We act on behalf of many individuals and families who have been previously advised to put their family home and other assets into a trust. These trusts are often called Family Protection Trusts.
Although each case is different, many of our clients were unaware of the implications of setting up a Family Protection Trust and may not have been properly advised of the potential pitfalls of doing so.
What is a Family Protection Trust?
A Family Protection Trust is simply a trust which has as its purpose the protection of assets owned by an individual or a family from potential future creditors.
The term Family Protection Trust has no meaning in law and is simply a descriptive label.
A trust is a legal vessel which can hold assets. A Trust has its own separate legal personality. Once assets such as the family home are transferred into a trust the family no longer own that property – the trust owns the property.
Family Protection Trusts have as their primary purpose the protection of the family home from certain creditors. Typically, Family Protection Trusts are an attempt to avoid the possibility of the family home being used to finance care home costs or to reduce potential liability to Inheritance Tax.
We have seen Family Protection Trusts being described as a means of avoiding ‘probate’ costs. As a reason for setting up a Family Protection Trust this may be the weakest reason we have come across. Family Protection Trusts rarely save Inheritance Tax.
Family Protection trusts may achieve their purpose, but often Family Protection Trusts are complex and do not provide the protection you require. Some Family Protection Trusts simply fail in their objective and may have been mis-sold.
The Problems with Family Protection Trusts
We consider some of the more common problems we have encountered.
Deprivation of Assets
Where a Council believes that a trust has been set up to avoid care home costs it can challenge the trust in court. If the Council is successful, the trust is ineffective and the costs of setting up and running the trust plus the court costs are all wasted.
I have transferred a property into a trust which is subject to a mortgage?
The conditions of your mortgage mean that you cannot sell or transfer a property unless the mortgage is paid off or with the approval of your lender. The lender is very unlikely to agree to allow you to transfer the house into a trust whilst you still have an outstanding mortgage.
Where you have transferred a property into a trust which is still subject to a mortgage you will be in breach of your mortgage terms and the standard security. This could result in the mortgage company seeking to recover the full amount of the outstanding loan from you if they become aware of the transfer.
The Trust has not been registered with HMRC?
Almost all trusts should have been registered with HMRC by late 2022.
The registration of a trust with HMRC is a complex process. A failure to register a trust with HMRC potentially exposes the trustees to a penalty for late registration. Whilst these penalties may be waived by HMRC our advice is to register the trust as soon as possible and explain to HMRC the reason for late registration. Where the trust has professional trustees such as a solicitor or accountant, that trustee should have taken steps to register the trust. HMRC are less likely to waive a penalty in the case of a professional adviser who has failed in his duties to register the trust.
The trust has not paid tax
This may be a more common problem than many appreciate as many Family Protection Trusts are not registered with HMRC. Trusts must pay tax every ten years and may be liable for tax if assets are sold.
The only solution to this problem is to register with HMRC and submit a tax return.
My professional trustee will not resign unless they receive a payment.
Unfortunately, some professional trustees are insisting on being paid to resign their position. It is understandable that some clients are angry about this. This may not be an intractable problem and can be subject to negotiation. We can advise on the best course of action.
The taxation of trusts
The taxation of trusts is a very specialised area.
Trusts must pay tax every ten years. The calculation of the ten-year tax charge is complicated. Trust income may also be taxable.
How can we help?
We can advise and help you with the following:
Although we do not give tax advice as part of our services, we work with chartered accountants who can.