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Can I put my house in trust to avoid paying inheritance tax?

A model of a house and the letters T, A and X signifying, "Can I put my house in trust to avoid paying inheritance tax?"

Many people ask, “Can I put my house in trust to avoid paying inheritance tax?”

This is a common misconception – a trust can’t, by itself, avoid inheritance tax on your home. But it’s a good idea for a number of other reasons and you should make a new Will at the same time (if you’re in or near Bristol, go to Will writing solicitors near me.)

The misconception about inheritance tax comes from the idea that you can give assets away to avoid inheritance tax.

When a person dies, the value of their estate is calculated. This value includes any large gifts made in the 7 years before they died.

In other words, if you give away an asset such as a property more than 7 years before you die, its value is not counted for inheritance tax purposes.

Now there are two ways of giving away a property during your lifetime. You can give it away to an individual, just as you would any other kind of gift. Or you can gift it into a trust.

Since this trust must be one that’s already in operation, the type of trust needed is a lifetime trust, i.e. one that’s set up in your lifetime. This is different to a trust written into a Will.

But what does a gift into trust mean? It means you are changing legal ownership so that it is now legally owned by the trustees of the trust. And the trustees have to abide by the terms of the trust deed (document).

So you might think that if you give away your home into trust, you have given it away for inheritance tax purposes. But you would be wrong.

Inheritance tax is levied by HMRC and they have rules called “gift with reservation of benefit”. The benefit in this case refers to the enjoyment of the asset.

So are you benefiting from an asset if you have gifted it into trust? If it’s your family home and you continue to live in it, the answer is yes. You are benefiting from the asset, even if you no longer own it. The value of the house would still need to be included in the inheritance tax calculation.

Why not just give my house away?

But what if you don’t gift it into trust? What if you just give it to someone outright – one of your adult children, for example?

First of all, there could be capital gains tax on the gift. But you can avoid inheritance tax if you live for seven years after the gift. However, there’s a catch and it’s a pretty big one for most people.

The catch is that you would have to pay rent to live in what used to be your own home.

Moreover, the amount of rent you pay must be the same as what anyone else would pay – in other words, the prevailing a market rent, not a derisory “peppercorn” rent. You’d have to pay this to the person you gave your house to.

And even worse, for most people, the rent would have to be regularly updated to match market values. And you’d have to pay it for the rest of your life.

Even if you could afford this, which let’s face it most people can’t, there’s another, possibly even bigger, drawback.

Imagine you fall out with the person you gifted your house to. They could make you homeless at the drop of a hat. Even in the best case scenario, there’s no going back. That person now has influence over your life that they didn’t have before.

In the worst case scenario and they die before you, the house may become owned by someone you don’t even like! For example, the spouse of your son or daughter. And don’t that relationships can, and do, change over time. Why risk it?

Why a trust is a good idea

But whilst simply giving away a property away is a very bad idea, giving it into trust may still be worthwhile.

No, it won’t save your family any inheritance tax. But think about who would inherit it. Is it possible that when you die, it would be a bad time for them to inherit?

What if one of your children was going through a divorce at the time of your death? They would be at risk of losing the asset as part of a divorce settlement? The trust would ensure they don’t need to inherit outright.

The same thinking would apply if one of your children was on means-tested benefits and would therefore lose those benefits. Or even a child who is high-net-worth already – if they inherited directly from you, it would push their own estate even further over the inheritance tax threshold.

The other advantage is that a house in trust can be sold immediately by the trustees. They won’t have to wait for a grant of probate to be issued after your death, a process which could potentially take several months or even longer.

Summary

The simple answer to “Can I put my house in trust to avoid paying inheritance tax?” is no – at least, a trust of itself cannot reduce inheritance tax if you continue to live in your house. However, in my experience, putting your house in trust provides several advantages for your beneficiaries (e.g. children) because it would prevent them inheriting outright at what could be a difficult time.

The information contained in these articles is for general interest purposes only. We take every precaution to ensure that the information is correct at the time of publishing but errors can occur. Given the changing nature of laws, rules and regulations, there may be omissions or inaccuracies in the information. Bristol Wills & Estate Planning Ltd is not responsible for any errors or omissions or for any results obtained from the use of this information. You should never rely on the information in these articles as a substitute for professional legal advice, whether from Bristol Wills & Estate Planning or any other legal service or professional.

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