Buying a house in a trust to avoid inheritance tax

tallac

I over heard a friend of a friend during a social event mentioning how he bought his house in a trust rather than his and his wife's name as this would mean if anything happened to both of them, then the house would be inherited to their kids without having to pay inheritance tax. I didn't get the opportunity to ask any questions but figured this would be easy to look into afterwards. However, I can't seem to find good, clear and easy to understand info on this.

I mentioned this to my parents who are looking to purchase a new home. Myself and my siblings have long long since flown away from the nest. However, my parents have asked me to look into this on their behalf if there's a way to legally avoid/minimise inheritance tax. So, if they purchase the house in a trust, does this help in anyway for us surviving children/grandchildren?

The only somewhat decent website I found was this: https://www.cashfloat.co.uk/blog/money-borrowing/buying-a-house-for-your-child

This seems to indicate buying in a trust is only works if the children are living in the house. This isn't the case in this instance so would this work? My parents are already tied in to using the myhomemoveconveyancing but they haven't purchased their new property yet (non-refundable money already paid to conveyancers but first house purchase fell through so the fees are carried over to their next house purchase).

Is there any basic information that can be shared on this to clarify the situation? Would they need to get proper financial advisors to get good advice? myhomemoveconveyancing seem like they'll do a reasonable job of a somewhat standard house purchase but don't come across like the best place to give advice for buying a house in a trust and the various options around.

Any thoughts or help on this please?

Mojisola

Will the estate of the last to go be more than £1m?

Keep_pedalling

Unless they are also paying full market rent to the trust then this counts as a gift with reservation of benefit, so will never fall out of their estate. The trust will also face capital gain issue when it is eventually sold.

tallac

Mojisola said:

Will the estate of the last to go be more than £1m?

It's possible.

Mojisola

tallac said:

Mojisola said:

Will the estate of the last to go be more than £1m?

It's possible.

It would be worth them giving money away now and hope to live for more than seven years.

theoretica

Over the decades the rules around trusts have tightened up - the government likes getting tax - and people trying to use them to avoid tax can actually find they need to pay more. 

GDB2222

Put as simply as possible, Inheritance Tax would be 40% of everything your parents leave over £1m. So, if they leave say £1.2m that’s £80k tax.

If the property is in a trust, there’s likely to be capital gains tax on any increase in value of the property between purchase and death. That could easily be a lot more than the inheritance tax, depending on property prices.

So, be careful not to concentrate on one tax and forget the others.

 It’s definitely possible to end up with a trust that doesn’t work for inheritance tax but still generates a capital gains tax bill. 

If you want to investigate this, be prepared to pay a lot of money in legal fees. If it were easy, everyone would be doing it.

Andthen07

GDB2222 said:

Put as simply as possible, Inheritance Tax would be 40% of everything your parents leave over £1m. So, if they leave say £1.2m that’s £80k tax.

If the property is in a trust, there’s likely to be capital gains tax on any increase in value of the property between purchase and death. That could easily be a lot more than the inheritance tax, depending on property prices.

So, be careful not to concentrate on one tax and forget the others.

 It’s definitely possible to end up with a trust that doesn’t work for inheritance tax but still generates a capital gains tax bill. 

If you want to investigate this, be prepared to pay a lot of money in legal fees. If it were easy, everyone would be doing it.

Are you sure, I thought the threshold was 325K.

Potential inheritance tax bill:

£200,000

Net estate value: £1,000,000

Assets above the inheritance tax threshold: £675,000

Less main residence nil rate band: £500,000

Inheritance tax rate: 40%

Emmia

Andthen07 said:

GDB2222 said:

Put as simply as possible, Inheritance Tax would be 40% of everything your parents leave over £1m. So, if they leave say £1.2m that’s £80k tax.

If the property is in a trust, there’s likely to be capital gains tax on any increase in value of the property between purchase and death. That could easily be a lot more than the inheritance tax, depending on property prices.

So, be careful not to concentrate on one tax and forget the others.

 It’s definitely possible to end up with a trust that doesn’t work for inheritance tax but still generates a capital gains tax bill. 

If you want to investigate this, be prepared to pay a lot of money in legal fees. If it were easy, everyone would be doing it.

Are you sure, I thought the threshold was 325K.

Potential inheritance tax bill:

£200,000

Net estate value: £1,000,000

Assets above the inheritance tax threshold: £675,000

Less main residence nil rate band: £500,000

Inheritance tax rate: 40%

I thought it was £325k each - so £650k nil rate for a couple...

GrumpyDil

Plus main property relief if you leave your residence to a direct descendant. 175k each partner in a couple so potential relief is 650k as above plus 350k= 1m in total.

https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

Keep_pedalling

GrumpyDil said:

Plus main property relief if you leave your residence to a direct descendant. 175k each partner in a couple so potential relief is 650k as above plus 350k= 1m in total.

https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

The interesting thing here is buying the house in trust means that don’t own a house, and although the house still forms a part of their estate for IHT purposes, it does not qualify for the RNRB so rather than save IHT this idiotic scheme could add £140k of IHT plus a nice chunk of CGT when the trust disposes of the house.