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Where Taxpayers and Advisers Meet

Trust settlor not renting

Rent free settlor in residence
Posts:3
Joined:Tue Sep 14, 2021 6:07 pm
Trust settlor not renting

Postby Rent free settlor in residence » Tue Sep 14, 2021 6:29 pm

Ten years ago I settled the family house in a Discretionary Trust. The trustees are myself, my wife, and 4 adult children. I and my wife continued to, and still, live in the house and neither of us pay rent to the trust. Does this mean that when I die the value of the housewill be treated as my estate with the value over 325000 subject to IHT, but if my wife is still alive, will it be the value over 650000 to which IHT applies?

It may be of no relevance but the Trust will be paying IHT (at I think 6%) next year on its ten anniversary.

AGoodman
Posts:1286
Joined:Fri May 16, 2014 3:47 pm

Re: Trust settlor not renting

Postby AGoodman » Wed Sep 15, 2021 12:48 pm

Yes, you have a reservation of benefit so the asset you put in (be it the whole or one half of the house) remains within your estate and is subject to IHT on your death.

If you predeceased your wife, your nil rate band will be £325,000 and anything above this will be at risk of IHT - but anything you leave to your wife would be exempt. The difficulty is that the house cannot be left to her in a way that would qualify for the exemption so if the value of the (share or whole) house that you settled is over this, tax will be payable.

The trust is also subject to the 10 yearly charge.

Settling your home is generally a bad idea - there may be a benefit for care home costs but probably isn't. The inheritance tax position is poor. I suspect a lot of these trusts have been missold.

Oh, you also need to register the trust with HMRC by October 2022 under the Trust Registration Scheme.

Rent free settlor in residence
Posts:3
Joined:Tue Sep 14, 2021 6:07 pm

Re: Trust settlor not renting

Postby Rent free settlor in residence » Sat Sep 25, 2021 4:42 pm

Thank you for your reply. However having just discovered HMRC’s IHT relief for those who have, prior to death, possessed: “A ‘residential property interest’” which according to HMRC means “an interest in a dwelling-house which has been the person’s residence at a time when their estate included that, or any other, interest in that dwelling-house."

I purchased the house over 30 years ago and settled it in a Discretionary Trust in 2012. I have continued to live in it and intend to continue doing so. My wife has lived with me throughout these years, and my will leaves “all” to her. The trust deed has a provision requiring the trustees (myself, my wife, and adult children) to permit me and my wife to live in the house until we no longer wish, or are unable, to do so. Is this the sort of residential property interest which will let my executors enjoy a nil rate band of 325000 plus 175000 (the current additional exemption) and pay no IHT if the value of my estate (house and some cash) does not exceed 500000?

maths
Posts:8283
Joined:Wed Aug 06, 2008 3:25 pm

Re: Trust settlor not renting

Postby maths » Tue Sep 28, 2021 3:42 pm

AG has given a pretty comprehensive answer to your question with which I agree.

As he comments, the element of your house which you originally settled is a gift with reservation and its value at the date of your death forms part of your estate for IHT purposes.

At the date of your death you will not own a so-called residential property interest and so in principle your estate is not entitled to the RNRB, £175K. However, it may be available under the downsizing rules. This will depend upon how much of your estate (ignoring the house in trust, assuming your settled 100%) you leave to lineal direct descendants (basically, children and g'children).

Any entitlement on your death to your spouse's unused (if any) NRB and RNRB assumes she dies first.

maths
Posts:8283
Joined:Wed Aug 06, 2008 3:25 pm

Re: Trust settlor not renting

Postby maths » Tue Sep 28, 2021 3:50 pm

AG is a trust expert and may comment further.

I wonder if it would make sense to appoint the property back out to you prior to the 10 year anniversary date in 2022?

No CGT charge should arise and any IHT exit charge may be relatively small.

Rent free settlor in residence
Posts:3
Joined:Tue Sep 14, 2021 6:07 pm

Re: Trust settlor not renting

Postby Rent free settlor in residence » Tue Sep 28, 2021 6:20 pm

Thank you for the additional advice.
I now know that my estate is not entitled to benefit from RNRB. Regardless of whether my right to remain resident in the property qualifies under the extremely complex RNRB rules, that relief apparently is available only if the property has been transferred after 2015 when the RNRB provisions came into force. The house therefore having been transferred three years earlier will be treated as part of my estate and IHT will be payable on its value over 325000. (I cannot leave the house to my wife to benefit from her nil rate band, as it is owned by the trust).
Therefore it seems, as Maths suggests, that the only way for my estate to benefit from my wife’s nil rate band of 325000 will be for the trust to pass the house back to me (or preferably to me and my wife jointly) thereby providing my estate with a nil rate band of up to 650000.
I am a beneficiary under the trust deed, but as real property is involved, I expect a formal conveyance and registration in the Land Registry will be required.
With regard to the tenth anniversary tax payment, I suspect the trust will have to pay the 6% IHT regardless of whether it disposes of the property now or after the tenth anniversary. A few months ago when I was looking into the tenth anniversary provisions I am fairly certain that I found somewhere that the house would have to be sold out of the trust within three months of the anniversary if the ten year period is not to start mounting up again.


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