I have a client who had settled an investment property into a discretionary trust around 10 years ago.
The trust receives rental income and pays IT at 45%.
Beneficiaries of the trust are unmarried children and they are high bracket taxpayers.
Settlor feels he pay unnecessary taxes and no income was distributed to children up to date.
The current value of the trust property is around 1. 6 M. At the time property transferred it was around £900K.
The settlor is concerned he has to pay ten-year anniversary charge sooner. He was thinking either to break the trust and transfer the property into a limited company. Appreciate, any advice of breaking up the trust and tax implications to trust and then transfer into a limited company. Will there be any taxes if transfer directly from the trust to a limited company?
Appreciate, input from members with regard to any other options available to, since he is mainly concerned to reduce tax?
There would have been IHT on the set-up of the trust based on the stated value on creation of 900k so any transfer out before the first 10 year anniversary will attract an exit charge using that rate as its starting point. The 10 year anniversary, as well as producing an IHT principle charge will also re-set the IHT rate for exit charges over the next 10 years.
Breaking the trust would need to be in accordance with the Deed to the stated beneficiaries and unless the property was sold at arms length to a company (with attendant SDLT issued for the company) and the cash distributed, not sure how he thinks the property could be transferred out of the trust into a company?
If the property were transferred in specie to the beneficiaries any capital gains tax could be held over because of the IHT liability, otherwise there would also be capital gains tax at 28% if the property is residential, or at 20% if it is commercial.