How To Transfer Property Into An Interest In Possession Trust

At Blackstone Solicitors, we understand that transferring property into a trust can feel daunting. An Interest in Possession (IIP) trust is a type of trust that grants the beneficiary the right to enjoy the income from or use of the trust property during their lifetime. While setting up an IIP trust can help with estate planning, asset protection, and tax efficiency, it’s crucial to understand the steps involved in transferring property into such a trust. In this article, we’ll explain what an IIP trust is, why you might consider using one, and how the transfer process works in England and Wales.

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What is an Interest in Possession Trust?

An IIP trust is a legal arrangement where the beneficiary, known as the “life tenant,” has the right to receive income generated by the trust assets or live in the property owned by the trust. This right continues for the beneficiary’s lifetime, after which the property usually passes to other beneficiaries, known as the “remaindermen.” The trust is managed by trustees, who are responsible for ensuring the assets are managed in line with the terms of the trust.

These trusts are commonly used for estate planning, especially when parents wish to provide for a surviving spouse while ensuring assets are ultimately passed down to their children. For example, an IIP trust might allow a surviving spouse to live in a family home for the rest of their life, with the property then being passed to the children once both parents have passed away.

Why Transfer Property into an Interest in Possession Trust?

There are several reasons why someone might choose to transfer property into an IIP trust:

1. Estate Planning: IIP trusts can help to manage the distribution of assets and provide for multiple beneficiaries. By using such a trust, you can ensure that assets like property are safeguarded for future generations.
2. Inheritance Tax Planning: When structured correctly, an IIP trust may offer some inheritance tax (IHT) benefits. It can help to reduce the size of your estate for IHT purposes, potentially saving significant amounts in tax.
3. Protection of Assets: By placing a property into an IIP trust, it is protected from being sold off due to the life tenant’s debts or other financial difficulties.
4. Providing for Dependants: If you have dependants with specific needs, an IIP trust can ensure they are taken care of, allowing them to live in a property or benefit from its income.

Before proceeding, it’s essential to understand the legal and financial implications. Consulting with an experienced solicitor, like those at Blackstone Solicitors, will help you make the right choice for your circumstances.

Steps to Transfer Property into an Interest in Possession Trust

Transferring a property into an IIP trust involves several key steps. Here’s a step-by-step guide to help you understand the process:

1. Obtain Legal Advice

Before transferring property into a trust, it’s advisable to consult with a solicitor who specialises in trusts and estate planning. They can assess your specific needs, explain any potential tax implications, and guide you through the process. At Blackstone Solicitors, we offer bespoke advice to clients across England and Wales, ensuring that each trust arrangement is tailored to individual circumstances.

2. Establish the Trust

If an IIP trust hasn’t already been set up, the next step is to establish it. This involves creating a trust deed, which is the legal document that sets out the terms of the trust. The deed should specify:

• The property being transferred into the trust.
• The life tenant (i.e., the person who will benefit from the trust during their lifetime).
• The remaindermen (i.e., the beneficiaries who will inherit the property after the life tenant passes away).
• The trustees who will manage the trust.

The trust deed must be properly drafted, considering the specific needs and circumstances of the settlor (the person creating the trust), the life tenant, and the remaindermen. Legal assistance is crucial here, as errors in drafting could result in the trust being invalid or ineffective.

3. Transfer Ownership of the Property

Once the trust is established, the legal title of the property needs to be transferred into the name of the trustees. This process involves the following steps:

• Preparation of a Transfer Deed: A transfer deed, such as a TR1 form, will need to be prepared to transfer ownership from the settlor to the trustees. The settlor may also be one of the trustees, but at least one other trustee should be appointed to ensure the trust functions properly.
• Sign the Transfer Deed: The transfer deed must be signed by the settlor and witnessed by an independent party.
• Register the Change of Ownership with HM Land Registry: The transfer deed must then be submitted to HM Land Registry to update the register to show the trustees as the new legal owners. There will be a fee payable, which varies depending on the value of the property.

4. Consider Stamp Duty Land Tax (SDLT)

In some cases, transferring a property into an IIP trust may attract Stamp Duty Land Tax (SDLT), depending on the value of the property and the circumstances of the transfer. For instance, if the transfer is made as part of a divorce settlement or to a spouse, SDLT may not be applicable. However, if there is an outstanding mortgage on the property, SDLT may be payable based on the outstanding loan amount.

Your solicitor will be able to advise whether SDLT applies to your situation and, if so, how much it will be.

5. Understand the Tax Implications

While transferring property into an IIP trust can offer certain IHT benefits, there are other tax considerations to be aware of:

• Inheritance Tax (IHT): If the settlor dies within seven years of transferring the property into the trust, the value of the gift may still be considered part of their estate for IHT purposes. However, IIP trusts created before 22 March 2006 are subject to different rules.
• Capital Gains Tax (CGT): If the property has increased in value since it was purchased, CGT may be payable on the gain at the time of transfer. There are reliefs available, such as Private Residence Relief, if the property has been the settlor’s main home.
• Income Tax: The life tenant is usually liable to pay income tax on any income generated by the trust assets.

A thorough understanding of these tax implications is essential before proceeding. Seeking specialist advice will help ensure that you maximise any available reliefs and plan effectively for potential tax liabilities.

6. Ongoing Management of the Trust

Once the property is transferred into the trust, the trustees are responsible for managing the trust in line with the terms set out in the trust deed. Their responsibilities may include:

• Ensuring the property is maintained and insured.
• Keeping detailed records of any income generated by the trust and any expenses incurred.
• Preparing and submitting annual tax returns, if applicable.

Trustees must act in the best interests of the beneficiaries and in accordance with the trust deed. Regular communication with the beneficiaries can help ensure that everyone is aware of their rights and responsibilities.

Common Issues and Considerations

While transferring a property into an IIP trust can provide many benefits, there are also potential issues to consider:

• Impact on Means-Tested Benefits: If the life tenant receives means-tested benefits, transferring a property into a trust could affect their eligibility.
• Future Tax Changes: Trust tax rules can change, so it’s essential to keep up-to-date with any legislative changes that might impact the trust.
• Trustee Selection: Choosing the right trustees is crucial. They should be trustworthy, competent, and ideally have some experience in financial or property matters.

Conclusion

Transferring property into an Interest in Possession trust can be a valuable tool for estate planning, asset protection, and tax efficiency. However, it is not without its complexities. At Blackstone Solicitors, we offer expert guidance throughout the process, from setting up the trust to managing it on an ongoing basis. Our team will ensure that your IIP trust is tailored to your needs and complies with all legal requirements in England and Wales.

How we can help

We have a proven track-record of helping clients create Trusts. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

How to Contact Our Wills and Probate Solicitors

It is important for you to be well informed about the issues and possible implications of creating a Trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.

To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Blog, News Tagged as

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