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I made a family trust with myself and my wife as trustee and

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I made a family trust with myself and my wife as trustee and my two daughters as the beneficiaries. The reason for doing so was to protect our main residential property, since we gave a personal guarantee on a commercial property we owned. At the time of making the trust, exactly 2 years ago, the commercial property was under threat of being repossessed and we had substantial loans outstanding. However the situation has changed and we managed to sell our commercial property with negligible losses. We now want to cancel the trust, however the value of our residential property has increased from £650K to £800K and we have an outstanding mortgage of £190K. I am just wondering what the tax implications would be from cancelling the trust and how to minimise these. In addition, would it be better to keep the trust? What other options do we have available?
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.

Hi

Thanks for your question

First I am very surprised that you were able to put this property into trust with an outstaning mortgage - so I can only assume that the mortgage lenders were agreeable to this.

if they were not, then this is an issue tht will need adressing first as the trust may be null and void anyway.

I assume you were paying market rent to remain living in this property to the trust? As you would have relinquished ownership of the property to thr trust, you canno then continue to have the benof lihere - or this then causes a reservation of benefit (makes the trust NULL and void for Inheritance tax) and then you have the issue of taking this property out of trust before the 7 years have lapsed (and the other two issues as advisd above) and this will crete a capital gain on the trust to tranfer this property back as under your own owneship, which will be established by the difference in value of the property from the time it was placed in the trust and taking it out.

I really think you are best advsied to engage the services of a financial adviser and accountant whi can help sort this mess out for you, as there are no minimising the mesh of problems that this situation has created.

Thanks

Sam

Customer: replied 2 years ago.

Neither myself nor the people who made the trust contacted our mortgage lender (Northern Rock) about making the trust, and they won't agree to lend us on the trust. Do you think we have grounds to make the trust null and void on this basis? Do you have any further info you can provide? How do we find out if the trust is valid? I don't think the people who made the trust have even contacted Inland Revenue!

Expert:  Sam replied 2 years ago.

Hi

This position of making the trust null and void becoems a legal issue - not a taxation one, as I have never known a trust being possible when there is still a mortgage outstanding on the property - and whoever actioned this trust for you, needs to be held accountanble as to how to take this forward.

I can only advie on the taxation position of a valid trust - and how it should work, and your is fully in breach of how this should work - which I am sure you can appreciate is not in my remit!

It seems that (along with some fresh legal direction) is the way you need to go, and you can always post a new question here on Just Answer under the UK law section, to gain some solid direction as to how to take this up with the company that undertook this for you, but in the meantime it would be appreciated if you could rate me for the level of service I have provided.

Thanks

Sam

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