Despite changes to tax treatment over the years, there is still a huge population of offshore trusts that hold residential real estate as their principal asset, either within an underlying company, or directly as a trust asset.
Often this property is lived in by some or all of the beneficiaries of the trust – either as a main residence or used as a holiday home. In either case the property can have sentimental value, and any trustee decisions regarding this asset can be complicated by this.
Some of the property has been held in trust for a long time, and the beneficiaries living in it may be advancing in age. Their loved home may not be suitable for them any more, or it may need repairs and renovation as the property ages alongside the beneficiary.
If the property is the trust’s most significant asset, this can bring cash flow issues and worry for both the trustees and the beneficiaries. Often the next generation of beneficiaries have conflicting feelings about their childhood home, and this may cause division amongst the family as some may wish to preserve the home, whilst others see the opportunity in renovation and sale.
At JTC we have started to see more interest from clients wanting to move out of cities towards more rural, or semi-rural, locations, mainly driven by the pandemic. In London in particular, working from home is likely to continue in many workplaces; this may influence the next generation’s feelings about a family home currently held in trust, either encouraging beneficiaries to support the trustee’s renovations of an existing home, perhaps adding office space, or conversely influencing the beneficiaries more towards a desire to sell. As lifestyles change, the next generation may start to feel that a city home will no longer suit them. We can help clients not only with the best sale price of a current property, but also with the search for a new family home, should the family’s advisors agree that holding real estate within the trust is still beneficial for future generations.
The trustee’s role
A good trustee will need to navigate these waters and try to balance the differing needs of the beneficial class, whilst ensuring they are, at the very least, maintaining the value of the trust fund. A sensible option to explore at this point is leveraging the value of the property and using the resulting cash to support the aging beneficiary, either by securing more suitable living arrangements or by renovating the trust property to suit their current needs. At JTC we work closely with experts in mortgages and financing who are able to help achieve this.
If work is undertaken to renovate or update the trust real estate, a specialist partner is often needed to act as a project manager for the trust: to oversee planning applications and renovations and to be onsite for works. There may also be VAT considerations involved, which a good trustee can help the client to navigate either through an in-house tax compliance team or by seeking specialist tax advice if required.
It is important that the project manager is experienced with working with trustees, especially if there are beneficiaries who are resistant to such works, or have differing views about whether the trustees are taking the right path.
In these cases a project manager could unknowingly make the situation worse because they do not understand the nature of the beneficiaries’ interest in the trust. In this situation we might call on the expertise of our colleagues in JTC Private Office who are able to help clients with project management and are highly experienced in understanding the intricacies of families. Alternatively we recommend specialists in renovations and interior design, some of which are also able to oversee the full project and work with us in the beneficiaries’ best interests.
Sensible renovations can be a diligent use of trust powers in maintaining and enhancing the value of the property. If an aging beneficiary remains living at the residence, such works will have a double purpose: to make the property more suitable in their later stages of life whilst also having an eye to the future and the possible sale of the property. Trustees will need to consider the current needs of the beneficiary, whilst making decisions as to the viability of a project to add value and increase a future sale price.
Constant communication between the trustee, the beneficial class and the project manager will be needed to foresee any issues and manage expectations.
With proper consideration and planning, and by having the right team, it is possible to enhance a trust’s value if property is the main asset. An eventual sale of the property at an enhanced price will also demonstrate to the next generations of beneficiaries that the trustee is forward-thinking and can continue to add value to the trust fund as well as be a trusted advisor to the family.