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Where Taxpayers and Advisers Meet

Trust planning for grand children

Ifeanyi
Posts:10
Joined:Wed Aug 06, 2008 3:54 pm
Trust planning for grand children

Postby Ifeanyi » Sun Apr 11, 2021 10:24 pm

Hello,

I am trying to understand the benefits of introducing a trust into my families' estate planning.

The aims of the trust would be to achieve the following:

1, Hold and invest assets in order to pay for the education of my grandchildren (born and unborn) and to provide them with a capital contribution to buy their own home on starting a family
2, Provide income to my two sons during their life-time

The assets that would be in the trust are as follows:
£000
Mortgage free residential home 800
50% share of BTL property 150
Stocks & shares 200
Cash at bank 70
Pension 250
Term Life Assurance policy

The trustees would be me and my two sons. The beneficiaries would be my grandchildren (born and yet to be born).

Income generated from the trust assets (i.e. from renting the 2 properties, interest and dividends on the stocks and shares) being split 25% each for my two sons, and the remainder staying in the trust. I also envisage that one of my sons and his family could live in the residential home on my passing, subject to paying a market rent to the trust. In the event of the sale of either of the properties, or stocks and shares, the proceeds would be split 25% each for my two sons, and the remainder for the trust.

I would be interested in whether a trust is a tax efficient way of achieving the above outcomes, and what is the most appropriate form of trust for the above objectives.
Thank you in advance

Parky1
Posts:16
Joined:Sun Feb 09, 2020 5:52 pm

Re: Trust planning for grand children

Postby Parky1 » Mon Apr 12, 2021 2:50 pm

I suggest you talk to a financial advisor. There are lots of issues involved in what you propose. For example:-
1. It sounds like a Discretionary Trust, if you wish to add beneficiaries in the future, so taxation of income (above the first £1000 p.a. will be high - 38.1% for dividends and 45 % for other income).
2. The amount you are planning to settle in the trust will be a chargeable transfer at 20% above the first £325000 (Inheritance Tax).
3. If you still live in the house, I believe it will remain in your estate for IHT, unless you pay a market rent into the trust.
4. Can you put your pension into a trust? I can't see how that would work. Do you mean a lump sum or the income from a pension?
5. There are other taxes. Capital gains tax is 20% and there is a 10yearly IHT tax of something like 6% on the total amount in the trust.

I don't think a trust as you describe it is particularly tax efficient. The main benefits are flexibility as to who benefits, and when. For tax efficiency you would be better off giving away your assets now and living 7 more years to avoid paying IHT on the gifts.

Having said all that, I am trustee of a similar, but smaller trust, and value the flexibility it gives me as a trustee to control the flow of assets to the beneficiaries. Even so, I am far from being an expert, as trusts can be very complicated, so I will be interested in the comments of others.

Ifeanyi
Posts:10
Joined:Wed Aug 06, 2008 3:54 pm

Re: Trust planning for grand children

Postby Ifeanyi » Thu Apr 15, 2021 9:10 am

Thank you for the response. This is very helpful as the take away is that a trust in itself may not achieve the sought tax efficiencies, but it does offer control and flexibility in the distribution and flow assets to beneficiaries. I also think that some form of advice is needed to bottom out the best way of structuring the discretionary trust if indeed this is the correct way to go. What type of professional is best placed to provide such advice (i.e. solicitor, accountant or trust adviser)? What would be typical costs of such advice? The level of tax on the trust income does seem rather higher than I had understood at 38.1% for dividends and 45 % for other income - which I presume is the rental income from the properties?

One further thought. If I leave my residential property out of the trust, and instead it is inherited via my will by my two sons and one of them wishes to live in it whilst paying market rent to the other, can the eventual capital gain be offset by any improvement/refurbishment works undertaken on the property during their occupation of the property? To the extent there is any IHT on the property can it be paid by instalments during the occupation also?

On the pension point I now see that this does not really work as I was thinking about the lump sum.
Thank you.

Parky1
Posts:16
Joined:Sun Feb 09, 2020 5:52 pm

Re: Trust planning for grand children

Postby Parky1 » Thu Apr 15, 2021 6:51 pm

Thank you for the response. This is very helpful as the take away is that a trust in itself may not achieve the sought tax efficiencies, but it does offer control and flexibility in the distribution and flow assets to beneficiaries. I also think that some form of advice is needed to bottom out the best way of structuring the discretionary trust if indeed this is the correct way to go. What type of professional is best placed to provide such advice (i.e. solicitor, accountant or trust adviser)? What would be typical costs of such advice? The level of tax on the trust income does seem rather higher than I had understood at 38.1% for dividends and 45 % for other income - which I presume is the rental income from the properties?

One further thought. If I leave my residential property out of the trust, and instead it is inherited via my will by my two sons and one of them wishes to live in it whilst paying market rent to the other, can the eventual capital gain be offset by any improvement/refurbishment works undertaken on the property during their occupation of the property? To the extent there is any IHT on the property can it be paid by instalments during the occupation also?

On the pension point I now see that this does not really work as I was thinking about the lump sum.
Thank you.
There are ways you can reduce your tax by changing the structure and values of your proposed Trust. For example, settling £325000 you will pay no tax on the money entering the trust. If you have a spouse you can increase that to £650000 by each creating a trust. If you create an Interest in possession trust, where the beneficiaries have a right to the income, rather than being discretionary beneficiaries, the tax on that income is 7.5% for dividends and 20% for other income (eg rent).
I went to a business accountant for this service, who also offered personal financial planning, wealth management and tax advice. The cost for setting up 2 trusts was £2500 (in 2013), including writing the deeds (subcontracted to a solicitor).
I can't comment on your query about CGT on a residential property as I have no experience of this.


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