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Where Taxpayers and Advisers Meet

Declaration of Trust

Joined:Wed Sep 02, 2020 11:43 am
Declaration of Trust

Postby coinbase » Mon Jun 07, 2021 10:01 am

My mother-in-law passed away in 2020. By a deed of trust set up in 1992, she left her house to my wife and me.
We discharged her mortgage in 1994. The house is currently valued at £220,000.

Land Registry was informed of the change of ownership in January this year and it has updated their records accordingly.
We now wish to set up another Declaration of Trust for the property in favour of our two adult children (and hope they survive us by seven years).
I'd like to know three things:

1. Was there any tax (IHT, SDLT or other) on the transfer of my mother-in-laws property, and
2. will there be any tax to pay on setting up a Declaration of Trust for our children, and three
3. would it be better to gift the property to our children?

Thank you.

Joined:Fri May 16, 2014 3:47 pm

Re: Declaration of Trust

Postby AGoodman » Mon Jun 07, 2021 7:16 pm

Your reference to seven years suggests that you think this is a good thing to do for inheritance tax. It isn't. The seven year period will not start running until you cease any benefit from the property, including living in it. While you receive any benefit it is called a reservation of benefit.

It is rarely a good idea to do inheritance tax planning with the family home because (a) it doesn't work and (b) it causes problems.

The two main problems you would have are:

- if your children sell the property (at your request or otherwise) they will have to pay capital gains tax on the gain in value - this is currently 28% and could (feasibly) increase as high as 40% in future.
- if you fell out with your children or they were divorced, their interest the property could be sold.

To illustrate this, when you sell MIL's house, the taxable gain will be the gain accruing since 1992, which is presumably substantial. If MIL had died owning the property, it would only be any gain accruing since 2020 when she died.

To answer your questions (assuming it was a simple bare trust rather than discretionary or MIL having a life interest)
- probably not - tax is usually based on beneficial ownership so you were already the owners. Any IHT would have been payable when MIL died on the basis it was still in her estate
- probably not - assuming you have lived in the house since you acquired it so can rely on PPR. As mentioned above, it would stay in your estate for IHT.
- it is mostly a formal distinction. Your children become the beneficial (effective) owners whether or not they become the legal owners. It would however save you having to register the trust for the HMRC trust register (the rules change March 2022)

Do not consider this without getting some proper advice as (to emphasise again) there is rarely any point to it.

Joined:Wed Sep 02, 2020 11:43 am

Re: Declaration of Trust

Postby coinbase » Wed Jun 30, 2021 1:56 pm

My thanks to you Mr AGoodman.

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