Inc tax on property Declaration of Trust
Discussion
My wife and I have purchased a property (rented out) under a Declaration Of Trust with our 3 children (all minors) as the beneficiaries in equal share.
Rental income is £10,200 pa with minimal expenditure (I manage it/do all maintenance, apart from Gas, electric checks, insurance). There is no mortgage. The children have no other earned income.
Income is split into three bank accounts under their names and is used to supplement school fees. So they are the sole beneficiaries of the income in that sense.
I am getting conflicting advice on who is responsible for the tax on the profit. One Accountant told me my wife and I have to declare the profit under SA, whereas the solicitor who set up the trust says the children are responsible for any tax on the income.
HMRC don't appear to want to advise me when I have asked them.
If the children are responsible for the tax on the profit, do they or can they file a SA return, although there will be no tax to pay (as under their personal allowance - do children have a PA??!).
There are no plans to sell the property in the short/medium term, but I presume any CG tax would be liable to the children in equal share if and when the property is sold?
Any advice would be most welcome.
Rental income is £10,200 pa with minimal expenditure (I manage it/do all maintenance, apart from Gas, electric checks, insurance). There is no mortgage. The children have no other earned income.
Income is split into three bank accounts under their names and is used to supplement school fees. So they are the sole beneficiaries of the income in that sense.
I am getting conflicting advice on who is responsible for the tax on the profit. One Accountant told me my wife and I have to declare the profit under SA, whereas the solicitor who set up the trust says the children are responsible for any tax on the income.
HMRC don't appear to want to advise me when I have asked them.
If the children are responsible for the tax on the profit, do they or can they file a SA return, although there will be no tax to pay (as under their personal allowance - do children have a PA??!).
There are no plans to sell the property in the short/medium term, but I presume any CG tax would be liable to the children in equal share if and when the property is sold?
Any advice would be most welcome.
A bare trust is not like other, more serious trusts. It's treated a completely transparent by HMRC and everything is taxed as if it's directly owned by the beneficiaries.
In the case of property everything depends upon where it came from and whether the advisers have actually been given all the relevant facts. There's a significant difference if the property actually came straight from the parents. This is what could be causing the advice from the accountant to differ from the solicitor's advice.
A child under 18 cannot take legal title to property, so there are two ways in which the property can be held: a simple ‘bare trust’ or a more formally constituted trust, such as a life interest or discretionary trust. Under a ‘bare trust’, another person holds the title to the property as a nominee. In all other respects, the child is regarded as the owner of the property and will automatically be entitled to take legal title to it when they reach the age of 18.
A more formally constituted trust requires a Trust Deed, which is a legal document setting out (amongst other things) who the trust beneficiaries are, who the trustees are, and how and when the trust’s income and assets should be distributed to its beneficiaries. In this case, it is the trust itself which is effectively regarded as the owner of the property and the child’s rights to the income from the property and to take title to it will depend on the terms of the Trust Deed.
N.B. Parental Settlements
Whichever type of trust is used, the major difficulty which arises is the parental settlements legislation. This legislation is triggered whenever there is any gift from a parent to their own minor child.
The effect is that all income from the property is treated as belonging to the parent for Income Tax purposes. (This is probably what the accountant is referring to.) Where a ‘bare trust’ is used, the parent will be taxed on all of the rental profits at their top rate of Income Tax.
If a more formal trust is used, the parent will be taxed on any sum which would otherwise have been treated as the child’s income. With a life interest trust, this would again effectively be all of the rental profits. A discretionary trust could retain some of its profits, but this will not really help as profits in excess of £1,000 will be taxed at the ‘trust rate’ of 45%.
To avoid the Parental settlements legislation requires the support of other family members or friends, typically the child’s grandparents, to make the gift. But parents still have to be very careful: if they contribute in any way to the running of the property there is a strong chance that the settlements legislation will again be triggered. Payment of a utility or repair bill could be seen as a settlement with all the Income Tax consequences described above. This could happen all too easily, especially if a bare trust is being used..
If if you have support from grandparents (or others) it's usually recommended to use a formally constituted trust and ensure the child’s benefactor puts sufficient additional funds within it, as working capital, to ensure that you never have to make any contribution to the property! All of this is why, as mentioned in the other thread, the whole area is fraught with practical difficulties.
All of which leads back to the importance of getting good professional advice. The interaction of IHT, Income tax and CGT always needs to be carefully considered in the light of exactly what you're trying to achieve. Hence my earlier comment that it's not really something to resolve on a car forum.
In the case of property everything depends upon where it came from and whether the advisers have actually been given all the relevant facts. There's a significant difference if the property actually came straight from the parents. This is what could be causing the advice from the accountant to differ from the solicitor's advice.
A child under 18 cannot take legal title to property, so there are two ways in which the property can be held: a simple ‘bare trust’ or a more formally constituted trust, such as a life interest or discretionary trust. Under a ‘bare trust’, another person holds the title to the property as a nominee. In all other respects, the child is regarded as the owner of the property and will automatically be entitled to take legal title to it when they reach the age of 18.
A more formally constituted trust requires a Trust Deed, which is a legal document setting out (amongst other things) who the trust beneficiaries are, who the trustees are, and how and when the trust’s income and assets should be distributed to its beneficiaries. In this case, it is the trust itself which is effectively regarded as the owner of the property and the child’s rights to the income from the property and to take title to it will depend on the terms of the Trust Deed.
N.B. Parental Settlements
Whichever type of trust is used, the major difficulty which arises is the parental settlements legislation. This legislation is triggered whenever there is any gift from a parent to their own minor child.
The effect is that all income from the property is treated as belonging to the parent for Income Tax purposes. (This is probably what the accountant is referring to.) Where a ‘bare trust’ is used, the parent will be taxed on all of the rental profits at their top rate of Income Tax.
If a more formal trust is used, the parent will be taxed on any sum which would otherwise have been treated as the child’s income. With a life interest trust, this would again effectively be all of the rental profits. A discretionary trust could retain some of its profits, but this will not really help as profits in excess of £1,000 will be taxed at the ‘trust rate’ of 45%.
To avoid the Parental settlements legislation requires the support of other family members or friends, typically the child’s grandparents, to make the gift. But parents still have to be very careful: if they contribute in any way to the running of the property there is a strong chance that the settlements legislation will again be triggered. Payment of a utility or repair bill could be seen as a settlement with all the Income Tax consequences described above. This could happen all too easily, especially if a bare trust is being used..
If if you have support from grandparents (or others) it's usually recommended to use a formally constituted trust and ensure the child’s benefactor puts sufficient additional funds within it, as working capital, to ensure that you never have to make any contribution to the property! All of this is why, as mentioned in the other thread, the whole area is fraught with practical difficulties.
All of which leads back to the importance of getting good professional advice. The interaction of IHT, Income tax and CGT always needs to be carefully considered in the light of exactly what you're trying to achieve. Hence my earlier comment that it's not really something to resolve on a car forum.
Very interesting - thank you for taking the time to explain!
The funds for the purchase came from the disbursement of a trust set up by their grandparents, which was wound up (involving a hefty tax payment to HMRC in the process), and the solicitor verified the source of funds.
We as parents have not financially input into the property at all, it is all self funding, nor benefited directly from it.
There is a formal Trust Deed, stating my wife and I as Trustees and the 3 children as beneficiaries. It also states the source of funds with amounts and dates.
Being minors, the Land Registry is in our names, but it also states that the property is held in trust for the 3 beneficiaries (listed on the TR1).
So it looks like in this instance we are ok.
We did take professional advice, but our accountant made me have a wobble. You have explained it better than anyone else (paid / unpaid)!
Thank you once again.
The funds for the purchase came from the disbursement of a trust set up by their grandparents, which was wound up (involving a hefty tax payment to HMRC in the process), and the solicitor verified the source of funds.
We as parents have not financially input into the property at all, it is all self funding, nor benefited directly from it.
There is a formal Trust Deed, stating my wife and I as Trustees and the 3 children as beneficiaries. It also states the source of funds with amounts and dates.
Being minors, the Land Registry is in our names, but it also states that the property is held in trust for the 3 beneficiaries (listed on the TR1).
So it looks like in this instance we are ok.
We did take professional advice, but our accountant made me have a wobble. You have explained it better than anyone else (paid / unpaid)!
Thank you once again.
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