Placing your home into a trust during your lifetime is often seen as a way to protect your assets and reduce Inheritance Tax (IHT).
While trusts can be beneficial, a lifetime property trust can carry significant risks and understanding what these are is crucial for your estate planning.
Our estate planning expert, Donna Smy, investigates.
What are the IHT implications of lifetime trusts?
IHT is often one of the main reasons people consider lifetime trusts, but the tax consequences can be unfavourable.
Many people may believe that the seven-year rule for lifetime gifts applies automatically when you put your home into a trust.
However, if you continue to live in your home rent-free after placing it into trust, the Gift with Reservation of Benefit (GROB) rules apply and your property will still be treated as part of your estate for IHT purposes.
In addition, putting your home into a trust may result in the loss of the Residence Nil Rate Band (RNRB), which is currently £175,000 per person when you die and leave your main home to direct descendants.
If the value of the property being placed into the trust exceeds the available Nil Rate Band allowance, which is a maximum of £325,000 per person, there may also be an immediate 20 per cent IHT charge when the trust is created, as well as ongoing ten-year and exit charges for the trust itself.
Can it reduce care home fees?
A common misconception is that a lifetime trust will automatically protect your home from care home fees.
However, local authorities can challenge this under the deprivation of assets rules and there is no fixed period after which assets placed in a trust are safe from these rules.
If they believe the trust was set up to avoid paying for care, they may ignore it entirely and treat you as still owning the property.
Loss of control over your home
One of the most immediate risks of putting your home into a trust is the loss of control.
Placing your home into a trust will give up your legal ownership and decisions such as selling or refinancing the property can only be made by the trustees.
Even if you are a trustee yourself, you must act in accordance with the trust deed and all trustees must act unanimously.
If your circumstances change, you could be restricted in making decisions about your property.
Trusts can also create unintended consequences for beneficiaries, particularly if it conflicts with your Will or if trustees disagree or lose capacity to act.
Unwinding a poorly planned trust can be expensive and difficult, but we can help you prepare a tax-efficient trust.
How to protect your assets properly?
Rather than rushing into a lifetime trust, it is important to consider all the possible options to protect your assets and estate.
These can include:
- Updating your Will
- Using a life interest trust on death
- Setting up Lasting Powers of Attorney (LPAs)
- Working with a financial adviser to plan for potential care costs
Retaining control over your assets is important and you must seek legal advice before making any important decision on you’re the future of your finances.
Our expert team can help assess your estate planning and protect your assets in a legally compliant way.
To learn more about trusts and estate planning, contact us today.
