Westfield WILLS
Protective PropertyTrust Protecting your Home for your Children
What is a Protective Property Trust?
A Protective Property Trust enables you to leave a share of your home to your children (or other chosen beneficiaries) in your Will.
It stops your share of your home being diverted away from your children, whilst at the same time giving your spouse/partner the legal protection they need.
The trust protects your share of your home if, for example, your
spouse/partner:
- Gets married or has a new partner
- Needs to pay for residential care
- Becomes bankrupt or gets into debt
- Changes his/her Will
As well as financial protection, a Protective Property Trust provides peace of mind. It can help you achieve fairness, reduce the risk of family conflict and legal battles.
This is especially important for couples with children from different relationships, due to the higher risk of family conflict and
inheritance disputes.
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How does this work?
Most couples own their property as joint tenants. This means ownership automatically passes to the survivor. To include a Protective Property Trust in your Will, you will need to own your home as ‘tenants in common’ so you each have a share of your home to give via your Will.
I’m not sure whether we own our property as joint tenants or tenants in common?
Don’t worry – we will check how you own your property and help you change to tenants in common if needed.
What rights will my spouse or partner have?
Typical terms of Protective Property Trusts include:
- A right to remain living in the home (usually for life)
- Flexibility to move home
- A right to income (e.g. if your spouse goes into care and the house is rented out) If your spouse/partner moves home, the Trust can apply to the new property and any surplus from downsizing be shared equally between the deceased’s trust and the survivor.
Isn’t it simpler to just leave half of our house to our children in our Wills?
This is very risky! Imagine what would happen if your spouse/partner and children fall out, or your children want to sell, become bankrupt or get divorced? Your spouse/partner would be vulnerable and could even end up homeless. A Protective Property Trust is a safer alternative.
What happens if my spouse/ partner needs care?
The Local Authority will only consider what your spouse/partner owns when making decisions about paying for care. Your share of your home in Trust is protected for your children’s benefit.
Who can be my trustees?
Family, friends or a professional trustee. Often the surviving spouse will be included as a trustee alongside their adult children if appropriate. Your choice of trustees will be discussed with you.
What do trustees do?
On first death, the property needs to be transferred into the names of the trustees. They must ensure the property is insured, maintained, keep records, and pay tax if due. When the trust ends, the trustees will transfer the trust property to the beneficiaries.
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How does this work?
Most couples own their property as joint tenants. This means ownership automatically passes to the survivor. To include a Protective Property Trust in your Will, you will need to own your home as ‘tenants in common’ so you each have a share of your home to give via your Will.
I’m not sure whether we own our property as joint tenants or tenants in common?
Don’t worry – we will check how you own your property and help you change to tenants in common if needed.
What rights will my spouse or partner have?
Typical terms of Protective Property Trusts include:
- A right to remain living in the home (usually for life)
- Flexibility to move home
- A right to income (e.g. if your spouse goes into care and the house is rented out) If your spouse/partner moves home, the Trust can apply to the new property and any surplus from downsizing be shared equally between the deceased’s trust and the survivor.
Isn’t it simpler to just leave half of our house to our children in our Wills?
This is very risky! Imagine what would happen if your spouse/partner and children fall out, or your children want to sell, become bankrupt or get divorced? Your spouse/partner would be vulnerable and could even end up homeless. A Protective Property Trust is a safer alternative.
What happens if my spouse/ partner needs care?
The Local Authority will only consider what your spouse/partner owns when making decisions about paying for care. Your share of your home in Trust is protected for your children’s benefit.
Who can be my trustees?
Family, friends or a professional trustee. Often the surviving spouse will be included as a trustee alongside their adult children if appropriate. Your choice of trustees will be discussed with you.
What do trustees do?
On first death, the property needs to be transferred into the names of the trustees. They must ensure the property is insured, maintained, keep records, and pay tax if due. When the trust ends, the trustees will transfer the trust property to the beneficiaries.
Sam and Alex are a couple with two children.
They make Wills that include a Protective Property Trust and leave the rest of the estate to each other.
Alex dies. Alex’s share is held on trust for the children.
Sam continues to live at home and is protected by the terms of the trust.
If Sam remarries, makes a new Will, needs care or gets into debt, Alex’s half of the property is protected for the children.
If none of these events take place, Sam’s children will also inherit the remaining half of the property via Sam’s Will.
Sam and Alex are a couple with two children.
They make Wills that include a Protective Property Trust and leave the rest of the estate to each other.
Alex dies. Alex’s share is held on trust for the children.
Sam continues to live at home and is protected by the terms of the trust.
If Sam remarries, makes a new Will, needs care or gets into debt, Alex’s half of the property is protected for the children.
If none of these events take place, Sam’s children will also inherit the remaining half of the property via Sam’s Will.
Protective Property Trust
Tax Overview
This guide is to help you understand the key points of how Protective Property Trusts are taxed and is based on the current 2021/2022 tax year rules and therefore could be subject to change.
This guide applies to married couples and civil partners (C.P). In brief, the Protective Property Trust begins on the death of the first spouse/C.P. and provides the surviving spouse / C.P. (‘the life tenant’) with a ‘life interest’.
The trust ends on death of the survivor and is when the beneficiaries receive the trust property.
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Inheritance Tax (IHT)
- Married couples / civil partners benefit from the spousal exemption.
- This type of trust qualifies for the Residence Nil Rate Band (subject to qualifying criteria). Typically, this is where the gross value of the estate is less than £2million and the beneficiaries are children, step-children, or grandchildren.
- There are no entry, anniversary or exit charges apply to this type of trust. The value of the trust fund is combined with the personal estate of the life tenant.
- On death of the life tenant, IHT may be due if the value exceeds available allowances and reliefs. If IHT is due, the trust will pay a proportionate share of this from trust funds.
- If the survivor (known as the ‘life tenant’) ends the trust early, this will be viewed as a gift (‘Potentially Exempt Transfer’). If he/she survives seven years, then no tax is due. If he/she dies within seven years of ending the trust early, then whether Inheritance Tax needs to be paid on the Potentially Exempt Transfer will depend on the availability of the nil rate band.
Capital Gains Tax (CGT)
- There is no Capital Gains Tax (CGT) payable on death of the first spouse / C.P.
- The trustees will receive the property at market value (Probate value) at time of death.
- If the property in trust was the main residence of the couple, then Principal Private Residence relief will be available in most cases and mean no CGT is payable if the property is sold e.g. if the life tenant wants to move or downsize.
- On death of the life tenant, the value of the trust property is given a further tax-free uplift to market value (Probate value).
- When the trustees transfer the property to the beneficiaries, CGT will only be payable if the property has risen in value above the Probate value.
- Trustees have an annual allowance of £6,150 that can be applied to any gains.
- The CGT rate for trustees is 20% and 28% for residential property.
Income Tax
- Income is not usually generated by this type of trust unless the life tenant has moved out of the property and this is rented out or surplus from downsizing has been invested to produce an income.
- The trustees may mandate income to be paid directly to the life tenant so that they declare and pay any tax arising rather than the trust. The advantage of this is that the life tenant may use his/ her personal allowances.
- If the trustees instead pay the income tax, this will be at 7.5% on dividends and 20% on other forms of income. Trustees do not have any savings or dividends allowances.