Should I Put My House in a Lifetime Trust?
- A lifetime trust transfers ownership of your house to a trust managed by trustees.
- Top Tip: You can put a house in a trust and continue to live in it.
- You won't enjoy tax benefits during your lifetime, but it may be tax-efficient in the management of your estate.
- A house you live in which belongs to a lifetime trust may still be considered when assessing your wealth and assets when the Local Authority decides how to fund your care.
What is a lifetime trust?
In most cases, placing your financial interests into trust will restrict your access to them. The beauty of a lifetime trust is that it doesn't restrict your access to the fund.
If you put your house in a lifetime trust it is protected against bankruptcy, divorce, and third-party claims; the trustees can look after the trust if you lose capacity, due to physical or mental illness or disability; and the house can be protected after you die, to be preserved for your beneficiaries.
Your home no longer belongs to you; it belongs to the trust, which allows you to live in it for the remainder of your lifetime. However, the local authority may count the house in a lifetime trust as an asset that could be sold to pay for your care and refuse to fund the care for you.
What is the difference between a lifetime trust and a Will trust?
A Will trust is set up in your Will and established upon your death. This means they offer no protection until you have died and the trust comes into effect. They are mainly used by couples who are tenants in common to place their share into a trust, rather than leaving it to their partner directly.
This means that both the surviving partner and the children of the deceased may be beneficiaries of the trust. For example, the surviving partner may have a 'life interest' allowing them to live in the home for the person's lifetime, but the share in the trust will benefit the named beneficiaries of the trust when the surviving partner dies.
If the surviving partner needs to go into long-term care, the share of the property held in the will trust may not count in the local authority's assessment. If the trust is set up correctly, they should only consider the share held by the surviving partner when assessing your care home fees.
How do I set up a lifetime trust?
Seek tax advice and legal advice on your trust options. A STEP professional is best qualified to advise on the tax and legal implications of various trust structures. You need to be completely sure, as the trust is usually irrevocable, and becoming a trustee is a serious responsibility.
Our panel solicitor can discuss your needs in a free 15-minute consultation. They will provide a quote for drawing up your trust document.
If you choose to go ahead after your free consultation, our panel solicitor will draw up and send you the trust document to consider. If you require, they will also write up a letter of instructions, setting out your wishes for the trust, for the current and future trustees.
The document must be signed by the person setting up the trust (the Settlor) and the people being appointed to manage it (the Trustees). They will then carry out a property transfer to the trustees.
If cash is being placed in the trust alongside the house, the trustees will need to open a bank account. If investments such as stocks and shares are being transferred to the trust, the trustees may need additional tax advice.
Paying professional trust administrators is expensive and often not cost-effective unless the assets in the trust are cash-generative enough to at least pay the administrators.
Do not appoint people as trustees who are not prepared to handle the administration. Failure to pay proper taxes will result in fines against the trust, which the trustees must pay.
Can I save tax with a lifetime trust?
This very much depends on the type of trust and the beneficiaries. Always seek professional advice, as it is not always cost-effective.
Capital assets placed in trust may be disregarded as part of your estate for inheritance tax purposes, as long as you live for more than seven years after establishing the trust and as long as you are not a beneficiary, nor benefiting from the assets.
If you continue to enjoy the benefit of living in the property, then HMRC will consider that you own the asset when calculating the inheritance tax due on your estate.
There are many different types of trust and each is treated slightly differently when it comes to taxation. Contact us for a free initial consultation to discuss your goals.
Inheritance tax implications
- When you transfer your capital assets into a lifetime trust you may face an immediate 20% charge on any balance worth more than the current nil-rate inheritance tax band (£325,000, including any gifts made in the previous 7 years).
- The trustees will have to submit tax accounts on HMRC and, if the trust is discretionary, pay a further 6% every ten years on the value over the nil-rate band.
- If you continued to live in the property then placing it in the trust would be a 'gift with a reservation of benefit', so it may be subject to inheritance tax as part of your estate when you die, as well. Your estate will no longer be able to claim the residential nil rate allowance, potentially increasing the inheritance tax paid.
Income tax implications
- Income tax is payable on any payments from the trust.
- There is an exit charge payable on assets that leave the trust.
Capital gains tax implications
- Capital gains tax is payable when assets are sold within a trust, or transferred to a beneficiary. This may also apply if the trust is liquidated.
- The annual allowance for capital gains is smaller for a lifetime trust than for an individual. Check the current year's allowance (2024-25: £3,000). There is tax relief on this rule if someone is disabled.
What's the difference between a lifetime fixed trust and lifetime discretionary trust?
Fixed interest trusts:
In a fixed-interest trust, the settlor specifies exactly how the trust property will be distributed.
Discretionary trusts:
In a discretionary trust, the trustees have ultimate discretion over how to handle the assets.
What are the advantages and disadvantages of a lifetime trust?
Pros
- Protect your property against bankruptcy, divorce, or third-party costs.
- You can retain complete control of the trust by appointing yourself as trustee.
- Discretionary trusts give the trustees freedom to administrate the trust as they fit, within the terms of the trust.
- Income tax purposes: As the private owner of an investment property or portfolio, you may be paying income tax at a higher rate. If the income is split between multiple beneficiaries, all or some of them may pay income tax on the distributions at their lower rate.
- Flexibility. Most lifetime trusts are revokable, allowing you to modify or dissolve the trust at any point in your life.
- You can avoid probate, bypassing the process for a swifter distribution of assets on your death.
- You can set terms and conditions under which assets are distributed, for example when someone reaches a certain age.
- You can set out what you want to happen after you die, choosing to distribute them all and dissolve the trust on death, or retain them in trust to be managed according to your terms.
- Privacy. A probated Will becomes a public document whereas a lifetime trust keeps the details of your estate private.
- You can include provisions for managing your affairs if you become incapacitated, avoiding court-appointed guardianship or deputyship.
- It's possible to use a lifetime trust to reduce estate taxes.
- You can include provisions for beneficiaries who are not yet old enough to inherit, or who have special needs.
- You can include provisions that mean money received by your children will be protected in the event of their divorce.
Cons
- Setting up a lifetime trust is often more expensive than a simple Will, due to the complex legal work involved.
- Trust administration can be complex and may be more hassle than probate.
- If you set up an irrevocable trust (you can't change it), you lose control of the assets and can't easily change the terms of the trust.
- If you set up a revocable trust, you won't enjoy any tax benefits during your lifetime. The assets held by the trust are considered part of your taxable estate. There may be tax benefits for the beneficiaries after your death.
- Additional costs of 'funding the estate' - the legal work involved in transferring the house, wealth, and assets to the trust can incur additional solicitor costs.
- If any assets are not properly and explicitly included in the trust, they may be subject to probate on your death.
- Your trust is only managed as well as the trustees can manage it. If they mismanage the trust for any reason, this can be difficult to rectify.
- Trusts are less susceptible to challenge than wills; however, beneficiaries or disinherited parties may be able to raise a legal dispute.
- Deprivation of assets. If the local authority thinks you've given away your assets (including your home) to avoid paying for care, they may refuse to pay for your care.
- You may retain the right to live in the property but any capital from the property now belongs to the trust. This restricts you from selling the property or borrowing against it and spending the proceeds freely.
- In a discretionary trust, the trustees may distribute the assets however they deem appropriate, per the terms of the trust (which is why it is so important to have the trust document drafted by experienced professionals). If you disagree with the trustee's decisions, there is often nothing you can do about it.
- Additional costs. You may end up paying more tax with a trust than without, which is why tax avoidance should never be the primary goal of a trust.
How much does a lifetime trust cost?
Legal fees for setting up a single lifetime trust usually cost a few thousand pounds. You should also be aware of the tax fees which will be involved.
Get in touch to book a free initial consultation with our lifetime trust solicitor, to discuss your goals and what kind of trust may be suitable. They will provide you with a tailored, no-obligation quote to complete the work.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
