Property trusts for individuals and families have become increasingly popular in the last ten years as property wealth has increased and wealthy individuals have looked to wrap their property into a settlement for their family for when they pass way.
Sometimes, these trusts have been constructed to reduce tax liabilities – until recently, a property could be gifted to offspring and rented back to the parents – as long as they lived for a further 7 years after signing the settlement, there would be no inheritance tax to pay on the sums over the old 255,000 pounds threshold (now 263,000 pounds). These families have now got until April 2005 to unscramble these trusts, otherwise the full market rate rental income will be taxed at the normal income tax rate for that person. Over a period of years, this would likely wipe out any positive benefit from inheritance tax savings by wrapping into a Trust.
Choice of Property Owning options
For a property investor with a large portfolio, it is highly important to seek good advice on the optimal arrangement for tax, costs and administrative purposes, e.g.:
• Individual(s): Have properties owned by the individual (or under the individual and wife/husband or partner)
• Trust: Roll the property into a Trust – in part to prepare a Will and for tax planning purposes
• Foundation: Put some or all of the properties into a Foundation – e.g. a charity that donates its income for good causes, with Trustees
• Company: Roll the properties into a Limited Company (UK based) or offshore company
• Balance Portfolio: Optimise one’s property portfolio in relation to capital value gained and annual income received to increase tax efficiency
The first and number one rule in this planning is integrity, and transparency.
Each of these types of property owning entity consume a good deal of resources for:
- Setting up – costs and time/manpower
- Annual administrative costs and time/manpower
- Costs, risks and time to unscramble the arrangement if this is necessary
- Pros and cons in relation to tax liabilities, and liquidity of assets
Of note is that most building societies will not allow properties to be rolled into trusts because they believe this reduces single point accountability, increases their risk, and/or increases their costs because of the added complexity. If a trust is the best option, early consultation with your bank/building society is required to prevent wasted time and cost.
For more on the soon to be launched Property Investment Funds (PIFs) click here.
Global/Expatriate Property Investor Options
There are further opportunities to optimise if you are an expatriate living overseas to the UK (see Expatriate Tax section). If you are a global investor, and can live anywhere, this is also most relevant since the company and/or trust construction would be appropriate for your citizenship, tax domicile, country of residence and years you have spent living “overseas”. There are both legal and tax experts that deal with both UK and Overseas Trusts, Companies and Tax Planning. Because of the complexity and expertise required, PropertyInvesting.Net suggests you contact us for a discussion on what type of services are required, so an appropriate recommendation can be made.