What are Asset Protection Trusts?

Released On 9th Jun 2024

In our latest blog series our specialist Trusts Team aim to cover some of the most common issues when navigating the administration of Trusts. This month's focus is on Asset Protection Trusts; what they are, what are the issues and how we can assist.

What are “Asset Protection Trusts”?

Usually a person’s home (can include other assets) is transferred into Trust during their lifetime, but they are named as the principal beneficiary and continue to live there rent free.

Very commonly it's marketed as a way to avoid paying care fees in the future, as the property no longer belongs to that individual (instead owned by the Trustees) therefore “protecting” the property from having to be sold to fund care.

It's also marketed as way to avoid having to obtain a Grant of Probate to sell / transfer the property after client’s death – but may be needed for other assets.

What are the issues?

Clients are not usually advised as to the tax implications (these Trusts fall into the “Relevant Property Regime”) – Inheritance Tax and Capital Gains Tax.
Often former professional trustees appointed (partners of Universal Wealth / McClures) – loss of control as no ongoing contact between the client and trustees (clients unable to sell their property).
Failure to comply with Trustee obligations – Trust Registration Service / 10-year Inheritance Tax returns (at risk of penalties).
Open to challenge by the Local Authority as a deliberate deprivation of assets – failure to achieve intended purpose.
Gift with Reservation of Benefit for Inheritance Tax purposes – as client still enjoying the benefit of the property the value will remain in their estate upon death, although not owned by them.
Risk of double taxation – Inheritance tax payable upon client’s death and exit charge payable by Trustees when Trust terminated.
Loss of Residence Nil Rate Band – as the property does not pass under a client’s Will or rules of Intestacy upon death as not an asset of their estate (even if it does end up with direct descendants).

What are the solutions?

Clients should seek proper legal advice as soon as possible (often issues only come to light when trying to move house or after death).

How can we help?

Porter Dodson’s specialist Trusts Team can assist by:

Contacting the Trustees / their solicitors
Retrieval of original documents held by the former firm
Reviewing the tax position and submitting relevant returns
Registering the Trust with HMRC
Changing the trustees to the client and / or family members
Updating the legal title to property
Advising in relation to terminating the Trust and preparation of relevant deed / tax returns
Advising as to whether to retain the Trust / vary the terms
Advising in relation to estate planning / update of client’s Will