Property Protection Trust

There are many of us who believe that setting up a Lifetime Property Protection Trust can avoid our home (or other assets that we own) being taken into account when assessing our inheritance tax bill and/or being taken into account when assessing our costs for care.  Here, we will give you our take on this.

We know that a Lifetime Trust may be set up so that either a sole owner can pass their home into this Trust or a couple holding their home as tenants in common can set up one Trust each and then put their shares of their home into each Trust. 

For joint owners, opting for two separate Trusts is popular owing to the potential tax consequences which can arise.  Governed under the Relevant Property Regime https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42161 for Tax purposes, Trusts have their own Inheritance Tax Allowance (£325,000 on today’s figures).  Two separate Trusts have two £325K ceilings with one Trust having one £325K ceiling.  This means that where the value being placed into the Trust exceeds its ceiling then tax entry charges, 10 year anniversary charges and exit charges will be applied.  Using two Trusts can reduced this potential liability to zero or at least mitigate it.

So why might you be motivated to place your home into a Trust?

To avoid Inheritance Tax?

Most of us are aware of HMRC’s 7 year rule whereby on the face of it, if you give something away and survive for 7 years then the gift will be outside of your estate for the purposes of Inheritance Tax https://www.gov.uk/inheritance-tax/gifts however, the gift must be a gift with “no strings attached” otherwise the 7 year clock never begins to run. 

It is a common misconception that a Trust can be set up, a share of the Property can be gifted into it, the person making the gift can live in the Property rent free and then after 7 years it is outside of their estate for the purposes of Inheritance Tax.  It is this rent free element which means that as far as HMRC are concerned this is a gift with strings attached (i.e. rent free occupation) and therefore the 7 year clock never begins to run.

The seven year clock only begins to run when a market rent is being paid.  If it is a full market rent then the seven clock begins to tick.  If it is less than the full market rent then the clock can begin to tick but it is likely that the transaction will be caught by the Pre-Owned Assets Tax.

To avoid Probate being necessary for Property?

Yes, this is more than achievable but proper advice should be sought by a suitably qualified person and all the pros and cons should be explained to you. 

To avoid their Home being taken into account against care costs?

There are no time limits which bars the local authority from pursuing your home or bringing this into account when assessing whether you should pay for your care or not, should you require care.   If the local authority takes the view that the home was gifted into a Trust with the intention to deliberately deprive a person of this asset for the purposes of the cost of care then they can apply to have the transaction set aside or simply assess the person requiring care as still owning the asset.

We are yet to have any reported cases in England & Wales where the local authority has successfully challenged a gift of a home for the purposes of paying for care.  In Scotland, a local authority made such a challenge but failed to get the gift set aside.   Sadly, this case provides no real incite as it was not litigated under our current statutes and in any event Scotland has a completely different legal system to that which we have in England & Wales.  We are therefore uncertain as to how far the reasoning in this case would, if at all, extend to a case heard under our legal system.

It is generally regarded that a local authority’s argument that a gift was made with deliberate deprivation is weaker the longer the gap between the gift and going into care but there is no authority to suggest this and no statutory time limit.

Bennett Oakley take the view that the local authority are unlikely to accept the Property Protection Trust as being sufficient to avoid care costs and therefore this is not a legal product currently offered to its clients.  Bennett Oakley adopt the approach that it is best to listen to a client’s needs and then assess whether the legal service they are asking for will be sufficient to achieve their intended outcome.  If it is not then Bennett Oakley believe it is unacceptable to offer such a product.

So are there ways to avoid the cost of care?

The answer is yes but you should be given all the options together with the pros and cons for each option from a suitably qualified and experienced lawyer.  If you wish to consider your options to protect your family wealth then call Jensen today (01444) 235232 to make a non-obligatory appointment.  We are very much looking forward to meeting you and using our legal expertise to help you and your family protect what you have worked hard for.

November 2017