In the second in our Myth Busters series, Colin Glass (Partner in our Private Wealth team) looks at the misconceptions that persist around gifting your family home.
The Family Trust False Promise
As the Roman Poet Virgil wrote over two millennium ago, “Trust not too much to appearances”, although I doubt that he was referring to family trusts all those years ago.
All too often we come across clients who, for one reason or another, were advised to place their family home into a trust. This was usually on the premise that this would protect the value of the home from the impact of care home fees or inheritance tax. Unfortunately, as many families found out to their cost several years later, placing your property into a home, whilst continuing to live in it, neither protects it from the impact of care home fees nor takes the value of the home outside of the scope of inheritance tax.
Potential challenges to family trusts for care home fees and taxes
The reason why gifting a property into a trust might fail so far as care home fees are concerned, is that it will be deemed as deliberately depriving yourself of an asset. In that case, local authorities have the power to deem that you will be treated as still owning your property when it comes to assessing care home fees.
So far as the impact on inheritance tax is concerned, the value of your home will be brought back in the calculation of your estate as it will be caught by the Gift With Reservation of Benefit Rules (GWROB). These rules basically state if you give any asset away, whether property, cash or shares, and reserve or receive a benefit from that gift, the gift will fail for Inheritance Tax purposes and the full value of the gift will be taxable. Living at a property rent free is deemed to be a benefit.
However, on a side issue, as far as the calculation of Capital Gains Tax is concerned, the gift will be treated as valid, and your loved ones may face a Capital Gains Tax liability which they might otherwise have avoided as currently there is a Capital Gains uplift on death.
How the use of trusts can adversely effect you
The gifting of your property into a trust may have an adverse effect on the impact of the exemptions from Inheritance Tax. This is because you will lose the valuable additional residence nil rate band which was introduced back in 2017. Depending upon the value of the property, when the property is gifted into the trust, there might be a lifetime inheritance tax charge, chargeable at the rate of 20%.
It is for the reasons above that I misquoted Virgil, as the appearance, benefit and use of trusts can be misleading. Having said that, in certain circumstances, trusts can be a useful tool in estate planning.
A Solution to GWROB issues
In order to avoid getting caught by the GWROB rules, it is possible to gift the asset away so long as you do not reserve any benefit. For example, if your financial circumstances allow, by paying a full market rental for the rest your life, you can avoid the GWROB rules. After a period of seven complete calendar years, the value of the asset given away will fall out of the value of your estate, whether given to a beneficiary absolutely or via a trust.
There are tax implications on the recipient although these fall outside the scope of this article – look out for other insights from our team on this and other issues.
For more information concerning the use of gifts and trusts in estate planning, please contact Rhea Rhugani, Colin Glass or Vincenzo Mazzone in our Private Wealth team.
The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.
