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Home sweet home…

“We have heard about this new scheme as a really great way of saving inheritance tax/avoiding probate fees.”

This sounds brilliant! What kind of plan is this? We’re all ears.

“All we need to do, is simply transfer our home into the names of our children and place it into trust”.

Oh.

This is a conversation that we are having more and more frequently these days. Whilst we are confined to the terms of current legislation, there will always be practitioners and advisors (and otherwise….) looking for more creative ways of apparently saving you time and money. And naturally, there will always be an appetite from clients to find ways to make their lives easier and more tax efficient.

How we truly wish that there was such a simple answer.

We at legalmatters confess to not being fans of this sort of lifetime gifting of property (also known as ‘home protection plans’ or occasionally ‘asset protection trusts’).

It may well be that, despite the advice to the contrary, the client’s circumstances and desires are such that this is something that could work for them. That is ultimately their choice. However, we have a responsibility to explain the pitfalls of these arrangements to avoid any costly regrets later on.

So why would a client look to give their home away? Often the driver behind this is to protect their children’s interest in the property and to ensure that the property will always be there for them to inherit.

Awkward Conversations
One of the main issues to consider is what would happen if the client’s children had a difficulty in their own relationships (either with a partner or spouse – or with each other). Family relationship breakdowns can leave the client vulnerable. Although the trust would carve out an interest for the client, the more obvious point is that this creates a very difficult dynamic within the family if there were to be a relationship breakdown of any kind. If the children (or their other halves) had a problem with any kind of debt or were maybe even facing something as significant as bankruptcy or divorce, then again their best intentions may be compromised.

Essentially, on paper the property is no longer the client’s and now belongs in the hands of trustees i.e. their children who are then going through that financially difficult period in their lives – all of which creates stress for the family as a whole.

Care home fees
People often cite protection from care home fee assessment as the driver to put their property into this kind of trust. However, the whole care fees funding situation is under review and we are promised a new Care Act shortly. Although we don’t yet know the detail of this, there is likely to be a cap on the amount of fees that any individual has to pay for their own care. This again brings into question whether or not an individual should even consider this sort of trust –especially as their home will often represent the major financial asset of their estate.

Not to mention the possibility that the transfer of an asset to a trust would be classed by the local authority as ‘potential deprivation of assets’. If the local authority chooses to treat the transfer as that (and they are robust and aggressive in their approach) then the risk is that the gift of property into trust would be clawed back and the whole exercise would been worth nothing – and would have cost several thousand pounds to boot.

The main issue is the question of why you would choose to give away your main asset and not give yourself the chance of getting the highest possible standard of care. Local authority care homes are not particularly nice places to be and if we were advising our own parents, the last thing that we would be saying would be to suggest they do anything that prejudices their ability to afford the highest possible standard of care.

Families often say to us that if a parent (as the former co-owner of a property) needed to go into care then the children / beneficiaries of the trust would top up the care fees and ‘do the right thing’. There is of course no guarantee that that would happen and indeed children may not be able to contribute financially in that way even if they wanted to.

Independence
Being in control your own destiny is also important, no more so than when a spouse has passed away. The structure of the asset protection trust is such that the client wouldn’t own their own home anymore and this is a very difficult thing for people to comprehend; it has always been their property and now it is not.

If the aim is to support your children in financial terms then there are better ways of doing this for example via lifetime gifts. The gift of a property into one these ‘asset protection trusts’ does not work for inheritance Tax planning purposes.

Practicalities
On a practical level, other things that need addressing when people place property into trust like this are ‘where will the maintenance fund come from to cover insurance repairs?’ Who would pay for that? Is that you or is that the trustees? Do you want to be going cap in hand to your children?

Trusts are also living and breathing things and they need active management and this means two things; administrative hassle and legal fees! At the very least, HM Revenue & Customs would need to be notified that the beneficiaries of the trust are declaring the income on their own tax return.

Finally, what would happen if you wanted to get out of the arrangement? The trust terms are such that an individual could, but the trustees have to consider why the trust was created in the first place and they have to balance the needs of all beneficiaries. Even if an independent professional trustee was appointed, they would still need therefore to consider the other beneficiaries (i.e. the client’s children) and their own situations – which can lead to a conflict if their interests don’t match.

In our view, the risks and cons far outweigh the potential advantages of placing your property into one of these asset protection trusts.

For that reason, we would rather therefore recommend alternative routes such as properly structured Wills or carefully planned lifetime gifting.

For help with your clients wishes, call us on 01243 216900 or email us at info@legalmatters.co.uk.

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