Trusts are often established as part of the estate planning process, and can be used as a tax-efficient means of passing on assets such as land, money and shares to your Partner or children. Tax aspects aside, they offer valuable asset protection in all manner of circumstances:
1. Lifetime trusts and elderly care assessment
Assessment for care fees in England is based on what’s called ‘properly assessable capital’. There has been considerable publicity regarding changes to funding for long term care, and trusts are at the heart of these debates. The point is that property held within a trust is not at the disposal of any specific person. In most cases, however, trusts are set up for a variety of reasons, and care fees are not the primary driver for them.
2. Lifetime trusts
Aside from care fee assessments, lifetime trusts can also be useful in other circumstances. For example, they could be useful where an older divorcing couple wish to place the property into a trust to allow a mutually agreeable way of leaving it to the children whilst allowing one party to remain living in the house in the meantime.
3. Trusts and estate planning
Will planning can be an effective way to ensure that at least half of the family home is ring-fenced from assessment for care fees. A Property Protection Trust written under the Will ensures that the share of estate of a deceased spouse is not used to pay for the care fees of the surviving spouse. This leaves the surviving partner a life interest in half of the total assets owned by the first to die. Whilst the survivor’s own share in the house will form part of his or her capital, the value of that share will be less, usually much less than 50% of the whole. This is because the open market value of the survivor’s half share will be determined by how soon a purchaser of the survivor’s half share can realise the value of their interest by forcing a sale of the property.
4. Capital Gains Tax on gifted property
Where the family home is ‘gifted’ to the children outright, Capital Gains Tax (CGT) will be applicable if and when the property is sold in the future. Where the property is transferred into a trust, however, the principle private residence relief can be preserved by ensuring that those living in the property have a right to do so, and this CGT will not be due.
5. Immediate lifetime charge to Inheritance Tax
Clients need to be aware that lifetime transfers into trust in which the value exceeds the nil rate band are subject to an immediate 20 % charge to Inheritance Tax. This rule formerly only applied to discretionary trusts, but has now been extended to cover many other forms of trusts.
For more information about forming a trust or for trust advice tailored to your specific circumstances, please contact a member of our trusts team.
Leanne is a Chartered Tax Adviser, specializing in advising on UK tax matters but also including overseas tax as needed. Leanne is head of Taxation Services at EHL Solicitors in Leicester.
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