Inheritance tax is the tax taken from the value of your estate when you pass away. It is usually up to 40% of your estate value (after the nil rate band of £325,000). You may also be eligible for the residence nil rate band of £175,000 if you leave your house to a direct descendant such as a child or grandchild.
Naturally, people want to do everything they can to minimise their inheritance tax liability and make sure that as much of their wealth is passed onto their loved ones as possible.
A lot of people contact us at Four Wealth Management to ask if they should put their house into a Trust to reduce their Inheritance Tax liability. First, you should understand exactly what a Trust is.
What is a Trust?
A trust is a legal arrangement which allows an individual to transfer assets such as property, money or investments to trustees. A trustee is someone who then manages and looks after these assets in trust for the benefit of the beneficiaries. The beneficiaries are nominated by the individual that put the assets into trust.
There are different types of trust, and each trust has its own tax implications. Book a no-obligation meeting with a financial adviser to understand these or call us on 0117 973 0500.
Should I put my house into Trust?
Often, the main motivation for placing a property in trust is to put your house outside of your estate for inheritance tax purposes. Putting your property into trust completely removes your house value from your estate and therefore it will not be subject to up to 40% tax.
It is important to note that the property must be in the trust for 7 years before you pass away to be completely exempt from inheritance tax.
There are different types of trusts that you can choose from, some trusts allow you to retain some control and flexibility over the property. Assets in trust are protected for your beneficiaries and will also not form part of their estate, for example if they were to get divorced the assets would not be split with their spouse.
To discuss which type of trust is suitable for your individual circumstances, book a no-obligation meeting with a financial adviser or call us on 0117 973 0500.
Can I continue to live in my house after putting it into Trust?
Once you put your house into trust, you are no longer the owner. The trust owns the property.
If you wish to continue living in the property, then you must pay rent at a commercial rate every month and keep records of doing this.
If you do not pay rent, then HMRC will still consider the house as part of your estate when you pass away as you have been using and benefiting from the property.
A downside of this is that the rent has to be paid to the trust or to the beneficiaries and tax then has to be paid on the rental income.
Do I lose the Residence Nil Rate Band?
The residence nil rate band is £175,000 per person (£350,000 per couple). This amount is exempt from inheritance tax on top of the nil rate band of £325,000. The residence nil rate band only applies if you leave your house to a child or grandchild. If you put your house into trust, then you will no longer quality for this inheritance tax exemption.
The tax implications of putting your house into trust are complex and it is not a decision to be rushed into.
Seek financial advice
If you are looking for help and advice with regards to reducing your Inheritance Tax liability, you can book a no-obligation meeting with a financial adviser or call us on 0117 973 0500.
Inheritance tax planning is complex, and the tax rules and allowances change frequently so financial advice can be invaluable to helping you to make the right decisions for your individual circumstances.
Meetings usually last one hour and can be face to face at your home address, at one of our offices or on zoom.
Book a no-obligation meeting with a financial adviser or call us on 0117 973 0500.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
