Lifetime Trusts and Tax
The tax treatment of Lifetime Trusts merits serious consideration. Because you are gifting the house to the Trust, it may be subject to inheritance tax if its value exceeds the current nil-rate band of £325,000.
Those who transfer their property to a Lifetime Trust may be subject to an immediate 20% tax on any balance exceeding £325,000 (including gifts made in the preceding seven years), while Trustees are required to file tax returns with HMRC. They may incur an additional tax cost of 6% of the value over £325,000 every ten years, in addition to income tax on any payments from the Trust and exit charges on assets leaving the trust.
If the ‘Fiduciaries’ sell or transfer Trust assets to a ‘Beneficiary’, these transactions may also be subject to capital gains tax (CGT). These may also apply when a trust is liquidated, and all assets are transferred to a ‘Beneficiary’.
Capital gains tax (CGT) will be calculated similarly to how it is for individuals, albeit with a reduced annual exemption of £6,000 in 2023/24 and £3,000 in 2024/25 (although this is yet to be confirmed). The exception is if the trust was established for a disabled person.
Additionally, you must consider that all Trusts must be registered with HMRC in the following scenarios:
- If created during your lifetime, when the Trust is established.
- If created in your Will, as part of the administration of your estate after your death.
Always seek advice from one of the Berkshire IFA Financial Planning team, before establishing a Perpetual Trust, as the tax implications can be substantial. This is especially true if the Trust's Beneficiaries are non-UK residents, as the rules can rapidly become more complex.