You may wish to gift your property to a trust for various asset protection purposes. A trust can provide protection for you and your family, including from financial claims on separation. If you would like to keep the property for family use and holidays, a trust is a particularly useful estate planning tool to pass the property down generations of the family while mitigating exposure to inheritance tax (IHT). However, it is important to understand the legal consequences and potential tax implications involved.
Type of trust
The first thing to think about is the type of trust to use. The most common option would be a discretionary trust which is the most flexible trust structure. It may also be appropriate to use a liferent trust, depending on the circumstances.
Inheritance tax (IHT)
IHT does not only apply on death. It can also be charged on lifetime gifts to trust and the value of the trust fund on particular events. A trust set up by one person will have its own available nil rate band (NRB) of £325,000. If the value of the property is above £325,000 at the time of the gift, IHT will be immediately payable at 20%. The amount exposed to IHT will be the value over £325,000. For example, for a house worth £400,000, £75,000 will be exposed to IHT. This would mean an immediate tax charge of up to £15,000 depending on who is paying the tax. If the value of the property is at or under £325,000, there will be no IHT to pay on making the gift if the full NRB is available. A couple could gift up to £650,000 to a trust without any immediate tax charge.
There may also be IHT reporting requirements on each 10-year anniversary of the trust. IHT will be payable on the value over and above the NRB at the time. However, there are various planning options that can be used to ensure that the value in the trust does not exceed the available IHT allowance and therefore mitigate the IHT payable. When an asset within a trust is distributed to a beneficiary, there may also be an exit charge depending on the value at the time.
If you make a gift of your property to a trust with a value over the NRB, and die within 7 years of making the gift, there will be IHT payable on the gift. The IHT will be due to be paid by the trustees. Provision can be made in a will to cover any IHT due on the gift. If you survive for 7 years from the date of the gift, the value will "fall out" of account for IHT purposes.
Gift with reservation of benefit rules
Another important point to think about is the gift with reservation of benefit (GROB) rules. If you make a gift of a property but continue to enjoy periods where you stay there, even if this is for a short time, this will be considered a GROB. This means the value of the property would still form part of your estate on your death for IHT purposes.
If you still want to make use of the property, to avoid there being a GROB, you should pay a full market rent to the trustees. It is good practice for the rent to be reviewed at least every 3 years. There may be other things to consider, such as drawing up a lease between you and the trustees.
Capital Gains Tax (CGT) and Income Tax
It is also important to take advice on the CGT position on making the gift, including whether any CGT is payable. There may be holdover relief available.
Income tax will not arise where there is no rent being paid to the trustees. However, income tax would arise in the trust where you are paying a market rent to live there, the property is being rented out to anyone else, or where any other income producing assets are held in the trust.
Compliance matters
Lastly, there are also compliance matters which must be dealt with in relation to trusts.
A trust must be registered on HMRC's TRS within 90 days of being set up. The trust must also comply with the Automatic Exchange of Tax Information (AEOI) rules, which is focussed on identifying any non-UK connections to the trust. The trustees also need to consider compliance with the Register of Controlling Interests in Land (RCI).
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