Lifetime Property Protection Trust
The Lifetime Property Protection Trust ('LPPT') is a form of lifetime trust designed to protect the family home from claims against it by third parties.
The family home is transferred to a trust by the owner ('the Settlor'). The Settlor retains a life interest in it. On the death of the Settlor, the family home is held on discretionary trusts for the beneficiaries (usually the children of the Settlor).
Can the LPPT be done by joint owners?
Yes. They are joint Settlors of the LPPT and they retain a joint life interest in the LPPT. After the death of the first of them, the survivor has a life interest in the LPPT.
Are there any drawbacks to the LPPT?
The Settlor is giving away what is most likely his or her main asset. Although he or she retains the right to live there rent free by virtue of the life interest, he or she no longer has access to the capital represented by the family home. Accordingly he or she could not sell the house and spend the proceeds, mortgage it or take out equity release. The LPPT does however contain powers enabling the trustees to unwind the trust at their discretion and transfer the family home back to the Settlor which would then give the Settlor access to the capital.
Aside from that, the Settlor continues to live in the family home in the normal way. He or she insures the property, pays council tax and utilities in his or her name and continues to treat it as if he or she still owns it.
What is the Inheritance Tax position?
The transfer to the LPPT is a chargeable transfer by the Settlor. It is not a potentially exempt transfer for Inheritance Tax purposes, but it is a gift with a reservation of benefit.
This means that the transfer of the family home to the LPPT will not reduce the Settlor's estate for Inheritance Tax purposes. The purpose of the LPPT is to protect the family home, not to mitigate Inheritance Tax. In addition, if the family home has a value of more than the nil rate band for Inheritance Tax (currently £325,000), Inheritance Tax could become payable at the time of the transfer. For this reason, if the value of the family home is over the nil-rate band, you should seek further advice.
What is the Capital Gains Tax position?
Principal private residence relief from Capital Gains Tax ('PPR') is available on the transfer of the family home to the LPPT. As the Settlor retains a life interest, PPR remains available whilst the Settlor occupies the family home and for three years after he or she ceases occupation. So if the family home is sold after the Settlor's death, no Capital Gains Tax should be payable. If, after the Settlor's death, the trustees of the LPPT allow one or more of the beneficiaries to occupy the family home, PPR will again become available.
So there should be no Capital Gains tax payable at any time.
What formalities do the trustees of the LPPT have to follow?
As long as the LPPT's only asset is the family home, none. If, after the death of the Settlor, the family home is sold and the LPPT holds cash or other income-producing investments, the trustees will have to submit an annual trusts tax return to H M Revenue and Customs and pay income tax at 50% on any income over £1,000.
Who should maintain and insure the family home?
The trustees of the LPPT have the power to allow a beneficiary to occupy trust property on such terms as they see fit so the question of who maintains and insures is down to the trustees. Normally the trustees would expect the Settlor to maintain and insure as a condition of being permitted to occupy the property - as the trust will hold no cash, the trustees will not have the resources to maintain and insure without recourse to borrowing.
What if the Settlor wants to move house?
The trustees of the LPPT can sell the family home and buy another one in which the Settlor can live. Any surplus sale proceeds will belong to the LPPT but any income produced by those surplus sale proceeds will be payable to the Settlor, who should declare the income on his or her tax return.
The trustees, however, have an overriding power of appointment in favour of the Settlor and could choose to transfer all or part of the sale proceeds to the Settlor outright if he or she needed them.
What happens to the title deeds of the family home?
The legal title to the family home will be put in the names of the trustees of the LPPT. The Land Register will be updated to reflect this.
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