Lifetime Trusts cannot be contested however they can be challenged if being used as a vehicle to deliberately deprive assets from: paying for your care; being held as part of a divorce settlement; creditors; being taken into account when filing for bankruptcy.
You may decide to transfer the family home into a Home Protection Trust. The idea is that you will retain an interest for your lifetime (the right to any income) and remain living in the home rent free (therefore becoming the life tenant).
After the death of you (or the survivor of you if a couple) the home or, if it has been sold, the proceeds of the sale will be held on a Discretionary Trust for multiple beneficiaries or classes of individuals.
The transfer of the property into the Trust is known as a lifetime chargeable transfer. Provided the value of the transfer by each transferor is less than £325,000 there will be no lifetime Inheritance Tax consequences unless any previous lifetime transfers into Trust or gifts have been made in the last seven years, in which case, if the total transfers exceed £325,000 then tax will be payable at 20% on anything above the threshold.
The value of the assets held in the Trust need to be looked at every 10 years. If, at that time, the Trust Fund exceeds the £325,000 threshold there will be charges of (up to and often much lower than) 6% to pay on the amount above the allowance.
In order to avoid the entrance (and usually the 10 year anniversary charges), couples who own assets jointly will sever the tenancy on the asset so it is held in equal shares and transfer each share into their own Trust which has its own allowance. Alternatively, the value of the assets going into the Trust can be capped at the threshold to ensure they never exceed it.
As you will occupy the property, no income will immediately arise so there is no need to notify HMRC of the creation of the Trust. If the property is let or sold with the proceeds invested, the Trust will have an income. The Trustees then need to notify HMRC and annual returns have to be filed.
The first £1,000 of income is charged at 20% or 7.5% on dividend-type income. Trust income over £1,000 is charged at 45% or 38.1% on dividend-type income. If you are paid income from the Trust then this will be charged at your personal rate of tax.
Although the transfer of the family home is a disposal for Capital Gains Tax (CGT) purposes, no charge will arise provided the home remains your principal private residence.
The property is transferred into the Trust at current value for CGT purposes but principal private residence relief will remain available while you, or the survivor of you, remains in occupation of the property and for the 9 months after you, or the survivor of you, ceases to occupy the property.
If, after your death(s), the Trustees permit a beneficiary to occupy the property then principal private residence relief will still be available.
If the Trust does attract CGT, it is charged at a rate of 28% and is only paid by Trustees if the assets have increased in value above the Trustees’ available annual exemption since being put in the Trust. The Trustees’ annual exemption is a maximum of one half of the individual’s annual exemption.
The Trustees must take advice on the potential Inheritance Tax implications before distributing assets to the beneficiaries under the Trust.
When the Trust is brought to an end, exit charges of (up to and often much lower than) 6% may apply. This will depend upon the value of the Trust assets when the Trust was set up; the value of the Trust assets when the Trust is wound up; and what, if any, distributions of capital have been made during the Trust period.
Assets held in this type of Trust will not generally be held as part of the Estate for probate and could therefore have the advantage of reducing the potential probate fees and times.
Please note: if you set up this Trust then your executors will not be able to claim the Residence Nil Rate Band (RNRB) on your Estate after your death which aims to enable you to leave your property to your descendants free of Inheritance Tax.