Trust of Land 

A Trust of Land is a highly useful tool for clients, providing clarity and certainty where informal or verbal arrangements already exist. It formalises those agreements in writing, ensuring that ownership and beneficial interests are properly recorded and legally recognised. Under section 53(1)(b) of the Law of Property Act 1925, “a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will.” 

Although the legislation is over a century old, it remains vital today. For clients, a Trust of Land can prevent future disputes between co-owners, protect family arrangements, and give peace of mind that their wishes are clearly set out. It is also a valuable planning tool, frequently used to mitigate Capital Gains Tax (CGT) and, in some cases, Inheritance Tax (IHT). By combining legal certainty with practical tax advantages, a Trust of Land offers clients both protection and financial efficiency. 

Capital Gains Tax and Principal Private Residence Relief 

When you sell or dispose of an asset that has increased in value since you acquired it, you may be liable to CGT. Any individual disposing of their main residence, held in their own name, is entitled to Principal Private Residence Relief (PPR). This relief is automatic for individuals and means CGT is not payable on disposal of the main residence.  

For PPR relief to apply, the individual named on the legal title must occupy the property as their main residence. If, however, the property is held in trust, the trustees may claim PPR relief provided that a beneficiary of the trust occupies the property as their main residence, in accordance with the legislation set out below. 

S.225 Taxation of Chargeable Gains Act 1992 

Principal Private Residence Relief applies ‘…in relation to a gain accruing to a Trustee… where, during the period of ownership of the Trustee, the dwelling-house or part of…has been the only, or main residence of a person entitled to occupy it under the terms of the settlement…’ 

A typical scenario in which a CGT problem may arise is where Mum and Dad purchase a property for their child but do not live in the property. CGT will need to be considered on any future disposal of the property.  

Example 1 

• Mum and Dad purchase a property for £250,000 for their son to live whilst he is at university and for his future use. 

• Mum and Dad are on the Legal Title. 

• Son lives in the property for 3 years and a further 7 years following university. 

• Son decides to move out of the property and Mum and Dad decide to sell. 

• Current value of the property is £750,000.  

• Legal owners are liable to pay the CGT liability. 

CGT Position 

£750,000 (value at disposal) minus £250,000 (acquisition value) = £500,000 (gain) subject to tax at a rate of 24% = £120,000 (ignoring allowances) 

Mum and Dad will pay £120,000 of CGT on disposal 

Solution 

We would need to consider the historical facts when determining if a Trust of Land can be evidenced. As Mum and Dad purchased a property for son to live in a Trust of Land could be used to formalise the verbal trust established.  

The Trust of Land will confirm that Mum and Dad have settled the property upon Trust into the names of Trustees for the benefit of their son since the property was purchased, resulting in a saving of £120,000 in CGT, a far better position. 

It is important to note the Trust of Land must be formalised before the next disposal of the property.  

Lets look at another example: 

Example 2 

• Son assists his parents with a purchase of a property.  

• Son is on the legal title together with his parents to meet the requirements of the mortgage lender. 

• The property was purchased in 2005 for £150,000.  

• Son has never lived in the property. 

• Parents lived in the property as their main residence. 

• Parents pass away. 

• Son decides to sell the property in 2015 for £450,000.  

CGT will need to be considered on disposal as parents and son are named on the legal title but son has never lived in the property as his main residence. The accrued gains are £300,000. PPR is available over two third share of the gain. Son’s third share of the gain will not attract PPR thus CGT is payable. 

CGT Position 

£450,000 (value at disposal) minus £150,000 (acquisition value) = £300,000 (gain) less PPR relievable amount £200,000 which leaves £100,000 subject to tax at a rate of 24% = £24,000 (ignoring allowances) 

Son will pay £24,000 of CGT on disposal 

Solution 

Establish a Trust of Land to reflect the historical facts that parents and son purchased the property for the benefit of parents and other beneficiaries. CGT will be mitigated on the basis that parents had a right to occupy the property since it was acquired. In this scenario, the Trust of Land will confirm that parents (settlors) have settled the property upon trust in the names of the trustees (parents and son) on behalf of the beneficiaries (parents and other beneficiaries). 

Providing the Trust of Land is established before the disposal of the property, the trustees will be able to claim PPR on the basis that a beneficiary of the trust occupied the property as their main residence resulting in a tax saving of £24,000. 

Parties to a Trust of Land 

When a property is held on trust, three key roles must be understood: the settlor(s), the trustees, and the beneficiaries. Each has distinct responsibilities and rights. The settlor creates the trust and provides the property, the trustees hold legal title and manage the property in accordance with the trust, and the beneficiaries enjoy the benefits of the property, whether through occupation, income, or capital. The following section explores each of these parties in more detail and explains how their roles interact within a trust of land. 

The Settlor(s) 

• The person who creates the trust – this could be one or more settlors 

• To determine who the deemed settlor(s) are consideration should be given to how the property was acquired not necessarily who it was acquired by 

The Trustees 

• Trustees are the people who are trusted to look after the trust property 

• The settlor transfers legal ownership of the trust property to the trustees 

• The trustees will be the individuals named on the title of the property 

The Beneficiaries 

• Beneficiaries are the people that receive benefit of the property 

• A person who occupies a property, receives the rental income or capital will be a beneficiary 

Inheritance Tax 

In some circumstances a Trust of Land can be established to mitigate IHT. If the Trust of Land is drafted to formalise a trust created more than seven years ago, providing the settlors never benefited from the trust in the last 7 years, the value of the asset will be immediately outside of their estates for their IHT calculation.  

For example, if a daughter occupies her parents’ property rent-free, but the property had previously been  rented out with the parents retaining the rental income, the parents could establish a Trust of Land to record this arrangement. The trust would confirm that the parents were beneficiaries while they received rent, and that they ceased to be beneficiaries once the rental income stopped. In such a case, the seven-year period for IHT purposes would begin when the parents were removed as beneficiaries.  

Other Considerations 

Relevant Property Charges 

If the property had been intended to benefit multiple individuals, subject to the discretion of the legal owners, then it may be possible to confirm that the Trust of Land is discretionary in nature. However, this means that the Trust of Land would be subject to the usual relevant property charges. If the arrangement commenced more than 10 years ago, you must consider the implications of the relevant reporting. If the reporting requirements have been missed, then this would be contrary evidence to the Trust being in place at this time. 

Dating the Trust of Land 

The Trust of Land is not being backdated, it is dated when it is signed as the Trust of Land is used to formalise a verbal trust already in existence. 

Appointment of further trustees 

It should be noted that two trustees are needed to transact with land, therefore further trustees can be appointed if required. If changing trustees, the property title will need to be updated to reflect the change. 

If you believe your client’s circumstances may be suitable for establishing a Trust of Land, please get in touch with the Estate Planning Team for further guidance and support.