Putting a Rental Property into a Trust

For landlords looking to protect assets for the next generation or reduce inheritance tax exposure, placing a rental property into a trust can be an effective strategy. The approach comes with real costs and tax consequences, but understanding these upfront is what makes the planning work.

This article explains the main reasons landlords put property into a trust, the step-by-step process for doing so, the tax implications at each stage, and the situations where a trust may not be the right approach.

What Is a Property Trust and How Does It Work?

A property trust is a legal arrangement in which ownership of a property is transferred to trustees, who manage it for the benefit of named beneficiaries. HMRC recognises trusts as a way of managing assets including land and buildings, and they are commonly used by landlords for inheritance tax(IHT) planning and asset protection.

A trust involves three parties, each with a distinct role. The settlor is the person who places the property into the trust and determines how it should be used, as set out in the deed of trust. The trustees become the legal owners of the asset and are responsible for managing the trust on a daily basis, including paying any taxes due.

The beneficiaries receive the income or capital generated by the trust. How much they receive, and when, depends on the type of trust in place.

What Are the Reasons to Put a House in a Trust?

Landlords and property investors use trusts for several reasons, though the right approach depends on individual circumstances:

Asset protection for beneficiaries: A trust allows you to ring-fence a property for a specific purpose, such as supporting children or grandchildren, without handing them outright ownership. This is particularly useful where a beneficiary is young, has financial difficulties, or needs structured access to funds over time.

Avoiding probate: Assets held in a trust do not typically form part of the deceased's estate for probate purposes, which can simplify administration and reduce delays when passing wealth to the next generation.

Inheritance tax planning: Once a property is placed into a trust, it moves outside the settlor's estate for inheritance tax purposes, provided the settlor survives seven years from the date of transfer. This can reduce or eliminate IHT liability on the transferred asset over time.

Controlled distribution of income: Discretionary trusts give trustees the flexibility to distribute rental income to beneficiaries at times and in amounts that are most tax-efficient, for example distributing income to a beneficiary in a lower tax band.

What Are the Drawbacks of Putting a House in a Trust?

Before proceeding with a trust, there are some practical limitations and costs that are important to understand:

Loss of control: Once a property is in a trust, decisions about whether to sell, re-mortgage, or make changes require trustee agreement. If you are not a trustee yourself, you have no direct authority over the asset.

Upfront tax costs: Transferring a property into most trusts triggers an immediate chargeable lifetime transfer (CLT) for inheritance tax purposes, and potentially a capital gains tax (CGT) charge if the property has increased in value. These costs can be substantial.

Ongoing compliance costs: Trusts require annual tax returns, trustee accounts, and HMRC registration. Professional fees for legal and accounting compliance add up each year.

Mortgage restrictions: Most mortgage lenders will not permit a mortgaged property to be transferred into a trust without their consent, and many will refuse outright. If the trust takes on the mortgage, stamp duty land tax may apply.

Which Type of Trust Is Best for a Rental Property?

The right trust for a rental property depends on what you are trying to achieve. Bare trusts suit straightforward transfers to known beneficiaries with absolute entitlement. Interest in possession trusts work well where a life tenant needs income now but the capital should pass to someone else later. Discretionary trusts offer the most flexibility for families where circumstances may change, but carry the highest immediate tax cost on entry.

Bare Trusts

Bare trusts are those in which the beneficiaries of the trusts are absolutely entitled to the trust’s capital and income which are legally owned by the trustee. At the creation of bare trusts, the property will be subject to Inheritance tax as a potentially exempt transfer (PET). However, if the settlor and beneficiaries are spouses, the transfer will be exempt.

Similarly, capital gains tax may also be applicable. Unless the asset is a business asset, the transfer will not be eligible for holdover relief.

Interest in Possession (IIP) Trusts

An interest in possession trust is a type of trust arrangement where the beneficiaries have a right to the income generated by the trust's assets. Unlike discretionary trusts, where the trustees have discretion over income and asset distribution, the trustees cannot hold any income and keep it within the trust and must pay out any income to the nominated beneficiaries.

In IIP trust, the life tenant (the main beneficiary) enjoys the right to receive income for a specific period, often lasting their lifetime. Once the life tenant's entitlement to income concludes, the trust's capital passes to another beneficiary known as the "remainderman" or "reversionary beneficiary”.

Holdover relief may be applicable on the capital gains tax on the asset being put into an interest in possession trust.

Discretionary Trusts

A discretionary trust is one of the most preferable trusts which enables the trustees to use and distribute the income and capital of the trust entirely at their discretion. The beneficiaries become entitled to receive distributions from the trust only when the trustees exercise their discretionary powers and decide to allocate the income or assets to them. Until the trustees make such a decision, the beneficiaries do not have a guaranteed right to the trust's benefits.

Under a discretionary trust, the income received by the trustee is initially taxed at the standard rate or the rate applicable to trusts. Concurrently, the income will be taxed as a trust income of the beneficiary when it is transferred to them. Beneficiaries will normally get some credit for the tax which has already been paid by the trustees.

How Do You Put a House into a Trust? Step-by-Step

Transferring a property into a trust involves several legal and administrative steps:

Step 1: Choose the right type of trust.

Before drafting any documents, decide whether a bare trust, IIP trust, or discretionary trust best meets your goals. This decision affects every subsequent step, including the tax cost and the legal structure.

Step 2: Instruct a solicitor to draft the trust deed.

The trust deed is the legal document that establishes the trust, names the trustees and beneficiaries, and sets out how the assets are to be managed. This must be correctly drafted by a solicitor to be legally valid. 

Step 3: Execute the trust deed.

The deed must be signed by the settlor and all trustees. For a property trust, a deed of trust (also called a declaration of trust) should be signed and witnessed.

Step 4: Transfer the legal title at HM Land Registry.

The property title must be transferred from the settlor to the trustees. This requires submitting a TR1 form (transfer of whole of registered title) to HM Land Registry. The trustees become the registered legal owners of the property.

Step 5: Notify HMRC and register the trust.

Most trusts must be registered with HMRC using the Trust Registration Service (TRS). Non-taxable trusts created after 6 October 2020 must register within 90 days. Taxable trusts have similar deadlines. Failure to register on time can result in a £5,000 penalty.

Step 6: Submit any required tax returns.

The transfer may trigger a stamp duty land tax return, a capital gains tax report (within 60 days of completion if CGT is due on UK residential property), and an inheritance tax return where applicable.

Does Putting a Property in a Trust Reduce Inheritance Tax?

Placing a property into a trust removes it from the settlor's estate for  Inheritance tax (IHT) purposes immediately on transfer. Whether any IHT is due at that point depends on the value of the property and how it compares to the available nil rate band.

When property is transferred into a trust, it becomes a chargeable lifetime transfer , immediately becoming subject to inheritance tax. If the property's value is below the £325,000 nil rate band, no inheritance tax is due. However, if the value exceeds £325,000, the amount above this threshold will be taxed at 20% if the beneficiaries pay the tax, or 25% if the settlors pay it.

Should the settlor die within seven years of the transfer, additional tax may be owed by the trustees. Taper relief may apply, reducing the tax owed if the settlor survives between three and seven years from the transfer date.

Can You Put a Mortgaged Property into a Trust?

Transferring a mortgaged rental property into a trust is possible in some circumstances, but there are significant obstacles.

Most lenders include a clause in mortgage agreements that prevents the borrower from transferring the property without consent. Many will refuse consent entirely. You should contact your mortgage lender before beginning any transfer process.

If the lender does agree, the trust taking on the outstanding mortgage debt may trigger a Stamp Duty Land Tax(SDLT) charge on the value of the debt assumed, even if no money changes hands. This is because HMRC treats the taking on of a debt as chargeable consideration for SDLT purposes.

Do You Need to Register a Trust with HMRC?

Most trusts that hold UK property must be registered with HMRC through the Trust Registration Service, regardless of whether they are subject to tax.

Trusts subject to income tax, capital gains tax, or inheritance tax must register. Some non-taxable trusts also require registration, including co-ownership trusts set up for jointly held property as tenants in common, and will trusts created on death.

To register, the trustee needs a government gateway user ID and password. Non-taxable trusts created after 6 October 2020 must register within 90 days of creation. For taxable trusts registered on or after 6 April 2021, registration must occur within 90 days of the trust becoming liable for tax or on or before 1 September 2022, whichever is later. Failure to register on time can result in a penalty of £5,000.

Do Non-Resident Trusts Need to be Registered in the UK?

Yes, Non-resident trusts liable to tax on UK income or on UK assets must be registered in the UK.

Conclusion

Transferring a rental property into a trust can protect assets for future generations, reduce inheritance tax exposure over time, and simplify the passing of wealth without probate. The process involves real costs and permanent decisions, so understanding the tax implications and registration requirements beforehand is what makes the planning effective.

Taking specialist advice before proceeding ensures the trust is structured correctly from the start.