Gifting property to child > Bare Trust?

[Woodearth]

Can anyone help me?

I purchased a buy to let property outright last year, it hasn't increased in value (so no CGT if I gift it?) and I want to take it out of my estate (to reduce IHT liability) and pass it to my son, who is under 18.

He would then receive the monthly rent, out of which I would like to be paid the expenses associated with this property, insurance, repairs etc' and also pay his school fees (and in the future Uni fees etc').

What is the best way of doing it and how exactly is it done? Can I set up the trust myself or do I need to incur costly legal fees, if I can do it myself what forms/process etc' do I need to go through?

I have read about Bare Trusts, but not sure the school/Uni fees can be paid out of the income and classed as an allowable expense?

Any advice greatly appreciated!

[AvocadoK]

You won't like me saying this, but this is an area where professional advice is essential. It's not just a matter of printing off a trust deed - it's making sure you are not going to fall into any tax traps. Some pointers:

1. If you set up a trust where you, as settlor, benefit, the trust income will be taxed on you. The school fees are invoiced to you, not your son, so paying school fees is considered to benefit you, not him.

2. If you benefit from the trust, it will not reduce your estate for IHT purposes.

3. If the trust excludes you and your spouse from benefit (and you do not in fact benefit) the rental profit will be taxed at the trust rate of 50% (bar the first £1000 at 20%) from 6/4/10.

4. If the trust makes any payment to your son while he is under 18, it will be taxed on you, not him.

5. The above rules apply to bare trusts as well as fully fledged settlements.

It's pretty difficult to set up a tax effective parental settlement, especially when you want to use the income from the trust property, and it would be a mistake to try, without expert advice.

AK

[maths]

I agree with AvocadoK's comments.

If your sole goal is to remove the property from your estate for IHT, a bare trust would achieve this.

The transfer from you to the bare trust is a PET.

For CGT any capital gain will be your son's not yours.

For income tax purposes any income will be subject to income tax on your part (subject to de minimis exemption re £100) whilst your son is under age 18.

At age 18 your son will in principle have the right to call for the property to do with as he pleases.

[draftsmann]

I generally only recommend setting up bare trusts as a last resort, due to the fact that a beneficiary of full age can as already mentioned wind up the trust and do as he sees fit with the trust property.

Sometimes it is a mistake to let the tax tail wag the estate planning dog!

Adrian Sacco TEP
The Trust Shop