Trusts – Genius Tax Planning or Unnecessary Expense?

Protecting your family home and assets is smart. But so too is tax compliance. 

Why Trusts exist

A trust is a legal arrangement where you (the “settlor”) hand your assets to someone else (the “trustees”) to look after for the benefit of other people (the “beneficiaries”). Protecting, growing and distributing family assets are the main reasons for setting up a trust.

You decide the rules (this is called a “trust deed”), the trustees become the legal owners managing everything, and the beneficiaries enjoy the spoils – either the income (like rent from a property), the capital (the actual assets), or both.

The Tax Reality Check

First up, Capital Gains Tax (CGT). Whilst transferring your home into a trust won’t trigger a CGT charge in most cases, the property’s eventual sale by the trust might (say, if the property value has increased since the trust’s inception). Trusts also pay a higher CGT rate than individuals this can be minimised.

Then there’s Income Tax. If the trust earns rental income, the trustees have to pay income tax on that rent.

Inheritance Tax applies if your share of the property exceeds £325,000. You could face an immediate 20% inheritance tax bill. Furthermore, additional inheritance taxes must be considered, funded and reported to HMRC:

• Periodic Charges: Every 10 years, HMRC charges a maximum of 6% of assets in the trust exceeding a £325,000 allowance
• Exit Charges: Remove assets from the trust, or end the trust, and there could be a charge of up to 6%
• If someone dies and a trust is involved in their estate, this may trigger even more taxes.

Then there’s Reservation of Benefit. If you put your home in a trust but keep living in it, HMRC considers it for Inheritance Tax. However, there are exceptions (e.g., paying full market rent for continued use of the gifted asset).