Can You Put A Rental Property In A Trust?

A trust is a legal mechanism that allows assets such as a property to be managed and looked after by people known as Trustees for the benefit of people known as beneficiaries. 

The answer to this question is yes, you can put a rental property in a trust, and it does not matter how long you have owned the property. 

You can dispose of property via a Will trust, which is created in your Will and becomes active upon your death. 

Alternatively, you can dispose of property via a lifetime trust, which is established during your lifetime. It is lifetime trusts that we will concentrate on within this blog. 

Why Put A Rental Property Into A Trust?

Trusts can be useful for protecting a property portfolio and are often used for inheritance tax planning. 

They are also useful to:

• Control and protect assets.
• Pass on assets when you’re still alive.
• Provide a solution when someone is too young to manage their affairs.
• Provide a solution when someone does not have the mental capacity to manage their affairs.
• To potentially reduce inheritance tax liability.

Benefits Of Using A Trust For Property

There are also an array of benefits associated with using a trust for property. These include:

1. Inheritance tax planning
2. Avoiding probate
3. Flexibility 
4. Asset protection

1. Inheritance Tax Planning 

There are many types of trusts, and all trusts are taxed differently. Consideration must be given by Trustees to income tax, capital gains tax liabilities and inheritance tax. 

When transferring a rental property into a trust, inheritance tax is due at the time of the transfer unless specific criteria are met. If the value of the property (together with the value of any gifts made in the previous seven years) exceeds the inheritance tax threshold of £325,000, inheritance tax at 20% is due on the loss to your estate above that threshold. 

Therefore, if you were to transfer a rental property worth less than £325,000 into a trust, there would be no inheritance tax to pay at the point of transfer.

Irrelevant of the value of the property, if you survive the transfer by 7 years, the value of the property will no longer form part of your estate when calculating inheritance tax upon your death. Therefore, no further inheritance tax would be due. This is, therefore, a very good inheritance tax planning tool. 

However, if you die within seven years of making the transfer, the full rate of inheritance tax (currently 40%) would be due. 

Placing a rental property in trust would not be suitable if you still want to receive the rental income yourself. This would be classed as a ‘gift with reservation of benefit’, and the market value of the property at the time of your death will form part of your estate upon your death, even if you have survived the transfer by seven years. 

In addition to the inheritance tax charges mentioned above, there are also potential inheritance tax charges due when assets are transferred out of a trust and upon every 10-year anniversary of the transfer.

These calculations can be complicated, so it’s best to speak to a legal professional.

2. Avoiding Probate

Depending upon what other assets you own personally, placing property into trust during your lifetime could potentially negate the need for probate after your death. 

This is because once you have placed a property into trust, you are no longer the legal owner, and the trust assets do not form part of your estate. They are instead owned by the trustees for the benefit of the beneficiaries.  

Avoiding probate will save money and will mean that the trustees are less restricted and can continue to rent or sell the property without the need for probate.

3. Flexibility 

Transferring rental property to a discretionary trust will provide trustees with greater flexibility when managing the property. 

Trustees would hold the property for the benefit of a class of beneficiaries, such as your children and grandchildren. 

It is down to the trustees to then use their discretion when deciding how to distribute income and capital. 

The trustees are free to decide which beneficiaries receive income or capital, how often they receive such payments and how much they each receive. 

For advice on how a trust could work for your circumstances, it’s important to speak to an experienced solicitor.

4. Asset Protection 

As trustees have discretionary powers, they can consider any changing circumstances of beneficiaries, changes in family structure, updated tax laws and more when deciding whether to make payments to any beneficiaries. 

Placing your rental property in a discretionary trust means that no single beneficiary is absolutely entitled to the income or capital. 

If your loved ones receive means-tested benefits, if they are potentially not ‘very good with money’, or if they are at risk of divorce, your trustees can tailor payments to these beneficiaries accordingly. 

The property would be protected from creditors if a beneficiary was made bankrupt or if they got divorced, and as no beneficiary is absolutely entitled to income or capital, being named as a beneficiary will not impact upon receipt of means-tested benefits.  

How We Can Help

Our team at Harding Evans contains expert trust and estate practitioners who are specialists in future planning. 

If you’re looking to set up a trust and discuss your options as a landlord, get in touch with our team to find out how we can assist you today.