Placing Your Property Into Trust During Your Lifetime

We regularly receive enquiries about placing property into lifetime trusts, often prompted by the belief that they provide a straightforward way to avoid probate, reduce inheritance tax and protect the family home from care fees.

While it is true that a property held in trust may be sold after death without the need for a Grant of Probate, this perceived benefit is frequently outweighed by the legal, tax and practical disadvantages. In many cases, retaining the property within your estate is the more appropriate and cost effective option.

Below are some of the key reasons why lifetime property trusts are not always advisable.

Immediate Inheritance Tax Charges

If your property is worth more than £325,000, transferring it into a lifetime trust can trigger an immediate inheritance tax charge of 20% on the value above this threshold. This upfront liability often comes as a surprise.

Loss of the Residential Nil Rate Band

Placing your home into a lifetime trust can result in the loss of the Residential Nil Rate Band. For married couples, this can reduce available inheritance tax allowances from up to £1 million to £650,000, significantly increasing the potential tax payable on death.

Ongoing Tax Implications

For inheritance tax purposes, transferring property into a trust is treated as a gift. If you do not survive seven years, the value may be brought back into your estate.

Even if you do survive seven years, the property may still be treated as part of your estate if you continue to live in it without paying full market rent, as this is likely to constitute a gift with reservation of benefit. Alternatively, you may become subject to the pre-owned asset tax, resulting in an annual income tax charge.

Care Fees Protection Is Not Guaranteed

Lifetime trusts do not automatically protect property from care fees. Local authorities may argue that placing a property into trust amounts to deliberate deprivation of assets, particularly where care needs were foreseeable, meaning the property can still be taken into account in a financial assessment.

Periodic Trust Charges

Unless the trust qualifies as a Disabled Person’s Trust, lifetime trusts can be subject to inheritance tax charges of up to 6% every ten years on values above £325,000, along with exit charges when assets leave the trust.

Loss of Control and Practical Issues

Once a property is placed into trust, you no longer own it. Control passes to the trustees, who must act unanimously. Any decision to sell or move will require trustee approval.

Trusts can also become difficult to manage if trustees disagree or if one loses capacity, potentially leading to costly and time consuming court applications; issues that would not arise if the property remained in your estate.

Lifetime property trusts are complex arrangements with significant tax and practical consequences. They are not suitable for everyone and should only be considered following tailored legal advice. In many cases, a well-drafted Will and thoughtful estate planning can achieve better outcomes without the risks associated with lifetime trusts.