Protective Property Trust Wills: Underused

Protective Property Trust Wills for homeowners (PPTs) are one of the most common types of Wills.

There are two versions:

  1. for joint property owners – a normal pair of Protective Property Trust Wills UK which will give the survivor the protection of living in the property for the remainder of their lifetime or earlier if the trust specifies i.e. remarriage. It also should ensure that if the survivor requires long-term care, at least half the property is preserved for the benefit of their beneficiaries who are normally the deceased’s children.
  2. A Right to Reside (or Life Interest) for (typically) clients where only one owns the property, but wishes to ensure that the survivor – who may be common law spouse, spouse, child etc – is able to stay in the home for as long as they need to, but without transferring ownership to them. That time can be time or marriage limited, but is usually as long as is needed (usually to death or until moved into care).   That way, the second party has a home (as long as they maintain and insure it usually) for whatever length of time is appropriate, but the property eventually goes (usually) to the family of the original owner.

How Protective Property Trust Wills are set up:

  1. Normally, joint owners of a home own it as “joint tenants” – they both own all of it (*in effect, so the death of one semi-automatically passes full ownership to the survivor, who can then leave it to whomever they like (new wife, Battersea Dogs home) and not the children of the deceased.  It is not uncommon for children to be sidelined by a new partner who may wish to protect his or her own interests rather than honour the original intention of passing the estate of the deceased eventually to the children/ grandchildren.   This is even worse if there is a blended marriage where the children of the deceased are likely to be cut out in favour of the children of the survivor – without the mechanism of the PPT (protective property trust) being in place. Or worse, the survivor remarried and leaves everything to the new partner, who gives it to their own children!
  2. The ownership is changed to tenants in common (normally half each) so each partner can select their own eventual beneficiaries for their share of the home.
  3. Protective Property Trust Wills are set up for each partner.
  4. On the first death, 50% of the property goes into a trust which allows the survivor to continue to live in the home, as long as they insure and maintain it, or indeed move.  If they move downmarket, they can release capital from their share, leaving the Trust owning a larger share of the new home. The trust would be set up on the death of the first testator. The legal title will then be transferred into the joint names of the surviving spouse (as an example) and the trustees. The buildings insurers need to be notified of the Trustees interest in the property.
  5. Apart from the Trust, the survivor can do what they wish (including making a new Will) with their share of the estate which remains at risk from care fees, predatory marriage, con merchants etc.
  6. If the survivor moves into care, the Trust can be released to the beneficiaries.
  7. When the survivor dies, the Trust will be released to the beneficiaries (as long as they are of age) but the estate of the survivor will be dealt with under the terms of their Will which may or may not be the same.

It is important to add here that a property cannot fully enter a life interest trust on death as until the mortgage has been settled, they are not seen to own the property. The simpler solution would be to ensure that both clients have life cover in place to cover the mortgage on first death. If on death there is still a mortgage on the property and there is nothing in place, the survivor does still have limited options:

They can sell and downsize as the PPT has downsizing provisions; or
A cash loan could be taken out to settle the mortgage.

What is the point of a PPT?
The main reason for a PPT is the protection it provides for the beneficiaries i.e. the children, to ensure they are protected and ultimately receive a share of the home.

If the share of the home is simply gifted to the partner directly, this could cause a number of issues – the main one being sideways disinheritance i.e. the surviving partner remarries and the house passes to their new spouse under the Will. A PPT will enable the partner to stay in the home and will avoid the risk of the partner potentially disinheriting the children.

Likewise, if a share of the home is gifted to the children directly while the spouse or partner has the other share, this could cause issues in that the children may want to force step mum out of the property or insist that she pays rent to remain in the property. A PPT prevents this from occurring and essentially protects both parties’ interest. It is important to add the beneficiaries will only own the share of the home when the PPT ends either due to the death of the life tenant or earlier.

Can the property be sold?
A PPT can include powers allowing the life tenant to downsize and use the sale proceeds to purchase a substitute property for the life tenant to live in. The additional proceeds from the sale will remain in the trust and the life tenant can be paid an income from this. This can be useful where the life tenant may not be able to look after a large home as they grow older.

Can the life tenant end the trust sooner?
If the life tenant (Mr) decides to revoke his life interest, he would simply inform the trustees that he wants the life interest to end and the share of the home will be distributed to the beneficiaries. However, if the life tenant also owns a share of the property, this does mean there is a risk that the children, now owning a share of the property, could attempt to force a sale of the property.

If the life tenant decides to revoke their life interest, as it will be earlier than death, the distribution to the beneficiaries will be classed as a Potentially Exempt Transfer (PET) from his estate and therefore he will need to survive the 7 year period for it to not form part of his estate for IHT purposes.

Disadvantages of a PPT
The main disadvantage of a PPT is that this inherently comes with a loss of control over the property for the survivor, since they’d be limited in how they manage the property e.g. would need the trustees agreement to sell, would be unable to take out equity release if needed.

Probate would be required and there would be fees associated with setting the trust up and transferring the property to the trust. Probate is unlikely to be avoided completely unless all the assets are held jointly.

There is also the future IHT liability that this creates since assets in the PPT would be treated as part of the life tenant’s estate for IHT purposes. If they had directly inherited the property, at least they could have had the opportunity to carry out some lifetime planning to reduce this.

How is a PPT taxed?
Inheritance Tax

For inheritance tax (IHT) purposes, the life tenant of the trust is treated as inheriting the trust property on the death of the testator. If the life tenant is the deceased’s surviving spouse or civil partner the spousal exemption will apply and delay any IHT until the life tenant’s death.

When the life tenant dies, everything in the PPT will be revalued and included in their estate for IHT purposes.

Where PPT’s are used between married couples or civil partners, the RNRB will apply if the share of the home passes directly to their direct descendants i.e. children.

Where there are unmarried couples it would be easier to explain using the example below:

Fred and Elsie own a property as tenants in common. They are not married. Fred has 2 children from an earlier marriage. If Fred includes a PPT in his will giving Elsie a life interest in the property until her death and names his children as the beneficiaries at the end of the trust, the RNRB will not apply. The reason for this is because the interest is seen as passing to Elsie and would therefore need to pass to her direct descendants for the RNRB to apply. If, however, Fred and Elsie get married, the RNRB will apply as stepchildren are classed as direct descendants.

Capital Gains Tax

There is no capital gains tax (CGT) payable on the testator’s death. The trustees will acquire the testator’s share in the property at the value at the time of death. There will be no CGT payable on the life tenant’s death.

CGT would need to be considered in the event the property is sold between the testator’s death and the life tenant’s death.

If a PPT covers the main residence, this will allow the private residence relief for CGT to apply and ensure that no CGT will be payable if the property is sold, e.g. to downsize.

Income Tax

Where the property is the life tenant’s main residence, the trust will not be creating any income. However, if the property is rented, cash is released due to downsizing or if the property is not the life tenant’s main residence, the trust will produce an income which will need to be taxed.

The life tenant is entitled to all income of the trust and is generally taxed on the basis that it belongs to the life tenant. However, this will depend on whether the trustees receive the income and then pay it to the life tenant or whether the trustees mandate the income so that the life tenant receives it directly. If the trustees mandate the income, it will be the responsibility of the life tenant to declare and pay the income tax due.

Disadvantages of Property Protection Trusts

Here we are talking about Property Trust Wills, which come into existence in full once the first person (property owner) dies, rather than Lifetime Property Trusts.

If a property is owned as joint tenants, each owner technically owns the whole, and on the death of one owner, the survivor just has to send a death certificate to the Land Registry to become the sole owner.  With Property Trust Wills, the ownership is “severed” so (normally) each owner now has a specific 50% share, so probate will be required after the first death in order to amend the way the home is owned and formalise the trust.   So you end up with 50% owned by the survivor, and 50%  owned by the Trust which is them strongly protected against creditors, including Social Services wanting payment of care fees for the survivor.

The survivors’ share remains at risk, a situation which MIGHT not have been the case had they opted for more expensive Lifetime Property Trusts.  That said, we are very happy to discuss lifetime trusts, but there has to be a very sound reason for setting them up, and avoiding care fees is absolutely not one, indeed, any suggestion that this was part of the reason for setting up lifetime trusts can leave them open to challenge.  With Property Trust Wills this is not presently an issue.

Home Income Plans are generally not possible after the first death, as the survivor does not own the whole property.

Call Us on 01323 741200