Wills & Estate Planning Fact Sheet
Family Trust
The single largest asset that most people will ever own is the family home. How can you protect it to ensure that the home, or the proceeds of its sale, remains in the family? There are three main ways in which this can be done, and each has its own advantages and disadvantages. This document attempts to set out some of them, though there may be others. It is for general guidance and information only. Specific situations require specific advice, and this document is no substitute for appropriate professional advice which is essential. Although it concentrates on the family home the general principles can equally be applied to other valuable assets.
In your Will you can leave your assets, including the family home, to one or more people of your choice. Commonly a couple in their Will would leave everything to the other and only specify that it would go elsewhere in the event that their partner dies first. As a Will can be changed the survivor could change his or her Will so that the family home or other asset does not end up where the person who has died first would want it to. As an example, a married couple, H & W, have two children A & B. they want to make sure that A & B share the family home or the proceeds of sale. They each make a Will leaving everything to the other with the proviso that if the other has died first then it goes to A and B equally. H dies first and for whatever reason (this could be because she meets someone else or because she falls out with one or both children etc) W changes her Will and now the home is not going to go to A & B but is going to go somewhere else. H is clearly not now in a position to do anything about this, and the home has not found its way to where he would have wanted it to go.
One solution sometimes suggested is that H & W sever the joint tenancy so they each own a separate half of the family home. They can then in their Will leave their own half directly to the children and give the other the right to live in the home for their lifetime. This solution works, but only for half of the family home as the surviving spouse still has the right to change his or her Will in relation to the half that they own.
That may be what people want in which case this partial solution works for them.
An immediate outright gift of the home to one or more other family members such as children achieves the desired effect. The home is now theirs. It has the added benefit in that after 7 years the value of the house might be disregarded for Inheritance Tax (IHT) purposes. The current threshold below which inheritance tax is not paid is £325,000 per person (£650,000 for a married couple or civil partners). The exception to this is if you continue to live in the home, in which case it would still be taken into account for inheritance tax purposes.
There are, however, a number of drawbacks:
- You are entirely reliant upon the people to whom you have given the home to allow you to live there. They may make promises now which they do not keep
- One or more of the recipients could become bankrupt in which case their share of the home would be taken to satisfy their debts and again you could find yourself out of the home.
- One or more of the recipients may have a claim made against them, for example by a spouse in divorce proceedings. Again, the value of their share in the home may be taken into account and that could in certain circumstances result in the home having to be sold.
- One of the recipients may die before you do, and their share of the home would then pass into their estate. That may, for example, be their spouse who may wish to sell the property in which case once again you would be out of a home.
- One or more of the recipients could attempt to raise finance on the home
- On the sale of the property Capital Gains Tax may be payable if the value of the property has increased from the date of the transfer to sale. Whereas there is no Capital Gains Tax as at the date of death when you own the property or the property is held in trust.
There will also be a registration fee which will be dependent upon the value of your property. Please click here to find out more about our fees.
This will solve many of the problems that have been referred to in this document. The terms of the trust will ensure that whilst you are alive you have an absolute right to live in the property. You can even sell it and use the sale proceeds to buy another home for yourself which again you can live in for as long as you wish. The terms of the trust will set out precisely where the home (or sale proceeds) goes when you die. It cannot be changed by your spouse or your partner if he or she survives you. In addition to ensuring the home goes to the people you want it to it has the added bonus that it is then disregarded as an asset of yours for certain purposes. There are, however, some drawbacks which you must be aware of:
- You will not be able to use the home to release capital for yourself, for example through an equity release scheme. Normally it would also be open to you to sell your home and downsize and thereby release some capital. Because the home is in a trust then any capital released from it will be held in the same trust. That means that you are only entitled to the income from that capital.
- It does not have the inheritance tax advantage that an outright gift might have. The value of the home will always be taken into account as part of your estate when you pass away for these purposes.
- Once it has been done it is very difficult to undo. The only way it can be undone is if every person who has a benefit under the trust agrees to do so. If any of those persons are under 18, they cannot agree. Accordingly, if you change your mind as to who you want to benefit after your death then unlike a Will you are pretty much stuck with this.
- Your estate cannot benefit from the additional Residence Nil Rate Band (RNRB) when a property is placed into trust. This additional RNRB is generally available when a main residence is passed on to children or grandchildren although the list is a little wider than that. This would mean that your Inheritance Tax Threshold would only ever be £325,000 (£650,000 for a married couple or civil partners) and the additional RNRB of £175,000 each would no longer be available.
- If the property being placed into trust is worth more than £325,000 (£650,000 for a married couple or civil partners) then the trust must pay 20% tax on anything over the threshold at the time that the trust is created. There is also then a 6% charge on the trust’s 10th anniversary and every 10 years thereafter. It may also be subject to an exit charge. Nevertheless, the trust can never pay more than the 40% IHT charge throughout its lifetime.
- All trusts must be registered by the Trustees upon creation via the Government website whether they are liable for tax or not. All trusts must be registered within 90 days of creation. This process can be cumbersome and HMRC will require a significant amount of financial information at that time from the Trustees, who will also have to register personally on the government portal if not already registered. We do not get involved in that process as it is personal to the Trustees.
- If, in the future, you end up going into a care home, it is important to remember that the local authority may still take your property value into consideration when means testing. You cannot place a property into trust to avoid paying care home fees.
- It is important to note that the property will then be owned (subject to the terms of the Trust Deed) by your Trustees and accordingly it would have to be insured in their names. It may be that you would then need separate insurance for the contents.
Costs
There will also be a registration fee which will be dependent upon the value of your property. Please click on the button below to find out more about our fees.
