Trusting your rental income…

Tue 20 Jan 2015

jo white spofforths

Individuals let property for a number of reasons and as a portfolio builds or a family’s circumstances change, the use of any rental profits generated could be better re-directed.

One popular use for this money is often for grandchildren’s or children’s school fees, whether for private education before they reach 18 or for their costs whilst at university.

Where rental income is used to fund such costs, it may be possible to restructure the ownership of the property so that any fees or living expenses are paid out of pre-tax profits.

By using a Trust, the initial money or assets can be settled by a grandparent or more remote relative and can also be available to parents whose children have reached 18.

By setting up the Trust correctly, any income arising from the Trust can be used to meet childrens’ school fees by naming them as beneficiaries. By doing this, any money drawn from the Trust for their education will be taxed on them personally but assuming they have little or no other income, a tax credit equal to the money drawn will be repayable to them from HM Revenue & Customs.

Where a parent would normally have to fund the fees from their post-tax income, by using a Trust , the school fees can be effectively paid out of pre-tax income due to the child being able to reclaim some, if not all of the tax credit mentioned above. In actual terms, the Trust’s income will be tax free as any amount paid out can be reclaimed at a later date by the children.

A Trust set up by a grandparent or more remote relative can be established at any point and can operate as long as required, covering nursery school fees to university costs and even a first property deposit. A transaction of this type can also be beneficial for estate planning, as it can reduce the future burden of Inheritance Tax on the estate.

If you are looking to make use of any Trust funds before the children are 18 then you need to make sure it is a non-parent initially settling any money as a parent would be taxed on the income extracted from any money given into Trust up until the child is 18.

If you already own the property and/ or the purchase was financed by a mortgage then care needs to be taken to ensure you do not trigger any unnecessary tax charges when transferring the property into Trust. Once the property is in the Trust it can benefit many generations of the same family and it is possible for the property to be transferred to the younger family members at a later date.

Putting property into Trust can be tax efficient but, as you can see, there are some key things to be aware of in order for the right people to benefit in the right ways.

If you liked this article then why not read more from Jo, check out her article on lettings tax or the most tax efficient way to own a property.

You can contact Jo for more information either by emailing her at or you can call 01403 253 282