Pros and Cons of Buying a Property Through a Trust
The real estate market is a good option to explore when determining where to put your money.Since there are numerous options available to you when it comes to buying property, it’s in your best interest to do some research to determine which option is going to serve your needs both now and in the future.
Given this, let’s think about establishing a trust to buy some real estate. A trust is, at its most fundamental level, a legal structure in which the trust creator hands over ownership of assets to the trustees for the benefit of the trust’s beneficiaries. Initial considerations as to whether a trust is appropriate for you will center on your unique situation and objectives.
You might be wondering, “Why would you want to use a trust to buy a property?” This is the first and most fundamental issue that must be answered.
Some of the most significant advantages are listed below.
1. Property rights are distinctly different from legal rights.
Since the trusts would be the legal owners of the property, it would not be included in your estate. This would prevent the property from being liable to estate duty, capital gains tax, executor’s fees, transfer duty (subject to relevant exemptions), and transfer fees following your death. The trust lasts forever, which is a huge plus because it guarantees continuity.
2. A decrease in the value of your personal assets
If the property were not in your name, your estate would be subject to far less in estate duty upon your death.
3. Protection from debt collectors
Since the trust, not you, is the legal owner of the property, your creditors cannot take it from you if you become bankrupt.
4. Effective administration
If you suffer from an age-related sickness to the point where you can no longer handle your own affairs, having the trust hold the property would protect it from your incapacity. Also, if you get this kind of illness, the trustees would be able to sell your property without your family having to ask the High Court for a curator to look after your affairs.
5. Earnings from real estate investments and tax planning
The trust is earning money if and only if the property is rented out. A tax of 45% would be levied on the money earned. But the trustees can give the money to the beneficiaries however they choose to save on tax payments. Any profits distributed would be subject to taxation at the recipient’s marginal tax rate. Depending on your yearly salary, this number would be significantly lower than 45%.
Learn the benefits and drawbacks of trusts.
Reasons to consider establishing a trust include those listed above. As you can see, a variety of factors, such as your susceptibility to insolvency, your current marginal tax rate, and the presence of any mental health issues in your immediate family, could all play a role.
Nonetheless, it is essential to discuss the potential drawbacks and risks associated with trust ownership.
1. Capital gains on asset sales are taxed.
If you own the property in a business capacity, the capital gains tax rate is much greater than if you owned the property in a personal capacity and sold it. It’s important to remember that if you use and directly own property as your principal residence, you may be eligible for a capital gains exemption. You can use the provisions if you need to use the property as your principal residence even while the trust owns it, but the associated fees may make that choice problematic.
Second, the trust’s share of the income tax
The trust would be subject to income tax at a rate of 45% on any rental income, regardless of how little the amount is charged to tenants. Remember the tax planning opportunities that have been discussed?
Third, securing funding.
If the trust needs money to buy property, that’s a huge drawback. As a result of the considerable risk involved, banks are usually hesitant to provide trusts with mortgages that cover the entire purchase price. The reason for this is that if a payment isn’t made, the next steps are much more complicated.
Therefore, when a big deposit is needed for a loan, the trustees must stand as guarantors for the loan with the bank. The number of trustees who would be required to post assurance depends on factors like the value of the trust’s assets, the trust’s ability to generate income, and the trust’s general financial health. While requirements will vary from bank to bank, it’s common for more than one trustee to be needed to stand as a surety.
For trusts, there is no universal rulebook that applies to all situations. It is recommended that you talk to tax experts or real estate professionals to help you make the best choice possible, taking into account your personal situation and goals.