Reducing tax on property development by using a trust

One possibility to reduce tax on property development is by using a trust. The general idea would be that you could save the 40% or 50% income tax charge if you did the development in your own name, and instead use a trust. The trust could be subject to income tax at the basic rate of 20%. There could therefore be a significant tax saving. There are as you'd expect a few key points to bear in mind when considering this: Settlor not to benefit Firstly it's vital that the settlor, his wife and minor children are excluded from benefiting from the trust. In practice this is likely to be the biggest problem with this type of planning. Under the tax legislation if income arises to the trustees of a settlement, that income is treated for all the purposes of the Income Tax Acts as the income of the settlor if the income arises from property in which the settlor has an interest. It then states that a settlor is treated as having an interest in property if there are any circumstances in which the property is payable to the settlor or the settlor's spouse/minor children or is applicable for the benefit of the settlor or the settlor's spouse/minor children. Therefore whilst the settlor could be a trustee it would be essential that he or she could not benefit in any way from the trust. You could though use the trust structure to benefit adult children without the anti avoidance rules being in point. Trust capital Another issue is that the rate applicable to trusts is currently 50%, however this only applies to trust income. You need to ensure that the development profit although income for tax purposes is not income under trust law. It is possible to do this and you'd be looking to argue the development gain was on trust capital account and as such it can be accumulated and paid out by the trustees on the exercise of a power of appointment over capital. By ensuring the development was on capital account this would prevent the 50% income tax rate applying and basic rate tax would be chargeable instead. This would then reduce the tax charge to just 20% with potentially no tax on the payment to the beneficiaries. Note that the trust would be an interest in possession trust with for example adult children or other family or friends benefiting. For inheritance tax purposes it would be taxed as a discretionary trust and therefore you'd look to make use the nil rate bands on the transfer into such a trust to avoid there being a 20% immediate charge to inheritance tax. Providing cash was extracted prior to the first ten year anniversary of the trust there would be no UK inheritance tax charges. Although its treated as a discretionary trust for inheritance tax purposes, for income tax any income arising on the proceeds eg interest or other investment income would be taxed on the trustees (basic rate) with the life tenants then potentially liable for additional tax if they're higher rate taxpayers. The use of a trading trust could therefore be beneficial in appropriate cases where the settlor and their spouse & minor children won't benefit.