TRUST OF LAND.
Historical Trusts of Land
If you own an additional property that you purchased to allow a child or relative to live in you may benefit from a Trust of Land. The Law allows a person to establish a Trust relating to land verbally. This verbal Trust must be formalised in writing before the next taxable event, for example the sale or transfer of the property. You may well have established a verbal trust of land without ever using the word “Trust”.
An example of this is parents purchasing a property for a child to live in while at university. The parents are the legal owners at the Land Registry and have allowed their child to live there rent free. When it comes to selling the property if it has increased in value the parents may have to pay capital gains tax on the sale. Further, if the parents do not wish to benefit from the sale of the property and allow the child to have the cash or simply wish to transfer the property to the child it could help to remove the value of the property from the parent’s estate for inheritance tax as well.
The Trust of Land works by confirming the verbal Trust that was set up at the time the property was purchased, this means the property can attract the main residence relief for CGT and the value of the asset is deemed to have left the estate of the parents at the time the property was purchased.
The Law allows a person to establish a Trust relating to land verbally. However, the verbal Trust must be formalised in writing before the next event (sale or transfer).
When to use
- Second property purchased for child to live in.
- No rental income has been received.
- Want to give to the child who lives there.
- Used to extinguish Capital Gains Tax.
- Used for IHT planning.
Mum and dad purchased a property for £80,000 for their son to live in whilst he was at university in 2008. Mum and dad are on the Land Registry Title, son has lived there for 10 years. Parents decide to sell the house in 2018 for £280,000.
- Gains accrued of £200,000.
- Capital Gains Tax payable as they live in another property.
- CGT is payable at 28% so CGT due is £56,000.
If the above is drafted as a Trust of Land, then the CGT would be £0!
Saving £56,000 of CGT as main residence relief now applies.
However, this must be done prior to the exchange of contracts for sale in 2018.
If mum and dad do not wish to benefit from the sale proceeds, have not benefitted from the property, and their estates are above their Nil Rate Band, then this value can be removed from their estates immediately saving £112,000 in IHT (40% of £280,000).
- Gift date 2008, start of the “7-year clock”.
- Out of the Trust for the calculation of IHT in 2015.
- This is a gift to the child who lives there.
- The property will no longer belong to the clients.
- Can write back CGT and IHT to the date client purchased.
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