Estate Allocation Trust

What it is

A trust you create now, during your lifetime, rather than through your Will. Assets you transfer into it are held by trustees for the beneficiaries you name.

We will be blunt on this page, because this arrangement is sold badly more often than it is sold well. It is suitable in particular circumstances only, and it is never recommended from a web page.

How it works

• A transfer into this kind of trust is a chargeable transfer for Inheritance Tax, not a simple gift. Above the available nil rate band there is a charge on creation at the lifetime rate.
• Once created, the trust sits inside the relevant property regime, with a charge of up to 6% on each ten year anniversary and a proportionate charge when assets leave.
• Anything you settle keeps affecting the tax position of later gifts for many years, because chargeable transfers cumulate.
• The trust will need registering with HMRC and the register kept up to date for as long as it exists.
• Unwinding one of these is difficult, sometimes impossible, and usually expensive.

The risks that get glossed over elsewhere

• Reserving a benefit. If you give away your home and go on living in it rent free, no seven year clock starts. The house stays in your estate at its value when you die, not its value when you gave it away. That is the single most common and most costly mistake in this field.
• The pre owned assets charge. Where the reservation of benefit rules do not catch an arrangement, an income tax charge may.
• Capital Gains Tax. Once the property belongs to somebody who does not live in it, the relief that would have sheltered your own home stops applying to their share.
• Care fees. If the purpose of a transfer is to shelter assets from care charges, a local authority can treat it as a deliberate deprivation of assets however long ago it was made. There is no seven year safe harbour for care funding, and the legislation allows a council to recover from the person who received the asset.

Where specialist advice matters

Everywhere. We go through every one of the points above with you in full before recommending anything, and we would rather turn work away than place someone into this unsuitably.