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Advice is required on the use of trusts both generally and to hold investment properties. The availability of the inheritance tax nil-rate band on a rolling seven-year basis is confirmed, but a suggestion that investment properties should be transferred to a company and the shares into trust seems less advisable
What is the maximum amount that can be put into a trust without an inheritance tax liability, assuming that the transferor survives for seven years after the transfer is made? I was told recently that, when a trust is set up, the maximum sum that can be transferred is the exempt amount, currently £325,000 per person.
For a married couple, it would therefore be £650,000. This implies that an inheritance tax exemption of up to £1.3m can be obtained, ie the standard exemption of £650,000 and a further £650,000 by setting up the trust.
I am also told that a different trust can be set up for investment properties where there would be no upper limit on inheritance tax. Basically, the investment properties are transferred into a limited company and a trust is then established to own the shares of the company. There are, apparently, a few conditions that must
be met.
Have any readers heard of such a trust and arrangements and, if so, how credible are they?
Query 18,182 – Seeker
Terry ‘Lacuna’ Jordan, BKL Tax
After Labour’s changes to the inheritance tax trust regime, nearly all lifetime transfers to trust made on or after 22 March 2006 are immediately chargeable (the exception being trusts for disabled people, transfers to whom are potentially exempt transfers).
Accordingly, Seeker is correct that the maximum tax-free amount for a married couple would be £650,000. (Pedantically, if they also each have two years’ annual exemptions available the maximum would be £662,000.)
If the couple survive for the seven-year period, they will regain their nil-rate bands intact and could repeat the process every seven years. However, if they die before seven years have elapsed there would on current figures be no nil-rate band available to the value of their estates on death.
The advice Seeker has been given on investment properties appears to be flawed. If the shares are owned by the owner of the investment properties there would arguably be no loss to his or her estate on the transfer to the company, but the capital gains tax and stamp duty land tax implications would also have to be considered. The subsequent transfer of the shares to the trust would be immediately chargeable for inheritance tax purposes as above.
For completeness, clients might consider investing in assets that would benefit from business property relief once owned for two years, eg a portfolio of trading companies on the alternative investment market (AIM), and then transferring those shares to trust once they benefit from 100% business property relief.
Another point to bear in mind is that, if the client has sufficient surplus income, the transfers to trust will be immediately exempt provided there is a demonstrable pattern of giving or the commitment to give regularly can be evidenced at inception.
Reply from Lawrence Adair, Gabelle Tax LLP
The exemption mentioned by Seeker is the inheritance tax nil-rate band, currently £325,000. However, an individual only has his or her standard nil-rate band and there is no separate nil-rate band for transfers into trust.
Therefore the maximum that a married couple can transfer to a trust without incurring inheritance tax is £650,000 (ie £325,000 each). This is provided they both survive seven years because, as has been assumed, gifts fall completely out of charge to inheritance tax after that time. If either died within that time, the nil-rate band available on death would simply be reduced accordingly.
Once they have survived the transfer by seven years, a further £650,000 (so a total of £1.3m) could be transferred into trust without incurring inheritance tax. Again to be completely inheritance tax-free, they would need to survive a further seven years.
An unlimited transfer into trust without incurring inheritance tax can only be made where the transferred property qualifies for relief such as business or agricultural property
relief (under IHTA 1984, s 104 or s 116).
Shares of a company owning investment properties would not usually qualify for either relief. So, on the face of it, transferring the investment properties to a company then settling the shares on trust would not give scope for an unlimited transfer and the value transferred into trust would still need to be limited, as described above, to within the available nil-rate bands.
To be able to have an unlimited transfer, the company would need to become wholly or mainly trading. Two possible ways to achieve this would be (very broadly speaking) to either develop the properties or sell the properties and then use the proceeds to start a new trading activity.
There would also, of course, be an overriding requirement that the shares would need to have been owned for two years before the transfer to the trust.
It should also be remembered that the transferor can retain no benefit under the terms of his or her trust – otherwise the inheritance tax “gift with reservation of benefit” provisions will bite.
For capital gains purposes, the transfer of shares to the trust could be done with the total gain up to that point being deferred under TCGA 1992, s 260. The deferred gains could, however, trigger a capital gains tax on a future disposal, as there would be no automatic uplift on the death of the transferor.
Finally, if UK properties subject to debts and charges are being transferred into trust there would be stamp duty land tax implications to consider too. For transfers to a company a market value rule applies.
