Our specialist Private Client team at Mayo Wynne Baxter meets many clients who have sought advice in the past, and prepared trusts, referred to as asset protection trusts, or similar. Clients have often been charged thousands of pounds to set them up as well as transferring their property, savings, and investments into the trust itself. In these circumstances, the clients are referred to as the settlors of the trust.

Many clients do not appreciate they no longer legally own those assets – they have given them to the trustees. Even if the settlors are also the trustees, they do not own the assets personally and they have lost the ability to use the assets in any way they wish to.

Trusts come in various forms but the type we see most in this scenario is a discretionary trust whereby the trustees have absolute discretion to determine how the trust assets are used or distributed amongst the beneficiaries, including when and how much, if any.

Are there Inheritance Tax benefits?

Substantial changes to trust law and the introduction of the “relevant property regime” mean using trusts of this nature for the potential tax benefits has been severely restricted.

Subject to some provisos, if the value of the assets transferred into the trust by any one settlor is less than the current Nil Rate Band of £325,000, there would be no immediate charge to Inheritance Tax. However, settlors should keep accurate records as their executors might need to be concerned how having settled the trust will impact the settlor’s estate for Inheritance Tax purposes in years to come. There could be immediate Capital Gains Tax implications if advice isn’t sought beforehand.

It is quite common for the settlors to continue living in their property without paying rent to the trustees or to receive dividends paid on the investments which are now owned by the trustees. By doing so, they have retained a benefit in the asset. A gift whereby a benefit is retained is called a Gift with Reservation of Benefit (GROB) – for Inheritance Tax purposes. The value of the property will still be treated as part of the settlor’s estate on their death regardless of how long ago the gift was made.

Despite it often being the case that the settlors’ adult children are the only beneficiaries of the trust, the settlors’ executors will have lost the ability to claim the Residence Nil Rate Band on the settlor’s death despite the value of the property being aggregated with their estate for Inheritance Tax purposes because of the GROB rules.

Overall, therefore, creating trusts of this nature can often have no benefits for Inheritance Tax purposes unless stringent conditions are met, and instead can be quite detrimental so caution must be taken.

Are trusts effective at protecting assets from being used to pay care fees?

If an asset has been given away in order to deprive oneself of that asset to avoid it being financially assessed for care fees then this is considered a deliberate deprivation of assets. In this case, the Local Authority can assess the settlor as if they still own the asset in question regardless of how long ago the gift was made, and the gift won’t be effective.

One could argue that, unless there are legitimate tax savings or other overwhelming reasons to give assets away, such as the need to assist a vulnerable child to live securely, then why else would one give away assets other than to avoid them being assessed for care fees? This is the case particularly as clients get older and the possibility of them requiring care becomes a more realistic prospect.

Consequently, these types of gifts do not work for the purpose of protecting the assets from care fees most of the time.

“At least my executors won’t need to obtain a Grant of Probate on my death”

Sometimes, executors need to obtain a Grant of Probate to deal with the sale or transfer of assets that once belonged to the deceased – such as selling their property or shares.

If the deceased no longer owned these types of assets at the time of their death because they had given them away in their lifetime, it stands to reason that the executors won’t need to obtain a Grant of Probate to deal with them.

Obtaining a Grant of Probate can be a relatively straightforward process and advice can be sought at the time which can make this even easier. On the face of it, obtaining a Grant of Probate can cost as little as the Probate Registry fee itself which is currently £273. Avoiding the need for executors to obtain a Grant of Probate is very rarely a good enough reason in itself to create one of these trusts.

In conclusion, there are still scenarios in which gifting assets to a trust during your lifetime can be effective at reducing tax burdens and as a way of filtering assets down to the future generations. However, advice should still be sought before anything is agreed and put in writing as it is often very difficult to undo what has already been done.