Be cautious about smooth-talking sales advice from potentially unqualified and unregulated “advisers”. If a proposal seems too good to be true, it quite possibly is. You may end up in a difficult situation.
Perhaps capitalising on the current financial climate, we are seeing a resurgence of so-called experts promoting the idea that putting your home into a trust is the solution to many estate planning concerns.
Promises range from simplifying and accelerating the process after death to reducing inheritance tax and protecting your estate from care home fees.
It’s no surprise that many people opt for this complicated arrangement, which can be expensive to implement (even before some hidden costs come to light). But there are often risks and downsides.
Additionally, we’ve seen advice given in such a way that restricts one’s ability to take legal recourse once problems are discovered. On some occasions, the original adviser has even become untraceable.
Let’s take a closer look at this type of arrangement.
What is a trust?
A trust is a legal entity that holds assets for the benefit of specific people. By putting your home into a trust during your lifetime, you transfer legal ownership to your chosen trustees.
What are some of the risks of putting your home into a trust during your lifetime?
1. Loss of control
You give up legal ownership. You cannot sell, refinance, or gift the property without the trustees’ approval. This can be problematic if your circumstances change.
2. Tax implications
a) Inheritance Tax (“IHT”) for you
Many people are aware of the seven-year rule when giving assets away.
But the rule also states that, for it to apply, you must not retain any benefit in your home once you’ve set up the trust—such as continuing to live in it rent-free.
The trust might also lose you a valuable IHT allowance known as the Residence Nil Rate Band (up to £175,000), available if you leave your home to descendants (other conditions apply). By transferring your home to a trust, however, you no longer own it to leave to descendants. You may end up owing HMRC more IHT.
So, no IHT benefit from using the trust and, as the property will be in trust when you die, it is also beyond the reach of your executors who may need it to settle the IHT bill.
b) IHT for the trust
A lifetime trust may itself suffer IHT. If the value of the home exceeds your “Nil Rate Band” allowance, there will be an immediate charge on creating the trust. The Nil Rate Band is typically £325,000, although this may be impacted by other lifetime gifting.
c) Capital Gains Tax (“CGT”)
Most homeowners qualify for Principal Private Residence Relief for their main home, exempting them from CGT if it has increased in value during ownership. However, the trust may lose the relief if care is not taken. An unnecessary CGT bill could arise—as high as 24%.
d) Income Tax for the trust
Often cash is added to the trust to cover ongoing administration costs. Or, if the property is later sold, the proceeds may be invested. Both may earn income in the trust, which will be taxed at the higher rate for Income Tax.
3. Does a lifetime trust protect my home if I go into care?
If you do need care, the Local Authority may deem that the trust was an attempt to deliberately deprive yourself of the value of your home and ignore the arrangement. In this scenario, the work undertaken and costs incurred will have been for nothing.
This often happens after you have lost mental capacity—at which time it is too late to consider any other asset protection opportunities.
4. Challenges with selling or refinancing
Lenders are unlikely to grant you a mortgage or equity release if your home is in trust. Selling can also become complicated.Any replacement property your trustees buy will also be subject to higher rates of Stamp Duty Land Tax.
There are certain types of property, such as retirement properties, which your trustees are prohibited from buying.
5. Unintended consequences for beneficiaries
Trusts may be used in an attempt to protect assets against misuse by beneficiaries or in case they divorce.We’ve seen confusion from clients who thought, wrongly, that the trust would protect the value of their home even if it is later passed to their beneficiaries. Any protection may only be available if the assets remain in the trust in the long term.
Putting the home in the trust may also conflict with the wishes set out in your Will.
6. Costs and other complications
This type of lifetime trust involves upfront fees and ongoing administration costs. It may require annual tax filings, legal updates and professional management charges.
Some have been led to believe that the trust eliminates the need for a Grant of Probate after they die. However, if you own any other assets worth over £5,000, a Grant is probably still needed.
Another layer of complexity emerges if the trustees cannot agree on something, lose capacity or are unable to act for any other reason. Further expense may be required to fix the problem (and who pays if there are no funds in the trust?).
Unwinding the trust once issues are discovered can be complex and costly.
Summary
Whilst a lifetime trust might be sold as a safe place for your home, it can often cause more trouble than it’s worth. We tend to find it is wiser to retain control.
So, be careful whose advice you take, take time before proceeding, and always consider a second opinion from someone regulated by the Solicitors Regulation Authority.
If you have any questions about this topic, please feel free to get in touch with Sarah or Tom below.
Sarah Stone - sarah.stone@porterdodson.co.uk
Tom Mottram - tom.mottram@porterdodson.co.uk
