Trusts can be incredibly useful vehicles when looking at tax efficient methods of estate planning. A trust usually arises when one person (the settlor or truster) transfers property to another person or persons (the trustees) to be held for the benefit of specified people (the beneficiaries) although trustees can also be beneficiaries and the settlor can be a trustee. If the settlor is also a beneficiary, special rules come into play and these are mentioned below. Trusts can be created during the lifetime of the settlor or established in a Will coming into effect on the death of the settlor.
Trusts Holding Artwork
When thinking about transferring artwork into a Trust, it is important to be sure of the intentions for its use. For example, is it for personal enjoyment, for investment purposes or to benefit the wider public? Depending on the answer, a private or charitable Trust may be more appropriate.
When artwork is held in trust, it is the Trustees who are ultimately responsible for deciding how the artwork is to be looked after, managed and disposed of if necessary. If the intention is for the artwork to be retained longer term, placing the artwork in trust and appointing trustees can help ensure a level of continuity for the ongoing management of the asset.
For items such as artwork, a formal valuation may be useful not only for insurance purposes, but also for the ultimate disposal of the property.
If the property is being sold, and particularly if there is a delay in the sale of an asset after a death, there may be an increase in the value of the property giving rise to a potential CGT liability. Similarly, if the asset is being transferred to a beneficiary, a valuation at the date of death will be important for the beneficiary should they choose to dispose of the property later. Normally, the beneficiary will be deemed to have inherited the property at the date of death value unless it has been revalued shorty prior to transfer.
A valuation of artwork will also be required if placing the artwork into Trust. For assets held within a lifetime private Trust, where the value of the Trust is below the settlor’s Nil Rate Band (usually £325,000) there will be no Inheritance Tax to pay. If there is tax to pay, this would usually be at the rate of 20% on the excess of the available Nil Rate Band on creation and then around 6% of the excess value every ten years thereafter.
Gifts with Reservation of Benefit
Often, in an attempt to reduce the value of a person’s estate, a person will give away assets from their estate. However, if the donee does not take true possession of the asset being gifted and does not have almost exclusive enjoyment of the asset, a gift with reservation may occur. Where the donor has reserved a benefit from the asset, its value will still be included in the donor’s estate for Inheritance Tax. In relation to artwork, a reservation could occur where a piece of art was gifted but the donor still displayed the piece in their home. However, a reservation can be avoided if the donor pays a market value rent for the item to the donee. By gifting the property and paying market rent to continue to enjoy the artwork, the value of the artwork itself will be removed from the donor’s estate for Inheritance Tax. These arrangements can be complex but the experts at Lyon & Turnbull have considerable experience of them and will be able to help.
Capital Gains Tax and Chattels Exemption
From a CGT point of view, a gift to a non-exempt beneficiary constitutes a disposal which potentially gives rise to a tax liability. Gifts to exempt beneficiaries (the donor’s spouse/civil partner or a charity including a charitable trust) are still disposals however they do not give rise to a CGT liability. However, CGT is only payable on personal possessions or chattels which are gifted if they have a value exceeding £6,000 per item or “set of items”. CGT is payable on the difference in value between the value of the asset when it was acquired and the value of the asset at the date of disposal. Individuals have an annual CGT allowance of £12,300. Any gain which exceeds this annual allowance is charged at a rate of 10% or 20% depending on the level of the donor’s income. Where the artwork is disposed of by a Trust, the annual allowance of the Trustees is normally £6,150 and the rate of tax is always 20%.
CGT Holdover for Gifts
There is a type of relief which is available to a donor when making a gift and this is known as Holdover Relief. The purpose of Holdover relief is to defer payment of CGT on the gain for the donor. The practical effect is that the donee’s base cost for future disposals is reduced by the amount of gain held over. For example, if the donor acquired an asset for £100,000 and at the time of disposal the value is £150,000, there is a gain of £50,000. The donor can elect to not pay CGT on this gain and instead, when the donee disposes of the asset, their base cost (which would have ordinarily been £150,000) would be reduced by £50,000 to £100,000.
Holdover Relief is available where the disposal is a chargeable transfer for IHT and the most common example of this is where an individual gifts and asset into a Trust. However, Holdover Relief cannot be applied where the Trust is settlor interested i.e. where the settlor, their spouse or their minor child or stepchild could benefit from the Trust. Gains cannot be held over on gifts to individuals because these are potentially exempt transfers for IHT rather than being immediately chargeable.
Nicola Robertson is a Senior Solicitor in Wright, Johnston & Mackenzie’s Private Client department based in Glasgow. Nicola assists clients with succession planning and executry administration. She advises on a range of matters including preparation of Wills and Powers of Attorney; establishment and administration of Trusts; Inheritance Tax planning and estate administration.