more, but when it comes time to sell it, there will be tax to pay on the kids’ share of the profit if the kids aren’t living there anymore, because it’s not their main residence.”
In this instance, the Trust of Land can be drawn up naming the children as trustees, who have in effect been holding their share of the property in trust for their parents. This retrospective planning negates any tax liability as the parents are seen as beneficiaries of the children’s share of the property, having occupied the entirety of the property, rent-free, with no immediate benefit to the children.
How it works
The law of England is based on a common law system, which recognises there can be separate legal and beneficial interests. While one person can be the official owner of an asset, another person can have the value or benefit from that asset.
If the property is being let out and the tenant is paying the full market value of the rental on that property, then there is no trust, because there’s no relationship between the owner and the occupier. A Trust of Land can only be applied where there is a historical verbal agreement between the owner and the beneficiary.
“If you want this trust to work, you have to have a clear diary of ownership and a diary of occupation and benefit,” Spencer explains. “In terms of instruction taking from the client, we don’t need to gather evidence to draw up a Trust of Land. We just base it on the facts they’ve told us. But The caveat with this type of trust is always it’s only as good as the facts provided by the client. If the facts are wrong, it could result in the tax savings being diminished or even completely removed.”
“The trustees of the trust will always be the owners of the property. It’s their responsibility – or the survivor of them – to be able to confirm the facts are true if the trust is ever questioned,” he says.
In complex circumstances, where a property has had multiple beneficiaries at different times over the years or has had periods of being let out to non-beneficiaries, evidence is required to confirm the dates of these occupancies for tax purposes when drafting a Trust of Land.
IHT benefits
Depending on the individual’s circumstances, CTT’s Trust of Land can also be useful for Inheritance Tax (IHT) purposes.
“The usual rule for IHT is that if you want to make a gift, you have to survive that gift by 7 years in order for it to clear your estate and not be subject to IHT when you die,” Spencer explains.
With the Trust of Land, in certain circumstances the property is deemed to have left the client’s estate at the time of the original verbal agreement, which may pre-date the drafting of the trust by seven years or more. In this case, the property would no longer be considered part of their estate and would be outside the client’s IHT calculation in event of their death, even if they pass away shortly after the Trust of Land is drafted.
“It’s the one trust that is going to be deemed to have had assets put into it prior to the trust being drafted,” says Spencer. “If the property was bought in 1984 and we drew up a trust today, the trust would be dated today, but it would start with the purchase in 1984. It would record what has happened with the house since that time, making its beneficiaries eligible for certain tax benefits when it’s sold.”
“In the Brighton example, the couple bought the house in 2012. When they came to sell it in 2019, they’d derived no benefit from it at all in that time. They’d never lived there or claimed any rent. The only person to benefit from it was their son,” he continues.
“So, we were able to draft a Trust of Land that said they’d given up all benefit to the property in everything but title back in 2012 when they bought it. The trust took the property out of their estate immediately for IHT purposes as soon as it was signed.”
“It’s a very powerful, unique – and lucrative – product. As an adviser, you can almost go in there with a tax calculator and say, ‘With this sale, you’re liable for a tax bill of £134,000; I can do you a trust that will mean you will pay none.’ It’s exceptional circumstances, but it does happen!”
Trust of Land for advisers
CTT is well known for its innovative trusts and unconventional approaches to legislation; the Trust of Land is a prime example of this. The group’s eclectic mix of financial and estate planning advisers means they have a wealth of expertise when approaching legislation for the purposes of creating a trust, as Spencer explains:
“I can remember exactly where the idea for the Trust of Land came from!” he laughs, “Myself, Clive, and Bob were studying for the STEP tax exam in 2008. There was a little section in STEP tax book about retrospective trusts. Whereas I just learned it parrot fashion, Clive and Bob saw an opportunity in that tiny paragraph and from there they created a product.”
Many advisers are astounded when they hear about the Trust of Land and the tax-saving opportunities they’ve missed out on for clients before discovering it. The trust is especially popular and beneficial among those CTT members in accounting.
“Nine times out of 10 when we present the Trust of Land to a new client adviser, they’re amazed – and a bit suspicious perhaps, because they’ve not heard of it before. Often when we do training days and webinars, attendees are gobsmacked it’s even a thing!” laughs Spencer.
“It’s a very popular product. We must have 30-40 enquiries a week. You don’t come across circumstances where a Trust of Land won’t fit the bill every day, but what it does makes it quite dramatic in its effect.”
Having been in place for nearly 100 years, it’s unlikely the Law of Property Act will alter any time soon, meaning the Trust of Land is here to stay. And if legislation does change, no doubt the great minds at CTT will be inspired to create yet another revolutionary planning product to serve members and their clients.
To find out more about CTT’s Trust of Land and becoming a CTT member, contact the CTT Partnership Team today.
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