Using family trust to provide deposit for childs property

[Cloisters]

Good morning,

In the next couple of years wife is likely to have access to family trust (as a beneficiary of same discretionary trust set up in 1997).

The trust was set up ahead of her late fathers passing to protect the house whilst her mother continues to live in it.

We had always assumed that on the death of the survivor, the trust would be wound up and monies distributed between the children as beneficiaries of the trust.

However, we are becoming aware that this will simply inflate the children's own IHT considerations and it may be sensible to use the monies to help the next generation whilst still retaining some control. I am also aware that trust law changed and having one in existence of that date could have opportunities that no longer exist?

The kind of thing I am wondering, is that if a grandchild of the settlor wanted to buy a house with a partner, could the trust provide the deposit such that should the relationship of the grandchild fail, the trust would retain the proportional ownership and it would not be included in any separation type arrangement? There are many other thoughts in this area such as loans to children or grandchildren without the monies being included in the childs IHT estate.

This also provided a potentially very useful mechanism in that one beneficary (sibling) is themselves childless and whilst the trust could lend that person the money during their lifetime, it would be protected and go to that persons siblings or their descendants rather than an existing partner or other per their will.

I am also interested to know what administration and other costs may be involved and appreciate I should probably take full advice at some point for our individual circumstances, but just want some pointers please and if there is a reference document or similar articles to read it would be useful ahead of time please.

Many thanks,

[TaxAdviser2018]

You should review the Trust Deed as to the Powers and Responsibilities of the Trustees including making loans or providing assets to beneficiaries. On the basis that Trust Deed permits the Trustees, any loans should be evidence in writing by way of a formal loan agreement and the Trustees should consider securing property of the beneficiary to protect the Trust's assets. You should confirm with a suitably qualified conveyancer that a restriction on title needs to be registered in respect of property.

The Trustees now have an obligation to register the Trust under the HMRC Trust registration scheme. In addition, any taxable income should be reported on a Trust Tax Return and filed by 31st January in the following tax year and tax paid by the due date. An Inheritance Tax Account (HMRC form IHT100) should be filed with HMRC in respect of each ten year anniversary from the original settlement date i.e. 2007, 2017.

Whilst the discretionary (relevant property) trust regime is flexible, any planning by the Trustees should be considered by reference to the Trust Deed and any other supplementary deeds.

[Cloisters]

Thank you. Given that the trust was set up in 1997 and funds placed in it in 2004, we are over the ten years you mention.
I had understood that as the only contents of the trust were a property that was shared until the death of the second spouse, that we did not need to do anything re the IR and that no 10 year tax was due (it would be tricky to pay in any case). I would appreciate any clarity you can give to this aspect please.

[Lee Young]

Without seeing the trust documents themselves or having a much fuller exposition of the history of the trust it is impossible to be categorical about the IHT compliance issues.

[TaxAdviser2018]

Thank you. Given that the trust was set up in 1997 and funds placed in it in 2004, we are over the ten years you mention.
I had understood that as the only contents of the trust were a property that was shared until the death of the second spouse, that we did not need to do anything re the IR and that no 10 year tax was due (it would be tricky to pay in any case). I would appreciate any clarity you can give to this aspect please.

An Inheritance Tax Account (IHT100) should be prepared for a relevant property trust for each ten year anniversary of the creation of the trust irrespective of when assets are settled during that period. This will determine if any IHT is otherwise payable. Under HMRC's new trust registration service, it is possible that they will communicate with the Trustees as to when each compliance event is approaching to ensure that the statutory deadlines are met.

In the meantime, I would recommend that the Trustees being the Trust's compliance returns up to date with HMRC.

[Cloisters]

Thanks,

I found this on the gov website which due to the "either" I read as not needing to anything until probate as no potential gain is realisable until then as I understand it, but am I misreading it - I don't really want to wake the beast early.

"When to register
If your client has a trust with a new tax liability, you must register by 5 October of the tax year after either:
-the trust has been set up
-it starts to make income or chargeable gains, if this is later"

Relevant link at https://www.gov.uk/guidance/register-your-clients-trust