Deputy Prime Minister Angela Rayner’s tax affairs have come under scrutiny again this week as it was revealed she has split the ownership of her £650,000 constituency home with a trust administered by a law firm.
Putting assets in trust can offer many benefits, for example to reduce your inheritance tax bill or to create a legacy for loved ones.
Speculation mounted that Rayner’s arrangement may be related to inheritance tax as the property, which is her old home in her Ashton- under-Lyne constituency that she owned with her ex-husband, was valued at £650,000 – the joint IHT allowance for a couple.
However, she declined to answer questions about its purpose, which No 10 says is because of a court order.
It is understood this order relates to trust arrangements for her children, one of whom has special needs. It may not concern inheritance tax at all.
Meanwhile, Rayner is not the only person turning to trusts to handle their money.
Wealth managers have reported a recent rush of enquiries about how to put wealth in trust to get it out of the hands of the taxman, especially since news of an inheritance tax raid on unspent pensions from April 2027.
So how do they work – and could they help you cut your tax bill or offer other benefits to your family?
Bad optics: Deputy Prime Minister Angela Rayner (pictured) has split the ownership of her £650,000 constituency home with a trust administered by a law firm
What is a trust?
Trusts are a legal arrangement that allow you to hand over assets to be managed for the benefit of one or more people.
You can of course just give away money or possessions as you like at any point, and if you live for seven years they will be lifted out of your estate for inheritance tax.
But some people choose to use trusts instead to retain some control over the assets, although they do not own them any longer.
They also might do so to protect the beneficiaries – for example from inheritance tax, or exploitation by others if they are vulnerable, or sometimes their own irresponsible spending habits.
A ‘settlor’ puts the assets, such as a property, into the trust, ‘trustees’ look after them and ‘beneficiaries’ ultimately receive them.
Does putting your home in trust beat inheritance tax?
A trust is a popular way to beat inheritance tax. You can put property or other assets into a trust set up for your loved ones.
If you survive for seven years afterwards, these fall out of your estate for inheritance tax purposes.
You can exert control over how assets in a trust might be used – for example you could stipulate beneficiaries can only access funds from a certain age or for particular purposes, such as university fees or buying a home.
However, you usually cannot continue to benefit yourself from what has gone into it.
That is why putting your own home into a trust does not tend to work. If you plan to carry on living in the home, it would be deemed a ‘gift with reservation of benefit’ by HMRC.
In other words you have not fully given it away because you are still getting use from it, which means it will remain liable for inheritance tax, unless you jump through hoops including paying market rent to live in it.
Do you even need a trust for IHT?
Although trusts are growing in popularity, be certain you are rich enough that your estate would attract inheritance tax before considering setting one up.
The basic threshold for inheritance tax – known as the nil-rate band – is £325,000, or if you are leaving a family home to direct descendants it’s £500,000 – double those figures if you are a couple. Trusts can be complex and setting them up requires financial advice and expense.
Every seven years you can transfer up to £325,000 individually, or £650,000 from a couple, into a discretionary trust tax-free.
On anything over that, you are charged 20 per cent of the value of assets being put in the trust (this is offset if you die and the seven-year rule kicks in, but cannot be reclaimed if you survive seven years).
Every ten years, there is a further 6 per cent tax charge on the excess over the nil-rate band.
‘Very few people go ahead with putting their main residence in trust for their beneficiaries once the difficulties have been explained to them,’ says Ian Dyall, head of estate planning at wealth manager Evelyn Partners.
‘Trusts add a layer of complexity to your affairs and often they come with additional administration and cost – including the cost to set up the trust and unwind it later,’ says Paul Davidoff, a partner at law firm Kingsley Napley.
The basic threshold for inheritance tax is £325,000, or if you are leaving a family home to direct descendants it’s £500,000 – double those figures if you are a couple
Will the inheritance tax rules change?
The Government could also change the rules in the future, removing any tax saving, Davidoff warns.
‘The result will be a complicated arrangement which has cost money to establish and administer, but without any tax advantage.
‘The more complex the arrangement that is required to save tax, the more likely it is that it will be affected by future tax changes.’
Protecting a special needs child
People who are vulnerable, for any number of reasons, might need spending decisions to be made on their behalf throughout their lives.
Unfortunately, they might also need protection from unscrupulous people who would exploit them.
You can set up a ‘discretionary’ trust during your lifetime or one that takes effect after your death, and tailor the rules to suit the person involved.
‘Some trusts for disabled adults or children receive special tax treatment,’ says Heather Rogers, founder of Aston Accountancy. ‘These are trusts for vulnerable beneficiaries.
‘There is no inheritance tax on creation of such trusts or ten-yearly charges as the idea is to accumulate funds to support the vulnerable beneficiary.’
You will want to take particular care in choosing trustees, including whether to be one yourself during your lifetime.
Any trustees should be clear on what you want – you should leave a ‘letter of wishes’ with your will – and be prepared to take on possibly onerous long-term responsibilities.
Get a solicitor with specialist experience to help you set up a trust with this goal. Charities relevant to your child’s needs might be able to provide recommendations and other advice.
Trying to avoid costly care fees
Some people try to put almost everything they own into trust including their home, to deplete their assets to the point where their local council will pick up any future care bill.
The hope is that if they give away their home in advance their family will get to keep it. Be warned, this is unlikely to work, and any firms that claim it can are best avoided.
If you need residential care, and your assets fall below the £23,250 threshold where your local council steps in to help, you will have to fill in a financial assessment and reveal what you gave away, via a trust or otherwise.
‘Giving away a property can be treated as a “deliberate deprivation” of one’s assets and the property might still be brought into account when considering some means-tested benefits,’ says Paul Davidoff.
There is no time limit on how far back your council can look into your affairs, and if it deems ‘deprivation of assets’ took place you can be charged for care as if you still owned your home.
Shelter a spouse after you’re gone
It is common in blended families for you to want a surviving spouse to have somewhere to live for the rest of their lives, but for your own children to inherit your property.
In this situation you can set up a ‘property life interest trust’, where your share of a family home – usually 50 per cent – would be placed into a trust after you are gone.
These typically give a spouse the right to remain in the property, including up until their death, but your share remains ring-fenced for your intended beneficiaries.
This kind of arrangement prevents widows and widowers from inheriting a home then changing their own wills to cut out stepchildren.
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