Putting your home in trust, and whether or not that is a good idea is something that has been mentioned in a few of our earlier blogs, but it is such an involved topic that it really needs to be discussed in a stand alone blog.

As mentioned in earlier blogs it is generally a bad idea to give your home away during your lifetime. The same is sadly true of placing your home into trust.

It is fairly common to find providers who advise clients to sever their interest the home (if owned with a spouse) and for each person to give their half of the house to a trust. This increases the amount you can place on trust without paying an entrance charge and also increases the tax allowances available to the trust going forward. There is also a version for single individuals who simply give their entire property to the trust. The trust then gives them a right to live in the property for their lifetime and sets out who should inherit it on their death. This is however where the first issue can arise: if the amount being put into the trust exceeds £325,000 (or less if the person has put any other assets on trust in the previous 7 years) then a immediate charge to inheritance tax may arise.

All express trusts (i.e. ones you have intentionally set up) need to be registered with the trust registration service within 90 days of creation and that register must be kept updated. This is an ongoing administrative step that you need to be aware of.

However in theory, once these 2 steps have been completed the house is outside your estate and safe from HMRC or the Local Authority getting their mitts on it. Right?

Unfortunately not. This is generally the point at which things go very wrong.

1. The Local Authority can, and often do, treat placing a property in trusts such as this as a deliberate deprivation of assets. This means that, if you are ever subject to a financial assessment they can treat you as still owning the property and so refuse funding.

2. Because you continue to live in the property (or have rights of enjoyment during your lifetime), HMRC will deem it to be a gift with a reservation of benefit. This means that the full value at the date of your death is deemed to be within your estate.

3. Placing your house in trust often increases the inheritance tax liability on your subsequent death since the residential nil rate band (potentially worth up to £350,000) will not be available to your estate (some trusts atetmpt to draft around this, but it is questionable whether this actually works). This can have significant implications for the estates inheritance tax position, especially considering point 2 above.

4. Depending on the wording of the trust, your principal residence relief for capital gains tax may also be lost on any subsequent sale or transfer of the property. Principal residence relief is only available where the trust has given a beneficiary an express right to occupy the property.

5. A point that is often missed is that these types of trust are potentially subject to inheritance tax every 10 years, from the date on which they were created. This is known as an anniversary or principal charge and will depend on the value of the property at that 10 year anniversary. If there is tax to pay then a return needs to be filed with HMRC and any tax due settled.

To add insult to injury, it is difficult and potentially costly to undo these trusts, particularly if they have been in place for a while and the property has increased in value. It certainly isn't something that a lay person can tackle on their own and specialist advice should be sought from a STEP qualified professional with a detailed understanding of trusts.

If you do have any questions about winding up this type of trust, or which to discuss alternative estate planning advice that won't leave you in the lurch, then please contact Ashley Minott by email or 01494 893518.