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Company and Trust: The best of both worlds?

One possible structure for family-based property investments may be to hold / build a property portfolio within a company, all or part of whose share capital is owned by a flexible trust. This structure gives flexibility as to the proportion of value in which the older generation retain an interest, together with flexibility on the extent and timing of transfers to remove capital value from their estates for Inheritance Tax (IHT) purposes.

Direct share ownership of property companies leaves value at risk in the event of divorce or financial issues and transferring shares in investment companies once value has accrued will have Capital Gains Tax (CGT) implications.

The basic advantages of any trust are ongoing flexibility as to who might benefit together with scope for the control and management of assets to be separated from their enjoyment. Consequently, senior family members can be included as trustees and remain involved in the management of the property company but still benefit from the removal of value from their estate for IHT purposes. Additionally, the trust can offer some protection from claims on divorce or bankruptcy.

One potential disadvantage of a trust is the limit on the value which can be transferred without incurring an IHT liability. Briefly, any gift to a trust will trigger a liability to the extent it exceeds the available IHT nil-rate band, currently a maximum of £325,000. Any resultant IHT is charged at 20%, increased to 40% if the settlor dies within 7 years.

However, the IHT nil-rate band is available to both husband and wife so a married couple can fund a trust to the extent of £650,000 without triggering any IHT. Additionally, transfers fall out of the reckoning after 7 years, so in a period of just over 7 years, a couple can fund a trust with £1.3 million completely IHT free.

Trusts are subject to a special IHT regime, the relevant property regime, which can result in IHT being charged on every tenth anniversary of the trust. The rules are complex but the rate of IHT borne on a tenth anniversary cannot be more than 6% of the value of the trust on that date. However, the rate is typically less than 6% as the trustees effectively assume the proportion of the nil-rate band available to each individual settlor at the date of original creation of a trust. By way of example, if a couple each settle £325,000 on a trust at its commencement and the trust fund doubles in value from £650,000 to £1.3 million at the first ten year anniversary then the IHT imposed on the trustees would amount to £39,000 [(£1.3 million - £650,000) x 6%]. If the nil-rate band increases then the actual IHT liability will reduce.

The taxation of trust income is more complicated and, depending on the form of the trust, may fall to be borne by the settlor, the trustees or one or more beneficiaries. However, a trust does afford scope for income to be taxed at a lower rate than if the same income were received by an individual.

From a tax perspective, the major potential advantage of a trust is with IHT. It can be arranged for the trust to be removed from the founders and the beneficiaries’ estates.

In summary, the ongoing profits of a property portfolio may well be subject to less tax within a company and combining this with trust ownership can provide substantially more flexibility than other ownership structures and potentially save IHT.

If you would like to discuss the structure of your property ownership, please get in touch with Cathy Corns or your usual Mercer & Hole contact.



Date: 17th June, 2016
Author: Cathy Corns


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