Using a property trust to protect wealth and minimise taxes

Holding investment property via a UK trust can be a very flexible way of holding property for your family as well as having substantial tax advantages. In this article we look at exactly how you can use a property trust. The key benefits of holding property in a trust are that: 1) It can provide a home of children or other family members whilst also protecting the value of the asset on a future divorce or separation 2) Trustees can take advantage of holdover relief and/or principal private residence relief to reduce capital gains tax 3) Income can be distributed to utilise the annual allowances/lower tax rates of certain beneficiaries Here's a good example of how a property investment trust can be used for both tax and asset protection. Jim set up a discretionary trust in 2000 which holds an investment property worth £300,000. Jim wants to gift this property to his Son (Jack) who is getting married. The problems with a direct gift of the property to Jack are: 1)If Jack and his wife divorced in the future the value of the property would be taken into account when looking at the value of the marital assets 2)As the property has increased in value since the acquisition in 2000 there would be CGT charge on the trustees. Using the trust Much better would be to make use of the trust. In this case the property could remain in trust and Jack could live there as a beneficiary, which would offer protection from divorce, creditors etc. Jack could live at the property rent free, so there would be no income to report, and the trust would become dormant. If or when the property is sold, the trustees would be able to apportion the total capital gains between the time it was let and the time Jack lived at the property. The trustees would be eligible for the main residence relief on the gains during Jack's occupancy. In addition, there is a very generous extension to main residence relief to the period when the property was let. The trustees may be able to claim lettings relief of up to £40,000 in addition to the main residence relief. This would significantly reduce the capital gains tax bill. If Jack was to let the property again before sale, provided the property has at some time been their main residence, the last three years of ownership will always be exempt when calculating the main residence relief. Jack and his wife did not move into the property, the net rental income could be paid direct to their children in the future. In this way, there would be little or no net income tax cost, and the property would still be protected. The rental income could also be redirected at any time to any of the other beneficiaries. Alternatively, Jacks wife could be added as a beneficiary under the terms of the trust, and the property then advanced outright to Jack and his wife. It is possible for any charge to capital gains tax to be deferred so that it would only become payable on the eventual sale. The property would then lose the protection of the trust wrapper, but there would be no immediate tax to pay. By making careful use of the trust it will provide protection for family wealth, maximise benefits for children/ grandchildren and minimise taxes.