Summary and overview
Property Protection Trusts can be created during your lifetime or in a will.
Due to their complexity and cost and the need for experienced legal and tax advice Property Protection Trusts are advisable only where there is a clear benefit.
Without significant planning, drafting and good administration a Property protection trust can give rise to disputes between beneficiaries, potentially significant tax liabilities, such as charges to Inheritance Tax or Capital Gains Tax and other complications.
Why set up a property protection trust?
The main drivers for considering a property protection trust are :-
To potentially shield assets from care home fees - however, local authorities can challenge arrangements they see as deliberate attempts to avoid care fees
To ensure your children inherit your property (especially in blended families)
To protect against a surviving spouse remarrying
For couples with children from previous relationships who want to ensure their children ultimately inherit their share of property while still providing for a current spouse or partner
For people with vulnerable beneficiaries - who may not be able to manage inherited property directly.
Parents with concerns about their children's future financial situations - such as potential divorce or bankruptcy.
Common instructions we get on property protection trusts
Our approach and client's needs and objectives typically centre around :-
Working out what you are trying to protect against – for example, remarriage after your death, children from an earlier relationship being disinherited, care costs or concerns about what might happen to your share of the property after the first death.
Checking whether there is actually an inheritance tax advantage – rather than assuming that putting property into trust automatically reduces IHT, we can consider the position with and without the trust, including available spouse exemption, nil-rate bands and residence nil-rate band. We also consider the other tax implications, if the trust is a lifetime trust and you may continue to live in the property and ensuring you understand what the trust cannot protect against, including issues around care fees, so that you understand the benefits and risks before proceeding.
Advising how much of the property should be protected – particularly if you and your partner own unequal shares or one of you contributed substantially more towards the property.
Deciding what rights the survivor should have – such as being able to remain in the property for life, sell and move to another property, downsize or, where appropriate, receive income from the trust assets.
Balancing your partner's needs against your children's inheritance – commonly in blended families where you want your spouse or partner to have security for the rest of their life but ultimately want your share of the home to pass to your children.
Checking how your home is owned – and, where necessary, change ownership from joint tenants to tenants in common so that your share can pass under your will into the trust rather than automatically passing to the surviving owner.
Advising who should be trustees – and who should have control if decisions later need to be made about selling the property, buying a replacement property or releasing money.
Drafting the bespoke trust terms
Tax implications
If you give away your home into a trust but continue to live in it rent-free, HMRC treats it as a "gift with reservation of benefit" (GROB). This means the property is still considered part of your estate for IHT purposes To avoid this, you would need to pay full market rent to the trust (and not receive it back indirectly).
If the property is not your main residence (e.g., a second home), transferring it to a trust can trigger CGT on any gain. If it is your main residence, Principal Private Residence (PPR) relief may eliminate CGT on transfer — but this depends on the trust type and your continued occupation.
If the trust receives rent from you (to avoid GROB rules), it may have to pay Income Tax on that rent. The trust may also be taxed on other income or gains, depending on the type (e.g., discretionary trust vs interest in possession trust).
Does a property protection trust reduce inheritance tax?
Not necessarily. A property protection trust should not be regarded as a simple way to avoid inheritance tax.
For many married couples and civil partners, leaving a share of the home on trust for the surviving partner may not reduce the overall inheritance tax payable compared with appropriate outright inheritance arrangements.
The tax position depends on how the trust is structured, who can benefit and the value and composition of the estate. There can also be important consequences for the spouse exemption, residence nil-rate band and transferable allowances.
This is one reason the trust should not be considered in isolation.
Alternatives to property protection trusts
Instead of a Property Protection Trust, you might consider :-
Simple Mirror Wills - leaving everything to each other, then to your children (simpler but offer less protection)
Outright gift with legal charge - giving your property directly to your children while securing your right to live there through a legal charge
Contact us for a consultation to discuss your specific needs and concerns.
