Life Time Interest Trust

[kumar9]

My brother and me own a Leasehold flat in London ( 45 years remaining ) ( we have not asked for lease extension as we hope laws will change to limit ridiculously high lease extension costs)
Flat is under £ 325,000 in value
Currently rented out earning around £ 15,000 per year NET NET
We are both 75 Plus and thinking of giving the property , its use and / or income to my two grand children ( both under 10 years of age) so that they can have enough money for their future education
Which would be the best , tax efficient way , of doing it ?
Out right gift?
Life time interest trust ?
Any other ?
Keeping in mind tax implications
Thank you
Kumar

[AGoodman]

For IHT, you simply need to give it away and not benefit from it in the future (i.e. benefit from the income).

The first catch is therefore that the children are too young to own property in their own name.

The simplest solution is a bare trust for the children - that causes problems because:

- they would inherit the property/proceeds outright at 18
- there would be a dry CGT charge on your gains (acquisition vs market value) when you declare the trust for them

There are two further solutions, which solve this:

- a life interest trust for the children with an overriding power to pay out once they are old enough.
- a discretionary trust for the children

Both would allow you to make a claim for holdover relief so there is no dry CGT charge - it would only be paid once the property is sold.
A life interest trust would mean you would need to hold the income for them outright (a bare trust of this could be built in). The advantage is that the income would be theirs and so benefit from their personal allowances - no income tax should be payable on these rates until they start earning. A discretionary trust is more flexible but the trust would pay 47% income tax, which could only be reclaimed when you made distributions to them.

The discretionary trust would involve more administration but might still be more attractive as:

- it would easily include any further grandchildren you might have;
- it is easier to spend the income on their education as the trustees have more discretion to pay it "for their benefit";
- the children could be treated as owning a property under a life interest trust - so would be subject to higher rate SDLT if they bought a property (when older) while the arrangement was still in place.
- I think the parents could also be treated as having an additional property while the children are minors with a life interest, which could cause them issues if, for example, they bought a home and did not qualify for relief as a replacement home.

You would need to take proper advice on all the above and particularly the SDLT implications as...its complicated. Trusts can be flexible so a life interest trust could be re-appointed onto discretionary trusts in future.

The other (and morbid) consideration is that any gains on the property would be wiped out for tax purposes if one of you died while still owning the property (thus avoiding any CGT entirely). If one of you had a bad prognosis, and wouldn't expect to survive 7 years, it might be more beneficial from a tax perspective to hang onto it and leave the proceeds in your will.

Finally, if there are few significant gains, it might be easier to just sell the property, pay any CGT and create a trust over the proceeds.

[kumar9]

Thank you so much dear Mr Goodman, apologies for the late reply as I have had health issues

Bare Trust
As grand parents , we already have a Bare Trust for them invested in equities ( 15 K Each)
It would be ok for us if they inherit the property at 18
We are not planning to extend the lease unless the expected law to reduce marriage values comes into force, and so no scope of CGT ?
So at the moment, as the lease is reducing in number of remaining years ,its falling in capital value and well below even the single IHT allowance
A life time benefit trust, with income gong to their bare trust , presently controlled by us, for future use for their further education, which is our aim?
As you said , present net income is unlikely to exceed each of them's Tax free allowance for income tax purposes.
Both the parents and grand children are presently living with us in our family home, owned as tenants in common by my self , my wife and my son
If and when each of the grandchildren wish to buy their own home, I suppose we , if we are still alive , or their parents can sell the property and distribute the proceeds 50/50 to each of them ?
Once again , thank you so much for your input
Wishing you a Very Happy 2026

[AGoodman]

Yes, you could avoid the higher rate of SDLT by selling before a grand buys a property. However, they would all lose their first time buyer status as a result of the bare trust. That would not be the case with a discretionary trust.