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TaxationWeb by Jennifer Adams

How can trusts be used to help children, grandchildren etc onto the property ladder? Jennifer Adams explains.According to the London’s Evening Standard newspaper it is almost impossible for anyone younger than say, 30 years, to be able to buy a house in the Capital and the situation is becoming increasingly the same in the Commuter Belt. Those who are able to get on the bottom rung of the ladder appear to be helped by their parents who are remortaging their houses to fund the deposit.

It can only be a matter of time before this becomes the 'norm' and parents must be prepared to set even more monies away for their children’s future. As usual the Government does not help much but the most tax efficient way remains via the use of Accumulation and Maintenance trusts ('A and M trusts').

However, if monies are being set aside for the benefit of one or a few specified children, grandchildren etc and the beneficiaries are older than 18 years then A and M trusts are not for you and you should be looking at a Life interest trust; similarly, if you have a wider class of beneficiaries in mind (and especially if further beneficiaries may be added in the future) then the flexibility of a discretionary trust should be considered; in all other instances you are looking at the A and M trust.

These trusts attract substantial IHT savings for the settlor as well as giving the assurance that the beneficiary will not be able to use the monies until a responsible age determined by the settlor (although there is a 25 year cut off age).

Other benefits of such trusts include:-

- The potential for capital growth outside of the donors and beneficiaries estate

- Transfers into such trusts are Potentially Exempt Transfers and as such it is possible to settle virtually unlimited funds with no IHT charge provided that the settlor survives 7 years from the date of gift and there is no reservation of benefit. This has the further added bonus of the value of the property divested possibly increasing in value outside of the estate of the original settlor but if the settlor is also made a trustee he can then keep a watchful eye on his investment.

- S165 or 260 TCGA 1998 CGT holdover relief is possible.

- The Income tax load is spread around the family, especially grandchildren.

- The beneficiary’s money is protected from himself which may not be possible with either an interest in possession or discretionary trust

- It may not be possible or practical to make an outright gift

- The use of a trust preserves property within the family unit.

For an A and M trust to be valid the two main conditions that need to be satisfied are found under S71 (1) IHTA 1984:-

1. a) One or more persons (beneficiaries) of whom at least one must be in existence or been in existence during the subsistence of the trust will, on or before attaining a specified age not exceeding 25, become beneficially entitled to the settled property or an interest in possession in it; and

b) No interest in possession must subsist in the property and the income is to be accumulated so far as it is not used in the maintenance, education or benefit of the beneficiary.

2. a) Either not more than 25 years have passed since the commencement of the settlement; or

b) all the beneficiaries are grandchildren of a common grandparent or great grandchildren.

Whatever the above section states the beneficiary actually does not have to be living for the trust to be possible – the way round this potential problem is to 'borrow' someone else's child - usually a first cousin of the yet unborn beneficiary. This strategy does carry the risk that if no intended offspring come along then that 'borrowed' beneficiary could benefit from the entire fund - which was certainly not the intention in the first place! The trust deed must therefore contain variation powers to enable the alteration of the shares of each beneficiary. Any such variation power can only be exercised if there are at least two beneficiaries in place and it is usually written that upon attaining a specified age the 'borrowed' beneficiary is then only entitled to a small interest in possession (which is then appointed away from him) leaving the intended beneficiary in place to benefit from receiving the entire trust contents.

As part 1b) states above, the income must be used for the maintenance, education or benefit of the beneficiaries and if not so used must be accumulated within the trust. The trustees have complete control over this as they can choose whether any income should be placed in the hands of the beneficiaries. Hence if the beneficiary is showing signs of funding his heroin habit then the trustees can agree to accumulate the income until they feel that the monies can be used sensibly or they could decide to deprive that particular beneficiary of his share before attaining the specified age. The capital continues within the A and M trust regime for the benefit of the remaining beneficiaries.

A and M trusts therefore have wide tax advantages but only if they fall within the strict rules as given under S71 IHTA 1984 above but they are not necessarily completely free of IHT as hidden within the legislation is a tax charge anything up to 21% of the value of the entire trust property. This tax charge is levied on A and M trust which do not come under the 'common grandparent' rules in 2b above either when the 25 year time limit runs out or if the property ceases to qualify as an A and M trust. IHT is calculated in accordance with s 70 IHTA 1984 at rates depending upon the number of quarter years that the trust has lasted and the property must be grossed up if the tax is paid out of it. The 25 year period runs from either the date of commencement, or from the date when the trust became an A and M trust, or from 15 April, 1976 whichever is the later date.