My client who is cohabiting intends to transfer a mortgage-free property valued at £375 K (inherited value £280K) to a 4yr old only child by creating a trust to pass it to the child at the age of 25 years. From Oct 2018 the property has become his main residence. If the property is rented monthly rent will be around £1300. I would appreciate any advice on below queries. am new in this field.
a) To my understanding, this will be a settler interested trust. If the trustees don’t distribute income to the child till the child reach the age of 18, will the rental income of the trust be treated as settlers income during this period?
b) For calculating periodic charge will it be possible to use 2 NRB of both parents? (i.e; f the client gets married to his partner)
c) GROB/POAT issues, if the client or partner stays in the property during the trust period or after the trust ended?
d) Since no CGT ( no holdover relief) or IT advantageous ( 45% tax on settlor) from discretionary trust any other suitable trust the members can recommend.
There would be an IHT entry charge of about 12.5k based on the figures you have given.
You have not stated when the property was inherited, but the gain on transferring it into trust is unlikely to be covered by Main Residence relief, so there would also be capital gains tax at 28%, although it could potentially be held over because of the IHT liability.
It will be a settlor interested trust, irrespective of whether or not the income is distributed to the settlor’s minor children, especially if the settlor continues to occupy the property - there would not be any income.
No, you would not have the benefit of 2 NRBs unless both parties owned and settled the property at the outset.
The definition of a settlor interested trust is different for income tax and CGT.
For CGT (the property will constitute settled property due to the contingent nature of the child’s interest) even if neither the settlor not settlor’s spouse can benefit but the child is a minor child of the settlor then the trust will still be settlor interested. As a consequence, no CGT hold-over relief (under ss.165 or 260 TCGA 1992) is available on settlement of the property.
If neither settlor (nor settlor’s spouse) can benefit, trust is not settlor interested for income tax purposes. Nevertheless, ITTOIA 2005 s. 629 is in point. Whether the settlor is subject to income tax on the trust income depends upon whether any payments are made out to the minor beneficiary or if the income is accumulated.