putting one's home into a trust for one's children

jcb48

 A friend of mine has recently lost her father-in-law. One of the 3 children who will inherit is desperate for the property to be sold. Another of the three children spent many years living at home, caring for the father and has no skills and no job and will be made homeless when this property is sold. The children have now found out that the property was put into trust for the children. The trustee now has dementia and is unable to act. Because the father paid no rent and there was no written agreement that he would continue to live in the home they are having to pay inheritance tax even though the value of the property is below the inheritance tax threshold. Is this right? Thanks.  Jill

Keep_pedalling

Well, they have found out one of the reasons for putting your own home in trust is nearly always a terrible idea.

Yes it is possible that doing this has created an IHT liability where non would be payable if it had not been put in trust. For starters if the trust was created before the introduction of the residential NRB that exemption is lost, and there is if the property was worth more than £325k there would have been a 10 year periodic charge.

The house would also never fall out of his estate as he continued to live there rent free.

These useless trust were often pushed by sharks using the fear of care fees to charge large fees to set them up.

GDB2222

jcb48 said:

 A friend of mine has recently lost her father-in-law. One of the 3 children who will inherit is desperate for the property to be sold. Another of the three children spent many years living at home, caring for the father and has no skills and no job and will be made homeless when this property is sold. The children have now found out that the property was put into trust for the children. The trustee now has dementia and is unable to act. Because the father paid no rent and there was no written agreement that he would continue to live in the home they are having to pay inheritance tax even though the value of the property is below the inheritance tax threshold. Is this right? Thanks.  Jill

It is possible that the advice given to FIL was negligent. It might be worth consulting a lawyer on this. 

jcb48

Thanks to the 2 commenters.  I think I have slightly got the wrong end of the stick.  My friend now tells me it is not inheritance tax but capital gains tax.  Any further comments?  I think they need independent 2 legal opionion ... 

Keep_pedalling

I would suggest they need an accountant who has the necessary qualifications to deal with trusts. 

poseidon1

jcb48 said:

Thanks to the 2 commenters.  I think I have slightly got the wrong end of the stick.  My friend now tells me it is not inheritance tax but capital gains tax.  Any further comments?  I think they need independent 2 legal opionion ... 

Would need to see the exact wording of the trust and when it was established ( before or after March 2006), since tax treatment changed substantially after that date.

If established before March 2006 and  trust stated father had an overriding life interest to occupy, with the house only passing to children following his death, then all house gains erased on father's death.

If trust established after March 2006, then CGT treatment will depend on whether trust continues beyond fathers death and to what extent the occupying child  was granted a formal right to occupy under the terms of the trust.

This could mean potentially 1/3rd of gain exempt under main residence exemption  flowing from the occupying beneficiary to trustees who would  face  primary obligation to settle cgt  before distributing proceeds. In this circumstance, there would be a question mark whether the occupying beneficiary receives the sole benefit of the partial CGT savings depending on trust wording.

As indicated by others, specific legal advice required from STEP qualified solicitor having regard to exact terms of trust, when established and how it was legally administered after inception up to its eventual termination.

If father's estate was never in danger of being in IHT territory, certainly could be indication that trust was cynically missold.

Marcon

poseidon1 said:

jcb48 said:

Thanks to the 2 commenters.  I think I have slightly got the wrong end of the stick.  My friend now tells me it is not inheritance tax but capital gains tax.  Any further comments?  I think they need independent 2 legal opionion ... 

Would need to see the exact wording of the trust and when it was established ( before or after March 2006), since tax treatment changed substantially after that date.

If established before March 2006 and  trust stated father had an overriding life interest to occupy, with the house only passing to children following his death, then all house gains erased on father's death.

If trust established after March 2006, then CGT treatment will depend on whether trust continues beyond fathers death and to what extent the occupying child  was granted a formal right to occupy under the terms of the trust.

This could mean potentially 1/3rd of gain exempt under main residence exemption  flowing from the occupying beneficiary to trustees who would  face  primary obligation to settle cgt  before distributing proceeds. In this circumstance, there would be a question mark whether the occupying beneficiary receives the sole benefit of the partial CGT savings depending on trust wording.

As indicated by others, specific legal advice required from STEP qualified solicitor having regard to exact terms of trust, when established and how it was legally administered after inception up to its eventual termination.

If father's estate was never in danger of being in IHT territory, certainly could be indication that trust was cynically missold.

...but possibly any claim might be time barred depending on when the trust was established?

Keep_pedalling

Marcon said:

poseidon1 said:

jcb48 said:

Thanks to the 2 commenters.  I think I have slightly got the wrong end of the stick.  My friend now tells me it is not inheritance tax but capital gains tax.  Any further comments?  I think they need independent 2 legal opionion ... 

Would need to see the exact wording of the trust and when it was established ( before or after March 2006), since tax treatment changed substantially after that date.

If established before March 2006 and  trust stated father had an overriding life interest to occupy, with the house only passing to children following his death, then all house gains erased on father's death.

If trust established after March 2006, then CGT treatment will depend on whether trust continues beyond fathers death and to what extent the occupying child  was granted a formal right to occupy under the terms of the trust.

This could mean potentially 1/3rd of gain exempt under main residence exemption  flowing from the occupying beneficiary to trustees who would  face  primary obligation to settle cgt  before distributing proceeds. In this circumstance, there would be a question mark whether the occupying beneficiary receives the sole benefit of the partial CGT savings depending on trust wording.

As indicated by others, specific legal advice required from STEP qualified solicitor having regard to exact terms of trust, when established and how it was legally administered after inception up to its eventual termination.

If father's estate was never in danger of being in IHT territory, certainly could be indication that trust was cynically missold.

...but possibly any claim might be time barred depending on when the trust was established?

And the likelyhood that the seller of the trust was not a regulated solicitor and the company has long since vanished. 

jcb48

Thanks to all who commented to help.  Much appreciated @Keep_pedalling @poseidon1