Protective Property Trusts
For most people, their home is their main asset which is no wonder why you choose to protect and preserve the value of it for your families and loved ones, against circumstances outside of your control.
When you set up your property trust you retained the right to continue living in your property but technically you no longer own the property. The trust you have set up provides a protective shell so that the value of your home should not be taken into account for purposes outside of your wishes.
What is a Trust?
A trust is a legal arrangement where you entrust the legal interest of cash, property or investments to someone else so they can look after them for either your benefit and/or your chosen beneficiaries.
There are some important roles and terms within a trust that you should understand:
- Trustees – these are the people who own the legal interest of the assets in the trust. They have the same powers a person would have to buy, sell and invest their own property. The Trustees have a legal duty to run the trust and manage the trust property responsibly. It is extremely important that you are happy with your choice of Trustees. Your Trustees may include your family members, but you may also have chosen to appoint independent professional Trustees such as partners of Wilson Browne, who you have entrusted to act in your best interests at all times and ensure your wishes are carried out. You will require at least two Trustees or a Trust Corporation at any one time but you can have a maximum of four.
- Life Tenant – this is the person(s) who has a life interest in the property which means that as long as the property still exists they are entitled to live there rent free for their lifetime. If the property is ever sold and converted into cash, then this person is entitled to any income produced from those proceeds of sale. They are also able to benefit from the net proceeds of sale at the discretion of the Trustees.
- Settlor – the person(s) who put their assets into a trust when it is created.
- Discretionary Beneficiaries – the people who, at the discretion of the Trustees, could potentially benefit from the trust property.
How does the trust work?
When you set up the trust, you decided on the rules about how it is managed. You transferred the legal title of the property into the names of your chosen Trustees. You are the Life Tenant of the trust and the terms of the trust give you a life interest as detailed above.
The Trustees are able to sell the property and purchase an alternative property for you to live in if you wish and any subsequent property will also be held by the Trustees subject to the terms of the trust.
Is a trust still suitable for me?
Each client is different so if it has been some time since you set up your Trust you may wish to review it with one of our experts to see if you are still happy with all of the terms. We are able to offer you a fixed fee trust review meeting for £200 +VAT.
What happens if I have to go into care after putting my house into trust?
Provided that sufficient time has passed since placing the property into trust (we would say at least 5 years) then the local authority should not assess you as owning your own home unless they claim that you intended to deprive yourself of capital to avoid paying care home fees. These are all factors you would have considered before setting up your trust. The more time that passes between placing your property into a trust and you going into care and require funding from the local authority, the more difficult it will be for the local authority to argue that you intended to deprive yourself of capital.
If you are no longer living in the Trust Property your Trustees will need to decide if the property is to be sold or rented out. Your Trustees should seek your wishes and feelings about this and consider your needs. As you have a life interest in the trust any income should be for your benefit during your lifetime. At such time your Trustees should seek both legal and financial advice on the next steps.
What happens to the trust after my death?
It would be expected that your chosen Trustees would transfer the trust fund (which may consist of the property or cash (if the property has been sold) to your chosen beneficiaries as per your letter of wishes. You may already have a letter of wishes, however, it is a good idea to update this or write one which can then be placed with your trust documents. In the absence of a letter of wishes your Trustees will look to distribute the trust in the same accordance with the terms of your Will. This will have the effect of ending the trust. Your chosen beneficiaries may be your children, grandchildren, other family members, friends, charities or a combination of any of these.
In some circumstances, it may be a benefit to your chosen beneficiaries for the Trust to remain in place for a period of time after your death, for example, if there are disabled or divorcing beneficiaries or for your beneficiaries’ inheritance tax planning. Your Trustees will discuss this with your chosen beneficiaries at the relevant time.
What happens if I no longer want the Trust?
The Trustees can consider terminating the trust by appointing out the capital proceeds back to you as the Settlors or to your nominated beneficiaries. If this is something you are considering you should speak to one of our experts who can advise you in your particular circumstances and draft the necessary paperwork. There will be a charge for this advice and the subsequent work.
What should I do if I have changed my wishes since I set up the Trust?
When you set up your trust you would have been encouraged to write a letter of wishes to your Trustees on how you would like them to manage your trust during your lifetime and what you would like to happen with the Trust assets after your death. This document is informal and not legally binding. If your wishes have changed you should update or write your letter of wishes to communicate to your Trustees what you would like to happen. This does not need to be legally drafted, although our experts can help if you would like them to. Any letter of wishes can be deposited with your original trust documents.
What are the tax consequences of my Trust?
You should be aware that this type of trust is known as a relevant property trust which have their own tax regime as detailed below.
Ten Year Anniversary Charges
HMRC make a charge for Inheritance Tax every ten years during the existence of a trust, sometimes referred to as the “periodic charge”. The ten year anniversaries are counted from the date of the creation of the trust. The periodic charge calculation can be complex but will be a maximum rate of 6% on the amount by which the value of the trust fund exceeds the nil rate band applicable at the time. The current nil rate band is £325,000 per individual , however, this may change in the future. If your trust has two Settlors you will be entitled to two nil rate bands, therefore £650,000.
Distribution to Beneficiaries or Winding Up of the Trust (“Exit charges”)
There may also be a charge to Inheritance Tax when the entire trust fund or part of it is distributed to one or more of the beneficiaries, sometimes referred to as the “proportionate charge”. This will depend on the total value of the distributions made in the previous ten years of the trust and the value of the trust. The maximum rate at which tax could be charged is 6%.
If the value of the trust fund remains below the nil rate band, there will be no Inheritance Tax to pay in your lifetime.
Capital Gains Tax
As you have retained a life interest in the property you should remain eligible for the principal private residence relief for Capital Gains Tax purposes which means there should not be a Capital Gains Liability if the property is sold immediately on your death or upon you ceasing to permanently reside in the property. Your Trustees should seek advice on all tax matters to ensure they are compliant.
Sometime in 2021 (date to be confirmed by HMRC), it is a requirement for Trustees to formally register the Trust with HMRC. Once registered, HMRC will need to be notified and a tax return will need to be filed on the following events:
a) An appointment of capital out of the trust (either the entire trust fund or part of it); and
b) The ten year anniversary of the trust (see above).
Further legal costs associated with the registration of the Trust with HMRC and the filing of any tax returns are likely to occur.
If Wilson Browne are Trustees within your Trust, then we will need to register the Trust to ensure that we meet the correct requirements.
Payment of Tax & Costs
If there are no cash assets in the Trust the Trustees will look to the Settlors to pay any outstanding tax or costs incurred in the administration of the trust. A failure or inability to do so may result in trust assets being sold to settle the liabilities.
We will try where possible to carry out any necessary work on a fixed costs basis which we have set out in a separate costs list.
Updating your Trustees
It is the Trustees responsibility to register the Trust with HMRC; notify them of any change of circumstances and for the calculation and payment of any tax. Failure to register and subsequently update the register where changes are made to a Trust, will likely incur penalties in the form of fines, any unpaid tax will incur penalties and interest. It is therefore imperative that you notify your Trustees of any change of circumstances such as change of names or addresses; death of a Settlor or Trustee and comply with any request for information such as the value of the Trust Property and request for identification.