Why You Should Be Wary of Advisors Who Recommend Putting Your Home into a Trust?

Many clients are understandably worried about inheritance tax and care fees. Their home is their main asset and, particularly in the South East, property values continue to increase.

Sadly, we have seen cases where clients have sought advice from unscrupulous advisors who
persuade the clients to put their homes into a trust fund. The trust is set up and the property is transferred into the names of the trustees whilst the clients are still alive. Commonly, these are called “Family Protection Trusts” or something similar. The advisors will persuade the client that the
benefits of the Trust are:

•  A reduction in the inheritance tax bill
• Protecting the home against care fees
• Avoiding the requirement for a grant of probate.

Do these schemes work? In a word, no. Kate Barker of Warners discusses the reason why these Family Protection Trusts (FPTs) should be avoided.

Inheritance Tax

These FPTs do not give any inheritance tax savings, because the client is generally a beneficiary of the trust fund for his or her lifetime. This means that HMRC treats the trust property as belonging to the client when working out the inheritance tax bill. In some cases, the establishment of the FPT has even had adverse tax consequences for the estate. The reason for this is that the Residence Nil Rate Band allowance (which is available for clients who own a property which they leave to their children or further descendants in their will) cannot be set against a property which is held in trust. This potential allowance of £175,000 per individual is therefore lost if the property is placed into an FPT.

In one case encountered by Warners, the inheritance tax bill came to £70,000 on the estates of a husband and wife who both died after having placed their home into FPTs. If they had not been persuaded to enter into the scheme, the inheritance tax would have been nil.

Care Fees
FPTs are not effective in saving the home from care fees. The Local Authority has the power to claw bank assets which have been gifted (either to an individual or to a trust fund) where the main purpose of the transaction was to avoid care fees in the future. Local Authorities are on the lookout for these types of schemes and will do their best to unwind the trust and claw back the property for means testing.

Grant of Probate

Warners have encountered cases where the supposed purpose of the FPT was to avoid the cost of obtaining a grant of probate. However, a Grant was required to deal with the other assets in the estate (namely savings and investments), so in that case there was no saving. Even where the FPT does successfully negate the requirement for a Grant the savings can easily be outweighed by the adverse inheritance tax consequences and the cost of setting up the FPT at the outset.

What should clients do instead?

• Make a properly drafted Will. Your Will can include provisions for inheritance tax planning and protecting against care fees. Trusts contained in your Will are generally not subject to the same problems outlined above, but it is still best to have your Will prepared by a qualified solicitor.
• Seek advice from an independent financial advisor. Your advisor will be regulated by the FSA and be able to provide advice concerning inheritance tax-efficient assets. Many IFAs now offer a “forecasting” service whereby they can demonstrate how much you will need to save to live comfortably in your retirement and how much you can afford to give away, should you choose. There are a range of products on the market for those seeking to reduce their inheritance tax liability.
• Protect your home. A legitimate advisor will tell you to be wary of transferring your home either into a trust or to your children. Your property is your most important asset, not simply because of its value but more importantly, because it is your home.
• If you have entered into an FPT and would like advice about the implications please contact us for further information.