First time buyers have found it increasingly difficult to get on the property ladder and the “Bank of Mum and Dad” or the “Bank of Grandma and Granddad”, have been heavily relied upon. Whilst it’s only natural to want to help our children and their children, benefactors should be aware of potential traps of gifting a deposit to the individual personally and a trust is definitely worth consideration.
Whilst the idea of a trust has long been associated with the very wealthy, they shouldn’t be overlooked as a useful means of helping loved ones to get on the property ladder.
For parents or grandparents who hope to ring fence wealth for a loved one’s future, putting money into a trust, instead of outright gifting, can protect against the risk of funds being inappropriately spent by young beneficiaries or lost because of failed relationships, whilst also acting as a way to engage in inheritance tax (IHT) planning for parents and grandparents.
How can I make sure my children or grandchildren have a home deposit via a trust?
Parents or grandparents often find a trust an attractive option as it means they don’t lose control of the funds altogether. So, it’s possible to put money into a trust for children and grandchildren to purchase a first home but remain as the trustee so that you decide how and when that money is distributed.
A really attractive thing about a trust is that a parent or grandparent can decide the rules of its management, for example the beneficiary could receive the funds at a certain age. However, it is up to the trustees to make decisions about and administer the trust assets once they are inside the trust.
The trust can also pass-through generations as they can last up to 125 years, and therefore both parents and grandparents can use it to pass on wealth to future children or grandchildren.
Can I mitigate IHT by using a trust?
Currently, the maximum which can be placed into a trust by the Settlor, without incurring an immediate tax charge is £325,000, (assuming no other gifts into another trust or chargeable lifetime transfers have been made in the last seven years). A couple could transfer up to £650,000 in this way.
With regard the parents’ or grandparents’ IHT positions, placing assets into a trust can remove them from the taxable estate, avoiding the 40% IHT charge although this needs to be done at least seven years prior to the donor’s death.
The seven-year clock starts ticking as soon as the assets are placed in a trust, although funds can be added in stages rather than as one lump sum. This would utilise the tax-free threshold for seven years, but after this time the exercise could be repeated.
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There may be additional administrative processes needed when using trusts, such as regular tax returns and potentially having to register with the Trust Registration Service, but any administrative cost may be a price worth paying for some in order to retain a level of control and ultimately protect the assets against bad decisions and stumbles which young people can often encounter.
Placing a house deposit in a trust will not only protect your money from HMRC with regards IHT, but also give you peace of mind that family fall-outs, relationship breakdowns or irresponsible spending may have reduced the funds you are giving.
There are many types of trusts, and some have extremely complicated tax rules which is why you should always consult an expert before you make any decisions in this area.
If you’d like advice about how you can assist your children or grandchildren to get on the property ladder whilst potentially saving IHT at the same time. Please get in touch if you'd like to know more.
