Your home in a trust: are you sure?

Putting property into a trust potentially could help savers cut their IHT liabilities – but there are numerous drawbacks to be aware of. Here, Partner and Chartered Financial Planner Andy Baker explains more.

Clients often ask me about putting their homes in trust to help cut their IHT liabilities. By relinquishing ownership of their home, this can potentially help some people decrease the size of their taxable estate and pass their property onto loved ones in a tax efficient way.

However, there are many serious pitfalls people need to be aware of with this option. Trusts are helpful financial planning tools, that can help with the above in the right circumstances, but there are many considerations you need to know.

First, by gifting a property into trust you are also giving up a lot of the security that comes with this, you will no longer own the property, you have no say over maintenance or management of the property.

You also need to ask if yourself if you can afford to gift the property into trust, for most people our homes represent one of our largest assets and whilst generally considered to be illiquid, they could be sold in future to realise funds if needed.

Also, if you decide that you still wish to live in your home after gifting it into the trust, you will have to pay rent at the normal market rate to continue to do so. If you didn’t, HMRC could view this as a ‘gift with reservation’ as you are still benefitting from something you have given away. Whilst it is difficult to stomach that you’ll have to pay rent for a house you’ve already paid off, you have to remember it’s not your house any more, it belongs to the trust – can you afford the monthly rental that the property may yield?

Gifting your main residence into trust could also mean that you miss out on the main residence nil rate band (MRNRB). Introduced in April 2017, this allowance provides an additional relief of £125,000 towards inheritance tax liability for the 2018/19 tax year (this is due to increase to £175,000 by 2020/2021). This allowance can be a helpful tax mitigation tool when used with the existing nil rate band of £325,000. Whilst tax rates are subject to change, the current rules mean that you only qualify for the additional nil rate band if the property is left to your direct descendants, so if your property is gifted into trust this allowance will be lost.

These are just some of the drawbacks that you may face. If you take away anything from this, it should be that gifting property into trust is a complex process and requires expert legal and taxation advice. If you’re using a trust, it should be part of a financial plan and not just relied upon as an easy fix for an Inheritance Tax liability.

This is a complex area so if you want to learn about what options could be open to you (as every case is different), then get in touch with the Equilibrium team to find out more.

Disclaimer: Rates of tax, tax benefits and allowances are based on current legislation and HMRC practice and depend on personal circumstances; these may change and are not guaranteed. This blog is intended solely for entertainment purposes of the reader and should not be construed as such for financial advice.