Setting up a Property Trust and placing your home into that Trust can be an effective strategy for sheltering and preserving your assets and it is an option that many people consider.
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Setting up a Property Trust and placing your home into that Trust can be an effective strategy for sheltering and preserving your assets and it is an option that many people consider. If you set up a Property Trust for genuine reasons that are not in any way related to avoiding paying residential care fees, then there is a chance that the property trust might not be challenged by the Local Authority. However, if the Property Trust is deliberately set up to avoid paying residential care fees or if you are already in receipt of some sort of support or care from the Local authority, then there is a very good chance that the property trust will be successfully challenged and claimed by the Local authority to pay for your residential care fees.
Property Trust Information
A typical Property Trust is usually set up so that the trust owns your property, but you would include the right to continue to reside in the property rent free for the rest of your life. It is a very flexible arrangement. A property trust could be set up either as an Interest in Possession trust or a Discretionary trust or even combining both. It is often set up as a Flexible Interest in Possession Trust. You obviously need to own your own home and ideally you need to have paid off your mortgage.
Reasons for Setting Up a Property Trust
Most people who set up property trusts have various specific reasons for doing so. These reasons might include some of the following:
- General affection – You may want to recognise the love and affection you have for the proposed recipient in a significant way. This is sometimes done by way of lifetime giving instead of by will.
- Moral obligations – You may want to feel that you have fulfilled your moral obligations. If the recipient might be expected to be your carer in the future it may be appropriate to recognise that. It may also be appropriate for certain family promises to be met in a formal way.
- Financial obligations – You may wish to formally recognise the contribution which a family member has made (directly or indirectly) to your property and/or to your lifestyle and personal choices. For example, a house purchase, mortgage payments, an ex-tension, a patio or double-glazing may have been funded by the recipient.
- Family harmony – Even in the best of families there can be potential for disputes, especially over property and money related issues. It may be necessary to avoid problems on death by recognising the issues now by making a gift of the family home during lifetime.
- Avoidance of delays on death – You may be concerned to reduce delays on sale of your property if you die. Without a grant of representation, the property cannot be sold. The obtaining of that grant of representation (by the executors if there is a will or by certain specified relatives if there is no will) can take time.
- Passing on the burden of property ownership – You may want to pass the burden of owning a property on to the next generation. This can be the financial burden as the cost of insurance, upkeep and particularly major repairs may be difficult to fund from pension and interest payments. It can also be a psychological burden. As people grow older they may find it adds to their peace of mind to be ‘free’ from property ownership.
- Administrative efficiency – As people grow older some feel that all the paperwork relating to property ownership is simply ‘too much’. They want to pass that obligation on to others who will be responsible for it.
Deprivation of Assets
Placing a home into a Property Trust can be regarded as deprivation of asset if you have created the trust and therefore cease to have a beneficial interest in the property and the trust could be assessed by the Local Authority as notional capital. However, if you are named as one of the beneficiaries of the trust and your interest is discretionary, then it becomes difficult to accurately quantify and the residential care notional capital rule could potentially be excluded. It is however essential that various positive purposes and reasons unrelated to residential care fees are stated in the trust deed, such as you wanting to make better provision for your family. If you are considering this option, it is essential that you seek specialist legal advice.
If you are considering setting up a Property Trust in respect of the family home, then you will have your own reasons for that. This raises a very important question: Am I certain I want to do it? It is important to ask this in all cases but even more so when the family home is concerned. It may be your main asset. It may represent your personal and financial security and your care choices. There are many reasons to be cautious. It is very important you are aware that we do not usually recommend that clients set up a Property Trust in respect of the family home, even to their children.
What is a trust?
‘A trust’ is a relationship which is recognised and enforceable in the courts. Its details are contained in a ‘trust deed’ which is rather like a rule book.
What are trustees?
Where there is a transfer of a home into a property trust then that property becomes ‘the trust fund’. It is put into the names of persons called ‘the trustees’. The trustees have certain powers over the handling of the trust fund for the benefit of ‘the beneficiaries’ named in the trust deed.
You may be a trustee but that is not recommended. It defeats the objective of passing on responsibility properly. Beneficiaries can be trustees but sometimes this can create a conflict of interests. You will need to choose your trustees. A minimum of two and maximum of four should be chosen. It is vitally important that you choose your trustees wisely. The trustees have certain discretions although they must act in accordance with the trust deed.
What must the trustees do?
Trustees do not have any power to go beyond the terms of the trust deed. Most things which a person would want to do with his own money can be done by the trustees for the benefit of the beneficiaries. For example, at an appropriate time the trustees can, upon taking appropriate advice, open and operate a trust bank account, invest money, buy and insure property and purchase help and assistance for the beneficiaries. Standard trust provisions are also used in the trust deed. They provide provisions necessary for the administration of the trust.
The terms of the trust deed
The beneficiaries will usually be you as the person(s) placing the home into the family trust for the duration of your life or lives (or until the trustees–for some good reason–consider otherwise) and then your children. Other options are possible depending upon your circumstances. We can discuss these with you in detail.
Can you continue to live in your home as you do now?
During your lifetime you can have the benefit of what is presently your home. The home can be sold if you need to move with the proceeds being reinvested in another property for you. Alternatively, the proceeds can be invested to generate an income for you as necessary. You do need to be aware that having a property in a trust is not the same as having it in your own name. The trustees can override your interest in the property (and any sale proceeds) if they have a good reason to do so which can be justified at law. This is another reason why we recommend that at least one professional trustee is appointed.
Benefits of a Property Trust
General affection and moral obligations
These can be fulfilled by founding a property trust. You can set matters in motion before you die similarly to an outright gift.
Founding a family trust can formally recognise the contribution which a family member or other person has made (directly or indirectly) to the property and/or to your lifestyle and care.
It may be desirable to avoid problems on death by recognising the issues now and by doing something about them during your lifetime. A trust can do this as well as an outright gift.
Knowing where the property will pass on your death
Having founded a property trust, you will be able to tell where it will go upon your death. It passes upon the terms of the trust which is already in motion when you die. This can add to your peace of mind.
Avoidance of delays on death
A property in a property trust can be sold without a grant of representation. The trustees can sign all the paperwork.
Passing on the burden of property ownership
You can pass the burden of owning a property on to the next generation using a trust:
The financial burden can be met by the trustees and beneficiaries if they agree to that. They may be more willing to do this once the commitment of a trust is put in place by you.
The psychological burden can be lifted from you. It will become the trustees’ responsibility to deal with the property and not yours.
As you grow older you can rest assured that all the paperwork relating to property ownership will be dealt with by the trustees. Even if you lost your mental capacity the trustees could handle that paperwork for you.
Retention of a place to live
You can remain in the home so long as you wish unless circumstances change, and the property must be sold to buy another suitable property or because you no longer need a home to live in.
Retention of income and discretionary capital payments
If the home is sold, then you remain entitled to an income from it. This means that, if needed, funds will be available to supplement your income should you need to live elsewhere. You can also have payments of income made to you at the discretion of the trustees.
The trustees do not own the property in the trust fund outright
For as long as you live enjoying a life interest entitling you to occupation, the property is not theirs to deal with as they see fit and is not available to their creditors or other claimants against their finances.
Disadvantages of a Property Trust
Trustee ownership is not the same thing as owning a property yourself
The trustees have discretions. This can however be taken into account in the terms of the trust deed. We will need to discuss those terms with you very carefully before you sign the trust deed.
Equity Release & Loans
If you need the property to support a loan such as a ‘home income scheme’ or other equity release type scheme the trust will not be able to achieve this for you. But the same is also true of making outright gifts.
Administrative Matters with a Property Trust
The main administrative matters are as follows. We can assist with these and, as the family home will be likely to be the main trust asset whilst you need to live there, the tax issues are not likely to be relevant. Some of this information is technical and is subject to changes in the law.
It is wise for trustees to keep records of receipts and payments and other transactions relating to the trust. This can be important for tax and other practical purposes. Any important transactions should be carried out only after taking legal advice to avoid problems, but that is similar to the situation where you are considering doing something with your own money.
If the home is placed into a property trust, then the buildings insurance must be transferred into the names of the trustees. This is because the house is in their names. Insurance brokers do not usually charge for this. Contents cover should remain in your own name(s). The contents remain your own.
Do not be alarmed that tax will suddenly become a complex issue. Whilst you still live in the home held within the trust it should not have a great impact. Even after any sale it should be straightforward. All trusts must be registered with the tax office. We will do that for you. The yearly trust tax return looks complicated but usually there will be little, if anything, to include within it. Sometimes one will not even be required. Again, we can assist if there are any queries.
Provided that the value of your home is below the nil rate band, currently £325,000, inheritance tax is neither saved nor increased by transferring your home into a property trust. It is inheritance tax neutral. It is not a part of a tax planning scheme. There is no inheritance tax charge on founding a property trust for houses valued at under £325,000. If your home is valued close to or over that amount you will need to tell us, and we will explain to you the best way to proceed. There may well not be any inheritance tax to pay after all, but care is needed. Inheritance tax will not be payable upon your death, unless you have more than £325,000 (the ‘nil rate band’ for tax year 2017-18) in total assets including the home and certain gifts made within 7 years of death. If all your assets, including trust assets, pass to a surviving spouse then no tax is payable on that death, whatever value is involved. On the survivor’s death, if the £325,000 limit is exceeded, inheritance tax may fall due at 40% of the surplus above £325,000. However, there is the introduction of the “Residence Nil Rate Band” to consider. This is an additional nil-rate band of up to £175,000 when a residence is passed on death to a direct descendant. This means that potentially the combined individual nil rate band limits could be up to £500,000 (£325,000 + £175,000). Specific advice will be required at the time.
Capital gains tax
There should not be any capital gains tax payable upon the transfer of your home into the property trust. This is because the ‘principal private residence exemption’ to capital gains tax applies on entry into trust and subsequently. (It does not apply to property held after an outright gift to a person who does not live there.) But if you have not always lived in the property whilst you have owned it (perhaps it was built after you bought the plot) there can be a capital gains tax charge upon setting up a property trust. Also, if you cease to live there for a few years and then it is sold there can sometimes be capital gains tax to pay. This is all the same as if you owned the property in your own name. If there are other assets held in the trust, apart from cash (there is no capital gains tax on cash), then the current capital gains tax rate applicable to settlor interested trusts is up to 28% depending on your overall tax situation (2017-18 tax year). It is not likely that capital gains tax will have any significant impact unless there is no home involved as the main trust asset for a long period of time.
There is no income tax charge upon founding a property trust. Whilst you live in the home within the trust you will not pay a rent for that residence. If, however it is let out, or the sale proceeds generate an income by way of interest, the tax liability is set at the lower rate or the basic rate depending upon the asset type. This is practically the same as for any income which you presently receive. If you are a higher rate taxpayer extra tax up to that rate may be due from you.
Stamp duty land tax
Unless there is ‘consideration’ (i.e. money paid for the transaction) there is no tax to pay on founding a property trust. There may be stamp duty land tax to pay if the property is sold and another is purchased for you to live in. The amount depends upon the cost of the new property. This is the same as if the property was in your own name. Note: if your home is subject to a mortgage then a transfer into a property trust may not be possible. Even if it were agreed with the lender, there might be a charge to stamp duty land tax because the liability to pay the mortgage would count as consideration that the trustees would be taking on. The tax due would depend on the value outstanding on the loan.
The pre-owned assets charge
In some situations, when property remains occupied by a person who has previously disposed of it, there is a special charge to income tax under the Finance Act 2004 Schedule 159. This does not apply where you have an interest under a family trust. It only applies in special circumstances, usually involving complex inheritance tax planning schemes. In the case of a property trust the exemptions within Schedule 15 paragraph 11 apply.
In short, the foundation of a property trust and its administration should not deter you from founding such a trust if you believe that it is right for you.
Seek advice from a solicitor that specialises in these matters such as ourselves and is able to properly help and advise on whether this might be a suitable option for you.