Property trusts can be a valuable tool for protecting assets, preserving wealth and supporting effective estate planning. However, trusts are not suitable for everyone and the legal and tax implications can be complex. In this guide, our property trust solicitors explain how trusts work, their potential benefits and risks, and when specialist legal advice may be needed.
What is a Property Trust and How Does It Work?
A property trust is a legal arrangement whereby property is held by trustees for the benefit of one or more beneficiaries. Trusts can be created during a person's lifetime or arise under the terms of a Will following death. The type of trust used will determine how the assets are managed, who benefits from them and how they are taxed.
Benefits of Setting Up a Property Trust
One of the main attractions of a trust is asset protection. In appropriate circumstances, trusts can help preserve family wealth and protect assets for future generations. They can also provide greater control over how and when beneficiaries receive their inheritance, which can be particularly useful where beneficiaries are young, vulnerable or financially inexperienced.
Trusts can also play an important role in estate planning, particularly for blended families. A Will trust, for example, may allow a surviving spouse or civil partner to continue benefiting from assets during their lifetime whilst preserving the capital for children or other beneficiaries in the future.
Lifetime Trust vs Will Trust: What's the Difference?
Not all trusts are the same.
A lifetime trust is created during an individual's lifetime. Assets are transferred into the trust and are subsequently managed by the trustees in accordance with the trust terms. As ownership passes to the trustees, the person creating the trust may lose direct control over those assets.
A Will trust, by contrast, only comes into effect following death. No transfer takes place during the individual's lifetime. Will trusts are commonly used to provide for a surviving spouse or civil partner whilst ensuring that assets ultimately pass to children or other chosen beneficiaries.
The choice between a lifetime trust, a Will trust or another planning arrangement will depend on your personal circumstances, family dynamics and objectives.
Risks and Tax Implications of Property Trusts
Tax considerations
Contrary to popular belief, transferring a property into trust does not automatically reduce tax liabilities.
Lifetime trusts can carry significant tax consequences. Transferring assets into trust can give rise to Inheritance Tax, Capital Gains Tax or Stamp Duty Land Tax implications. Some lifetime trusts may also be subject to ongoing Inheritance Tax charges during the life of the trust.
In addition, if someone transfers a property into a lifetime trust but continues to benefit from it, for example by continuing to live there, the Gift with Reservation of Benefit rules may apply. This could result in the property remaining part of their estate for Inheritance Tax purposes.
Will trusts are often treated differently. Where assets pass into a qualifying life interest trust for a surviving spouse or civil partner, the spouse exemption will frequently apply, meaning that no Inheritance Tax is payable on those assets on the first death.
Trusts can involve ongoing administration, including record keeping, tax compliance and professional advice. These responsibilities can lead to additional costs and complexity.
Administration and care fee planning
Trusts are also sometimes promoted as a solution to care fee concerns. However, there is no guarantee that transferring property into trust will protect it from being taken into account in future care assessments. Local authorities may investigate transfers and consider whether deprivation of assets has occurred.
Proceed with caution
Trusts can be valuable estate planning tools when used appropriately, but they are not suitable for everyone. It is important to note that most deeds of trust are irrevocable and therefore it is essential that you are entirely happy that the trust meets your needs and that your circumstances are very unlikely to change. Dispute Resolution Solicitor, Lee Foster, has worked with many clients where he has had to make several applications to the court to revoke trusts that have been mis-sold or not explained properly and it can be complicated and costly process. His advice would always be to ensure that you fully understand the legal implications of creating a trust and take tailored advice from a specialist in relation to your own circumstances.
Before transferring property into trust or incorporating trust provisions into a Will, it is important to obtain specialist legal and tax advice. Careful planning can help ensure that the chosen structure achieves its intended purpose whilst avoiding unexpected consequences.
Why choose Banner Jones Solicitors?
At Banner Jones, our trust and estate planning specialists advise clients across Sheffield, Chesterfield, Mansfield and the wider region on wills, powers of attorney, trusts, inheritance planning and later life planning.
Make an appointment today with our property trust experts in South Yorkshire, Derbyshire and Nottinghamshire
