Many British families find that their home is held in a trust, often set up by a will to protect a spouse or children after someone dies. Downsizing—selling the current home and buying a smaller one—can be done, but the process depends on the type of trust and who benefits from it. Understanding the steps and tax implications is key to making the transition smooth and ensuring everyone’s interests are protected.
Step 1: Identify the Type of Trust
The first thing to do is work out what kind of trust you’re dealing with. The two most common types are:
Life interest (IPDI) trust: Here, a named person (the “life tenant”) has the right to live in the property and/or receive income from it for their lifetime. The trustees are responsible for managing the property and, if needed, selling it and buying a new one for the life tenant.
Discretionary trust: In this arrangement, the trustees have the power to decide who benefits from the trust and when. Their decisions must follow the trust deed and any letter of wishes left by the person who set up the trust.
Step 2: Understand the Tax Points
Downsizing within a trust brings up a few tax issues:
Capital Gains Tax (CGT): For life interest trusts, principal private residence (PPR) relief can apply if the life tenant actually lives in the property as their main home. This means any gain on the sale may be exempt from CGT. For discretionary trusts, PPR relief is much more limited, so it’s important to get advice early if you’re in this situation.
Stamp Duty Land Tax (SDLT): When the trustees buy a new property, SDLT is payable just as it would be for any other purchase. The amount depends on the price and whether any surcharges apply.
Step 3: Follow the Right Process
Read the trust deed: This is your rulebook. Check that the trustees have the power to sell the current property and buy another, and see if anyone else’s consent is needed (for example, the life tenant or other beneficiaries).
Minute trustee decisions: Trustees should hold a meeting (even if it’s just a phone call or email exchange), agree on the sale and purchase, and record their decisions in writing. Keep copies of valuations for both the sale and the new purchase.
Hold the new property correctly: The replacement home should be bought in the names of the trustees, not the life tenant. Make sure the life tenant’s right to live there is clearly documented, either in the trust deed or a separate agreement.
Example: How Downsizing Works in Practice
Let’s say a widow is the life tenant of a house worth £700,000 held in a trust. The house is too large for her needs, so the trustees sell it for £700,000 and buy a flat for £500,000. The remaining £200,000 stays in the trust, invested for her benefit. She continues to have the right to live in the new flat for the rest of her life, and the trust’s paperwork reflects this.
Practical Tips and Pitfalls
Always check the trust deed before making any decisions. If the trustees act outside their powers, the transaction could be challenged.
Keep a clear paper trail: minutes of meetings, valuations, and correspondence with beneficiaries.
For discretionary trusts, make sure all trustee decisions are properly documented and in line with the trust’s terms.
If the trust is considering a property that will not be the main home of the life tenant, be aware that PPR relief may not apply, and CGT could be due on any gain.
SDLT must be budgeted for when buying the new property, as it can be a significant cost.
Key Takeaway
Downsising within a trust is a routine process if you follow the trust deed, document all trustee decisions, and pay attention to tax reliefs and SDLT. With careful planning and clear communication, you can ensure the life tenant’s needs are met and the trust’s assets are managed properly.
Disclaimer: This article is for general information only and does not constitute legal, financial or tax advice. Every estate is different, and outcomes depend on your specific circumstances. Take time to familiarise yourself with the rules and keep your paperwork up to date.