Accumulation and maintenance trusts

A trust (settlement) arises when a person (the settlor) transfers assets to trustees, who hold the assets for the benefit of one or more persons (the beneficiaries), who will receive income and/or capital from the trust.

A discretionary trust exists where trustees have discretionary power as to the distribution of income and capital and nobody is entitled to it as of right.

An accumulation and maintenance trust is a special type of discretionary trust. The beneficiaries must all be grandchildren of a common grandparent (not necessarily all children of the same parent), and a beneficiary must receive part or all of the income on or before his or her twenty-fifth birthday. Until then, the income must either be used for his or her maintenance, education, or benefit, or be accumulated.

The Income Tax position
Income received by the trustees is chargeable on the trustees at 40% (UK dividends at 32.5%). The 10% tax credit on UK dividends cannot be used to cover any part of the trustees' liability.

Any income paid to beneficiaries who are under eighteen and children of the settlor is treated as the settlor's own income for income tax purposes.

Where income is paid to beneficiaries it is deemed to be after deduction of tax at 40%. Thus income of £300 net is equivalent to gross income of £500 from which £200 tax has been deducted.

A repayment of tax can be claimed (by the parent or guardian while the beneficiary is under eighteen) to recover the 18% additional rate tax, entitlement to have income taxed at 10% or 20%, and any otherwise unused personal allowances of the beneficiary.

Accumulated income passing to the child on reaching the appropriate age is treated as capital and hence not subject to income tax.

Capital gains treatment

Transfers into the trust are treated as a disposal at open market value by the settlor. The settlor will be liable to capital gains tax unless gifts holdover relief is available.

Capital gains tax at 40% is payable on disposals of chargeable assets by the trustees, subject to the annual exemption of £4,100 for 2004/05.

When a beneficiary becomes absolutely entitled to any chargeable assets of the trust, they will be deemed to be disposed of at market value, and capital gains tax will be payable accordingly. In certain circumstances the trustees' gain can be held over to the beneficiary.

Inheritance tax implications

Transfers into the trust fund are potentially exempt from inheritance tax and will not be taken into account if the settlor survives for seven years.

There is no charge to inheritance tax on property remaining within the trust. Nor is there any charge when a beneficiary becomes absolutely entitled to trust property.

Therefore, the transfer of the whole property via the settlement to the beneficiaries is completely free of inheritance tax.

Tax planning points

A person with children, grandchildren, or others under twenty-five whom they wish to benefit should consider gifting assets into an accumulation and maintenance trust. Provided that person survives for seven years after making the gift, no inheritance tax will be payable.

The trust can be considered as an inheritance tax exempt fund until the children reach twenty-five. There are therefore great tax advantages in putting growth assets into such a trust.

If the gift is to the settlor's own children, it is not advisable for the trustees to pay income to a beneficiary for his or her maintenance etc. while the child is unmarried and under eighteen (in these circumstances it will be treated as the settlor's own income).

Buying a house

Buying a house can be a stressful and complicated process, with a number of potential obstacles along the way. However, some straightforward planning can help you to maximise the chances of making a successful transition to your new home.

Initial Planning

When deciding where you want to live, there are a number of factors you will need to consider. These may include:

* The funds you have available
* The location, including proximity to schools, shops and other local amenities
* The size, style and situation of the property
* Transport links
* Outdoor space and parking facilities
* Council tax and other charges
* Setting a budget
It is essential to budget carefully. As well as any additional mortgage payments that may be due on the new property, you will need to consider other costs such as solicitor's and estate agent's fees, Stamp Duty Land Tax, removal charges and possible storage costs, and any necessary funds for renovating or redecorating the property.

It is also a good idea to have a contingency fund in place to cover unexpected costs, for example additional rental charges in the event that you are unable to move into your new property straight away.

Viewing a property

It is often said that people make up their minds about a property within the first few moments of seeing it. However, while having a positive emotional response to a house may be important to you, it is also essential to remember that buying a property represents a significant financial investment.

Consider the following viewing suggestions:

* Take somebody with you - as well as helping to ensure your personal safety, they may notice things that you do not
* View the property in daylight so that you can look out for signs of any potential problems, such as cracks, crumbling plasterwork, or patches of damp
* Write down any questions you may want to ask, such as how the property is heated, how long it has been on the market, responsibility for any shared facilities, and so on. If the property is not freehold, you should find out about the duration and terms of the lease
* Estate agents' details are usually only approximate: take a tape measure so that you can find out whether your existing furniture will fit in the rooms
* Aim to make a second viewing during a busy time, such as the rush hour, so that you can get a more accurate picture of traffic levels, journey times, etc
* Selling your existing home
* If the purchase of your next home is dependent on selling your existing property, you should put your own house on the market as soon as possible.
* To help maximise the sale value of your existing home, consider the following tips:
* Attend to any unfinished DIY jobs, leaking sinks or peeling paintwork, which could put off potential buyers
* Remove any excess clutter which may make it difficult for viewers to properly assess the available space
* Make sure that gardens and outside spaces are well-kept and will appeal to potential buyers who may be passing by the property
* More often than not, your move will form part of a 'chain' of people, who are each looking to buy and sell a property. If one of the links in the chain breaks down, it can have a knock-on effect on the entire process. To help the system along, keep in regular contact with the other members in the chain, and try to remain flexible and approachable in your dealings with them.

Solicitors and surveys

You must instruct a solicitor who is qualified in conveyancing. They will conduct the appropriate searches and deal with the necessary legal issues.

It is also advisable to have a survey conducted by a qualified chartered surveyor. This may seem an additional expense, but it could save you a substantial amount of money in the long run.

There are three main types of survey:

* Valuation survey - which confirms the value of the property for the purposes of the mortgage lender
* Homebuyer's valuation report - this also includes a basic survey of the property's condition
* Full structural survey - this is the most expensive, but also the most extensive, of the three options, and goes into far greater detail regarding the construction and condition of the property If renovation work is required, you should get several quotes from different companies. If you are purchasing a brand new house, make sure you are supplied with a good warranty from a reputable company, such as the National House-Building Council (NHBC) 10-year Buildmark warranty.

Making an offer

If you like the property, you should put in an offer as soon as possible. In most parts of the UK, it can be common practice to make offers below the asking price. When a vendor accepts your offer on their property they are not bound to sell to you at this stage, and can go on to accept a higher offer - known as gazumping.

However, the procedures for house buying are significantly different in Scotland, where properties are usually marketed at 'offers over' a stated price, and offers become legally binding at a much earlier stage. It is common practice in Scotland to operate a process of sealed bids, whereby each buyer submits their best offer by a specified closing date.

Completing the deal

Once offers have been accepted, you have had the results of any surveys, your mortgage has been approved, and your solicitor has conducted the necessary searches, the solicitors for each party will draw up contracts. Once the contracts have been exchanged, a date will be set for the 'completion' of the sale. At completion, the property will legally become yours.

In Scotland, the 'contract' takes the form of 'missives', a series of formal letters which pass between the solicitors of each party. On conclusion of the missives, you will be given a date of entry to the property.

Moving tips:

You should begin to plan your move well in advance of the moving date, from obtaining quotes from removal and storage firms, to beginning the process of boxing up your personal possessions

Notify the relevant organisations of your new address, including banks and utility companies, and arrange for your mail to be forwarded to your new address. You should also check the meter readings at both properties

Remember to transfer your building, contents and other insurance policies to the new house with effect from the purchase date, and make sure that your belongings are covered during the move itself

Choosing a mortgage

Taking out a mortgage on a property is a significant financial decision. For many people it represents the largest amount of money they will borrow in their lifetime, so it is particularly important to make an informed decision about which mortgage is best for you.

However, with a large number of different types of mortgages available, and a variety of ways of paying back the loan, choosing the right mortgage may seem rather a daunting task.

When choosing a mortgage, there are key issues to consider, including:

* How you want to pay back the loan
* The type of interest you want to pay; and
* Which arrangement suits your particular circumstances. v Types of mortgage
Repayment

With a repayment mortgage, you repay both the interest due and the capital amount borrowed on a monthly basis. The overall sum outstanding reduces over time, until it is finally cleared at the end of the term. One key benefit of a repayment mortgage is that you can be sure that the loan will be paid off in full.

Interest-only

With an interest-only mortgage, you pay only the interest as it accrues, and simultaneously invest funds elsewhere, with the aim of amassing sufficient returns to repay the capital amount of the mortgage at the end of the term.

It is important to understand that your savings will reflect the performance of the investment fund. Thus, a well-performing fund can result in a surplus at the end of the mortgage term - but equally a fund which performs badly could result in a shortfall. The performance of the investment should be regularly monitored, to ensure that you are still on track to repay the full mortgage.

The repayment of the capital for interest-only mortgages will typically take the form of an endowment, ISA or pension mortgage:

Endowment mortgage

An endowment mortgage involves taking out an endowment policy which provides life assurance cover, and a sum for investing.

ISA mortgage

This is similar to an endowment mortgage, only it uses an Individual Savings Account (ISA) to invest in stocks and shares, again with the aim of earning enough to repay the loan.

Pension mortgage

Pension mortgages make use of a pension fund to take advantage of tax-free savings. At the end of the term, the savings are used to repay the mortgage, and any remaining amount is used to provide a pension.

Paying the interest Another key issue to consider when choosing a mortgage is the type of interest you want to pay. Interest rates may be fixed or variable.

Fixed rates

With a fixed rate mortgage, the interest rate is fixed for a given time. This can be an advantage if you want to know exactly what your payments are going to be. The main disadvantage is that if interest rates should fall, you will still have to pay your set rate.

Variable rates

Variable rates are normally linked to the Bank of England interest rate, which is reviewed on a monthly basis, so your payments will reflect current interest trends. It is therefore advisable to ensure that you could continue to pay the mortgage should interest rates - and therefore your monthly payments - increase. The negative equity problems in the 1980s arose as a result of increasing interest rates accompanied by a fall in house values.

A number of other interest rate packages are also available, including capped rates and discounted rates.

Some useful questions

When considering which type of mortgage is the best for you, it is important to consider the following:

* How much can I afford to pay?
* Which type of mortgage best suits my needs?
* Can I take a payment holiday?
* Can I pay off extra amounts or make lump sum payments?
* Are there any additional fees or redemption penalties?
* You should always seek professional advice before committing to any new mortgage product