Estate planning in the UK often brings up several crucial decisions regarding the management and protection of property. Placing a house into a trust has become increasingly popular among available options. This legal arrangement allows you to transfer ownership of your property into a trust, managed by trustees for the benefit of the beneficiaries.
While putting a house in trust can offer benefits such as avoiding probate and reducing inheritance tax liabilities, it also comes with certain complexities and costs. This detailed article will explore the pros and cons of placing a house in trust, focusing on how this estate planning tool works within the UK legal framework.
What Does It Mean to Put a House in Trust in the UK?
In the simplest terms, putting a house in trust involves transferring ownership of the property to a trust, which one or more trustees then manage. The trustees are responsible for managing the trust’s assets (in this case, your home) in the best interests of the beneficiaries—who are often your children or other family members.
Doing this effectively removes the house from your estate, which can have tax and legal benefits. Trusts are a common part of estate planning in the UK, particularly for those who wish to protect their property from probate or reduce the inheritance tax burden on their heirs. However, transferring a house into a trust involves specific legal obligations for trustees and beneficiaries.
Some key points to understand:
- Trustees: The individuals or institutions responsible for managing the trust. You can appoint yourself as one of the trustees, but all decisions must prioritize the beneficiaries.
- Beneficiaries: Those who will benefit from the property held in trust. Typically, this is family or close relatives.
- Legal Implications: Once in the trust, the property no longer legally belongs to you, which means it’s no longer counted as part of your estate for probate or tax purposes.
What Are the Steps to Consider When Putting a House in Trust?
Putting a house into a trust involves several key steps. Here’s a general guide to help you understand the process in the UK:
1. Determine the Type of Trust
The first step is to decide which type of trust best suits your needs. Common options for the property include discretionary trusts, life interest trusts, and bare trusts. Each has different implications regarding control, tax, and asset protection, so choosing the one that aligns with your estate planning goals is essential.
2. Consult with Legal and Financial Advisors
It’s vital to seek professional legal and financial advice before establishing a trust. A solicitor specializing in trusts will help you understand the legal implications, while a financial advisor can explain any tax implications. This will ensure that the trust is structured in the most efficient way possible.
3. Draft the Trust Deed
Once you’ve determined the type of trust, your solicitor will draft the trust deed, which is the legal document outlining the terms of the trust. It will specify the trustees, the beneficiaries, the property involved, and how the trust should be managed. The deed must comply with UK trust law.
4. Appoint Trustees
The trust must have at least one trustee, but typically two or more are appointed to manage the trust’s assets. You can appoint yourself as a trustee along with a professional or family member. The trustees are responsible for ensuring that the trust is run according to its terms and that decisions are made in the best interests of the beneficiaries.
5. Transfer Ownership of the Property
The next step is to legally transfer ownership of the house into the trust. This is done by changing the property’s title in the Land Registry. The property’s legal ownership is transferred from your name to the name of the trust. Once this transfer occurs, the house no longer belongs to you but is held in the beneficiaries’ trust.
6. Register the Trust with HMRC
In the UK, you must register the trust with HMRC’s Trust Registration Service if the trust has tax liabilities or is liable to pay certain taxes like income tax, capital gains tax, or inheritance tax. Registration ensures the trust complies with tax laws.
7. Ongoing Trust Management
Once the property is in the trust, the trustees must manage it according to the terms of the trust deed. This may involve maintaining the property, paying associated taxes, or distributing any income generated by the property. Trustees are also responsible for submitting any required tax filings on time.
8. Review and Adjust the Trust as Needed
Over time, you may need to review the trust’s terms and ensure it continues to meet your and the beneficiaries’ needs. Any changes may require legal advice and possibly the consent of the trustees and beneficiaries.
Additional Considerations
- Tax Implications: Placing a property in trust can affect inheritance tax, capital gains tax, and potentially stamp duty.
- Care Home Fees: While a trust can help protect against care home fees, local authorities may challenge the trust if they believe it was set up to avoid paying for care.
Consulting with professionals throughout this process is crucial to ensuring the trust is established legally and functions as intended.
Types of Trusts for Property in the UK
Here are 10 types of trusts for property in the UK that are commonly used in estate planning:
1. Bare Trust
In a bare trust, beneficiaries have an absolute right to the trust’s assets once they reach the age of 18. The trustee holds the property in their name but has no discretion over how it is managed or distributed. This is a simple trust often used for minor beneficiaries.
2. Discretionary Trust
A discretionary trust gives the trustees full control over how the trust’s assets, including property, are distributed to the beneficiaries. The trustees decide who receives trust funds and how much among the beneficiaries, making it highly flexible.
3. Interest in Possession Trust
In this type of trust, a beneficiary is entitled to the income generated from the property (such as rent), but they do not own the property itself. The capital (property ownership) is preserved for other beneficiaries, often children or future generations.
4. Life Interest Trust
Like an interest in possession trust, a life interest trust allows a beneficiary (often a spouse) to live in or receive income from the property during their lifetime. After their death, the property is passed to the remainder beneficiaries, usually children.
5. Protective Trust
A protective trust is designed to provide for a beneficiary while protecting the property from being misused or claimed by creditors. It restricts access to the trust’s assets under certain conditions, like financial irresponsibility.
6. Accumulation and Maintenance Trust
These trusts are often used for minors or young beneficiaries. The trustees can accumulate income or use it for the beneficiaries’ maintenance and education until they reach a certain age, at which point the property is transferred to them.
7. Charitable Trust
A charitable trust is established to hold property for charitable purposes. It can own property, which is either used directly for the charity’s objectives or sold to fund its activities. Charitable trusts are tax-exempt.
8. Asset Protection Trust
An asset protection trust is specifically designed to protect property from creditors or legal claims. This type of trust can also be used to safeguard the property from being used to pay care home fees in the future, although this is subject to local authority review.
9. Family Trust
A family trust is set up to hold property for the benefit of family members. This is commonly used to ensure that family wealth, including real estate, is passed down through generations in a controlled and tax-efficient way.
10. Home Protection Trust
Home protection trusts are often used by individuals who want to pass their home on to their heirs without it being subject to probate or used to pay for care home fees. However, local authorities can challenge this if they believe it constitutes deliberate asset deprivation.
Summary Table: Types of Property Trusts
| Type of Trust | Purpose | Beneficiary Rights |
| Bare Trust | Simple, for minors | Full ownership at 18 |
| Discretionary Trust | Trustee flexibility | Trustee decides distribution |
| Interest in Possession Trust | Immediate income rights | Capital preserved for future heirs |
| Life Interest Trust | Lifetime use or income | Capital passes to others on death |
| Protective Trust | Asset protection | Restricted access under conditions |
| Accumulation & Maintenance | Education/maintenance for minors | Full access at a specified age |
| Charitable Trust | Charitable purposes | None (for charity) |
| Asset Protection Trust | Safeguard from creditors/legal claims | Restricted beneficiary access |
| Family Trust | Intergenerational wealth transfer | Trustee controls asset management |
| Home Protection Trust | Avoiding probate/care fees | May be challenged by authorities |
Pros of Putting a House in Trust
1. Avoiding Probate
One of the primary benefits of placing your house in trust is the ability to avoid probate. Probate is the legal process by which a will is validated and an estate is distributed. In the UK, this process can be time-consuming and expensive. By transferring a house into trust, the property is not considered part of your estate, so it can be passed directly to your beneficiaries without the need for probate.
2. Inheritance Tax Planning
Inheritance tax in the UK can take a substantial portion of an estate if it exceeds the tax-free threshold. Trusts can help mitigate this by reducing the value of your estate. Property held in trust is no longer counted towards the value of your estate, meaning you could potentially save on inheritance tax. For example, the UK has a tax-free allowance of £325,000, and anything above this is taxed at 40%. A trust can help manage these tax liabilities more effectively.
3. Asset Protection
Trusts can also protect from creditors, legal claims, or in the event of a divorce. By placing the property in trust, it is shielded from personal financial issues and can help safeguard the inheritance for future generations.
4. Control Over Distribution
Trusts allow you to control how and when your beneficiaries receive the property. For example, you may choose to delay the distribution of the house until a beneficiary reaches a certain age or until specific conditions are met, ensuring that the property is not misused or mishandled.
5. Planning for Care Home Fees
One of the reasons people consider putting their house in trust is to avoid potentially incurring care home fees. While a trust may shield your property from being sold to pay for care, it’s important to note that local authorities can challenge the trust if they believe it was set up to avoid paying for care—this is known as “deliberate deprivation of assets.”
Cons of Putting a House in Trust
1. Costs of Setting Up and Maintaining the Trust
Setting up a trust involves legal fees, and there may be ongoing administrative costs to maintain it. These costs can vary depending on the complexity of the trust, the need for professional trustees, and any additional legal or financial advice required to manage the trust effectively.
2. Inflexibility
Once a trust is established, making changes can be difficult. In some cases, it may be impossible to alter the terms of the trust without the consent of all parties involved, including trustees and beneficiaries. This lack of flexibility can be a significant drawback, particularly if your circumstances change after the trust has been set up.
3. Tax Implications
Although trusts can reduce inheritance tax, they can also come with other tax liabilities, such as capital gains tax if the property is sold. There are also ongoing taxes associated with trusts, such as the ten-year anniversary charge and exit charges on assets within the trust. These charges can be as high as 6% on assets above the tax-free threshold, making it essential to weigh the tax benefits against these costs.
4. Potential for Local Authority Challenge
If the primary reason for putting a house into trust is to avoid care home fees, there is a risk that local authorities could challenge the arrangement. If they determine that the trust was created with the sole purpose of avoiding these fees, they may require the house to be sold to cover the costs of care.
What Are the Financial and Legal Implications of Trusts?
Putting a house in trust can have a wide range of financial and legal implications, which need to be carefully considered before making a decision.
- Legal Fees: The cost of creating a trust can be significant, especially if professional trustees are involved or if legal advice is required throughout the life of the trust.
- Capital Gains Tax: If the property increases in value after it is placed in the trust, capital gains tax may apply when it is eventually sold.
- Ongoing Administration: Trustees must manage the property in accordance with the trust deed, which may involve regular legal or financial advice, further adding to the costs.
What Are the Alternatives to Putting a House in Trust?
For those who are unsure whether a trust is the best option, there are several alternatives to consider:
- Gifting the Property: You can gift your home directly to your beneficiaries, though this could trigger inheritance tax if you die within seven years of the gift.
- Wills: Ensuring that your property is passed on through a well-structured will is another common estate planning strategy. Unlike a trust, a will allows you to retain full ownership of your home until your death.
- Lifetime Mortgages: If you want to release some of the equity in your home without selling it, a lifetime mortgage allows you to borrow money against the value of the property while still retaining ownership.
Conclusion
Putting a house in trust offers numerous benefits, from avoiding probate to protecting assets for future generations. However, it’s not without its challenges, including setup costs, tax liabilities, and potential legal complexities. Before deciding whether to put your house in trust, it’s essential to seek professional legal and financial advice to ensure that it aligns with your estate planning goals.
What Are the FAQs About Putting a House in Trust
How does putting a house in trust avoid probate?
By placing your house in trust, the property is no longer part of your estate, meaning it bypasses probate and can be passed directly to beneficiaries.
What are the costs of setting up a property trust in the UK?
Legal fees and ongoing administration costs can vary but often involve a significant initial investment.
Does putting a house in trust help with inheritance tax?
Yes, it can help reduce the value of your estate for inheritance tax purposes, though some large trusts may still incur charges.
Can I still live in my home if it’s in a trust?
Yes, as long as you appoint yourself as a trustee. However, the property is no longer legally yours.
Does putting my house in trust protect it from care home fees?
While trusts may help, local authorities can challenge the arrangement if they believe it was created to avoid care costs.
Are there tax liabilities involved in transferring property into a trust?
Yes, capital gains tax and inheritance tax may apply, depending on the circumstances.
What happens to the property if I have a mortgage?
If there’s a mortgage, the lender’s consent is usually required before placing the property into trust.
