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Property trust

Herbs16
Posts: 49
Joined: Wed Aug 06, 2008 3:53 pm

Property trust

Postby Herbs16 » Wed May 17, 2017 3:48 pm

Hi
Ive a colleague who has set up a trust and put a residential property in it which receives rental income.
Is this profit taxable?
The beneficiaries are his 3 young children.
Many thanks
Dave

maths
Posts: 6734
Joined: Wed Aug 06, 2008 3:25 pm

Re: Property trust

Postby maths » Wed May 17, 2017 4:07 pm

The issue is not really whether the rental income is subject to income tax (which it in fact is) but on whom ie on parent; child; trustees?

What sort of trust is it?

AnthonyR
Posts: 139
Joined: Wed Feb 08, 2017 2:33 pm

Re: Property trust

Postby AnthonyR » Fri May 19, 2017 3:42 pm

There's a mass of tax issues for your friend to understand:

CGT on the transfer into trust
SDLT on any mortgage value assigned
Inheritance tax on the transfer into trust (if over £325,000)
Income tax on the trustees (potentially the settlor if settlor interested)
Income tax on the beneficiaries

If your colleague has transferred a rental property into trust for the benefit of his minor children then it triggers CGT, potentially creates an immediate IHT charge and would be ineffective for income tax and IHT purposes!

Persuade him to take some proper advice if he hasn't already.
Anthony Rogers CTA
Fusion Partners LLP
anthony@fusionpartners.co.uk

AGoodman
Posts: 128
Joined: Fri May 16, 2014 3:47 pm

Re: Property trust

Postby AGoodman » Mon May 22, 2017 10:36 am

I agree it is complicated and proper advice is invaluable as there are a number of "advisers" who are mis-selling trusts as a panacea solution.

If the friend and his wife are excluded from benefit (and do not in fact benefit) then it may well be effective for inheritance tax and would take the property out of his estate after 7 years. This would require the trustees to retain and use the income for the children, not for the parents.

There are unlikely to be any other benefits for the moment. If the friend is properly excluded then the trustees will pay 45% income tax on any accumulated rental income and the friend will pay income tax on any income distributed to or for his children while they are under 18. Once 18, the children will pay income tax themselves (potentially at a lower rate) on any distributions.

Herbs16
Posts: 49
Joined: Wed Aug 06, 2008 3:53 pm

Re: Property trust

Postby Herbs16 » Wed May 24, 2017 12:01 pm

If the beneficiaries are the children and the income falls within their personal allowance, then I thought no tax was due? The grandparents and parents are the trustees, the rental profit is only £5000.

AGoodman
Posts: 128
Joined: Fri May 16, 2014 3:47 pm

Re: Property trust

Postby AGoodman » Wed May 24, 2017 1:52 pm

You are maybe not aware of the anti-avoidance provisions designed to prevent people transferring income to their children.

If a parent makes a gift to a minor child (or into trust for them), any income received by the children while they are under 18 is taxed on the parent - s.629 ITTOIA. This would apply immediately if the trust is a bare trust or the children have a right to the income.

If the trustees have power to accumulate or a discretion to choose which children will benefit, they will be liable to tax at 45%. If they then distribute it to minor children, the income is attributed to the parent under s.629 but the parent receives a tax credit for the tax already paid.

maths
Posts: 6734
Joined: Wed Aug 06, 2008 3:25 pm

Re: Property trust

Postby maths » Wed May 24, 2017 2:36 pm

It is for the reasons set out by AGoodman that grandparents rather than parents set up trust for minors so avoiding the anti-avoidance provisions.

Depending upon the numbers and facts involved and the objectives it may make sense to consider unwinding the trust.

Herbs16
Posts: 49
Joined: Wed Aug 06, 2008 3:53 pm

Re: Property trust

Postby Herbs16 » Mon Jun 05, 2017 3:13 pm

Hi
Its a standard discretionary trust so I was under the impression if the beneficiary is small children, then no tax is payable on the rental income?

Am I wrong, if so does anyone know any legislation I can read?

Thanks

maths
Posts: 6734
Joined: Wed Aug 06, 2008 3:25 pm

Re: Property trust

Postby maths » Mon Jun 05, 2017 3:35 pm

Trustees are exposed to income tax at 45% on trust income whether beneficiaries are minors or not.

Beneficiaries are subject to income tax if trustees distribute income to them. The tax paid by trustees can be offset against any beneficiary liability and reclaimed if appropriate.

See ITA 2007 s479 and ITTOIA s683.

AnthonyR
Posts: 139
Joined: Wed Feb 08, 2017 2:33 pm

Re: Property trust

Postby AnthonyR » Tue Jun 06, 2017 6:53 pm

As Maths mentioned, the net effect where the beneficiaries are nil taxpayers is no tax. However, the trust pays tax at 45% then the beneficiaries pay their own tax, offsetting the tax paid by the trust (which usually results in a repayment of that tax).

BUT again as mentioned - the parental settlement anti avoidance rules in s.629 mean that if the income is paid to the minor children of the settlor it will be taxed on the settlor at their marginal rate, not that of the children.
Anthony Rogers CTA
Fusion Partners LLP
anthony@fusionpartners.co.uk


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