Deed of Trust to Spouse or Ltd Company to reduce Tax?

Hi Tif

If I understand correctly, your aim is to sell your three properties over the next couple of years and to minimise the effects of Capital Gains Tax upon their sale, as well as to reduce your exposure to Income Tax in the meanwhile.

This is perfectly achievable. Your Capital Gains Tax liability upon their sale could even be reduced to zero.

The important question to ask is; what do you want to do with the proceeds of sale? That will determine the best course of action for you to take now.

In any case, you will need very specific advice that cannot be provided on an open forum. I therefore recommend that you book a Property118 Tax Consultation and look at this from all angles.

https://www.property118.com/tax/

Hello Tif,

Also worth considering how any benefits impact your spouse's future US tax returns and liabilities.

Good luck with it all!

Hi Tif

As stated by Alex it is essential that you get advice about the best course of action. Each set of circumstances are different and therefore advice on this forum can only be generic and not specific.

First port of call would be your Ltd company accountant to see what they recommend. If they are not specialists then a Property 118 consultation is good value for the cost and will give you a clear idea of where you should be heading.

Initially it would make sense to transfer some of the property income to your spouse to take advantage of the lower tax rates. For husband and wife a transfer of just 1% of the property would transfer 50% of the income to the spouse. This retains almost all of the capital with the original owner. A deed of trust would probably be the best way to do this.

This also gives better tax relief for any mortgage interest as for a basic rate taxpayer relief is effectively given at 100%.

Transferring properties to a limited company is probably not the way to go in the short term. There would be SDLT to pay on any transfer and also capital gains on the sale to the company. Whilst any further gains until the date of ultimate sale would only be taxed at 19% or 25% in the company there would be further tax to pay to extract the funds from the company.

Putting property into a trading company could also affect a claim for entrepreneurs’ relief if the company were to be sold around the same time.

As a side note are both you and your spouse taking advantage of the £2,000 per annum 0% dividend tax on your company?

Spreading the sale of the properties over 2 or 3 tax years would give you the use of multiple annual allowances reducing the tax payable. This should be possible to achieve with a little planning.

As you can see specific advice and planning is needed. It will be money well spent to plan correctly as the tax savings will far outweigh any cost of the advice.

Reply to the comment left by Alex at 05/01/2022 - 09:36
I am looking purely for IHT advice as a result of properties being held within the family. I need to understand the options available given our specific circumstances before making any firm decisions about a course of action. Are free initial consultations available to make the options clear first, before we commit to a specific path?

Hi DSR

Property118 can provide you with all the IHT advice that you need. We do not offer free consultations, but a Property118 tax consultation only costs £400 inc VAT, which is likely to be a fraction of a fraction of a percent of the benefits you can enjoy.

You will not be committing to any 'specific path' as a result of your Property118 Tax Consultation, although it will provide you with all the information you need to make informed decisions about what you wish to do and why.

https://www.property118.com/tax/

Reply to the comment left by Alex at 05/01/2022 - 11:17
Alex, out of interest, do Property118 take into account any other taxation jurisdictions (as in this case, USA)? Given that a US citizen is required to file a tax return regardless of where they live in the world, it's a big consideration for many of our clients. We usually use CPA/Accountants who have expertise in both UK and US tax matters.
Thanks!

Hi Helen

Property118 does not provide accountancy advice, or accountancy services, so all matters relating to accounting would be referred back to the client's Accountant in any case. We work 'hand in glove' with clients and their Accountants, not separately from them.

It would not be possible to have detailed legal knowledge of every tax jurisdiction in the world, especially not within such a small fee! Property118 and Cotswold Barristers have unparalleled knowledge of legal matters relating to property tax consultancy for the United Kingdom only.

Reply to the comment left by Alex at 05/01/2022 - 11:26
Thanks Alex!

Surely IHT advice would require some knowledge of other tax jurisdictions? Or would you refer to an appropriate advisor?

I was talking with a US citizen in Australia, who's discovered she's required to declare and pay CGT to the US govt on the recent sale of her property in Australia. She wasn't aware of this, nor were her advisors in Australia it seems...too late now!

Hi Helen

Like I said, it would not be possible to have detailed legal knowledge of every tax jurisdiction in the world, so for overseas clients we would refer them back to their own Accountant or tax specialist in their country of residence.

However, it's worth repeating that Property118 and Cotswold Barristers have unparalleled knowledge of legal matters relating to property tax consultancy for the United Kingdom.

It is not necessary to know everything about every other country in order to plan for UK Inheritance Tax. In the majority of circumstances, it can be entirely separate. The example you have illustrated is that of disposal, which is not the same as planning.

You should ensure you get proper advice from an accountant who understands both the U.K. & US tax systems. I will say it’s a nightmare to find a reliable one who is not part of a massive company that then charges a fortune. There may be issues with creating a foreign trust from a US persepective?
Your spouse should be filing IRS returns every year whatever they earn, especially if you start filing U.K. returns (& the FBAR if they have a bank account here which ever goes over $10,000). It sounds like you should also file form 5471 for foreign ltd companies - make sure the accountant understands the category filer rules if you are joint shareholders.
If you have children though, it can end up that you have no tax to pay in the US (U.K. tax rates are generally higher) and you also get a rebate of a couple of thousand dollars from Child tax credit. So despite the hassle, worth doing!
Be aware that if your spouse owns / Co-owns your principal primary residence, when you come to sell it CGT will be due on their share in the US as it’s seen as a foreign property (and none has been taken here to offset). This is what Boris Johnson a big argument with the IRS about when he was London mayor. He eventually quietly paid up…