Lifetime Property Protection Trust
A Lifetime Property Protection Trust (‘LPPT’) is a form of lifetime trust designed to protect the family home from claims against it by third parties.
A trust is a legal entity that allows someone to benefit from an asset without being the legal owner.
The family home is transferred to a trust by the owner (‘the Settlor’). The Settlor retains a life interest in it.
On the death of the Settlor, the family home is held on discretionary trusts for the beneficiaries (usually the children of the Settlor).
Can the Lifetime Property Protection Trust be done by joint owners?
Yes. They are joint Settlors of the Lifetime Property Protection Trust and they retain a joint life interest in the LPPT. After the death of the first of them, the survivor has a life interest in the LPPT.
Are there any drawbacks to the Lifetime Property Protection Trust?
The Settlor is giving away what is most likely his or her main asset. Although he or she retains the right to live there rent-free by virtue of the life interest, he or she no longer has access to the capital represented by the family home. Accordingly, he or she could not sell the house and spend the proceeds, mortgage it or take out equity release. The Lifetime Property Protection Trust does however contain powers enabling the trustees to unwind the trust at their discretion and transfer the family home back to the Settlor which would then give the Settlor access to the capital.
Aside from that, the Settlor continues to live in the family home in the normal way. He or she insures the property, pays council tax and utilities in his or her name and continues to treat it as if he or she still owns it.
What is the Inheritance Tax position?
The transfer to the Lifetime Property Protection Trust is a chargeable transfer by the Settlor. It is not a potentially exempt transfer for Inheritance Tax purposes, but it is a gift with a reservation of benefit.
This means that the transfer of the family home to the LPPT will not reduce the Settlor’s estate for Inheritance Tax purposes. The purpose of the LPPT is to protect the family home, not to mitigate Inheritance Tax. In addition, if the family home has a value of more than the nil rate band for Inheritance Tax (currently £325,000), Inheritance Tax could become payable at the time of the transfer.
There is now an extra nil rate band for Inheritance Tax for people who leave their house to their direct descendants when they die. This extra nil rate band is presently £175,000 (£350,000 for married couples).
This extra nil rate band will not be available to the estates of Settlors who have transferred their home to an LPPT. Accordingly, a person who has assets (including their house) totalling more than £325,000 (£650,000 in the case of married couples) could lose a very valuable Inheritance Tax exemption if they transfer their house to an LPPT and should consider very carefully whether the benefits of an LPPT outweigh the potential Inheritance Tax saving.
What is the Capital Gains Tax position?
Principal private residence (‘PPR’) relief from Capital Gains Tax is available on the transfer of the family home to the Lifetime Property Protection Trust. As the Settlor retains a life interest, PPR relief remains available whilst the Settlor occupies the family home and for 18 months after he or she ceases occupation. So if the family home is sold after the Settlor’s death, no Capital Gains Tax should be payable. If, after the Settlor’s death, the trustees of the LPPT allow one or more of the beneficiaries to occupy the family home, PPR relief will again become available.
So there should be no Capital Gains tax payable at any time.
Who should maintain and insure the family home?
The trustees of the Lifetime Property Protection Trust have the power to allow a beneficiary to occupy trust property on such terms as they see fit so the question of who maintains and insures is down to the trustees. Normally the trustees would expect the Settlor to maintain and insure as a condition of being permitted to occupy the property – as the trust will hold no cash, the trustees will not have the resources to maintain and insure without recourse to borrowing.
What if the Settlor wants to move house?
The trustees of the Lifetime Property Protection Trust can sell the family home and buy another one in which the Settlor can live. Any surplus sale proceeds will belong to the LPPT but any income produced by those surplus sale proceeds will be payable to the Settlor, who should declare the income on his or her tax return.
The trustees, however, have the power to advance capital to the Settlor and could choose to transfer all or part of the sale proceeds to the Settlor outright if he or she needed them.
What happens to the title deeds of the family home?
The legal title to the family home is put into the names of the trustees of the Lifetime Property Protection Trust. The Land Register is updated to reflect this.
Can a Lifetime Property Protection Trust be done if there is a mortgage at the family home?
Yes, although it might not be possible to put the legal title of the family home in the names of the trustees. In such cases, the Settlor will execute a declaration of trust declaring that he or she holds the property as a trustee on trust for the trustees of the Lifetime Property Protection Trust. The Settlor will, of course, remain liable for any payments due on the mortgage and it will in effect be the equity in the family home that has been transferred to the LPPT (i.e. the value of the property less the amount outstanding on the mortgage.)
What are the advantages of a Lifetime Property Protection Trust over a simple transfer of the property to children?
If the family home were simply transferred to the Settlor’s children, then if any of those children whilst the Settlor was alive
- became bankrupt
- wanted to sell their share of the family home
- fell out with the Settlor
it is possible that the Settlor might not be able to continue living at the family home.
However, in the Lifetime Property Protection Trust, the Settlor has a life interest that cannot be overridden either by other beneficiaries or by third parties making claims against other beneficiaries.
In addition, the LPPT ensures that principal private residence relief from Capital Gains Tax is available, which would not be the case if there had been an outright gift to the children. An outright gift to children would incur CGT on the sale of the property if the value of the property had increased between the date of the gift and the date of the sale.
How is the family home protected in the event of a beneficiary’s death/bankruptcy/divorce?
Apart from the Settlor who has a life interest, all the beneficiaries are discretionary beneficiaries who can only benefit from the Lifetime Property Protection Trust (a) after the Settlor’s death and then (b) only if the trustees exercise their discretion in their favour.
So if a discretionary beneficiary died, no part of the LPPT would form part of their estate. If a discretionary beneficiary became bankrupt, no part of the LPPT would vest in their trustee in bankruptcy (nor could the trustee in bankruptcy make any claim against the LPPT).
In the event of a discretionary beneficiary’s divorce, a court in the divorce proceedings could take into account the likelihood of the beneficiary’s benefiting from the LPPT when dividing matrimonial assets (just as the court could take into account the likelihood of a future legacy), but the court could make no order concerning the assets of the LPPT.
Who should be appointed as trustees?
The appointment of trustees who can be relied on to give effect to the Settlor’s intentions is very important. Whilst the Settlor’s continuing right of occupation is a legal right which cannot be overridden by any exercise of the trustees’ powers, on the death of the Settlor the trustees will need to decide
- whether to sell the family home
- whether to keep the trust going after the sale of the family home
- when and in what proportions to divide the trust’s assets between the discretionary beneficiaries.
As all these decisions are to be made at the discretion of the trustees, they clearly have considerable power.
The Settlor will usually be one trustee. As to the others, the Settlor’s children are usually appointed, but consideration should be given to the scope for a trustee to exercise his or her discretion in a self-serving way – might a child who is not appointed a trustee lose out?
How long does a Lifetime Property Protection Trust last?
For a maximum of 125 years, although in practice it will be a much shorter period. As the Settlor retains a life interest, it will last for at least the Settlor’s lifetime (unless the trustees decide to exercise their power to transfer the trust assets outright to the Settlor).
Normally the trust will be wound up after the death of the Settlor and after the sale of the family home when all the trust assets can be divided outright between the discretionary beneficiaries.
However, the trustees can decide to keep the trust going, which they might do if the sale of the family home does not coincide with an appropriate time for a discretionary beneficiary to receive a lump sum (whether through a divorce, bankruptcy, disability or otherwise).
What is the position if the Settlor goes into care?
The local authority will carry out an assessment of the Settlor’s means. If the Settlor has capital of more than £23,250 he or she will be entitled to no state funding of the care fees. If the Settlor has capital of between £14,250 and £23,250, he or she will be entitled to limited state funding. If the Settlor has capital below £14,250, he or she will be entitled to full state funding.
Whether the value of the family home counts as the Settlor’s capital in the assessment is, of course, the crucial question. Clearly, the family home itself belongs to the Lifetime Property Protection Trust and not to the Settlor. However, it is likely that the local authority will become aware of the transfer to the LPPT during the assessment. So how will the local authority deal with it?
The local authority must of course act in accordance with the law, which is contained in the Care Act 2014 (‘CA’) and the Care and Support (Charging and Assessment of Resources) Regulations 2014 (‘CSCARR’). Local authorities are guided in the interpretation of these pieces of legislation by Care and Support Statutory Guidance (‘CSSG’) published by the Department of Health.
Section 70 CA provides that where a person in care has given an asset away and the gift was made with the intention of avoiding charges for care, the person or persons to whom the asset was given is liable to pay the local authority the cost of the care fees.
However, sub-section 3 of section 70 provides that the recipient of the gift is not liable to pay the local authority an amount that exceeds the benefit accruing to him.
So in terms of the LPPT, section 70 CA has very limited relevance. If a local authority could demonstrate that the Settlor gave the property to the LPPT with the intention of avoiding charges for care, the recipient of the gift i.e. the trustees of the LPPT, would on the face of it be liable to the local authority for the cost of the care fees. However, the trustees’ liability could not exceed the benefit accruing to them. As the trustees would have had no benefit accruing to them from the gift as they would be holding the property as trustees rather than beneficiaries, they would have no liability. Indeed, as all the beneficiaries of the transfer with the exception of the Settlor would be discretionary beneficiaries, nobody would have had a benefit accruing to them from the transfer.
For these reasons, a local authority could not use the provisions of section 70 CA against an LPPT.
So the local authority would look to the provisions of CSCARR and the guidance in CSSG. Regulation 22 of CSCARR provides that a person in care is to be treated as possessing capital of which he has deprived himself for the purpose of decreasing the amount that he may be liable to pay towards the cost of his care. So the Settlor of an LPPT could be treated as still possessing the capital represented by the family home which he or she transferred to the LPPT if it was for the purpose of decreasing the amount he may be liable to pay for care fees.
How does the local authority determine the purpose of the transfer? CSSG states that there may be many reasons for a person depriving themselves of an asset and that a local authority should, when determining the purpose, consider (a) whether avoiding the charge for care was a significant motivation and (b) the timing of the disposal of the asset. At the point the capital was disposed of could the person have a reasonable expectation of the need for care and support?
Whether a local authority could show that avoidance of care fees was a significant motivation in setting up the LPPT will depend on the facts of each particular case. However, CSSG is clear that, as well as motivation, a local authority should consider whether the Settlor had a reasonable expectation of care at the time he transferred the property to the LPPT.
It is difficult to know what local authorities will consider a reasonable expectation of the need for care might be - however, to give the words their natural meaning, a person giving an asset away must have had reason to expect that he would need care in the future, whether by reason of his health or some other factor.
CSSG appears to confirm this when it later states:
For example, it would be unreasonable to decide that a person had disposed of an asset in order to reduce the level of charges for their care and support needs if at the time the disposal took place they were fit and healthy and could not have foreseen the need for care and support.
So if the Settlor was fit and healthy at the time he created the LPPT, it is difficult to see how a local authority could consider that at the time he had a reasonable expectation of the need for care.
Is the Settlor reliant on state funded levels of care?
No. If a person in care is being funded in whole or in part by the local authority and they chose a care home which is more expensive than the rate which the local authority is prepared to pay, a third party (usually the family ) may agree to pay the difference.
In the case of the Lifetime Property Protection Trust, the trustees could decide to sell the family home and use part of the sale proceeds to make the top-up payments.
Can the Lifetime Property Protection Trust also hold savings and investments?
Yes. The Lifetime Property Protection Trust can hold other assets as well as property. The life tenant would be entitled to the income from any savings and investments held in the trust and would need to account for income received on their tax return (as they would whilst owning the asset outside the trust). It must be noted that if capital growth of the savings/investments whilst in the trust were to result in the value of the trust exceeding the Nil Rate Band, 10 yearly and exit charges could apply.
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