The question, from R Scott, 67 from Powys
The mortgage on my house is due to finish next week. I would like to put it in trust to my children. Do I have to wait until I have the deeds to do this and what are the pros and cons of doing this?
The answer, from Steve Martin CFPCM at Smart Financial Planning - an Accredited Financial Planning FirmTM
On a practical level you should have the deeds in your possession before you give the asset away.That said, you could put all of the framework in-place before hand.
Putting it in trust for your children, I assume, is an attempt to mitigate the Inheritance Tax liability that your children will have in the future. To quickly recap, you can transfer £325,000 of wealth after your death to anyone without a tax charge to pay. This is called your Nil Rate Band. If you are married you will have £650,000 of wealth that you can transfer after the second death (assuming that you haven¹t transferred any assets to anyone other that your spouse at the first death). There is a possibility of further IHT relief if you have previously been widowered, if that is the case please seek further advice. If you have made any transfers of wealth in the preceding 7 years to anyone other than your spouse you may have, Œused up¹ some of this allowance, again you would need to take further advice in this case.
If your estate is less than the Nil Rate Band (or two Nil Rate Bands) there is no need to place your property in trust unless you are seeking to control the beneficiary of the house on your death, if that is the case I would suggest that you deal with this in your will rather than in life.
On the assumption that the value of your estate is in excess of the Nil Rate Band (s) I would first look to make plans to reduce your Inheritance Tax liabilities in other ways than planning with your house as it is notoriously difficult.
If, however, your only option is to look to plan with your house you need to exercise care. There is a significant risk that your planning will be ineffective and caught by the Œgifts with reservation¹ legislation. Simply, this means that if a gift is made it needs to be made without reserving any rights to the asset otherwise it is not effective for Inheritance Tax Planning. In this case, after the house has been given away you either need to move out of the property or pay full market rent for the use of the property. Anything other than these two options would invalidate the Œgift¹. This applies whether the property is gifted to a trust or directly to your children.
If you do place the property in a trust, you will need to check the tax position of the gift into the trust as it is likely that you would need to pay tax on it. There would be a 20% tax charge on the value above £325,000 (£650,000 if it was a joint gift and jointly settled trust). Additionally, there will be a tax charge every 10 years or if the property was removed from the trust. Properties in trust do not benefit from Principal Private Residence relief so any increase in value of the property would be subject to Inheritance Tax and the trust will have a 0% allowance which is only half of that available to an individual. The rent that you would need to pay would be subject to income tax at the trust rates.
All in all, I would be very surprised if placing the property into trust will achieve your objectives although I have obviously had to make some assumptions about your objectives and circumstances.
I can, however, give one definitive piece of advice, you need to take professional advice! This should be from a Certified Financial Planner or a Chartered Tax Adviser. A Certified Financial Planner will consider your full financial position and provide the tax advice within the wider context. A Chartered Tax Adviser would be able to help you consider the tax consequences but they are unlikely to consider your wider financial position and objectives. Unless your solicitor is an expert on Inheritance tax planning and property trust taxation please do not rely on their guidance alone.
Steve Martin CFPCM
Smart Financial Planning