Avoid capital gains with property trusts

Recent press coverage has billed property trusts as a legitimate way to minimise capital gains tax (CGT) payable on the sale of property. However there are many restrictions that mean that this type of trust is not for the typical buy to let investor.

The benefit of a property trust
When you sell the property, the trust qualifies for private residence relief (PRR) which ensures that it is exempt from CGT.

Barriers to a buy to let property trust - .

• Trust schemes can cost several thousand pounds to set up.
•  Lenders often require a larger deposit than the standard 15-20%, and may charge higher interest rates
• Every time there is a new tenant at the property the trust must be amended, which with 6-10 month tenancies would be costly over a 10 year period.
• The property must be occupied by a beneficiary of the trust as their principle private residence (PPR). E.G. It would exclude those who rent a flat in London and go home at the weekends.

There are various restrictions and charges levied on a trust. For instance the trust can only receive £285,000 capital every 7 years. Martin Muirhead, Head of Property, at Kingston Smith Chartered Accountants comments:

“Discretionary trusts for property have been around for a long time. The idea works for many trusts set up by the children of elderly parents who want to provide their parent’s home and still control the capital asset to make sure it is not in their parent’s estate on death or going into care. We are now seeing these trusts being adapted for buy to let for the few sophisticated investors who can afford it.

“Trusts are quite costly to set up and lenders won’t apply standard buy to let loan to value. So to make a trust pay, you would need around £200,000 deposit meaning that buy to let trusts are best suited to the high net worth individual rather than your mainstream buy to let investor with £30,000 to £40,000 seeking 85% LTV.

“Just as they did with double trust inheritance tax schemes, the HM Revenue & Customs may well decide to introduce new rules to combat investors taking advantage under buy to let. If they bring in retrospective legislation any previous tax advantage could be wiped out.”