Property trusts are sometimes presented as a simple, low-risk way to protect your home and reduce inheritance tax. In reality, there are significant risks that you should consider carefully before proceeding. Here is what the small print does not always tell you.
Risk 1: Losing Your Mortgage Options
Most residential mortgage lenders will not lend against a property held in trust, or will impose significantly more restrictive terms. If you have an existing mortgage, your lender's consent is required before transferring the property into trust — and many lenders will refuse. This can leave you unable to remortgage or release equity when you need to.
Risk 2: Unexpected Tax Charges
Discretionary trusts face a 10-year anniversary charge of up to 6% of the trust's value, and an exit charge when assets leave the trust. If the property value exceeds the nil-rate band (currently £325,000) at the point of transfer, an immediate 20% IHT charge may apply. These charges are rarely mentioned in trust scheme promotions.
Capital gains tax private residence relief may be lost or restricted once a property is held in trust. Trustees pay CGT at 24% on residential property gains — significantly higher than the rate for individuals in many cases.
Risk 3: The Gift with Reservation Trap
If you continue to live in the property after transferring it into trust, HMRC treats it as a 'gift with reservation of benefit'. The property remains in your taxable estate — the trust achieves nothing for inheritance tax purposes. To avoid this, you would need to pay a full market rent to the trust, which most people are unwilling or unable to do.
Risk 4: Irrevocability
With an irrevocable trust, you cannot simply change your mind. Reversing the arrangement requires the consent of all beneficiaries and, in some cases, a court order. If your circumstances change — a divorce, a change in family relationships, or a change in your financial needs — you may find yourself unable to adapt.
Weighing Up the Risks
None of these risks means that a property trust is never appropriate — but they do mean that it should only be used where it is genuinely the most suitable solution for your specific circumstances. A specialist solicitor can help you weigh up the risks and identify whether a trust, a will, or another arrangement is the right approach.