Holiday Home Trust – UK Properties
What is it?
The Holiday Home Trust comprises a trust deed designed to protect the value of your holiday home from inheritance tax (IHT) across several generations. The Plan also helps protect your holiday home against third party claims that can occur, for example, on divorce.
Who is it for?
This Plan is suitable for you if you own a holiday home in the UK which you wish to pass out of your ownership IHT free whilst still retaining an element of control over its use and devolution.
How does it work?
IHT is currently payable on the value of all assets in an estate exceeding £325,000 at the rate of 40%. One way of reducing your IHT liability is to make gifts and to survive the gift by seven years, when the value then passes out of your estate IHT free.
The Plan is designed to ensure that an IHT effective gift of your holiday home occurs without the downsides associated with an outright gift to the next generation, such as loss of control over the property. This is achieved by the property being given to an appropriate trust or trusts.
In order to be IHT effective no benefit must be reserved from the gift so an open market rental is paid for your ongoing use or occupation of the property. This rent is likely to be small compared to the potential IHT savings, and can be used towards the cost of running and maintaining the property, costs which previously would have been borne by you in any case.
The Plan also ensures that you can retain control over the property in your capacity as one of the trustees, meaning that you can continue to use it (albeit paying a rent to do so), have a say in the timing of any sale and control its use.
The value of the property remains outside of the estates of the second and subsequent generations, so achieving an IHT saving for them too, whilst also ensuring that the property is protected against claims arising on divorce or through financial difficulties.
It is currently possible for a couple, married or unmarried, to protect the value of a holiday home worth up to £650,000 without any immediate charge to IHT under the Plan (on the assumption that no previous gifts have been made within the last seven years).
What are the tax savings?
If you survive the implementation of the Plan by seven years then the whole value of the property is taken out of the charge to IHT, saving 40% of its value.
If you were to make an outright gift, a charge to capital gains tax (CGT) would arise on any increase in the value of the property since you acquired it. Under the plan any charge to CGT can be held over and deferred until the sale of the property.
There is a potential charge to IHT every ten years from creation of the trust, and a potential exit charge which may be payable if the property were to leave the trust in the future. This is, however, at present a reduced rate (a maximum of 6% of the value exceeding the nil rate band at the time) and this would not be generally payable provided the value of the property or the share of the property in any one trust does not exceed the IHT nil rate band (currently £325,000).
Case study
For example, take Mr and Mrs Mason who own a holiday property in Cornwall valued at £500,000 which they use for about four weeks a year. They are keen to reduce the IHT liability on their estate, but wish to retain control over the property and defer the CGT charge that would arise on any outright gift to their children.
Mr and Mrs Mason enter into the Plan and each set up separate trusts into which they transfer their respective shares in the property. The CGT charge is deferred, and after seven years they have saved IHT of £200,000. As long as the value of the half share in each trust remains below £325,000 there are no ongoing IHT charges. Mr and Mrs Mason are trustees of each trust which enables them to retain an element of control.
The value of the property also remains outside of their children’s estates helping to reduce their ultimate IHT liability.
What will we provide you with?
This Plan consists of:
- a trust deed(s) to receive the gift of the property;
- a letter of wishes recording your wishes with regard to the future of the property;
- a transfer of the legal title to the property to the trustees and
- preparation of all necessary IHT returns to HMRC concerning the gift.
We can also offer ongoing trust management services (including the preparation of annual trust income tax returns and all ongoing IHT returns) if wished, for an additional fee.
The cost
A due diligence and advice report will be prepared for
£1200 plus VAT. The trust deed costs from £2650 plus VAT. Preparation of an IHT 100 costs £600 plus VAT and registration with the Trust Registration Service from £600 plus VAT.