I am moved to write this blog after a good client of mine recently approached me, having been approached herself by a company offering her an ‘Asset Protection Trust’. Her question for me was should I do it. My unequivocal answer was no for the reasons I will set out below.
My main inspiration for writing this blog though is not the shocking disingenuity of the people who hawk these products (although that would have been good enough), but rather the fact that this client was the latest of a growing number whom I have helped sometimes to avoid the planning in the first place, but often to untangle it when it (inevitably) goes wrong. As I will describe below, unpicking this planning can have considerable tax ramifications.
Asset protection trusts (sometimes referred to as Lifetime, Family, or Universal Protection Trusts) are, in simple terms, trusts into which you are encouraged to transfer your home, and perhaps your other savings and investments, with a view to avoiding care fees later down the line.
The idea, simply put, is that if you have ridden yourself of the legal title to your property, the property itself cannot be considered when determining your liability to settle care fees in due course.
I have also seen some companies that claim that such trusts will also save inheritance tax.
Fortunately, my client was conscious of the old maxim ‘if it sounds to good to be true..’. I can certainly report from the coal face that the magical trust that disappears your assets from care fee assessments and inheritance tax, whilst allowing you full use of them in the meantime, does not exist. It is nevertheless easy to see why a person who is not conversant in legal matters, especially if they are otherwise elderly or vulnerable, might be taken in by a well-presented snake-oil salesman.
There are numerous reasons why these trusts are problematic, as follows:
Any action taken at any time with a view to avoiding care fees will almost certainly be viewed by a local authority as a deliberate deprivation of capital. In these circumstances you will still be charged for care on the basis that you own the assets given away. This is known as notional capital.
A transfer into trust is a ‘lifetime chargeable transfer’ for inheritance tax (IHT) purposes. It is also a chargeable disposal for capital gains tax (CGT). Taken together, this can result both in immediate adverse capital tax consequences as well as further adverse consequences when the property is sold or when you die in due course.
It is a crime under the Legal Services Act 2007 for an unregulated provider (i.e. anyone who isn’t a solicitor) to offer trust creation and administration services. In turn, you will not find a solicitor willing to set up an asset protection trust*
*I did come across one firm offering such trusts, but this was unfortunately what they called a standard discretionary trust to provide for wider family members (which is entirely legitimate). The critical concern here is not the name of the trust (although asset protection does seem the most popular) but is rather any trust offered to you with a view to avoiding care fees.
Deprivation of Capital and the 7 Year Rule
The rules here are set out in the Care and Support (Charging and Assessment of Resources) Regulations 2014 (the Regulations). In short, the Regulations state that any action taken whereby the avoidance of care fees was a significant motivation, will be a deliberate deprivation of capital.
As the case of Yule v South Lanarkshire Council  1 CCLR 546 makes clear, there are no time frames involved, so Local Authorities can (and do) go back to an action taken 20 or 30 years ago and deem it a deliberate deprivation of capital.
Quite often people believe that if an action was more than 7 years ago, it cannot be taken into account. However, this is a confusion with the IHT rule that an asset given away only falls out of your estate for IHT purposes after 7 years. Moreover, this planning would not even trigger the 7-year survivorship rule anyway as it is almost always a reservation of benefit (see below).
Some of the companies hawking these products suggest that as long as a person had no immediate or foreseeable need for care, then the transfer is not a deprivation. To those companies I (and many local authorities) would say ‘rubbish’.
The Regulations do say that at the point the capital was disposed of, could the person have a ‘reasonable expectation of the need for care and support’. However, that is only a corollary to determining whether the avoidance was a significant part of the motivation. If you transfer your house into trust on (and only after) receiving advice that this will avoid care fees, and you further continue to live there, it would be somewhat of a stretch to suggest that you never foresaw the future need for care.
Some companies then suggest that there are other reasons why you might set these trusts up, notably to avoid probate costs. However, most estates will still require a Grant of Probate, so no costs are saved here. Further, unless you are prepared to name trustees other than yourselves and to fully transfer your property into third party hands, your house will likely still need a Grant of Probate to deal with anyway be it in trust or not.
I did once help a client who was victim of a rather large and now infamous scam involving the firm Universal Wealth Preservation. That firm not only set up these trusts, but the directors acted as trustees and many hundreds of people transferred their property and other savings to them. Those direcors promptly 'did a runner'.
My clients at that time had transferred the title of their property to the directors Steven and Melanie Long, whose names appeared on their title deeds. I was thankfully able to convince the Land Registry to transfer title back to my clients without the need for a Court Order. Many other parties were not so lucky.
Steven Long is now in jail.
Capital Tax Nightmare
The bulk of my involvement with these trusts has come with picking them apart and settling the capital taxes for doing so.
When you transfer your home into trust, this will trigger an immediate charge to inheritance tax if the value of the transfer exceeds, at most, £325,000. Most firms setting up these trusts completely overlook these charges, and I have had to settle back tax with penalties and interest on several occasions.
Unless you start to pay your trust a full market rent for living in the property, which not many people can afford or would want to do, then the value of the house will not only remain in your estate for IHT, but will also be taxable within the trust itself. In other words, it takes an asset that is taxable once, and turns it into one that is potentially subject to multiple instances of tax.
Worse than that, if you die with a house that you leave to your children, then your estate can claim an additional IHT allowance known as the residential nil rate band. This allowance can save up to £140,000 of IHT for a married couple. However, your estate will completely lose that allowance, and therefore that IHT saving, if you had transferred your house into trust.
Finally, trusts only have a limited CGT allowance and trustees cannot automatically benefit from private residence relief for CGT. Whilst private residence relief can usually be claimed when you remain in occupation of trust property, this does mean that when the property is sold after death, more CGT is paid than would have been the case if sold from an estate (which benefits from a full allowance).
In short, these trusts can have complicated and adverse capital tax ramifications that are almost never pointed out by the dishonest souls selling them.
This has been a soapbox topic of mine for some years now. However, this scandal is finally picking up traction in the mainstream.
Age UK have the following to say about them:
“effectively a worthless piece of paper”
The Chartered Insurance Institute:
“Many of the victims, when interviewed, admitted that the main reason why they "bought" the trust was to protect their assets from care home fees. Clearly, there must have been a lot of mis-selling even if not outright fraud. It is surely well known amongst advisers that a transfer of one’s home to a trust in order to avoid care home fees is likely to be considered to be a deliberate deprivation of assets and, as such, ineffective for the very purpose it was set up. That people willingly pay thousands of pounds and are happy to transfer their home to a third party just shows the power of persuasion of these promoters.”
The Society of Trust and Estate Practitioners:
"Many qualified practitioners consider that such devices do not deliver what they promise, in that local authorities are entitled to disregard the trust when assessing the individual's assets, under the deliberate deprivation of assets rules"
The Office of Fair Trading:
“Victims could get redress under the regulations, which state: ‘A misleading action occurs when a practice misleads through the information it contains, or its deceptive presentation, and causes or is likely to cause the average consumer to take a different decision.”
It is a running theme of this blog (see here) that, as much as you would neither use an unregulated electrician to rewire your home, nor an unlicensed engineer to fit your new boiler, you should never, ever (under any circumstances, really) use an unregulated provider of legal services.
Most legal services, such as trust creation, are reserved legal activities and it is fortunately therefore a crime for an unregulated provider to offer them. Nevertheless, a simple google search will sadly reveal a large number of unregulated providers offering asset protection trusts. There has been growing action by both professional bodies and the police in recent years, with some providers ending up in jail. Nevertheless, the problem persists, and it is often of little comfort to those taken in by such outfits when they are finally brought to justice.
It goes without saying, but even when an unregulated provider can lawfully provide a legal service (such as Will writing) you are putting your money and your families affairs at risk by failing to take proper advice.
If you are ever approached by someone selling these trusts, have any concerns at all, or perhaps have already found yourselves having set up such a trust and want some practical guidance as to undoing it, please do not hesitate to contact Alex Stanier on 01494 893 533.