Putting Your Home or Other Residential Property in Trust

The inheritance tax nil rate band of £325,000 per person has been frozen since April 2009 and will remain frozen until at least April 2028, that’s a staggering 19 years of ever higher inheritance taxes as our property values grow.  In addition, the residential nil rate band that started in 2017, hit £175,000 in 2021 is also frozen until April 2028.

• Agricultural Property Relief and Business Property Relief, with unlimited relief from IHT, will be merged in April 2026, limited to £1m combined with the excess subject to 20% IHT.  More and more farms and businesses will be subject to IHT in less than a year, forcing the sale in whole or in part of land or the business.  Yet more IHT revenue for HMRC.
• Unused pension funds will now be included for inheritance tax (IHT) from April 2027.  HMRC’s IHT revenue is already setting new records every year and will get a massive boost from 2027 as our estates are all set to pay even higher IHT from pension funds.

We have covered many ways on how to plan for, mitigate, and reduce IHT with investments in trusts, insurance, gifts and gifts from normal/excess/surplus income but this does not cover perhaps our largest asset, our home.

I’ll Give My Property Away

It is perfectly legal to give your property away and provided you live for 7 years, it may then be outside your estate but:

• If you continue to live in or benefit from the property, HMRC would say this is a ‘gift with reservation’ i.e., you have not really given your property away, so the full value will still be included in your state unless:
• You pay market rent to whom you have gifted the property to, but they may then be subject to income taxes on the rents you pay them.

Putting Your Home or Other Residential Property in Trust

It is perfectly legal for you to put residential property in trust.  That’ said:

• If you cumulatively gift more than £325,000 (into a discretionary trust), it will be subject to Inheritance Tax at 20% on day 1 as a chargeable lifetime transfer (CLT).  IHT is not a death tax, it is a gifting tax.
• If the cumulative gift is jointly made by you and you spouse/civil partner, you each have £325,000 i.e., £650,000 combined.
• Discretionary trusts may also suffer an additional 6% tax charge every 10 years, as successive estates of your heirs will not be paying IHT on the property now held inside the trust.
• If you gift residential property that is not your home, e.g., buy to let property, any rents received by the new trust will suffer income tax at 45%.

Landed Gentry?  Not any more …

• The use of trusts for property, mansion houses and stately homes has been around for hundreds of years, so this is not a new thing but after the Settled Land Act 1925, it has become increasingly more important to consider trusts to avoid IHT. 
• Given property prices in London can average £1,2, 3 million or more and now the average UK property price is £297,781 (Halifax Property Index April 2025), you are only just below the individual IHT allowance of £325,000 and when you start adding unused pension funds in for IHT from 2027, the use of trusts for property should no longer be the exclusive domain of the wealthy but it affects most homeowners with pension funds.

Pros of Property in Trust

• Avoids probate as not part of the estate.
• Control and flexibility given to the trustees.  You can be a trustee to retain some control.
• IHT planning for future generations meaning the property will not be subject to IHT on death in future.
• Privacy:  trusts are private whereas your estate and will is in the public domain.
• Protection:  the property is protected from claims, creditors, and legal action against you.
• Wellbeing:  the stress of you managing the property is passed to your trustees.

Cons of Property in Trust

• Complex:  more administration, trustees’ responsibility, and reporting to HMRC, including HMRC’s Trusts Register.
• Costs:  setting up the trusts, ongoing management by trustees all costs money.
• Finances: 
• you cannot put the property in trust if you have a mortgage on it (once inside the trust, the trustees may raise a mortgage if they wish).
• you lose access to the capital and lose the ability to raise funds as the property is no longer yours.
• Inflexibility:  it is difficult to change the trust wording once the property is inside the trust.
• Tax Liabilities:
• Inheritance Tax - potential for Chargeable Lifetime transfer IHT of 20% if gifted to a discretionary trust and cumulative gifts in the last 7 years exceed £325,000 per person.
• Inheritance Tax - periodic 6% tax charge every 10 years for discretionary trusts as successive generations will not be paying IHT for up to 125 years.  That said, 11 X 6% is only 60% in total compared to successive 40% IHT bills for each generation.
• Income tax - only £500 pa tax free allowance and income tax rates at the additional rate of 45% as well as dividends at the additional rate of 39.35%.  Ideally, do not generate income but would do if the property gifted is a buy to let residential property.
• Capital Gains Tax - unless you may use of ‘holdover relief’, CGT will be payable on disposal of assets inside the trust at 24%.
• Longevity of Trust:  this is a pro and a con.  Trusts can only run for a maximum of 125 years (from April 2010), so it has an end date, but successive generations can avoid IHT on property for up to 125 years.

Is it any wonder that eventually, so many properties fall into disrepair/derelict or end up being owned by the National Trust, English Heritage or Historic Scotland as well as Welsh and Northern Ireland counterparties?

Do consider putting your property in trust as another estate and IHT planning tool.  You will need to access professional financial, tax and legal advice.

Talk to us about our ‘In Retirement, Inheritance Tax, Later Life and Care Planning Strategy Review’.

See: Later Life & Inheritance Tax Review

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