Put property into Trust for Children, avoid IHT?

sunflower_lass

My father is considering putting the family home into Trust for his 3 children, as a method of avoiding IHT.

The house is worth £800k. Both he and my Mum want to live there for the foreseeable future (they're in their early 70's and fit and well!)

Can anyone advise if this is a good idea, or is there a better route?

Us 3 kids (in our 20's) get on very well and have little concern about falling out!

Mojisola

sunflower_lass wrote: »

My father is considering putting the family home into Trust for his 3 children, as a method of avoiding IHT.

The house is worth £800k. Both he and my Mum want to live there for the foreseeable future (they're in their early 70's and fit and well!)

Read up on "gift with reservation".

https://www.hmrc.gov.uk/manuals/ihtmanual/ihtm04071.htm

purdyoaten

sunflower_lass wrote: »

My father is considering putting the family home into Trust for his 3 children, as a method of avoiding IHT.

The house is worth £800k. Both he and my Mum want to live there for the foreseeable future (they're in their early 70's and fit and well!)

Can anyone advise if this is a good idea, or is there a better route?

Us 3 kids (in our 20's) get on very well and have little concern about falling out!

With most gifts the donor no longer retains the benefit. If they do, most would argue that there was never really a gift at all. HMRC would consider this to be the case in this instance. For IHT purposes, the house would remain in the estate as if nothing had ever happened.

zygurat789

sunflower_lass wrote: »

My father is considering putting the family home into Trust for his 3 children, as a method of avoiding IHT.

The house is worth £800k. Both he and my Mum want to live there for the foreseeable future (they're in their early 70's and fit and well!)

Can anyone advise if this is a good idea, or is there a better route?

Us 3 kids (in our 20's) get on very well and have little concern about falling out!

This is not a DIY area of tax planning, he needs to consider professional advice.
If he reads up a bit he will see many many instances where doing something like this actually costs more in tax than if it had been left alone.

purdyoaten

zygurat789 wrote: »

This is not a DIY area of tax planning, he needs to consider professional advice.
If he reads up a bit he will see many many instances where doing something like this actually costs more in tax than if it had been left alone.

Unfortunately he may not have to go much further than this forum.

antrobus

Giving your home away and continuing to live in it
You can continue to live in your home as your primary residence after giving it away, provided you pay a market rent to the new owner. Bear in mind that the new owner may have to pay Income Tax on the rent you pay them.
If you don't pay a market rent, the gift will be considered a 'gift with reservation of benefit' and the house may be subject to Inheritance Tax.
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm

kidmugsy

It's notorious that it's fairly straightforward to avoid IHT on cash (as long as you live for seven years after making the gift) and very difficult on owner-occupied property.

xylophone

Bear in mind that the new owner may have to pay Income Tax on the rent you pay them.

And in this case, "the new owner" would be the trust - there are special rules relating to the taxation of trusts.... http://www.hmrc.gov.uk/trusts/types/

antrobus

xylophone wrote: »

And in this case, "the new owner" would be the trust - there are special rules relating to the taxation of trusts.... http://www.hmrc.gov.uk/trusts/types/

There are indeed. Although I'd have thought that the payment of market rent in itself would be a 'bad idea' as it creats a tax liability where none currently exists.

kidmugsy wrote: »

It's notorious that it's fairly straightforward to avoid IHT on cash (as long as you live for seven years after making the gift) and very difficult on owner-occupied property.

Actually it's notorious that it's fairly straightforward to avoid IHT on cash irrespective of how long you live. You just keep quiet about it.:)

00ec25

transferring the property to a "trust" and then continuing to live in it is a very bad idea as this more obvious route out of IHT was closed long ago

http://www.hmrc.gov.uk/trusts/iht/transfers-in.htm

If you continue to benefit from a gift in a trust
If you make a gift into any type of trust but continue to benefit from the gift - for example, you give away your house but continue to live in it - you will pay 20 per cent on the transfer and the gift will still count as part of your estate. These are known as gifts 'with reservation of benefit' - find out more by following the link to 'Passing on your home to your children' below.

This creates a situation where there are two possible Inheritance Tax charges if you die:
a charge when you transfer the gift into a trust
a charge to your estate when you die - because the asset is still considered part of your estate
To avoid double taxation, only the higher of these charges is applied - in other words you won't ever pay more than 40 per cent Inheritance Tax.

As I'm sure you now appreciate IHT planning is not suitable for a DIY approach where it is certain (as in your case) that the size of the estate will be above the IHT threshold. The usual advice is therefore to pay for a professional - there is an organisation whose members specialise in this called STEP - it is better to use one of them rather than any old high street solicitor or accountant - below is the page from HMRC advising on "Passing on your home to your childre" incl links to the law society and STEP

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm

You�ll find some links below to professional organisations - though not all professionals are registered with them.
Find a solicitor on the Law Society of England and Wales website (Opens new window)
Find a solicitor on the Law Society of Northern Ireland website (Opens new window)
Find a solicitor on the Law Society of Scotland website (Opens new window)
Get help from the Society of Trust and Estate Practitioners - STEP website (Opens new window)