03/02/2026
We often have clients enquiring about putting their home into trust or where they have already done so and need help. Getting this wrong can be very costly.
So we thought it might be helpful to write an article about why this can be such a bad idea.
*This is intended as a summary piece and should not be relied on for any specific scenario. In all cases you should always seek specific legal advice for your circumstances.*
Putting your home into Trust.
If the settlor (the person creating the trust) also becomes the life tenant, or continues to live in the property without paying full market rent, they are still enjoying the trust property in substance.
This is critical for tax purposes.
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Inheritance Tax: Gift with Reservation of Benefit (GWR)
(a) The GWR Rules
Under Finance Act 1986, s.102, a transfer is a gift with reservation of benefit if:
• the settlor gives away an asset, but
• continues to enjoy a benefit from it.
Living in a house after placing it into trust without paying a full market rent is a classic example of a GWR.
(b) Application to a Trust
If a settlor:
• transfers their home into a trust, and
• continues to live there rent-free or at undervalue,
then:
• the transfer is not effective for IHT purposes, and
• the property is treated as still part of the settlor’s estate on death.
So:
• No IHT mitigation is achieved, even if the trust was created many years earlier.
• The trust fails in its main estate-planning purpose.
(c) Pre-Owned Assets Tax (POAT)
If GWR rules are somehow avoided (e.g. via complex structuring), Schedule 15 Finance Act 2004 (POAT) may apply instead, imposing an annual income tax charge based on the rental value of the property.
So the settlor is taxed anyway.
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Capital Gains Tax Problems
(a) Loss of Principal Private Residence (PPR) Relief
If an individual owns and lives in their home:
• CGT is usually avoided on sale due to Principal Private Residence relief (TCGA 1992, s.222).
However, once the house is transferred into a trust:
• the trust, not the individual, owns the property;
• PPR relief may be unavailable, unless very narrow conditions are met (e.g. certain disabled beneficiary trusts).
If the property is later sold:
• CGT is charged on the trust, at the trust rate (currently up to 28%) on residential property,
• with only a small annual exemption, much lower than for individuals.
(b) No CGT “Uplift” on Death if GWR Applies
Because a GWR means the property is still treated as part of the settlor’s estate:
• there may be a CGT uplift on death,
• but this merely confirms that no effective lifetime planning occurred.
If the trust continues after death, future gains will still be taxable within the trust regime.
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Practical and Legal Unsuitability
Putting all this together, a trust is unsuitable where the settlor lives in the property because:
1. IHT planning fails due to GWR rules.
2. Potential POAT income tax charges may arise annually.
3. CGT exposure increases, with potential loss of PPR relief.
4. The settlor has effectively:
o given up legal ownership,
o gained no tax advantage,
o and possibly worsened their tax position.
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Local Authority Care Home Fee Assessments - Deprivation of Assets
(a) What Counts as Deprivation?
Deprivation occurs where:
1. A person deliberately reduces their assets, and
2. A significant operative purpose was to avoid or reduce care charges.
Placing a house into a trust is a classic red flag, particularly where:
• the settlor continues to live in the property,
• the trust was created while the settlor was older or had foreseeable care needs.
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(b) Continued Occupation Is Highly Relevant
If the settlor:
• lives in the house both before and after the transfer, and
• gains no commercial benefit from the arrangement,
local authorities are likely to conclude:
• the settlor still treats the property as their home, and
• the transfer was artificial for means-testing purposes.
This mirrors the GWR analysis in tax law and reinforces the deprivation argument.
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Consequences of a Deprivation Finding
If a local authority decides that transferring the home into a trust was a deprivation of assets, it can:
(a) Treat the Property as Notional Capital
Under s.70 Care Act 2014 and Annex E:
• the authority can assess the settlor as if they still own the property,
• meaning they are treated as a self-funder regardless of the trust.
So:
• no protection from care fees is achieved, even if legal ownership has changed.
(b) Pursue the Trustees or Beneficiaries
Where assets have been transferred to a third party:
• the local authority may seek recovery of care costs from:
o the trustees, or
o the beneficiaries,
under s.70 Care Act 2014.
This can place trustees in a difficult legal and personal position.
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Timing Does Not Guarantee Safety
A common misconception is that:
“If the trust was set up years before care was needed, it’s safe.”
This is not correct.
Local authorities look at:
• the foreseeability of care needs, not merely timing.
Given that:
• ageing itself makes care needs foreseeable,
• especially where the settlor was already retired or elderly,
an IIP trust of the settlor’s home is highly vulnerable to challenge.
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Interaction with a Trust Structure
An Interest In Possession (IIP) trust may be especially weak for care fee planning because:
• the settlor often remains the life tenant, reinforcing continued benefit;
• there is no genuine loss of enjoyment or control;
• the arrangement looks contrived when assessed in substance, not form.
Local authorities are directed to consider the reality of the arrangement, not just the legal paperwork.
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Comparison with Will Trusts
By contrast:
• an IIP trust created on death (e.g. a spouse life interest trust in a will):
o does not involve deprivation by the deceased,
o is generally respected for care fee purposes for the survivor,
o because the survivor never owned the deceased’s share outright.
This highlights why lifetime IIP trusts are far more problematic.
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When Trusts Are Appropriate
Trusts may be suitable where:
• the settlor does not continue to benefit from the property;
• for example, providing a life interest for a surviving spouse under a will;
• or where the property is an investment asset, not the settlor’s home.
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Summary
A Trust is typically unsuitable where the settlor continues to live in the property not only because of tax inefficiency, but also because:
1. Local authorities are likely to treat the transfer as deprivation of assets.
2. The property may be treated as notional capital, defeating the planning.
3. Trustees or beneficiaries may face recovery action.
4. Continued occupation strongly undermines the argument that the asset has genuinely been given away.
Taken together with:
• GWR rules for IHT,
• Potential loss of PPR relief and increased CGT exposure,
a trust of a settlor-occupied home is usually ineffective, risky, and counterproductive.
