How to Put Your House in a Trust

Thinking of protecting your home for the future? Putting your house in a trust could be the answer. Trusts can be valuable for reducing inheritance tax (IHT). By transferring assets into a trust, you can potentially remove their value from your estate which, after seven years, means that they generally won't be subject to IHT.

People use trusts to safeguard their wealth for future generations but establishing a trust can be a complex decision with serious legal implications and expert advice is essential.

What is a trust?

A trust is a legal arrangement where you (the settlor) hand over ownership of an asset – like your house, money, or investments – to someone else (the trustee). The trustee manages the asset for the benefit of another person or group (the beneficiary).

With a house, you're handing over ownership and management of your home to a legal entity - the 'trust'. This trust then holds and looks after the property for the benefit of your beneficiary. The trust document lays out who gets what and when. By putting a property into trust rather than making an outright gift, you can control how the property is used after it is given away.

Property is often transferred into a trust as part of inheritance tax planning, however, the trust needs to meet certain conditions and be set up correctly by a solicitor. For example, some trusts are set up to avoid care home fees and reduce the inheritance tax payable by a beneficiary. Other trusts are used for when a beneficiary is too young or vulnerable to receive the assets right now, or if there are several beneficiaries that you wish to gift an asset to.

Although the property will no longer legally be yours in a trust, you can choose to be one of the trustees during your lifetime which means you can remain in control of the property.

There are administrative costs in creating and administering the trust. It may also be necessary to submit a tax return if rental income is produced from the trust.

Types of trust

Discretionary Trust

Common for estate planning and asset protection.

A discretionary trust gives you the ability to decide who gets what, when, and how much. It's like having a trust fund manager who can distribute the benefits of your home (or any asset) as they see fit, based on your wishes and the circumstances of your beneficiaries. It's a popular choice for families because it offers maximum flexibility.

With a discretionary trust, any income and/or capital of a trust would only be given to a beneficiary if the trustees agree. For example, income from a rental property could be sent (by the trustees) to the beneficiary most in need of the money.

Bare Trust

Often used for children's inheritances.

A bare trust is like a straightforward promise. You hand over your house (or any asset) to a trustee, but they have no real power or control. The beneficiary is the boss and can do whatever they want with the asset. This type of trust is often used for children, where the trustee holds the property until the child reaches a certain age.

Interest in Possession Trust

Popular in providing for spouses or partners while preserving assets for future generations.

With an interest in possession trust, you're giving someone the right to enjoy the benefits of your house without owning it outright. It's essentially leasing your own home.

The beneficiary gets to live there rent-free, but you retain ownership of the property. This can be a great option to continue providing for a spouse or partner while ensuring the property passes to other beneficiaries in the future.

Pros and cons of putting your house in a trust

The specific benefits and drawbacks will depend on your circumstances and the type of trust you choose. It's essential to seek professional advice tailored to your needs.

What is the process?

• 1

  Choose the right trust

• Deciding on the most suitable type of trust for your circumstances. As discussed, options include discretionary, bare, and interest in possession trusts. Consulting with a legal professional here is both recommended and crucial.

• 2

  Draft the trust deed

• This legal document outlines the terms of the trust, including who the trustees and beneficiaries are, how the property will be managed, and how assets will be distributed.

• 3

  Appoint trustees

• Trustees are responsible for managing the trust. You can choose individuals such as family members or friends, or consider professional trustees.

• 4

  Transfer ownership

• The legal title of the property is transferred from you to the trust. This involves signing legal documents and registering the change with the Land Registry.

• 5

  Consider tax implications

• Putting your house into trust can have tax implications. You must seek professional advice to understand them.

• 6

  Ongoing administration

• Managing a trust involves ongoing responsibilities, including keeping accurate records, filing tax returns, and ensuring the trust complies with legal requirements.

How much does it cost to put your house in a trust?

Costs can vary significantly based on location, the complexity of the trust, and the solicitor you choose.

Initial setup

• Solicitor fees: These typically range from £1,000 to £3,000, depending on the complexity of the trust.
• Stamp Duty Land Tax (SDLT): This might apply if the property is transferred into the trust. The amount depends on the property value.
• Trust registration: There might be a fee to register the trust with HMRC.

Ongoing costs

• Trustee fees: If you appoint professional trustees, they may charge an annual fee.
• Accountancy fees: You might need an accountant to handle the trust's tax affairs.
• Legal fees: Ongoing legal advice might be necessary, especially for complex trusts.

Additional costs

• Valuation fees: If a property valuation is required for the trust, there will be additional costs.
• Potential capital gains tax: If the property's value increases after it's placed in trust and is subsequently sold, capital gains tax might be applicable.
• Trust administration costs: There might be ongoing administrative costs associated with managing the trust, such as record-keeping and correspondence.

Inheritance tax implications

Inheritance Tax (IHT) can be a complex area, and putting your house into a trust adds another layer of complexity. Let's break down some potential scenarios:

Example 1: Immediate IHT

Scenario: You decide to put your £500,000 house into a trust. Your nil-rate band for inheritance tax is £325,000.

Implications: You'll face an immediate inheritance tax charge of 40% on the £175,000 that exceeds your nil-rate band.

Example 2: Seven-Year Rule

Scenario: You successfully avoid an immediate IHT charge by transferring your house into a trust. You survive for seven years.

Implications: If you meet certain conditions (e.g., not benefiting from the trust), the value of the house will be removed from your estate for IHT purposes when you die.

Example 3: Ten-Yearly Charge

Scenario: Your trust has been running for ten years. The house is now worth £700,000.

Implications: The trust will likely face an IHT charge based on the increase in value since the trust was created.

Example 4: Early Death

Scenario: You die within seven years of setting up the trust.

Implications: Your estate will face an IHT charge on the value of the property transferred into the trust.

These examples do not reflect real-life scenarios - real-life situations can be much more complex. Professional tax advice is recommended to understand the specific implications of your circumstances.

Different types of trust have different tax implications, and whoever benefits from the trust can also affect tax liabilities.

Income tax

• Trust as a taxpayer: Trusts are considered separate taxpayers and may be subject to income tax on any income generated by the trust assets.
• Beneficiary taxation: Income distributed to beneficiaries may also be subject to income tax.
• Accumulated income: If income is not distributed, the trust itself pays income tax at higher rates.

Capital gains tax (CGT)

• Trust as a taxpayer: Trusts are liable for CGT on gains made from the disposal of assets.
• Potential exemptions: Certain disposals within the trust might qualify for exemptions or reliefs.
• Inheritance tax relief: If the property is passed to a beneficiary after the trust ends, there might be potential inheritance tax relief on the gain.

It's important to note that the tax treatment of trusts can be complex and subject to change. Seeking professional advice is essential to understand the specific tax implications for your situation.