Frequently Asked Questions on Trusts

Q: I want to buy a house for my children, where they can live rent-free. What’s the best way to do this?

Garner & Hancock can advise you on how to save Capital Gains Tax (CGT) when buying a second property for your children. A legitimate route still exists (unless closed in a future budget) that allows you to purchase and later sell a property without incurring CGT—while preserving your full exemption on your own home.

Why Set Up a Trust?

With rising property prices making home ownership difficult for young adults, many parents are exploring trusts as a way to help their children avoid the rental market and save for a deposit. While “trust” may sound expensive or exclusive, it’s increasingly seen as a practical tool, much like life insurance, and is relatively affordable to arrange.

Garner & Hancock can guide you through the process step by step, offering bespoke advice tailored to your family’s needs.

Think “Trust” Before Buying a Property

Before purchasing, speak to us about setting up a formal written trust—often with one or both parents named as trustees. Typically, you loan the deposit to the trust, which then takes out the mortgage. Your IFA should be informed so they can source the right mortgage product. Mortgage lenders may request a guarantee, which we can help review.

Types of Trusts

• Life Interest Trust: Names a single child as beneficiary with a right to income from the property.
• Discretionary Trust: Allows multiple beneficiaries. While there’s no automatic right to income, it can be structured to provide it. Beneficiaries may live rent-free as life tenants.

Discretionary trusts offer flexibility—e.g., one child may occupy the property during university, then another later. There’s no limit to how often occupancy changes, provided the terms allow rent-free use.

How Do CGT Savings Work?

Each beneficiary can trigger their own Principal Private Residence Relief when they move in. As long as the property is continuously occupied by a named beneficiary, CGT is wiped out on sale. Your own home’s CGT exemption remains unaffected. No income tax is due on sale—but you must not charge rent during occupancy.

What If My Children Move Out?

You must sell within 18 months to avoid CGT liability. During this window, you may let the property to tenants without affecting the exemption. Beyond 18 months, CGT may apply.

Can I Use a Trust If I’ve Already Bought the Property?

Yes. In some cases, an “implied trust” may apply—even without a formal deed—if the arrangement mirrors trust conditions. HMRC will assess whether the setup operated like a trust in practice.

Inheritance Tax on Trusts

If you loan money to the trust (e.g., a deposit), it doesn’t trigger IHT unless the loan exceeds the £325,000 threshold. Amounts above this may incur a 20% IHT charge.

Can We Rent Out the Property?

Yes, but rental income is taxable.

• If rent is paid to the trust: Register the trust with HMRC for self-assessment.
  • Life Interest Trust: 20% tax after expenses.
  • Discretionary Trust: 45% tax after expenses.
• If rent is paid to the child: They must register for self-assessment and can claim expenses. If they earn below the personal allowance, they may reclaim tax.

Tip: Write to HMRC to confirm your child need not file a return if income is below the threshold.

What Happens If a Parent Trustee Dies?

New trustees can be appointed and the trust continues. If the trust is structured for inheritance, standard IHT rules apply.

Are There Other Taxes on Trusts?

• Trusts owning property may face a 10-year IHT charge of 6% on values above £325,000.
• Distributions may also trigger IHT, depending on the value transferred over the past decade.
• Gifting to a trust may avoid the 10-year charge, but special rules apply.

What Are My Duties as a Trustee?

Trustees must:

• Act in the best interest of the trust
• Keep accurate records
• Protect trust assets
• File tax returns and pay any due tax

We recommend reviewing the Government’s guide for trustees—it’s clear, practical, and free.

How Garner & Hancock Can Help

We offer expert advice on:

• Creating and administering trusts
• Trustee guidance and compliance
• Asset distribution
• Trust taxation and annual returns

Always seek specialist tax advice from an accountant and consult an experienced IFA for financial planning.

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