Family Trusts etc for Dummies

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    Family Trusts etc for Dummies

    I've attempted to read through online info about family trusts v setting up a 'business' for tax purposes but it goes over my head. I've an appointment with my solicitor very soon to discuss. He said that there were a 'few ways' to protect my estate. I wanted to read up as much as I can beforehand so that I don't get swayed.
    I'm single with adult kids. I work in healthcare. I've paid off my mortgage for my main residence which I bought in the mid 1990s. I bought my (now) rental flat in late 1980s and lived there until mid 1990s, from when I rented it out via a letting agent. I bought the flat for around £42k and the value is now £185k. My main residence will not be subject to cgt - that's about as much as I can understand.
    I was thinking of selling the flat to one child for a much lower amount (to use as a pension fund) and using an inheritance which I received from a parent, to buy something for another child. Then pray that I live for another 7 (or is it 8?) years. Joking aside, I've a health condition that can cause damage.
    The other options of family trust or setting up a business is what confuses me. Eg,if a family trust or business is set up and I'm out of the picture (after the 7 or 8 years), can my kids sell everything or can they only live off the income? Can they make decisions on the trust themselves or must it be a solicitor? I know the legal fees can be high. Are there any good websites that can explain in very simple terms?

    #2
    You have so many questions. I don't have a clue on the answers, but I am convinced you need to be speaking with a Property Tax Specialist as well as a Solicitor.

    Comment


      #3
      Originally posted by jessa46 View Post
      I've attempted to read through online info about family trusts v setting up a 'business' for tax purposes but it goes over my head. I've an appointment with my solicitor very soon to discuss. He said that there were a 'few ways' to protect my estate. I wanted to read up as much as I can beforehand so that I don't get swayed.
      Moving property into a company is quite expensive and, while I wouldn't rule it out, a trust is likely to deliver similar benefits and be cheaper and easier to manage.


      I'm single with adult kids. I work in healthcare. I've paid off my mortgage for my main residence which I bought in the mid 1990s. I bought my (now) rental flat in late 1980s and lived there until mid 1990s, from when I rented it out via a letting agent. I bought the flat for around £42k and the value is now £185k. My main residence will not be subject to cgt - that's about as much as I can understand.
      All that makes sense and sounds right.


      I was thinking of selling the flat to one child for a much lower amount (to use as a pension fund) and using an inheritance which I received from a parent, to buy something for another child. Then pray that I live for another 7 (or is it 8?) years. Joking aside, I've a health condition that can cause damage.
      There are no obvious problems with this, but:
      A - it's difficult to make the two gifts equally valuable, if that's important to you.
      B - it's difficult to stop the wealth you've obviously worked really hard to build up and consolidate leaving the family. Once it's in the hands of your children, they might marry and divorce, die and leave it to someone else, or become addicted to something.
      That may not be important to you, but I'd expect the solicitor to raise it as a concern.

      It also depends quite a lot on how old your children are.

      The other options of family trust or setting up a business is what confuses me. Eg,if a family trust or business is set up and I'm out of the picture (after the 7 or 8 years), can my kids sell everything or can they only live off the income? Can they make decisions on the trust themselves or must it be a solicitor? I know the legal fees can be high. Are there any good websites that can explain in very simple terms?
      A trust is an arrangement which is managed by trustees (there have to be more than one).

      It's not a company, but it's an arrangement which exists for a purpose, which the trustees have to make sure it honours.

      Taking a simple trust, imagine setting up the Jessa family trust to benefit you and your two children.
      The property remains in your name (there are other possibilities, but this is to keep it simple.)
      There would be two trustees, who could be the solicitor, or two people you trust or two relatives.

      If the trust were to be for your children only, it could be you and the solicitor (or someone else).
      The trustees aren't going to do much and they're not allowed to make money from the trust itself (although they can pay for legal advice from the trust's income) - so the legal fees shouldn't be an issue.

      The rental property is made part of the trust and then the trustees can decide where the income goes (amongst the beneficaries) or whether to sell the property and split the proceeds between the beneficiaries.
      They have to act for the beneficiaries guided by the intentions of the trust itself.

      The trust is registered with HMRC and would normally have to make an annual tax return of its own - but after the first year would have no income or outgoings.

      The properties beneficial ownership is now with the trust, so the inheritance tax position is that, after 7 years it's outside your estate.
      The trust controls the property and so nothing can happen to it unless the trustees agree,

      You could add in another property and the income from both could be split evenly.

      Eventually, the trustees can wind up the trust (if it's served its purpose - and both properties have been sold).
      If they want to, the beneficiries can petition a court the have the trust wound up.
      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

      Comment


        #4
        This is a complicated area but:

        1. Selling a flat at a 'much lower price' - HMRC will still want to tax it at its actual value and charge you CGT. If you gave it away then it would be out of your estate in 7 years.
        2. Being able to 'sell up' or only 'receiving income' would depend on the type of trust - but why would you want to tie their hands once you are no longer around?
        3. If you set up a business or a Trust where the kids do only get the income who is going to run the business to trust?

        It is not clear from your post what you are trying to do - are you trying to help your kids / avoid paying tax / provide an income for them in the future? Depending on your aims the actions may vary. It is also important to try to avoid paying CGT AND IHT.

        My personal experience of Trusts (some money left to my kids by my Grandparents) has put me off them for life! Although financially it worked out well for them, the hoops you must jump through, the pain of running one, the complicated tax issues etc I would only ever use one if there was no other sensible option!

        Why not give away the inheritance you received (if its recent you may be able to do a deed of variation on the will so you don't have to live for 7 years) and then keep the flat which will be subject to IHT when you die but will provide an income for you in the meantime. Or give the flat away now (and pay CGT) to your kids (joint property can be a problem) and live on your inheritance. Or give away money on a regular basis out of income (out of your estate immediately). Lots of options depending on your actual goal.

        Whatever you do, keep it as simple as possible so that your heirs don't end up spending their inheritance trying to unwind the trust!!

        Good luck - you may need it!

        And by the way - if you ask a legal professional for a solution expect to get an answer that requires a legal professional to do it!!

        Comment


          #5
          The threshold for charging iht ( inheritance tax ) starts above £325K or £500K if you leave the family home to your children.

          These websites may help you:

          https://www.gov.uk/trusts-taxes

          https://www.which.co.uk/money/tax/inheritance-tax

          https://www.which.co.uk/money/tax/in...s-aw1mb2n7snwx

          https://www.taxcafe.co.uk/inheritance-tax.html

          https://www.moneysavingexpert.com/fa...-planning-iht/

          Comment


            #6
            Hopefully the Chancellor will tighten up on these tax-fiddling manoeuvrers:
            I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

            Comment


              #7
              A trust is a fairly useful mechanism and isn't any kind of fiddle.
              The better fix would be to abolish inheritance tax and CGT - which needlessly complicate the tax system.
              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

              Comment


                #8
                Thank you all for the replies. I should have been clearer - it's in case something does happen to me and I become either incapacited or worse, which is why I was looking at the business or trust idea. My estate could potentially be at the 625k mark (includes the sum I inherited), dependant on house prices. I might keep the status quo with regards to my own home (which my kids will inherit), keep the flat rented out and see what they do with the inheritance lump sum. One wants to go into property development. I'd rather he went out and got a job after he finishes uni as I can see him sitting back and watching me doing all the work; it's something I don't have the energy for. But to get him off my back,I'll probably get something dirt cheap in eg, Cumbernauld and see what he does with it. The joys of parenthood.

                P.S Does anybody else have problems with this website? Everytime I attempt to log on, I get an error message saying - you've got the password wrong 5 times etc. I then have to reset my password each time. One of my posts has just been marked as spam.

                Comment


                  #9
                  Yes, I find it does this on a Sunday. . .

                  Comment


                    #10
                    Originally posted by Claymore View Post
                    You have so many questions. I don't have a clue on the answers, but I am convinced you need to be speaking with a Property Tax Specialist as well as a Solicitor.
                    "Property Tax Specialist" and "Solicitor" are not necessarily mutually exclusive. If you go to an accountant he will tell you if and when you need a solicitor and if you go to a solicitor he will tell you if and when you need an accountant.

                    To jessa46: There is no easy way into tax. If you have found nothing online which helps I am not sure anyone on this forum can. If you are looking to be informed of the basics you really need to read a book aimed at the layman. In any event, tax advice is always very much personal. There is no one size-fits-all - it has to be made-to-measure.

                    Comment


                      #11
                      Originally posted by theartfullodger View Post
                      Hopefully the Chancellor will tighten up on these tax-fiddling manoeuvrers:

                      However much the Left, media and HMRC may wish to vilify anyone who uses tax avoidance it is clear that, by definition, tax avoidance is legal and people have every right to take advantage of anything that avoids paying tax. As Lord Clyde so vividly put it in 1929,

                      No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue” (Ayrshire Pullman Motor Services & Ritchie v CIR, 1929, 14 TC 754)."


                      The UK has the fourth highest inheritance tax in the world. Is it fair?

                      Imagine if OP, sells her property. Has to pay CGT (18% or 28%). She may sell a 2 bed home, but can only buy a 1 bed as replacement. Takes a haircut. Then something unfortunate happens and the estate is subject to Inheritance tax (40%). For the tax man, it is money for old rope.

                      The super-rich pay 10% tax on their inheritance. Because they can afford an army of advisors and lawyers. (see article below).

                      The heirs of the late sixth Duke of Westminster paid no inheritance tax on the bulk of his £8.3bn family fortune following his death in 2016.
                      https://www.theguardian.com/business...ay-lower-rates

                      The bulk of the tax is being paid by ordinary people with a bit of money. Tax planning is n't economic, when it costs £100,000 to arrange your affairs, plus annual fees.

                      The mob wants people to pay more tax, but often it is the people in the middle who end up paying the bulk.

                      This lady is simply trying to give a home to her kids. Why are n't they any more deserving? She could blow the lot and spent it all. Is there any difference between spending the money on cruise ship holidays or spending money on the kids?.


                      The super-rich live in Monaco and 0% income tax. International corporations are the biggest tax avoider and route their money via Ireland etc....

                      The country is handing out Council homes to the needy, why can't parents help their own children?

                      Comment


                        #12
                        Originally posted by Flashback1966 View Post
                        However much the Left, media and HMRC may wish to vilify anyone who uses tax avoidance it is clear that, by definition, tax avoidance is legal and people have every right to take advantage of anything that avoids paying tax. As Lord Clyde so vividly put it in 1929,
                        As it happens I agree with you about inheritance tax, which has too low a threshold.

                        But the Lord Clyde quote has basically been overridden by the General Anti Avoidance Rule introduced by the Finance Act 2013. You can take advantage of the tax system where it allows you to (taking income in dividends rather than salary for example), but loopholes and other "gaps" aren't to be exploited as a general principle.

                        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                        Comment


                          #13
                          It’s worth remembering that less than 5% of estates incur IHT and it’s only payable once over the threshold

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