Trusts explained, finishing with the Asset Allocation Trust for your home

The concept of a trust is very straightforward and explained simply on my website, here’s the link: https://willplanningsolutions.co.uk/services/trusts/

The confusion undoubtedly comes from the vast array of names given to them. What a trust does depends on the rules laid out in a trust deed, the dos and don’ts, the parameters and constraints. Trustees will be appointed to manage the trust fund for the benefit of the specifically listed beneficiaries.

A trust can either be set up now, whilst you’re alive, fit and well, or at the date of your death via your Will. At the point it comes to life, it will be its own separate legal entity, be registered for tax with HMRC, and recorded on the TRS, the Trust Registration Service, used mainly to help prevent money laundering.

The most common use for a trust by far is to own the family home, so that it stays ‘in the family’ for successive generations to benefit from it. Ideally this is for your home, your principal private residence, PPR because there’s no Capital Gains Tax on transferring the house you live in, whereas with Buy-to-Let houses there probably will be. A trust can last up to 125 years.

Most of us are interested in solving two main issues, to protect the house from mean testing for care home fees, and reduce or eliminate Inheritance Tax, IHT.

There are of course other risks that the family assets may face, such as preserving the right to State benefits for a disabled or vulnerable person, reducing the cost of administering an estate through the probate process, what happens to the assets if there’s a divorce or bankruptcy.

Settling your house into trust now then could seem to be a good idea, however it isn’t quite the panacea you might hope it is.

Having transferred (or gifted) your home into trust, done by updating the Land Registry Title, the gift is deemed to be a GWROB, a gift with reservation of benefit, so because you’re still living in it, that’s the benefit part, it is still 100% yours for the IHT calculation on your estate, and the Care Act 2014 rules about deliberate deprivation of assets says that if you need care in the future, and have given assets away that you might need in the future, they’ll ignore what you’ve done and get access to them anyway.

If you’re contemplating a trust, you need to go into it with your eyes wide open. The other negative here is if you think you may need access to a lifetime mortgage (equity release by another name!) you won’t find a lender prepared to help you if your property is in a trust.

You will probably have heard about people placing their home into a Family Asset Protection Trust, FAPT for short, and they may well have succeeded to protect it against these risks but there’s no guarantees it will work. Having a very good reason though can help, such as parents with a disabled child, justifying the reasons why in such a case, the parents will be worried about means tested benefits being withdrawn or severely reduced and affecting the disabled child’s standard of living. You get the point.. they want to safeguard the child’s future.

FAPTs are still limited to receiving £325k each, it is the Nil Rate Band amount, NRB, so a single person could put in their home if it didn’t breach this value. If it was worth more, the excess would pay lifetime IHT of 20%, so why would you! Same goes with a married couple, they could each put their own half into their own trust so £650k is the limit for couples. When the circumstances are appropriate, clients will still use an FAPT.

Now though, you can put in more than £650k into a trust, and you need an Asset Allocation Trust for this. AATs work well for properties above £650k and below £2.7M because they will preserve both the NRB and the Residence NRB, RNRB for a couple with children, this is the £1M at 0% IHT, the maximum available. It works by allocation, the £325k NRB in a fund, the RNRB of £175k (maximum) in another fund and any excess value (above £500k)  in another fund, effectively three funds in one trust.

There is a major complication (there are quite a few others as well) and this is to do with being able to claim the Residence NRB (RNRB) amounts of £175k each. If your estate is going to need the RNRB (2 RNRBs if you’re married couple) to mitigate IHT, you need an AAT. It is all to do with the RNRB rules. In order to claim the RNRBs you must leave your house ‘directly’ to a lineal descendant. If you have already transferred it to an FAPT, it has already been given to a trust, not your children, so you can’t claim it. If you use an AAT you will be able to claim the RNRBs because, as I said earlier, it is in a separate fund, which essentially ‘does’ leave it to your children and you can then claim the RNRBs. My explanation is slightly over simplified, you’ll find more on gov.uk, here’s a good starting point; https://www.gov.uk/guidance/check-if-you-can-get-an-additional-inheritance-tax-threshold.

The Land Registry title is changed to show the names of the trustees, restrictions are put on the title that refer to the AAT.

The trust deed, from day one, appoints the initial trustees, which can change as the years pass by. The trust beneficiaries are usually listed as the individual or couple who transferred in their home, and remoter issue, their children and future generations of children. Trustees can add beneficiaries if they wish or need to. The mechanics of how the trust works is the tricky bit to understand. Usually the wording is fixed, having been checked out by barristers, no one would want to change any of the wording  for fear of creating confusion or different meanings.

If at any time the trustees wish to, they can sell the assets, i.e the home, and distribute the trust fund as they wish to, the trust could remain open or be closed.

Lots of companies do these trusts, charge ridiculous fees and call them different names, in my opinion having read through a number of sets of clauses, some are more understandable than others, the plainer the English the better and if you want my help, please just ask, I use one particular company because their clause wording is readable, I have a high element of trust in the business and the individual that owns/runs it. It’s my reputation here as well as theirs!