If you search the internet hard enough you will find organisations based in this country who suggest that they can help you move your house into a Trust to reduce the amount of inheritance tax payable on death or to reduce care fees on moving into care.
It is our view that both of these strategies are unlikely to work and in fact could have negative implications.
Avoiding Inheritance Tax on Death
If you transfer your property into a Trust and live rent free then this is almost certainly going to be classed as a “gift with reservation of benefit” (GWRB).
GWRB legislation exists to avoid this exact situation, i.e. that you cannot gift something away and continue to enjoy a benefit from it. If you transfer a property into a Trust, or to another third party and failed to pay full market rent then a property would form part of your estate as if it remained in your own name.
Importantly you may well lose other valuable tax benefits of a main home, for example principal primary residence relief, which means that capital gains tax is not normally paid on the property. If it is owned by a trust tax will typically be a 28% capital gains tax, with no allowance for inflation. The trust would also have to pay income tax on any rent that you paid them.
Protecting the family home from care fees
Transferring your property to an individual or a trust to reduce your estate for the purposes of a care fee assessment is likely to be classed as “deliberate deprivation”.
Local Authorities have powers that can unravel such gifts and there is no time frame for how long they can look book. We strongly suspect many of our clients to aim for the best possible care they can afford even if this involved the family home. This is because individuals are living increasingly long, and whilst dependency may increase in old age it is unrealistic stereotype to assume that any one going into care would not have a wish to receive the best possible care they can afford.
Additional considerations on the above
Changes in legislation that came in from 6th April 2017, further reduce the advisability of such a strategy.
It is now possible that many individuals will see larger inheritance tax thresholds through the new “residence nil rate band”. This is where they leave the value of a property to their children. By moving the property outside of their personal ownership into a Trust, an individual may find they cannot make use of the residence nil rate band at a potential loss of £350,000 allowance that could have otherwise been passed to their children on death without taxation.
Like any tax and trust planning this can be a complicated area, and we would rarely expect the family home to form part of such planning for most individuals. Inheritance tax is likely to be a reality for many families, but with people living longer at the potential to make other plans in life, it may well not affect many until the last survivor of a married couple die, and this could be well over the age of 90.