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Home for Christmas? Succession planning and the typical family protection trust

By Elizabeth Gibbison, Tax, Trusts and Estates associate at Irwin Mitchell

We have a number of clients who seek our review of existing trusts in place which they have been encouraged to set up by other advisors. An array of clients in the past have been persuaded to, for example, transfer the house they live in to trust, based on the promise this is a successful care fee planning mechanism (spoiler alert: there's no guarantee of this!). 

Clients have told me about fees as high as £7,000 being associated with transferring their home to trust as charged by advisors from various companies, firms and banks and often they haven't provided the information required in order to make such a major decision regarding foregoing the ownership of their home.

It's no wonder clients do want to keep the idea of passing on assets to future generations in mind, given the average amount spent on care fees in the North East per year is approximately £36,000 a year.

As a little recap on the fees people are trying to avoid in completing such lifetime planning, fees are due to change (for the better?!) next year in relation to the capital which can be clawed back. There is to be a lifetime cap in place of £86,000, being a limit on the amount anyone in England will spend on their personal care over their lifetime, which will be effective as of October 2023, although this is not as generous as it seems. There will still be a daily living allowance to pay, and the cap will not apply to those who have already paid in part for their care fees (so the clock starts running again for those individuals in October 2023 for example). 

Currently, any capital over £23,250 and all income can be taken into account in the offset against care fees. The threshold for Local Authority support in relation to their contribution towards care fees is being raised via a rule that no one with less than £100,000 will contribute more than 20% of these assets per year. Most individuals never need to live in care, and the average life expectancy in care is approximately three years. When crunching the numbers, given the average care fee bill in the North East per month is around £3,000, this amounts to £108,000 over a three-year period. We are an ageing population and care is pricy!

It isn't surprising therefore that in the past people have been persuaded to transfer the home they live in to trust in the hope, should they require residential care, they will be in a position to protect their main asset, which is almost always the property they live in, for their loved ones or those closest to them.

Previously when discussing these sensitive issues with clients, ultimately if they're successful regarding depriving the Local Authority of any capital (in them assessing this from a care fee perspective), this would mean potentially they wouldn't receive the higher level of care they would in a more expensive care home in the event their capital was taken into account where income wouldn't cover these fees.

There are also many other issues to think about with contemplating the transfer of your main home to trust, predominantly the fact you will no longer own your own home is another factor to account. Also, a gift of a residential property to trust doesn't work from an Inheritance Tax (IHT) planning position, unless a market rent is paid by the person so living in and continuing to enjoy a benefit from, the property. This is because it can be seen as what is known as a ‘gift with reservation of benefit’ and it would be counted still as part of your estate when the time comes from this point of view.

There are however sensible things which can be done in a person’s Will through a variety of trusts. These can protect assets for future generations' care fee planning, where there would be a guarantee that your share in your home would be safe from attack from care fee assessments. They can also guard against other scenarios life may throw someone’s way, such as the remarriage of a surviving spouse or civil partner after the first person dies or where a beneficiary is in financial difficulty.

So, in short, there are some home truths to discuss in relation to the transfer of your residential home to trust, and sometimes it is appropriate. However, much of the time we're found assisting clients to unpick this type of arrangement on account of the fact that it had been sold to them under the pretense it would certainly be effective in relation to depriving the Local Authority of assets. This is unfortunately not the case, as the Local Authority can look back to the date on which the gift of the asset was made, the circumstances in which the gift was made, the age of the person making the gift at the time and their health and ultimately the Local Authority could then claw back this asset. 

There is therefore no way to ring-fence this asset. However, we can advise you in relation to more safe ways to preserve assets from a care fee planning point of view, and from attack, and we can provide you with information and peace of mind in this regard. After all, a home is an individual’s castle and there is time to mull this over as many of us deck our own halls over the festive period.