A property protection trust has advantages and disadvantages – but is it worth having one in place? Here we look at property protection trust disadvantages.
Property protection trusts are often referred to as lifetime trusts, and they are established immediately so your home is gifted to the trust, allowing you to keep living there.
You must be aware of all your options if you’re considering setting up a lifetime trust.
Property Protection Trusts – What Are The Disadvantages?
It’s worth evaluating the pros and cons of property protection trusts before you go ahead and create one, so you’re not surprised when anything happens further down the line.
For example, there is the possibility when you set up a lifetime trust that your local authority can rule that your arrangement is a ‘deliberate deprivation of assets’.
If this happens, they may assess you as if you still own the property, and if you are applying for care funding, it may be refused on this basis.
A lifetime trust has many legitimate purposes, but it can’t be seen to be circumnavigating care rules, which is what the deliberate deprivation of assets ruling refers to.
What Is The Tax Treatment of Property Protection Trusts?
The tax treatment of lifetime trusts should be a key consideration because if you gift the house to the trust, it may be liable for inheritance tax (IHT) if it’s worth more than the nil-rate band, which is currently £325,000.
So, if you transfer your property to a property protection trust, you could face an immediate charge of 20% on any balance over £325,000, which includes any gifts made in the last 7 years.
This could prove to be a costly way of transferring the property to a trust, particularly if you don’t have the liquidity to cover an IHT bill running into five figures.
Trustees will also need to submit tax accounts to HMRC, with the potential of a tax bill every 10 years at a rate of 6% of the value above £325,00, plus income tax on any payments that are made from the trust AND exit charges on assets.
Aside from IHT, there is also Capital Gains Tax (CGT) to consider…
CGT for lifetime trusts is calculated in the same way it is for individuals, except the annual allowance is lower – £6,000 currently. However, if the trust is set up for someone who is disabled then this figure is slightly higher at £12,000.
You should seek expert legal advice before setting up a lifetime trust to ensure that you do it in the most tax-efficient manner possible and consider all of your potential options.
For example, if some of your beneficiaries in the trust aren’t based in the UK, then things can become complicated, and it might not be the right option for you.
Later Life Planning – What Should I Know?
If you’re planning for later life, there are a lot of things to consider.
A property protection trust focuses on the financial aspects of your estate, and it might be that you think about creating a power of attorney (POA).
A POA is a legal document that allows someone else to make decisions on your behalf, should you not be able to.
There are loads of reasons why you might create a POA, also referred to as a Lasting Power of Attorney (LPA), particularly if you have someone in mind to make decisions on your behalf.
A property and financial affairs LPA gives your attorney (the person you give control in your POA document) the ability to make decisions on your finances and property. That could be paying bills, collecting pensions and benefits, selling your home, managing bank accounts, and other financial matters.
All powers of attorney must be registered with the Office of the Public Guardian, which your solicitor will handle.
Crucially, this could be a more favourable option for tax purposes as it allows a loved one to make decisions on property and finances without having the burden of paying IHT or CGT immediately.
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