In the last two months alone, I’ve been instructed by four different clients who had ‘property protection trusts’ (also called ‘wealth preservation trusts’, or similar). Each had relied on the advice of non-solicitor advisors to variously save inheritance tax (IHT), probate fees and care fees. In all cases, the legal work was done remotely by companies who aren’t regulated by the Solicitors Regulation Authority.
In each of these cases (and every case I’ve come across in over 23 years of practising), this type of product was (a) unnecessary, (b) wasn’t provided with sufficient care to ensure that the client actually understood what they were letting themselves in for and (c) typically cost £2,000-£8,000.
To be clear, it’s rarely a good idea to give your property away, even to a trust, as this leaves you without ownership, control and difficulty in arranging future finance.
Most trusts I’ve seen were sold to save IHT, including when the client had no tax liability. Broadly, spouses or civil partners can, between them, give up £650,000 tax-free, and a further £350,000 if their main residence passes to direct descendants. For the majority of the UK, this means that no IHT will be payable. In any event, unless you pay an open market rent whilst you continue to live there, the gift of your home to the trust will be caught by ‘reservation of benefit’ rules and not count as a gift at all for tax purposes, not even the ‘7-year rule’ applies.
‘Discretionary trusts’ are used for these products, and clients seem unaware that these trusts are taxable. For trust assets over £325,000, there is an ‘entry charge’ (20%, but relief is usually available). However, clients don’t expect the 10 yearly 6% charge and so don’t budget for it. There may also be an ‘exit charge’ depending on the trust’s lifespan. This is pretty heard to bear for those clients that didn’t have an IHT problem in the first place.
The other (misleading) selling point of these trusts is that they will ‘protect the home from care fees’.
A ‘Deliberate Deprivation of Assets’ is where someone intentionally diminishes their wealth to accelerate local authority care contributions. Local authorities routinely try to use this to refuse to avoid contributions. Their case is much easier to prove as a person ages, where there’s a relevant diagnosis or where the trust receiving the gift is advertised to ‘save care fees’!
Unwitting clients can pay thousands for a questionable scheme, provided by an unregulated limited company, often with insufficient professional indemnity insurance, meaning there’s little recourse when things go wrong.
There are various ways to protect your wealth, including simply having the right will. Such wills cost a fraction of the price of these trusts, and you won’t be parting with your home, paying rent of have unexpected tax bills. So please, do the research before falling for the pretty brochure and promise of ‘protecting your inheritance’.
To discuss this further, please get in touch with me on 07866 547366 or email@example.com.