What is a Trust?
A trust is a legal arrangement where assets are given to a trustee to look after them for the benefit of someone else. It is important to be aware that once a trust is set up the asset will no longer belong to you. This would include if you were putting your house in trust, so you would need to exercise extreme caution.
Trust & Inheritance Tax
It is possible to sever the joint tenancy of a home and for each joint owner to put their respective share of the house in a trust. This can also be done for a sole owner. By doing so, the trust then allows you the right to live in the house for the remainder of your lifetime and sets out who is to subsequently benefit from the trust.
However, the disadvantage to this is that if the amount being put into the trust exceeds £325,000 a 20% immediate inheritance tax charge will arise.
This is not the end of it either. By continuing to live in the property, HMRC will class this as a gift with reservation of benefit, meaning that the whole value will continue to remain in your estate and be taxable, thus defeating the point of putting the property in trust for this purpose.
Furthermore, putting your property in trust will mean that you can no longer take advantage of the residence nil rate band of £175,000 (or £350,000 for married couples). This will have the effect of actually increasing the amount of inheritance tax that will become payable rather than the reverse.
Also, depending on the value of the property, the trust may be liable for inheritance tax every 10 years from the date it was set up.
For all of these reasons, it is not advisable to set up a trust if your only or main purpose is to avoid or reduce inheritance tax.
Trust & Care Home Fees
Putting a house in trust reduces the value of your assets on a financial assessment for local authority care home funding. However, if you have put your property in trust for the reason of avoiding care home fees, the local authority will deem this to be a deliberate deprivation of assets and will treat this as though you still own the property. This is the worst case scenario as you will still be liable for care home fees and you no longer own the property to cover the cost.
Gifting or Transferring Property
So, what if you were to gift or transfer your property to your children instead, would this have the desired effect?
By giving your property away, your right of continued occupation is at risk. You will lose control over what your children decide to do with the property, most worryingly they could sell the property without your consent. Parents will often think their children will not do this. But what if they were to divorce or get into financial difficulties. This property would then form part of their own assets. Or if they predeceased you, the property would pass in their Will or on intestacy and could also be subject to inheritance tax.
Your children would also lose any financial advantages given to a first time buyer as they will be classed as already being a homeowner. The same applies to stamp duty, as they would already own a property, when they come to buy a home the higher second homeowner stamp duty rates will apply.
Transferring your property will not get round the inheritance tax issues either. For this to be effective, you would also have to give up your right of enjoyment of the property, for example by paying a full market rent to your children. Otherwise, HMRC will treat you as still owning the whole property value for inheritance tax.
As regards care home fees, the same applies as for a trust. If the Local Authority consider that the property transfer was made to avoid care home fees, they will set this transfer aside and treat you as still being the owner of that property for financial assessment purposes.
Unfortunately, putting your home in trust or transferring your home is therefore unlikely to achieve the result you are hoping for if the purpose of doing so is for reasons of inheritance tax and/or care home fees.