For many people, their home is their most valuable asset, and preserving it for future generations is a key priority in Writing a Will and estate planning, especially in later life. A Protective Property Trust, also known as a Life Interest Trust, is a popular tool used in Wills to protect your share of the property and ensure it passes to your chosen beneficiaries. This type of trust provides various benefits, including safeguarding assets from potential future care fees as well as reducing the risk of sideways disinheritance.
Let’s explore how Protective Property Trusts work, the roles of trustees, and the tax implications of setting one up.
What is a Protective Property Trust (PPT)?
A Protective Property Trust is one of the most common types of trusts included in Wills. This type of will is designed to protect the share of the property owned by the first spouse or partner to die, while allowing the surviving spouse or partner to live in the home for the rest of their life. Once the second spouse or partner dies or other specified conditions are met, such as the surviving spouse or partner remarrying then the property belonging to the deceased spouse or partner is protected and preserved for their intended beneficiaries, such as children. This could include children from a previous marriage or relationship. These types of Trusts are often the ideal solution for couples who want to look after each other, whilst ensuring that their home will be protected after their death for their chosen loved ones, and to prevent the value of the family home being swallowed up by potential fees in the future.
A Protective Property Trust therefore is a legal arrangement that allows individuals to protect their share of a property from various risks, such as care home fees, after they pass away. Essentially, it separates the ownership of the property into two shares—one held by the surviving partner, and the other held in trust. This can prevent the entire value of the home from being used to cover future costs or liabilities, ensuring that a portion is safeguarded for the eventual beneficiaries.
How Protective Property Trusts Work
A Protective Property Trust only becomes active when the first partner or spouse dies. Upon the death of the first partner, their share of the property is transferred to the Protective Property Trust, and the surviving partner (known as the life tenant) retains the right to live in the home for their lifetime. On the death of the second partner, this arrangement ensures that the property eventually passes to their children or other chosen beneficiaries. This arrangement is particularly common among couples, married couples and civil partners who want to ensure that their property eventually passes to their children or other chosen beneficiaries.
Here’s how the process works:
Severing Joint Tenancy: To create a Protective Property Trust, the property must be held as tenants in common, which allows each partner to own a specific share. This arrangement contrasts with joint tenancy, where the surviving partner automatically inherits the whole property. If the property is currently held as joint tenants, a severance of tenancy can be made to allow each partner to pass on their individual share through the trust.
Setting Up the Trust Upon First Death: When the first partner passes away, their share of the property is transferred into the Protective Property Trust, according to the instructions in their Will. The surviving partner retains ownership of their half and the right to live in the home. The deceased’s share is placed in trust, managed by trustees who ensure it is ringfenced and preserved for your chosen beneficiaries.
Trustee Responsibilities: Trustees, often chosen from family members or trusted friends, are responsible for looking after the Trust assets, including maintaining the property, approving sales or moves, and ensuring that the life tenant’s needs are met while preserving the trust’s assets for future beneficiaries.
Life Tenancy for the Surviving Partner: The surviving partner is typically granted a life tenancy, which allows them to live in the property as long as they need, often until they remarry, cohabit, or pass away. This ensures the surviving partner has a stable place to live while preserving the property share for future beneficiaries.
Why Choose a Protective Property Trust?
There are several reasons why a Protective Property Trust is a valuable estate planning tool:
Preservation of Inheritance: The trust ensures that your share of the property will ultimately pass to your chosen beneficiaries, rather than being entirely absorbed by care fees or left to a new spouse if your surviving spouse or partner remarries.
Protection Against Care Fees: By placing a share of the property in trust, only the life tenant’s share is considered for care home assessments if they were to face the need of long-term care in the future, helping to preserve the other share for the children or other beneficiaries.
Avoiding Sideways Disinheritance: Nobody knows what the future might hold. Your partner or spouse could remarry and without a trust, there is a risk that the property could unintentionally pass to the new spouse or be inherited by someone outside the intended beneficiaries. A Protective Property Trust prevents this by locking in the deceased partner’s share for specific beneficiaries.
Flexibility: The surviving partner retains the right to live in the property, and the trust can often be transferred to a new home if they choose to downsize.
Protecting Your Loved Ones with a Protective Property Trust
A Protective Property Trust can help you ensure that your property remains in the family, providing a clear path for it to pass down to future generations. This trust type is particularly beneficial for:
Blended Families: Protecting each partner’s share of the property, especially when there are children from previous relationships.
Elderly Homeowners: Safeguarding the home from being entirely lost to care home fees.
Anyone Concerned About Remarriage or Relationship Changes: Ensuring that their original beneficiaries will inherit their share, regardless of the surviving partner’s future relationships
Role of Trustees in a Protective Property Trust
A Protective Property Trust is not created automatically after someone has died and it will need to be set up correctly by the Trustees. The trustees are also responsible for managing the trust’s assets according to the terms in the Will. In a Protective Property Trust, trustees must transfer the deceased partner’s share of the property into the trust, oversee any necessary maintenance, and ensure that the home is adequately insured. Trustees must also observe any taxation and registration obligations with HMRC. They also have a duty to act in the best interests of both the surviving partner and the ultimate beneficiaries.
If the surviving partner decides to sell or downsize, the trustees may approve the sale and reinvest the proceeds in a new property that aligns with the trust’s purpose. Trustees may also manage any income generated from the property, such as rental income, if the property is not used as a primary residence.
Depending on the terms of the Trust, they may also need to manage cash accumulated by the property, perhaps from future rental income or if there is surplus cash from a house sale. Trustees should always seek the appropriate advice and consider the needs of the surviving spouse or partner before making any decisions. The role of a Trustee should not be undertaken lightly.
Taxation of Protective Property Trusts
While Protective Property Trusts offer valuable protection, they also have tax implications. Understanding these can help ensure you make an informed decision about incorporating a trust into your Will.
Inheritance Tax (IHT)
For IHT purposes, the assets held in the Protective Property Trust are generally treated as part of the life tenant’s estate. However, if the life tenant is the surviving spouse or civil partner, the spousal exemption typically applies, meaning no immediate IHT liability. When the life tenant dies, the assets in the trust are revalued and included in their estate, potentially subjecting them to IHT. When the property is ultimately passed on to children or other direct descendants, the Residence Nil Rate Band (RNRB) may apply, depending on the family relationship, and might influence the applicable nil rate band. However, this can vary for unmarried couples.
Capital Gains Tax (CGT)
No CGT is due since the deceased’s share of the property is inherited at its market value on the date of death. However, CGT considerations may arise if the property is sold between the first and second deaths. If the life tenant resides in the property, Principal Private Residence Relief can often be applied, potentially eliminating CGT on a sale. If the property generates rental income, for example, if the life tenant moves elsewhere, any income generated will be subject to CGT at the relevant rates. Trustees should be aware of this when making decisions about the property’s use.
Income Tax
For income tax purposes, the life tenant is usually entitled to any income generated by the trust. If the property is rented out, the rental income is treated as belonging to the life tenant, and they are responsible for declaring it on their tax return. In cases where downsizing occurs and there are proceeds from a sale, the trustees can manage the cash in the trust and potentially pay out an income to the life tenant. This income would be taxed as personal income for the life tenant.
Stamp Duty Land Tax (SDLT)
If the trust involves purchasing a new property, such as in cases of downsizing, SDLT may apply to the purchase. This tax will depend on the property’s purchase price and applicable SDLT rates.
Practical Considerations
A Protective Property Trust provides a structured approach to managing and preserving property assets, but it’s essential to understand the practicalities:
Can the Property Be Sold? The Protective Property Trust can allow for flexibility in selling the property. If the life tenant wants to downsize, the trustees can sell the property and reinvest the proceeds in a new home. Any surplus proceeds can be held in trust, potentially generating income for the life tenant.
Can the Trust be brought to an end? The life tenant can voluntarily end their life interest in the property, at which point the assets would be distributed to the trust’s beneficiaries. The Life Tenant cannot bring the Trust to an end and inherit the whole property without the consent of the other intended beneficiaries. Any early termination would be treated as a Potentially Exempt Transfer (PET) for IHT purposes. The life tenant must survive for seven years from the date of the transfer for it to be fully exempt from IHT.
What Happens if the Surviving Partner Wants to Move? Most Protective Property Trusts offer flexibility, allowing the surviving partner to sell the property and move, with the trust transferring to the new property. The trustees will reinvest the proceeds from the sale to ensure the original share is still protected in the new home, safeguarding it for the future beneficiaries.
Could my children lose their inheritance?
Creating a Protective Property Trust in your Will is a great way to protect a share of your home and ensure that this will ultimately pass onto your chosen beneficiaries. Providing that the trust is set up correctly, the share of your property held in trust will be safeguarded and cannot be taken into account in any assessments made on the surviving partner in the future, so you can be confident that there will always be a share of property protected for your children’s inheritance.
What Are the Risks of Not Having a Protective Property Trust? Without a Protective Property Trust, the entire value of the property may be considered when assessing care costs for the surviving partner. This could result in the home being sold to cover those costs, leaving little or no inheritance for the intended beneficiaries. The property could also pass fully to a new partner if the surviving spouse remarries, further diminishing the likelihood of the children or other heirs inheriting the home.
Disadvantages of a Protective Property Trust
While there are many advantages, there are also some drawbacks to consider:
Loss of Full Control: The surviving partner has limited control over the property, as they need the trustees’ approval for certain actions, such as selling the property or making significant alterations.
Probate and Fees: A Protective Property Trust cannot avoid probate, and there may be additional costs involved in setting up and managing the trust. Legal fees may apply to administer the trust and ensure compliance with the will’s terms.
IHT Implications: Assets held in the trust are subject to IHT in the life tenant’s estate, which could lead to a tax liability on their death. If the life tenant had inherited the property directly, they might have had opportunities to engage in lifetime planning to mitigate IHT that aren’t available with the trust.
Setting Up a Protective Property Trust
Establishing a Protective Property Trust involves careful planning and clear terms laid out in your Will. To create this type of trust, you’ll need to work with a professional Will writer and Estate Planner who can help you understand your options, draft the necessary documents, and ensure that your wishes are honoured. They can also guide you in selecting trustees who will be responsible for managing the trust and seeing that your property is ultimately passed on to your designated beneficiaries.
Conclusion
A Protective Property Trust is a powerful tool for ensuring that your property remains in your family and is distributed according to your wishes. Whether you’re concerned about care costs, blended families, or simply wish to provide a stable home for your surviving partner while safeguarding an inheritance for your children, a Protective Property Trust can be a valuable addition to your estate plan.
If you’re interested in learning more about Protective Property Trusts and whether they’re right for you, then feel free to get in touch. We're on hand to guide you through the process, answer your questions, and help you establish a plan that protects both your loved ones and your legacy.
