Direct Access Barrister

Wills, Trusts & Estate Planning

Client guide · please read and keep

Family property trusts, explained

What they are, why people use them, and what they require of you

This note explains, in plain terms, the kind of trust you are considering or have set up: how it works, the benefits people seek from it, and the duties and risks that come with it. It is written to be read once and kept with your papers. It is general information, not advice on your own circumstances; advice on whether a trust is right for you is given separately and in writing.

What a trust is

A trust is a legal arrangement in which one set of people, the trustees, hold and manage property for the benefit of others, the beneficiaries, under rules set by the person who created it, the settlor. Legal ownership and benefit are split: the trustees own the property in law, but they cannot treat it as their own. They must deal with it only as the trust deed allows and only for the beneficiaries.

The settlor

Creates the trust and puts property into it.

The trustees

Hold the legal title and manage the property. There can be up to four trustees of land. The settlor is often one of them.

The beneficiaries

Those who can benefit. In a discretionary trust they are a class of people (for example, the settlor’s children and their descendants), and the trustees decide who among them benefits, when, and by how much.

A lifetime trust of this kind is created while the settlor is alive, by a deed, and usually holds the family home or a share of it. It is different from a trust in a will, which only takes effect on death.

The main types you may meet

Discretionary trust

No beneficiary has a fixed entitlement. The trustees hold the property for a class of beneficiaries and decide how to apply it. This gives the greatest flexibility and the most protection, because no single beneficiary owns a share that a creditor or a divorcing spouse could reach. It is taxed under the “relevant property” regime described in Part 4.

Life interest trust

One person (the “life tenant”) has the right to the income of the trust, or to live in a property, for life or for a fixed period. When that interest ends, the property passes to others named in the deed (the “remaindermen”). This is often used so that a surviving spouse can stay in the home for life, with the children taking afterwards.

Bare trust

The trustees hold the property for a beneficiary who is absolutely entitled to it; the trustees simply hold the legal title. This is the simplest form and carries none of the discretionary-trust tax regime, but it gives no real protection, because the beneficiary owns the asset outright in everything but name.

Why people use these trusts

The genuine benefits, properly understood, are these.

Continuity of management. If the settlor loses mental capacity, the trustees can continue to deal with the property without an application to the Court of Protection. This is often the most practical day-to-day advantage.

Smoother administration on death. Because the legal title is already in the trustees’ names, the property does not have to pass through the settlor’s probate, which can save time and cost in administering the estate.

Protection against ‘sideways disinheritance’. Where a couple want to be sure their share of the home ultimately reaches their own children, a trust can prevent it being diverted if the survivor remarries or makes a new will.

A measure of protection on a beneficiary’s problems. In a discretionary trust, because no beneficiary owns a fixed share, the trust fund is better insulated against a beneficiary’s divorce, bankruptcy or creditors than an outright gift would be.

Provision across generations. The trustees can hold the fund for children and grandchildren and release it when it is needed, rather than handing it over in a lump.

Two benefits that are often oversold — read carefully

Inheritance tax. A trust does not automatically save inheritance tax. If the settlor keeps any benefit from the property (for example, by continuing to live in it rent-free), the gift is a “gift with reservation of benefit” and the property stays in the settlor’s estate for inheritance tax, so no tax is saved. A trust saves inheritance tax only in specific circumstances, and even then the trust fund carries its own tax regime (Part 4). Anyone who tells you a trust is a guaranteed inheritance-tax saver is overstating it.

Care fees. A trust is not a reliable shield against care-home fees, and it is dangerous to set one up for that purpose. If a local authority decides that avoiding care charges was a significant reason for putting the home in trust, it can ignore the trust and assess you as if you still owned the home. There is no time limit on how far back a council can look — the inheritance-tax “seven-year rule” does not apply to care fees at all. Regulators have warned specifically against schemes marketed as “asset protection” against care costs. This is dealt with fully in Part 5.

The obligations that come with a trust

A trust is not a thing you set up and forget. It creates continuing legal duties, mostly falling on the trustees. The main ones are these.

Trustees’ core duties

—Act only in the interests of the beneficiaries, and only within the powers the deed gives. The trustees must never treat the property as their own.
—Act together and keep proper records. Decisions should be minuted, and trust money kept separate from personal money, usually in a trust bank account.
—Account to the beneficiaries and deal even-handedly between them.

Registering the trust with HMRC

Almost every trust of this kind must be registered on HMRC’s Trust Registration Service. It is the trustees’ legal duty. A trust that holds land must usually register within 90 days of being created, and the details must be kept up to date, with changes reported within 90 days. A trust with a tax liability must also confirm its details each year. This is an anti-money-laundering requirement as much as a tax one, and penalties can follow from missing it.

The trust’s own tax regime

A discretionary trust falls within what is called the “relevant property” regime. In broad terms:

On creation

Putting property into the trust is a “chargeable lifetime transfer”. If the value is within the available tax-free band (currently £325,000), no tax is payable on entry; above it, tax is charged at the lifetime rate.

Every ten years

The trust is reviewed and may pay a periodic charge of up to 6% on the value above the available band.

On distributions

An “exit charge” may arise when property leaves the trust.

Capital gains tax

The family home no longer benefits from the full “main residence” exemption once it is held in trust and the settlor has moved out, so a future sale may give rise to a capital gains tax charge that would not have arisen had the home been kept and sold by the owner.

None of this is a reason not to use a trust. It is a reason to go in with the running costs and obligations understood, not just the benefits.

Care fees and “deliberate deprivation”

This deserves its own section because it is the single area where these trusts are most often mis-sold and most often go wrong.

When a person needs residential care and asks the local authority to help with the fees, the authority carries out a means test. If it finds that the person has given away or transferred assets, it applies a test set by the Care Act 2014: was avoiding the care charge a significant reason for the transfer? It does not have to be the only reason, or even the main one — significant is enough. If the authority decides it was, it can treat the person as still owning the home (“notional capital”) and refuse to fund the care.

What this means in practice

—There is no time limit. A council can look back many years; a transfer made long ago can still be challenged if it concludes care was foreseeable and avoidance was a significant motive.
—The inheritance-tax seven-year rule is irrelevant to care fees. The two regimes are entirely separate.
—The people who received the property can be pursued. Under the Care Act the council can recover care costs from a person who received transferred assets, up to the value they received.
—Timing is everything. A transfer made while the settlor is fit and well, with no care need in prospect, is far harder to attack than one made when care was already foreseeable.

The fair position is this. A trust set up for sound reasons, well before any care need, may survive a challenge; the authority is not allowed to assume deliberate deprivation, and must explore genuine reasons first. But a trust set up to put the home beyond the reach of care fees, especially when care is already on the horizon, is exactly what the rules are designed to catch, and it can leave the family worse off than if nothing had been done. We will not set up a trust on the basis that it defeats care fees, and you should be wary of anyone who offers to.

Deciding whether a trust is right for you

A trust is a long-term commitment with real running obligations and real limits. It suits some families very well and others not at all. The right question is not “what can a trust avoid?” but “what am I trying to achieve, and is a trust the proportionate way to achieve it?” We will give you that advice in writing, specific to your circumstances, before anything is signed.

If you take nothing else from this note

A trust splits ownership from benefit and gives flexibility and continuity, which are real and valuable.
It brings continuing duties: registration, record-keeping, and a tax regime of its own.
It is not a guaranteed inheritance-tax saver and it is not a safe way to avoid care fees.
Set up for the right reasons and at the right time, it is a sound arrangement; set up for the wrong ones, it can backfire.

This note is general information about trusts and does not constitute advice on your own circumstances. Before creating, changing or relying on a trust, take advice specific to your situation.

Barraj Legal — a trading style of Rhys Johns, a barrister authorised & regulated by the Bar Standards Board. Sophia House, 28 Cathedral Road, Cardiff CF11 9LJ