There are many reasons people may want to gift their family home to trust. This is most commonly for asset protection purposes and, in particular, to protect the family home from residential care home fees. There are, however, compliance matters which must be dealt with to avoid penalties.
HMRC's Trust Register (TRS)
Once you set up the trust, it must be registered on the TRS within 90 days. This is managed by HMRC and is a register of the key details of most UK trusts or trusts with a UK connection. All trusts require to register with the TRS unless they fit within one of a small number of exemptions. If the trust pays UK tax (income tax, capital gains tax, inheritance tax or LBTT), trustees must also ensure that the TRS is up to date and an annual declaration is completed.
Register of Controlling Interests in Land (RCI)
The trustees also need to consider the RCI rules. The RCI launched by Registers of Scotland on 1 April 2022 seeks to improve transparency on who controls Scottish land and property. An RCI entry is required where the owner named on the property register is not the person, or only person, in control of making decisions relating to the property. This may apply to the trust holding the family home, such as where the trustees change and the current trustees no longer match the trustees named on the title deeds.
Inheritance tax (IHT)
IHT does not only apply on death but can also be charged on lifetime gifts to trust and the value of the trust fund going forward. There may be IHT reporting requirements on the gift to the trust and on each 10-year anniversary of the trust, however, planning can be done to ensure that the trust fund does not exceed the available IHT allowance and therefore that there is no IHT to pay.
Capital gains tax (CGT)
It is important to take advice on how to preserve 'principal private residence' relief from CGT on a later sale of your home by the trustees. Any gain on the property when your trustees later sell the home, such as if you wished to downsize, may need to be reported to HMRC. However, documents can be put in place when you set up the trust to ensure there is no CGT to pay.
Income tax
Income tax does not arise where you do not pay rent to the trust for your house. If there are any other income producing assets in the trust, the income would need to be taxed and reported to HMRC as part of your own income.
In the right circumstances, gifting your family home to trust can help you achieve your asset protection goals. However, legal advice and expertise is necessary to ensure that the above compliance points are dealt with and that penalties for non-compliance are avoided. The Personal team at Brodies would be pleased to assist you with the creation of trusts and the associated trust compliance.
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Senior Solicitor
