What is a property trust in the UK?
In the simplest terms, a trust is a legal arrangement where assets—in this case, your house—are transferred from one person (the 'settlor') to another (the 'trustee') to be held for the benefit of a third party (the 'beneficiary'). When you put your house in a trust, you effectively transfer the legal ownership of the property to the trust's trustees. You no longer own the house directly, though you might still live in it and retain some control depending on the trust's structure.
This legal separation of ownership from the right to benefit is the foundation of a trust. The trust document, known as the trust deed, outlines the rules and how the property should be managed and ultimately distributed. The decision to establish a trust is often part of a broader estate planning strategy, particularly for older adults concerned with inheritance tax, care home fees, and ensuring their wishes are carried out precisely.
Potential benefits of a property trust
Avoiding probate
When a property is held in a trust, it often bypasses the probate process entirely upon your death. Probate can be a lengthy and expensive procedure, potentially causing delays and stress for your beneficiaries. By using a trust, the property's transfer is managed privately by the trustees according to the deed's instructions, resulting in a much faster and smoother process.
Asset protection
For many, a primary motivation is to protect the house from potential future risks. A properly structured trust can provide a layer of protection against several claims:
- Divorce settlements: If a beneficiary goes through a divorce, assets held in a trust may be better protected from division.
- Bankruptcy: Your property could be shielded from future creditor claims against a beneficiary.
- Care home fees: This is a complex and often misunderstood area. While a trust may protect assets from being used to fund long-term care, local authorities can challenge the arrangement if they believe it was created with the sole purpose of deliberately depriving yourself of assets to avoid care costs. This is a serious risk that requires expert legal advice.
Inheritance tax planning
Using a trust can be an effective way to manage your inheritance tax (IHT) liability, though it is a highly complex area. By transferring your house into a trust, its value is removed from your personal estate after seven years, meaning it won't be subject to IHT on your death, provided you do not retain a "reservation of benefit" (e.g., continue to live in the house rent-free). Different rules and charges apply depending on the type of trust and the value of assets transferred, so professional advice is essential.
Control over distribution
Trusts allow you to set specific conditions on how and when your property is distributed to beneficiaries. This is particularly useful if your beneficiaries are young or financially inexperienced. For instance, you could specify that they only receive the capital when they reach a certain age, or that the surviving spouse can live in the home for their lifetime before it passes to children.
Drawbacks and risks to consider
Cost and complexity
Setting up a trust is not a simple, low-cost process. You will face legal fees for drafting the trust deed, which can easily exceed £1,000. There may also be ongoing administrative costs, such as trustee fees and accountancy fees for filing tax returns. This complexity requires regular management and oversight, which can be a burden for trustees.
Loss of control
Transferring your house into a trust means you no longer have direct legal ownership. While you can appoint yourself as a trustee and retain some decision-making power, you must always act in the best interests of the beneficiaries, not yourself. This loss of direct control can be a significant emotional and practical challenge for some homeowners. For an irrevocable trust, the loss of control is permanent, making it difficult or impossible to reverse the decision.
Tax liabilities
Beyond potential IHT benefits, trusts have their own complex tax rules. These can include:
- IHT charges: Discretionary trusts can be subject to IHT charges every 10 years, as well as an exit charge when assets are distributed.
- Capital Gains Tax (CGT): If trustees sell the property, CGT may be payable, potentially at a higher rate than if an individual sold it. Holdover relief may be available in some cases.
- Income Tax: Income generated by the trust (e.g., from a rental property) is often taxed at the highest rates.
Deliberate deprivation and care fees
As mentioned, local authorities have the power to investigate if they believe you have given away assets to avoid care fees. If they conclude that this was your motivation, they can still treat you as if you own the asset and include its value in your means-tested assessment. This effectively nullifies the purpose of the trust for this specific goal and can leave your family liable for the fees.
Key UK trust types for property
| Feature | Revocable (Living) Trust | Irrevocable Trust |
|---|---|---|
| Flexibility | Highly flexible; can be altered or cancelled by the settlor. | Very rigid; generally cannot be altered without consent from all beneficiaries or a court order. |
| Control | Settlor retains a high degree of control over the assets. | Settlor relinquishes control; assets are managed by trustees for the beneficiaries. |
| Creditor Protection | Limited protection, as assets are still considered owned by the settlor. | Stronger protection, as assets are owned by the trust, not the settlor. |
| Inheritance Tax | No IHT benefits while revocable, as assets are still part of the settlor's estate. | Offers potential IHT benefits after 7 years, removing the asset from the settlor's estate. |
| Probate Avoidance | Yes, the property can bypass probate upon the settlor's death. | Yes, the property avoids the probate process entirely. |
The process of putting your house in a trust
- Seek professional advice. Consult a solicitor who specialises in trusts and estate planning to discuss your objectives and ensure the trust is set up correctly according to UK law.
- Draft the trust deed. Your solicitor will prepare a legally binding document outlining the trust's terms, beneficiaries, and trustees.
- Appoint trustees. Select trustworthy individuals or a professional trustee to manage the trust. You can often be a trustee yourself, but this impacts tax considerations.
- Transfer the property. Your solicitor will arrange for the legal title of the house to be transferred from your name to the trust's name via the Land Registry. Be aware of potential Stamp Duty Land Tax (SDLT) implications on transfer.
- Inform HMRC. Your trust must be registered with HMRC's Trust Registration Service, and any applicable taxes must be paid.
Conclusion
Deciding whether you should put your house in a trust in the UK is not a simple yes or no answer. It is a powerful estate planning tool with significant potential benefits, particularly concerning probate avoidance and, in some cases, inheritance tax planning and asset protection. However, these advantages come with substantial costs, legal complexities, and a loss of direct control over the asset. The risk of the 'deliberate deprivation' rule for care fees is a critical consideration for older individuals.
Ultimately, a trust is not a one-size-fits-all solution and can have serious, irreversible consequences if not structured correctly. It is essential to weigh the potential benefits against the drawbacks in the context of your specific financial situation and long-term goals. For an authoritative source on inheritance and trusts, consider visiting the official MoneyHelper website for further guidance on the topic. Consulting with a specialist solicitor or financial adviser is the most sensible first step to ensure your estate is planned effectively and your wishes are legally protected.
Visit MoneyHelper for more information on using a trust to cut your Inheritance Tax.
