I hope someone can clarify this scenario please.
A solicitor has suggested Mr A assigns 50% of his beneficial interest in their residential property (he is the sole registered proprietor on which he holds a mortgage) into a declaration trust to his wife, but with Mr A’s retained 50% subject to the full mortgage.
Another discretionary trust is to be set up for their 2 existing buy to let properties:
a) Split £50k (26%) to Mr A and Mrs A holding £140,000 (73%)
b) The share to Mrs A is after the repayment of the mortgage which means that Mrs A is taking on responsibility of 22% of the mortgage. This equate to £38,500/ Her equity in this property will be £49,000 and Mr A will have equity of £175,500.
Therefore the gifts they are both making are:
Mr A - £50k + £175.5k = £225,500
Mrs A - £140k + £49.5k = £189,500
A deed of appointment to be set up to give their adult son the right to the rental income. And their daughter will also benefit once she is 18.
The solicitor has suggested all this be done to minimise tax, but hasn’t made clear what tax?
Is there a gift with reservation on the main residence?
Is trustee tax paid on the net rental income?
If sold, would there be CGT of 28% on the net gains?
Any clarification would be greatly appreciated. Likewise, are there any issues with these proposals?
The gift of the main residence will be CGT free and will be then eligible for CGT PPR. If W has no responsibility for the mortgage no SDLT
The transfers into the DT will be a CGT disposals. Hold-over relief can be claimed if its conditions are acceptable but not if the DT is settlor-interested as it seems it will be here. This is because for IHT the transfer is a CLT. It may however be within NRB. If this is a DT what is the idea behind the spouses having fixed percentage shares? You can do this but the trust will still be an RPT. SDLT will be payable by the trustees but only the amount of any mortgage taken on. Is there a mortgage on the buy-to-lets? Quite possibly.
If the son and later the daughter are given IIPs within an RPT for life or a fixed period they will not however be taxed on the rents because H as settlor will be by virtue of his retained interest in the capital if not in the income. The IIP owners will be entitled under the trust to the rents net of tax. The trustees will pay tax at basic rate and H will get a credit. Does the daughter benefiting after 18 mean that she will not become a beneficiary until then or that her share of income will be accumulated from the outset under s31 or expressly?
While that is so for income tax, for CGT the properties will be settled property but the appointment of IIPs and their termination will not be deemed disposals and nor will their termination (and neither will be chargeable events for IHT).
The massive snag is that if H is a beneficiary of the DT, as seems to be intended subject to the fixed share wrongthink, there will be a GROB by him which does not cancel out the CLT. Double charges relief may prevent double taxation if he dies or ceases to be a beneficiary (which would cause a PET) but the cumulation stands and will affect his subsequent inter vivos gifts and his estate (if only the transferable NRB) if he does not survive 7 years.
So income tax on H as settlor re the rents, capital gains without hold-over relief, and a CLT plus GROB for IHT. Plus a rather strange DT structure. A plan indeed.