Placing a property into a trust during your lifetime can be an effective estate planning strategy to manage and safeguard an asset, but all too often these are created with a focus on the establishment of the trust and not the ongoing obligations, especially taxation ones. Settlors and Trustees need to understand the taxation implications to ensure the trust has been set up and operates correctly.

Taxation considerations at the outset

Inheritance Tax (IHT)

When assets are transferred into a trust, they may be subject to Inheritance Tax if the value of the assets exceeds the inheritance tax “nil-rate band” – currently £325,000. Where two settlors are each placing their respective share of a property into a trust or trusts, they would each have their own allowance.

Where the settlor will still remain living in the property, it is important to understand that the value of the property at the date of their death is likely to also be included in the inheritance calculation at their death.

Capital Gains Tax (CGT)

Transferring a property into a trust is considered a disposal for Capital Gains Tax purposes and can trigger Capital Gains Tax. Where a property is the settlor’s main residence then an exemption would normally be available to mitigate any increase in value during a period of occupation and ownership. Alternative property or land may trigger a liability to tax.

Trust Registration Service

The trustees of the trust must register the trust with HMRC’s Trust Registration Service (‘TRS’) within 90 days of the trust being established and the keep the TRS register updated on certain events occurring with the trust.

Ongoing considerations

Inheritance tax

There could be Inheritance Tax charges if the value of the trust exceeds the nil-rate band on the 10th anniversary of the trust’s creation and every 10 years thereafter. Even if the assets within the Trust are below the taxable threshold of £325,000 (as at 2025), if they are over 80% of that value, the trustees will still be required to complete and submit an Inheritance Tax return for the trust regardless of whether tax is due to be paid. Failure to complete the return within the deadlines from the 10 year anniversary is likely to result in late filing fees and/or penalties.

Capital Gains Tax

Trustees may also be liable for Capital Gains Tax on any increase in value of the property at any point of disposal, such as a sale or transfer of the property. There can be reliefs available in certain circumstances, however this may still need to be reported correctly to HMRC and trustees should seek professional advice. There can be strict deadlines of reporting disposals for Capital Gains Tax to HMRC so it is important to take professional advice.

Income Tax

Whilst a property is occupied by a beneficiary, a trust may not generate any income, but if the assets held by the trust change over time and any income is generated in the future, this will be subject to Income Tax. Trustees are normally responsible for paying tax on any income generated by the trust’s assets, although this can become the responsibility of a beneficiary if the trustees have the power to apply the income for their benefit. The rates of Income Tax applicable to trusts can be higher than personal Income Tax rates.

Stamp Duty Land Tax (SDLT)

If a property is purchased by the trustees, Stamp Duty Land Tax may be payable. This depends on the value of the property and the circumstances of the transfer.

Due to elapse of time since some trusts were created and the evolution of taxation and reporting requirements, it is not uncommon for property trusts to not be registered on the Trust Registration Service or for trustees and settlors of trusts to not be fully aware of the above taxation implications. Our Wills, Trusts and Probate team are available to help advise trustees of their obligations and ensure the correct operation of trusts to keep on the right side of the law.

For further advice, contact your nearest Clark Willis Solicitors office in either Darlington or Northallerton.