Guest post introduction

Guest article by Tessa Morgan, Director of Private Client Services at M+A Partners

Family trusts can be a useful part of longer-term property and estate planning, particularly where families want to retain control over a rental property while providing for future generations. But how do they work, who might benefit, and what tax and practical issues need to be considered?

For this guest article, Tessa Morgan of M+A Partners explains some of the key considerations when using a family trust to hold rental property, including succession, flexibility, tax and the responsibilities that come with trusteeship.

As with any structure involving property and family wealth, the legal, tax and financial planning implications need to be considered together. This article provides a practical introduction to the main issues.

What is a family trust?

A family trust is a legal arrangement under which trustees hold assets for the benefit of beneficiaries. In the context of rental property, the trustees usually hold and manage the property, while the beneficiaries are the people who may benefit from the rental income or capital value.

Trusts can be structured in different ways. Some give beneficiaries fixed rights to income, while others give trustees discretion over who benefits, when and by how much. The right structure will depend on the family’s objectives, the property, the tax position and the level of flexibility required.

Why use a trust to hold rental property?

A trust can be useful where a family wants to separate ownership, control and benefit. Parents or grandparents may wish to provide for children or grandchildren without giving them direct ownership, particularly where beneficiaries are young, financially inexperienced, vulnerable or going through relationship difficulties.

Placing the property into trust creates a framework for trustees to manage the property, collect rent, pay expenses and decide how income or capital should be applied. This can provide continuity where the property is intended to remain within the family long term.

Who might a property trust work for?

A property trust may work well for families who already own rental property and want to plan for long-term ownership, future generations and asset protection. It may also be relevant where a family is buying an investment property and wants the ownership structure to support wider estate planning from the outset.

Trusts can also provide flexibility where beneficiaries’ needs differ or change over time. However, they are not suitable for every rental property owner. Ongoing administration, trustee decision-making, tax compliance and proper records are required, while mortgage arrangements, lender consent, insurance, tenancy documents and landlord obligations also need to be considered.

What are the tax considerations?

Tax is often central to the decision. Transferring rental property into trust can give rise to Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax considerations, depending on the type of trust, property value, any debt and the circumstances of the person making the transfer.

Many trusts holding land, buildings, cash or investments fall within the relevant property regime for Inheritance Tax. Tax may therefore need to be considered when assets enter the trust, at each ten-year anniversary and when assets leave the trust. A transfer into trust may also be treated as a disposal at market value for Capital Gains Tax purposes, while trustees may be taxed on rental income and later gains. Reliefs may be available, but they are not automatic and should be reviewed before any transfer.

Can I put an existing rental property into trust?

Yes, but this should not usually be done without full advice. The property may need to be valued, any mortgage lender may need to consent, tax charges may arise and the trust deed must be carefully drafted to reflect the family’s objectives.

Existing tenancy arrangements, insurance policies, property management agreements and bank accounts also need to be considered. Trustees take on real responsibilities: they must act in the beneficiaries’ interests, manage the property prudently, comply with tax and reporting obligations and keep proper records.

How does a trust compare with personal or company ownership?

Holding rental property personally can be simple, but it may not provide the same control over succession or protection against fragmented ownership. A trust allows chosen trustees to manage the property and decide how beneficiaries should benefit, which can help where a family wants to avoid giving beneficiaries direct ownership immediately.

A company may also be appropriate, particularly for a larger property portfolio or where profits are to be reinvested. A trust serves a different purpose and is often used to manage family benefit, succession and control. In practice, the right structure may involve personal ownership, a company, a trust, or a combination.

Tessa Morgan

Director of Private Client Services

M+A Partners

tessa.morgan@mapartners.co.uk

Important: The tax and practical consequences of placing rental property into trust can be significant. Legal and tax advice should be taken before any steps are taken.