Lifetime Property Protection Trusts
If my house is owned by a trust then it won’t be mine?
That’s correct but the whole point of the planning is that in order to try and prevent a third party from taking away something belonging to you, primarily we must change the legal ownership of that asset out of your name as a private individual into “another name”.
So, if a trust owns my house, who controls the trust?
The trust is controlled by trustees. The person establishing the trust (you, the settlor) decides who the initial trustees are going to be. Therefore, it is the settlor’s choice as to who will work alongside him / her as co-trustees.
How many trustees can / should there be?
A trust must have at least two trustees but can have up to four trustees.
Must all trustees agree before a decision can be made?
Yes – trustees’ decisions must be unanimous. There is a provision, however, for trustees’ decisions to be made on a majority basis if one of the trustees is a professional trustee such as a lawyer, accountant or financial advisor. But, whether to appoint a professional trustee or not is the sole decision of the settlor.
What if I fall out with one of my trustees? Does that mean there is a stalemate?
The trust deed contains an express power for the settlor to appoint and remove other trustees. Therefore, if the settlor and a trustee have a falling out, the settlor simply removes the hostile trustee and replaces him / her with another trustee. Of course, this is all dependent on the settlor having mental capacity.
Could I not just gift my house to my children?
Yes, you could – but imagine what would happen if your child’s relationship or marriage broke up, or if he / she became bankrupt or if you fell out with them in any way – your child would own your home and that is not necessarily a good position to be in under any of those circumstances!
I have read that trusts are taxed at 45%. This concerns me.
The tax rate of 45% relates to “unassigned income” into a trust. When your home is in trust (and it isn’t being rented out) the trust will not be receiving any income. Therefore, you do not have to worry about any income tax. Should the situation change and your trust starts to be in receipt of income, we will advise you as to how you can either reduce that rate of tax down from 45% or claim a tax rebate from HMRC.
Will there be any capital gains tax to pay when the trust is set up?
You never pay capital gains tax when you sell or otherwise transfer your main residence, so, no you will not pay any capital gains tax.
If the trust sells the property, will capital gains tax be paid then?
In most cases no capital gains tax will be paid. This is because if one of the beneficiaries of the trust has a right to live in the property and call it his / her main residence, the so-called “principal private residence exemption” for capital gains tax will still apply.
I have been told that you pay 20% tax when you transfer something into trust and then pay more tax every 10 years. Is that correct?
Most trusts are known as relevant property trusts (“RPTs”). RPTs have three possible tax points – when you transfer assets into trust, every 10 years, and when you transfer assets out of trust. To avoid the “entry” charge, we simply do not transfer assets worth more than £325,000 per person into a trust in any 7 year period. If the equity in your home is worth more than £325,000 (single person) or more than £650,000 (couple) then we will discuss with you how to avoid the “entry” charge. And remember that we are talking about the net equity – so if your home is mortgaged, you should take into account the amount of the outstanding mortgage when calculating the net equity.
To avoid the 10 year “periodic” charge, we simply ensure that the trust assets are valued before the 10th anniversary of the trust and, depending on the tax laws in force at that time, we can make whatever arrangements are necessary to reduce or eradicate any potential tax. However, do remember that the “periodic” charge is only taxed at a rate of 6% on the excess over the inheritance tax allowance. So, for example, if a trust’s 10th anniversary was in the tax year 2017/2018 and the value of the trust assets was £400,000 if no planning was done, the trust would pay 6% tax on the excess over and above the inheritance tax allowance (£325,000) which would result in a tax bill of £4,500. This is not, therefore, a very onerous tax liability.
Version 1 – July 2018
The “exit” charge is calculated, in a relatively complicated way, as a fraction of the periodic charge. In most cases, the highest rate of tax for transfers out of a trust (where the value of the asset exceeds the inheritance tax allowance) would be 0.6%. For most people, however, the exit charge will not apply.
Is it true that you cannot claim the residence nil rate band (“RNRB”) if the house is in a lifetime trust?
If the house is in a standard lifetime discretionary trust at the time of the settlor’s death then, no, the RNRB cannot be claimed because the home is not passing to direct lineal descendants. However, we do have an option involving a different lifetime discretionary trust, in conjunction with a carefully worded Will, where it is possible to still claim the RNRB. If this is applicable to you, this will be discussed in greater depth.
Is there any stamp duty to pay?
No, this transaction is exempt under Schedule L of The Stamp Duty (Exempt Instruments) Regulations 1987.
Now and in the future
Are you able to guarantee that this planning will work?
Absolutely not. What we can guarantee is that if you do nothing at all, assets (including your home) over the value of £23,500 will be taken from you should any form of long-term care be required. At least if you do something, you are putting hurdles in the way of the third party looking to take your assets away from you. It very much is a case of “nothing ventured, nothing gained, nothing lost” and you should ask yourself whether you are prepared to pay the equivalent of just a little more than the cost of a week in care, per person, to try and protect an asset worth several hundred thousand pounds whilst bearing in mind that, if for whatever reason, the planning doesn’t work, the money you have paid would only have been used to pay for your care anyway.
What is deliberate deprivation? Is it a criminal offence?
Deliberate deprivation means that the Local Authority have concluded that you have disposed of an asset purely for the avoidance of, for example, paying care costs. If the trust was established at a time when care was foreseeable and / or the trust was not set up for reasons other than the avoidance of paying care costs then it is likely the Local Authority will claim that there has been deliberate deprivation of assets.
It is not a criminal offence, all it means is that whilst the asset may belong to someone else (your trust for example), the value of it will still form a part of your assessable assets and, as a result, it could still be sold to pay for you care before or after your death. But, again, this is what would happen if you had simply done nothing and, therefore, it is hard to see how you are worse off. The key is to act as early as possible and when you are as mentally and physically healthy as possible.
Is the law likely to change?
Changes in the law are inevitable however in most cases, should a law change it is unlikely to change with retrospective effect. It would be an incredibly unpopular move, politically, to ask hundreds of thousands of people who have set up a trust to “unwind” the planning they have done.
Does this whole process make moving expensive and complicated?
No. When your house is owned by a trust, and it needs to be sold it will require the signature of all of the trustees. That is it – no more complicated or expensive than if you were selling your house as private individuals. The trusts have a lifespan of up to 125 years and so they do not need to be set up again when you move to a new house.
Does having a mortgage now or in the future complicate things?
In a word, no it doesn’t. However, if you have a mortgage at the moment or there is any likelihood that you will want / need a mortgage or equity release in the future, then we will talk this through with you in greater depth.
So, are there any downsides?
In our view, providing you take into account potential complications such as needing to claim the RNRB or possibly needing to take out a mortgage or equity release in the future, there are no “downsides” per se. In general, the only potential negative is the perceived layer of complexity whereby your trust owns your home which, as we have explained above, is not complicated. If you do not require means tested care the trust could potentially benefit you and your family in a number of other ways. And, as we have said, if for whatever reason the trust fails completely, you are in no worse a position that if you had done nothing at all.