Helpsheets ... continued 51 from homepage

Using a trust to mitigate capital gains tax on property.

A trust is purely an arrangement where an individual (the settlor) transfers an asset into a trust run by other persons (the trustees) for the benefit of someone else (the beneficiary).

The trust has an independent existence from the trustees, who can retire or join with no implications except if a non-resident trustee is appointed.

Why a trust?

In addition to being a very useful succession planning tool, a trust generally keeps assets safe from the clutches of creditors or estranged spouses and provides a safe conduit for assets destined for younger children or other vulnerable beneficiaries.

A trust is also a mechanism to dissociate the benefit of an asset's use for a defined period from its eventual long-term ownership.

Type of trust

The legally binding trust deed (which must be drafted by a qualified professional) will dictate whether the trust is:

- a discretionary trust, which offers welcome flexibility as the trustees can choose how and when any income or capital is transferred to individuals within the defined class of beneficiaries; or

- an interest in possession trust, when the named beneficiary (life tenant) has an automatic right to the trust income during their lifetime (typically, a spouse) while future ownership will pass to someone else (often the couple's children) on death.

When does CGT arise?

Capital gains tax (CGT) is charged at the following points:

- when property is transferred into the trust;

- on the property's exit from the trust; or

- if the trust becomes non-resident.

As an aside, the above often have inheritance tax (IHT) consequences, although the interaction of CGT with IHT can be beneficial. Any transfer of a mortgaged property will require the lender's permission and may also result in a stamp duty land tax charge (or the equivalent in Wales or Scotland).

Property transferred into trust

When the settlor gifts property to a trust, this is a deemed market value transfer between connected parties. Any resulting gain will be automatically reduced by capital losses on other assets owned by the settlor arising in the same tax year. Further, any available current tax year trading losses or brought forward capital losses can also reduce the gain. Unless a holdover relief claim is made (see below), any remaining amount (after deduction of the immaterial annual exemption) will crystallise a CGT charge for the settlor, subject to rates of 18% for gains falling within the basic-rate band and 24% otherwise.

For property owned by a married couple (or civil partners), it is possible to change the relevant proportions (at nil gain, nil loss) so that, on transfer to the trust, full use is made of both individual's losses, annual exemptions and lower tax rate bands. Care is required, however, to avoid triggering anti-avoidance provisions.

Any CGT arising on residential property disposals must also be reported and paid within 60 days of the transfer using HMRC's CGT on UK property service, and in most cases, reported on the settlor's self-assessment tax return as well.

Property exiting the trust

The transfer of property out of the trust is treated as a disposal, whether by sale or appointment to a beneficiary (which is a deemed market value transfer under TCGA 1992, s 71, although holdover relief could be available). After deducting any available losses, the trustees will be liable to CGT on the gain at a rate of 24%. The tax is payable and reportable within 60 days (for residential property), which requires the trust to have already registered with the trust registration service according to HMRC's Agent Update 140 (hopefully most trusts will have already registered to avoid penalties).

If an appointment results in a loss which cannot be set against gains realised by the trust in the same tax year, it can instead be transferred to the recipient beneficiary for use against future gains arising from the same property (under TCGA 1992, s 71(2)).

Deferral of gains

While not eliminating any gain, holdover relief at least offers a deferral opportunity. It is only available on transfer into the trust, however, where the settlor, their spouse or dependent children cannot (or could not) benefit from the trust, under TCGA 1992, s 169B. On a future transfer to a beneficiary, another holdover claim is often possible, which can encompass the original relief already embedded within the asset's value.

Holdover relief requires a joint claim on form HS295, except for the initial transfer to a trust when it is just the settlor who elects for relief.

Example: Holdover relief on gifted property

Logan owns a buy-to-let property which he acquired for £100,000 but is now worth £400,000. On gifting the property to a discretionary trust, the gain is £300,000. To avoid a 'dry' CGT charge of £72,000, he claims holdover relief, which defers the gain, meaning that the property's base cost for the purposes of any future disposal by the trust is £100,000 (rather than £400,000).

A few years later, the trustees appoint the property to a beneficiary when the property is worth £500,000. The resulting gain of £400,000 (calculated by deducting the base cost of £100,000) can be deferred again so that the beneficiary's base cost is £100,000 with respect to any future disposal. The CGT has successfully been deferred twice.

Restrictions

Holdover relief is only available in respect of:

- business and agricultural assets, including plant, machinery, and trading company shares, under TCGA 1992, s 165; and

- any type of asset where an IHT charge arises, under TCGA 1992, s 260, including transfers covered by the nil rate band of £325,000, exemptions or reliefs, but not merely potentially exempt transfers. For a jointly-owned property, the nil rate band will cover a property value of £650,000 (as reduced by any previous transfers to trusts or companies in the seven years preceding the gift).

When appointing property out of the trust to a beneficiary, timing is important as an IHT charge arises only after three months have elapsed from either the creation of the trust or its most recent tenth anniversary. There is also a clawback period of six years from the end of the tax year of the transfer, where the held over gain will come into charge should the trust become settlor-interested or emigrate (although, as non-residents remain liable to UK CGT on UK land, any clawed back gain can itself be deferred under TCGA 1992, s 168A).

Occupying residential property

A word of caution in relation to residential property is that principal private residence (PPR) relief, which normally exempts the gain relating to the period when the property was occupied as an individual's main residence, may not be available. Any holdover relief (whether claimed on the property entering or exiting a trust) precludes any subsequent PPR relief claim in respect of a beneficiary who occupies the property (under TCGA 1992, s 226A).

This is true no matter whether it is the trust or beneficiary who makes the eventual disposal. A choice therefore has to be made between:

- incurring a CGT charge when property enters the trust, retaining the possibility of a future PPR claim; or

- deferring the gain, which prevents any possible future PPR relief claim, and paying CGT on any appreciation in value in the future at whichever rate then applies.

Practical tip

When transferring residential property into a trust, the long-term effects of any available holdover relief claim must be weighed up against the loss of PPR relief, particularly if the settlor has losses to offset. Specific professional advice should always be sought to ensure the (often irreversible) tax consequences of using a trust are fully anticipated.

Businesses which give away free gifts or samples need to be aware of the VAT implications to ensure that they account for VAT correctly.

Gifts

Where a business makes a free gift, they do not receive any consideration in return.

If input tax has been incurred in relation to that gift which can be recovered, the business must account for VAT on the cost value of the gift unless the gift is a business gift.

Business gifts

A gift is a business gift if it is made in the course of promoting the business and the business is entitled to reclaim the VAT charged as input tax. The range of items that may count as a business gift is wide, including brochures and posters to expensive executive gifts. The definition also includes long service awards and retirement gifts, items given to trade customers, thank-you gifts given to customers and prizes in free lotteries or competitions or dispensed from gaming machines.

A business does not need to account for VAT on business gifts as long as the total cost of business gifts made to the same person does not exceed £50 in any 12-month period. However, where the total cost of business gifts to the same person exceeds this limit and the business is entitled to recover the VAT incurred on the purchase as input tax, they must account for VAT on the total cost value of the gifts.

Where a gift is used for business purposes by the recipient and VAT is accounted for, as a VAT invoice cannot be issued, the business must issue a tax certificate which must contain the words ‘No payment is necessary for these goods. Output tax of £X has been accounted for on the supply.’

Samples

A sample is defined for VAT purposes as ‘a specimen of a product which is intended to promote the sales of that product and which allows the characteristics  and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions’.

Free samples are not liable to VAT.

However, it should be noted that a finished item from a discontinued line does not count as a sample. Further, an item is not regarded as a sample where it is provided in greater quantities than necessary to assess its characteristics and qualities. For example, if a wine importer provided a client with a bottle of wine, HMRC would accept that it was a sample. However, the provision of a case of 12 bottles would suggest more than a sample.

Why there will not always be a partnership for tax purposes where property is jointly owned.

The way in which income from letting properties which are jointly owned is taxed depends on whether a partnership exists and if not, whether the co-owners are spouses or civil partners.

It should be noted at the outset that merely owning property jointly does not in itself give rise to a partnership, and in most cases, the letting of a jointly-owned property will not constitute a partnership.

What then is a partnership, and when will one arise in relation to property letting?

What is a partnership? A partnership is defined in the Partnership Act 1890, s 1(1):

'Partnership is the relationship which subsists between persons carrying on a business in common with a view to profit'.

The Act also provides that:

- joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof; and

- the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.

However, it is possible that an individual may own properties which are let out as part of a partnership business. This may be the case where the person is a partner in a trading or professional partnership or, more rarely, where they are a partner in an investment business that does not constitute a trade, and which includes or consists of the letting of property.

Is there really a partnership? Whether a partnership exists will depend on the facts. A partnership is unlikely to exist where an individual is simply one of a group of joint owners of a property which they let out. However, if they provide significant additional services, this may indicate a partnership. For example, where cleaning, maintenance and gardening services are also provided, this may indicate a business. The key is the amount of business activity involved – for there to be a partnership, the level of business activity needed is akin to the level of organisation needed in an ordinary commercial business.

It may be easier to pass this test where the jointly-owned property is let as holiday accommodation, as it is likely more services will be provided than in relation to a long-term holiday let. For example, to run a successful holiday let, it will be necessary to advertise the property, liaise with guests and provide cleaning, laundering, gardening and maintenance services.

Partnerships and tax  A partnership set-up can offer tax advantages, and where this is the preferred route, it is vital to pass the business organisation test – a failure to do so will mean that HMRC is unlikely to accept that a partnership exists and the usual joint ownership rules will be applied.

Where a partnership rental business exists, it is treated as a separate rental business, and the profits and losses must be calculated for that business in isolation. The partnership rental business is separate from any other profit rental business that the individual may have. If the individual is a partner in more than one property partnership, each partnership is a separate rental business. The profits and losses from different rental businesses cannot be set against each other; losses must be carried forward and relieved against future profits from the same rental business.

Tax treatment: Partnership  Where a partnership exists, the normal tax rules apply. The partnership is transparent for tax purposes, and each partner is taxed on their share of the profits.

The profits are allocated in accordance with the agreed profit-sharing ratio. Regardless of the relationship between the partners, they can decide between themselves how to split profits. This can be a massive advantage for partners who are married or in a civil partnership and gives them a flexibility in how they share profits not available outside the partnership.

They do not need to set the profit-sharing ratio in advance. They can simply agree to share profits and losses in such proportion that is agreed among themselves. This allows them to tailor the split each year to achieve the best possible outcome.

Example: Partnership: Airbnb rental income

John and Jane have three holiday cottages that they let out through Airbnb. They also publicise the cottages through their social media account. They provide guests with a welcome hamper. They provide towels and bedding and undertake the cleaning, garden and general maintenance. HMRC accepts that they have a property partnership.

In 2026/27, the rental profits are £60,000. John works entirely in the business. Jane undertakes the administration work. She also runs a separate business as a yoga and Pilates teacher from which she makes £40,000 in 2026/27.

Jane has used up her personal allowance and £27,430 of her basic-rate band, leaving £10,270 of her basic-rate band available. John has his basic-rate band and personal allowance available.

They agree to allocate profits in the ratio 5:1 so that John has 5/6 of the profits (£50,000) and Jane has 1/6 (£10,000) of the profits.

The first £12,570 of John's share of the profits is covered by his personal allowance. The remaining £34,730 is taxed at 20%, a tax bill of £6,946. Jane is taxed at 20% on her share of the profits, a tax bill of £2,000.

If they had shared profits equally, each receiving £30,000, £19,730 of the profits would move from being taxed at 20% to being taxed at 40%, increasing their joint tax bill by £3,946.

Joint ownership – No partnership

Where properties are owned jointly outside a partnership, the way in which the rental income is taxed depends on the relationship between the parties.

Joint owners are married or in a civil partnership

Stricter rules apply to tax rental income when the joint owners are married or in a civil partnership. Where this is the case, the tax planning options depend on how the property is owned.

The default position is that the rental income is treated as allocated equally between the spouses or civil partners, with each being taxed on 50% of the rental profits, regardless of any actual split between them.

This may be a good or a bad thing. If a property is owned solely by one partner and that partner pays tax at a higher marginal rate, transferring a small stake in the property (say 5%) using the 'no gain, no loss' rules will transfer 50% of the rental income for tax purposes to the spouse or civil partner paying tax at the lower rate. This will reduce the overall tax bill on the rental income and make it possible to utilise personal allowances or basic-rate bands that might otherwise be wasted.

However, if a different split would be ideal, this is only an option if the property is owned as tenants-in-common in different shares. This can be done by making a form 17 election for the income to be allocated for tax purposes by reference to the underlying beneficial shares. The ownership split can be changed by making transfers between them on a no gain, no loss basis to achieve the desired result. The election cannot be made retrospectively, and if it is to have effect for the full tax year, it must be made at the start of the tax year.

If the property is jointly owned as joint tenants, the only permitted rental split for tax purposes is a 50:50 split.

Joint owners are not spouses or civil partners

Where property is owned jointly by persons who are not married to each other or in a civil partnership, there is more flexibility as to the allocation of rental income for tax purposes. The usual situation is for the income to be allocated between the joint owners in accordance with their ownership shares.

However, the joint owners may decide to allocate rental profits differently, in which case each person will be taxed on the profits that they actually receive. This achieves the same flexibility as a partnership but without the need to satisfy the business test.

Practical tip

A property rental partnership can offer married couples and civil partners greater flexibility in the sharing of rental profits. This can be very useful from a tax planning perspective. However, it is important that the arrangement passes the 'partnership' test.

The way in which an unincorporated landlord receives tax relief for interest and finance costs depends on whether or not the property is a residential property. Relief for interest and finance costs incurred by unincorporated landlords in respect of residential lets is given as a basic rate tax reduction, whereas the interest and finance costs relating to non-residential properties are deducted in calculating the taxable rental profits.

Where a property portfolio comprises both residential and non-residential lets or where a property has both residential and non-residential parts, it is important that interest and finance costs are treated correctly.

Mixed property portfolios

Where an unincorporated landlord has a property portfolio which includes both residential and non-residential lets, the treatment of interest and finance costs will depend on the nature of the property to which they relate. Where there are separate mortgages for each property, it is straightforward to identify whether the interest relates to a residential or a non-residential property. The interest relating to non-residential lets can be deducted in calculating the taxable rental profit whereas relief for the interest on the residential lets is given in the form of a basic rate tax reduction.

Example

Hughie owns two properties which he lets out – a flat and an industrial unit. The flat has a mortgage of £100,000 and Hughie pays interest of £4,000 in the tax year. The industrial unit has a mortgage of £60,000 in respect of which Hughie pays interest of £3,600.

He can deduct the interest of £3,600 paid in respect of the industrial unit in calculating the taxable rental profits. However, relief for the interest on the residential mortgage is given as a basic rate tax reduction of £800.

Mixed-use property

Where a property has both residential and non-residential parts, as would be the case for a shop with a flat above it, the interest must be apportioned to the various parts on a just and reasonable basis. For example, this may be by reference to the value of each part or by floor area.

The interest apportioned to the non-residential part can be deducted in calculating the taxable rental profits, whereas relief for the interest apportioned to the residential part is given as a basic rate tax reduction.

Example

Bella lets out a shop with a flat above. She has a mortgage of £200,000 on the premises on which she paid interest of £10,000 in the tax year in question. The flat accounts for 60% of the floor area and the shop for 40%.

£4,000 of the interest (40% of £10,000) is attributed to the shop and deducted in calculating the taxable rental profits. The balance of £6,000 (60% of £10,000) is attributed to the flat and relieved as a basic rate tax reduction of £1,200.

A consideration of some of the inheritance tax implications of parents helping their children pay mortgages.

The difficulties of affording a house and the potential for help from the 'bank of mum and dad' are often discussed. Parents may be willing to assist and this will commonly be by transferring money to children and because there is no 'gift tax' on such payments, it might be thought that this is the end of the matter. However, there may be inheritance tax (IHT) implications.

Generally, a gift of money will be a transfer of value and, subject to any available exemptions, it will be a potentially exempt transfer (PET) for IHT purposes. This means it will not be taken into account in calculating the donor's IHT liability if they survive for seven years after the gift. However, if they die within three years, the full amount gifted will be treated as part of their estate. If they die in years four, five, six or seven after the gift, a decreasing proportion is included.

Structure of gifts

The basic principles above mean that the structure of the financial help is important. A one-off lump sum paid towards a deposit or to reduce the mortgage balance will normally be treated as a PET unless it is covered by one of the standard exemptions. An individual has an annual exemption of £3,000, and any unused amount can be carried forward for one tax year. So, if a parent has not used the previous year's exemption, they may be able to give up to £6,000 without it being added back into the estate for IHT purposes. If both parents make gifts from their own assets, they may each use their exemptions.

Amounts above those exemptions will become relevant if the donor dies within seven years. In brief (and ignoring the residence nil rate band and other reliefs), the first £325,000 of an estate on death is chargeable at 0%, and any excess is charged at 40%. HMRC looks at gifts in chronological order when deciding whether earlier lifetime gifts have used up the nil-rate band.

Gifts out of income

Regular mortgage payments by a parent may be treated more favourably under the exemption for normal expenditure out of income. This is often the most useful relief where parents intend to help over time rather than by a single large payment. To qualify, the payments must: form part of the parent's normal expenditure; be made out of income rather than capital; and leave the parent with enough income to maintain their usual standard of living.

HMRC guidance specifically recognises that mortgage payments made on someone else's behalf may qualify if these conditions are satisfied. In practice, that means the arrangement should look like a settled pattern, such as a monthly standing order, and should be funded from income such as salary, pension income, rental income or dividends, not from savings or the sale of assets. If the exemption applies, the gift is immediately outside the estate and there is no need to survive seven years.

Documentation is essential. Parents should keep clear records showing the source of the funds, their income and expenditure, and the intention behind the payments. A short letter or note stating that they intend to make regular payments towards a child's mortgage from surplus income can be helpful evidence if HMRC later reviews the estate. Bank statements and an annual summary of income and living costs can also support the claim to exemption. Without this, HMRC may treat payments as PETs. Just because payments are made directly to a lender rather than the child, for IHT purposes, a payment made on the child's behalf can still be a gift.

Conclusion

While the IHT considerations must be considered, there are wider estate planning points to consider. Large gifts could reduce the parents' own financial resilience, particularly if care costs or changes in income arise later. Also, will gifts to one child raise fairness issues between siblings?

Practical tip

As an alternative, parents could simply loan money to their children. Because this is repayable in future, there should be no IHT and funds may be protected in case of financial difficulty or divorce.

Over the summer, HMRC consulted on proposals for the timelier payment of income tax due under Self-Assessment (ITSA).

Currently, taxpayers within Self-Assessment must pay their income tax and any Class 4 National Insurance by midnight on 31 January after the end of the tax year to which it relates. This means that income tax and Class 4 National Insurance for 2025/26 must be paid in full by midnight on 31 January 2027.

If the tax and Class 4 National Insurance bill for the previous tax year was £1,000 or more, unless 80% of the amount due for the year was collected at source, such as under PAYE, the taxpayer must make payments on account of the current year’s liability on 31 January in the tax year and on 31 July after the end of the tax year. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Any balance due must be paid by 31 January after the end of the tax year.

Taxpayers with PAYE income

Taxpayers who are within Self-Assessment and who have a PAYE source of income will make in-year payments on account of their Self-Assessment tax bill through PAYE from 6 April 2029 (2029/30 tax year).

Other taxpayers

Where a taxpayer has no or insufficient PAYE income for tax and Class 4 NIC that they owe through Self-Assessment to be collected in year through PAYE, HMRC are exploring increasing the frequency of payments on account and advancing them so that all payments on account are made in the same tax year as the income to which they relate. Under this proposal, the payments would be based on the taxpayer’s forecasted liability which in turn would be based on past returns. Once the taxpayer had reported their liability for the year, the amounts paid and owed would be reconciled, with the taxpayer making a balancing payment or receiving a refund as necessary.

Transition year

Moving to in-year payment will mean that in the transition year taxpayers may be paying tax for more than one tax year. Although the actual tax paid will not change, moving the payment dates in year may cause cashflow difficulties for taxpayers. HMRC are considering options to support taxpayers during the transition, such as spreading payments for previous years over a longer time frame.