Can I avoid inheritance tax by putting my property in trust?

This has been a common question raised by numerous clients and there is a great deal of misleading information to be found on the internet.

In this article I will discuss the consequences of giving away your main residence and contrast this with giving away a property that is not your main residence.

Your main residence

If you retain a benefit in any asset you have given away, whether it be to a trust or directly to your child, the value of the asset will always form part of your estate for inheritance tax purposes. The Revenue call this a gift with a ‘Reservation of Benefit’. In simple terms, for tax purposes, you cannot give away your property and live there rent-free to avoid an inheritance tax charge.

For the property to fall outside of your estate for tax purposes, you will need to remove the benefit. To do this, you will either need to leave the property or pay to the recipient of the gift a market rate rent as determined by a professional. If you have sufficient funds to pay a market rate rent, then you would need to ensure this is reviewed annually and full records are kept. Once you begin paying the market rent, you will need to survive by 7 years for the gift to be outside of your estate for tax purposes.

You also need to be aware that whoever you pay the rent to, will need to declare the income on their Tax Return.

If you live with a family member you may be able to gift them a share of your property without the Reservation of Benefit rules applying. However the family member must remain in the property until your death. In this case, you will still need to survive the gift by 7 years, for the share to no longer be in your estate for tax purposes.

A property which is not your main residence

If you own a second property which you no longer need, then it is worth considering whether to make a gift of the second property either into a trust or to your desired beneficiary. As long as you no longer benefit from the property and survive the gift by 7 years, it will fall outside of your estate.

If the property is a holiday home however, then you will need to be mindful of visiting the property in case HMRC consider that you have retained a benefit from the gift.

If you own a rental property and want to give away the property whilst retaining the rental income then you may be able to do so without the Reservation of Benefit rules applying to the gift. In this scenario, you can give away a share of the property whilst retaining the full rental income.  However, it is imperative to seek advice when entering into this type of arrangement as it is very likely to come under scrutiny from HMRC, upon your later demise.

When gifting a second property, you can either gift it directly to your desired beneficiary or you may decide you wish to retain some control over the property.

If you do not wish to give the property to your desired beneficiary straight away i.e. because they are minors or you are not sure they could handle the responsibility of the property, then you can gift the property to trust.   You can then act as a trustee who will manage the property until you feel your desired beneficiaries can receive the property.

When giving away a second property it is likely that Capital Gains Tax will be payable immediately. However if you gift the property in trust, the trustees can defer the payment of the tax to when the property is sold.

This article touches on the complex nature of trusts and the potential tax consequences. If you feel you would like a more detailed insight of whether gifting your property in trust is suitable for you and to discuss the potential tax consequences in more detail, then please contact us to have a meeting with a qualified lawyer, Call us on 01689887887 or email cwj@cwj.co.uk